Standard costing and variance analysis
Chapter seven
BA 2 - Standard costing and variance analysis. Quantia Learning
,BA 2 - Standard costing and variance analysis. Quantia Learning
,Standard costing is a ‘control technique that reports
variances by comparing actual costs to pre-set
standards facilitating action through management by
exception’ (CIMA terminology).
A standard cost is a carefully pre-determined unit cost
that is prepared for each cost unit containing details of
the standard amount and price of each resource that
will be utilised in providing the service or
manufacturing the product.
The standard then becomes a target against which performance can be measured.
The actual costs incurred are measured after the event and compared to the pre-determined
standards. The difference between the standard and the actual is known as a variance.
Analysing variances can help managers focus on the areas of the business requiring the most
attention. This is known as management by exception.
Standard cost card
After standard costs for a product or service have been set, they are presented in a standard
cost card. A standard cost card for a product shows the variable elements of production cost
and it may look like this:
Standard cost card : Product A
$ per unit
Direct materials: X kgs @ $X per unit XX
Direct labour: X hours @ $X per hour XX
Prime cost XX
Variable production overhead:
X hours @ $X per hour XX
Variable production cost XX
BA 2 - Standard costing and variance analysis. Quantia Learning
, Note:
Standard hours for labour and overheads are usually the same as we normally assume that
variable overheads vary in direct proportion to the number of direct labour hours worked, unless
told otherwise.
Some standard cost cards will also include the fixed overhead and
the standard selling price. These standard data provide the
information for a detailed variance analysis, as long as the actual
data are collected at the same level of detail.
In order to be able to apply standard costing it must be possible to
identify a measurable cost unit. A measurable cost unit can be a
unit of product or service but it must be capable of being
standardised (standardised tasks must be involved in its creation).
Standard costing can also be used for services although it can be
more difficult to apply in some types of service organisation, where cost units may not be
standardised and they are more difficult to measure.
The following data relates to a single unit of product K-
Direct materials: 40 m2 @ $6.48/m2
Direct labour: Bonding department – 48 hours @ $12.50/hour
Direct labour: Finishing department – 30 hours @ $11.90/hour
The following are the budgeted costs and labour hours per annum for variable production
overhead:
$ Hours
Bonding department 375,000 500,000
Finishing department 150,000 300,000
BA 2 - Standard costing and variance analysis. Quantia Learning
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