Standard costs also assist the management team when making decisions about long-term pricing. As the name suggests, it bases on the assumption of the basic nature of company business over a long period of time. Therefore, this cost will only change when the core business of company changes. Chartered accountant Michael Brown is the founder and marketing cost per unit CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own.

Objectives of Using Standard Costing System

Importantly, comparison of actual cost with standard cost shows the variance. Standard costs are typically determined during the budgetary control process because they are useful for preparing flexible budgets and conducting performance evaluations. Allowing for normal inefficiencies, the product is expected to require 0.50 hours of labor at a cost top 10 alternatives to xero of 15.00 per labor hour.

1. Brad decided to conduct a standard costs variance analysis to see if he could isolate the issue, or issues.
2. Brad spent $9,000 more on variable manufacturing overhead than he projected.
3. However, Brad actually incurred $1,284,000 in variable manufacturing costs.
4. The total variance for variable manufacturing overhead is separated into the variable manufacturing overhead efficiency variance and the variable manufacturing overhead rate variance.
5. Direct materials include all materials that can be easily and economically traced to the production of a product.

Per the standard, total variable production costs should have been $1,102,500 (150,000 units x $7.35). However, Brad actually incurred $1,284,000 in variable manufacturing costs. Actual variable manufacturing costs incurred were $181,500 over the budgeted or standard amount.

Practice Video Problem 8-1: Computing direct materials variances LO2

Generally, management does not useideal standards because ideal standards do not allow for normalrepairs to machinery or rest periods for workers. Since planning underideal standards is unrealistic, managers rarely use ideal standardsin budgeting. Instead, management uses practical standards inplanning because these standards are more realistic, allowing formachinery repairs and rest periods for workers. Any variances thatresult when practical standards are used indicate abnormal orunusual problems.

What is your current financial priority?

The standard variable manufacturing overhead rate per direct labor hour was established as $3. Total variable manufacturing overhead costs per the standard amounts allowed are calculated as the total standard quantity of 37,500 times the standard rate per hour of $3 equals $112,500. During the period, Brad projected he should pay $112,500 for variable manufacturing overhead to produce 150,000 units. Once the top section is complete, the amounts from the top section can be plugged into the formulas to compute the variable manufacturing overhead efficiency (quantity) and rate (price) variances. All standard cost variances are computed using the actual production quantity. The goal is to determine how much should have been incurred to produce the actual quantity of units produced and compare that to how much was actually incurred to produce the actual quantity of units produced.

Variable Overhead

First, standard costs serve as a yardstick against which actual costs can be compared. The second advantage is that if immediate attention is taken, control over costs is greatly facilitated. A proper standard costing system assists in achieving cost control and cost reduction. The last advantage of using standard cost is that even when other standards and guidelines are constantly being revised, standard cost serves as a reliable basis for evaluating performance and control costs. The current category “Standard Costing and Variance Analysis” discusses the technique of standard costing and variance analysis, which is aimed at profit improvement mainly by reducing materials, labor, and overhead costs. The standard costing price variance is the difference between the standard price and the actual price of a unit, multiplied by the quantity of units used.

The variable manufacturing overhead variances for NoTuggins are presented in Exhibit 8-10. Refer to the total variable manufacturing overhead variance in the top section of the template. Total standard quantity is calculated as standard quantity of the cost driver per unit times actual production, or 0.25 direct labor hours per unit times 150,000 units produced equals 37,500 direct labor hours.

Therefore, the total variance for direct materials is separated into the direct materials quantity variance and the direct materials price variance. The template provided in Exhibit 8-3 can be used to compute the total direct material variance, direct material quantity variance, and direct material price variance. The total direct labor variance can be calculated in the last line of the top section by subtracting the actual amounts from the standard amounts. The standard quantity allowed of 37,500 direct labor hours less the actual hours worked of 45,000 hours yields a variance of (7,500) direct labor hours. The direct labor rate per hour variance is calculated as the projected standard direct labor rate of $18 per hour, less the actual direct labor rate of $18.50, which yields a $(0.50) unfavorable per hour rate variance. The total direct labor variance is the total standard labor costs allowed of $675,000 less the actual amount paid for direct labor of $832,500, which is $(157,500) unfavorable.