Rifqi Dhia Ramadhan

135020307121016
Managerial Accounting
Standard Costing:
A Managerial Tool Control

Learning Objectives:
1) Basic Introduction Of The Standard Costing
2) What Is Standard Cost Per Unit And Standard Cost Sheet
3) General Definition Of Budget Variance
4) Direct Material Variance And Direct Labor Budget Variance
5) Variable And Fix Overhead Budget Variance
OBJECTIVES 1: BASIC INTRODUCTION OF THE STANDARD COSTING

Description
What is standard costing? Standard costing is the cost that maybe will
suffer (expected cost), that assigned by the company. To assess the
standard costing we must find the total of The Quantity standards x
Price Standards. Quantity standards basically came from Historical
experience, engineering studies, and input from operating personnel.
Meanwhile, Price Standards came from: purchasing, personnel, &
accounting. Standards are generally classified as either ideal or
currently attainable. Ideal standards demand maximum efficiency
and can be achieved only if everything operates perfectly. Currently
attainable standards can be achieved under efficient operating
conditions. Allowance is made for normal breakdowns, interruptions,
less than perfect skill, and so on. These standards are demanding but
achievable.
Why adopt a standard cost system? For planning & control such
as: To improve performance measures, To give manager more
information by decomposing total variances into price & usage
variances For product costing To use unit cost system that is
readily available in pricing. And help manager to get more specific
data.

OBJECTIVES 2: WHAT IS STANDARD COST PER UNIT AND STANDARD

COST SHEET
Description
Standard costs can also be used in service organizations. For example,
could set standard processing times for different categories of returns.
If the standard processing time is three minutes for a 1040EZ and the
standard price of labor is $9 per hour, then the standard cost of
processing a 1040EZ is $0.45 [$9 (3/60)]. In manufacturing firms, the
standard cost per unit is the sum of the standard costs for direct
materials, direct labor, and overhead. The standard cost sheet provides the details underlying the standard unit cost.
The example of standard cost sheet:
Description

Sub-Total

Total Direct Materials

Total Direct Labor

$ 0,045

Total Overhead

$0,145

Then the total of standard unit cost are: $ 0,195

The standard cost sheet also reveals the quantity of each input that
should be used to produce one unit of output. The unit quantity
standards can be used to compute the total amount of inputs allowed
for the actual output. A manager should be able to compute the
standard quantity of materials allowed (SQ) (Unit quantity
standard x Actual output) and the standard hours allowed (SH)
(Unit labor standard x Actual output) for the actual output. This
computation must be done for every class of direct material and every
OBJECTIVES 3: GENERAL DEFINITION OF BUDGET VARIANCE
class of direct labor.
Description
The budget variance is the difference between actual costs and
planned costs. Budget variance is split into 2 groups: Price rate:
(difference between the actual and standard unit price of an input
multiplied by the number of inputs used: (APxSP)AQ) and usage
efficiency variance (difference between the actual and standard
quantity of inputs multiplied by the standard unit price of the input:
(AQxSQ)SP) that help Managers to have more ability to analyze and

control the total variance if they breaking the budget variances into
price and usage variances. We investigate variance if they are material
and if the benefits of corrective action are greater than the costs of
investigation. So after we assess the price rate minus usage variance
we can get the amount of the total variance.
OBJECTIVES 4: DIRECT MATERIAL VARIANCE AND DIRECT LABOR
BUDGET VARIANCE
The total variance measures the difference between the actual costs of
materials and labor and their budgeted costs for the actual level of
activity.
A. DIRECT MATERIALS VARIANCE: In direct materials managers
should calculate the material price variance and the materials usage
variance.
1. The materials price variance (MPV) measures the difference
between what should have been paid for materials and what was
actually paid. The formula for computing this variance is:
MPV: (AP x AQ) - (SP x AQ) or (AP - SP) AQ
AP: The actual price per unit
SP: The standard price per unit
AQ: The actual quantity of material used

2. The materials usage variance (MUV) measures the difference

between the direct materials actually used and the direct materials
that should have been used for the actual output. The formula for
computing this variance is:
MUV: (SP x AQ) - (SP x SQ) or (AQ - SQ) SP
AQ: The actual quantity of material used
SQ: The standard quantity of material allowed for the actual output
SP: The standard price per unit

B. DIRECT LABOR VARIANCES: In direct labor managers also know

the formulation to assess the labor rate variance and the labor

efficiency variance
1. The labor rate variance: The labor rate variance (LRV)
computes the difference between what was paid to direct laborers and
what should have been paid. The formula is:
LRV: (AR x AH) - (SR x AH) or LRV : (AR - SR)AH
AR: The actual hourly wage rate
SR: The standard hourly wage rate
AH: The actual direct labor hours used
2. Labor Efficiency Variance: Formula Approach The labor
efficiency variance (LEV) measures the difference between the labor
hours that were actually used and the labor hours that should have
been used:
LEV = (AH X SR) - (SH X SR) or LEV = (AH - SH) SR
AH: The actual direct labor hours used
SH: The standard direct labor hours that should have been used
SR: The standard hourly wage rate
OBJECTIVES 5: VARIABLE AND FIX OVERHEAD BUDGET VARIANCE
The total overhead variance, the difference between applied and actual
overhead, is also broken down into component variances, we will divide
overhead into 2 categories: fixed and variable.
A. VARIABLE OVERHEAD VARIANCES
Total Variable Overhead Variance The total variable overhead
variance is the difference between the actual and the applied variable
overhead. There are 2 types of variable overhead variance. First is
Variable Overhead Spending Variance, and the second is Variable
Overhead Efficiency Variance

1. Variable Overhead Spending Variance. The variable overhead

spending variance measures the aggregate effect of differences
between the actual variable overhead rate (AVOR) and the standard
variable overhead rate (SVOR). The actual variable overhead rate is

simply actual variable overhead divided by actual hours.

Variable overhead spending variance = (AVOR X AH) - (SVOR X AH)
= (AVOR - SVOR) AH

2. Variable Overhead Efficiency Variance. The variable overhead

efficiency variance measures the change in variable overhead
consumption that occurs because of efficient (or inefficient) use of
direct labor. The efficiency variance is computed using the following
formula:
Variable overhead efficiency variance = (AH - SH) SVOR

B. FIXED OVERHEAD VARIANCES

Total Fixed Overhead Variance The total fixed overhead variance is
the difference between actual fixed overhead and applied fixed
overhead, when applied fixed overhead is obtained by multiplying the
standard fixed overhead rate times the standard hours allowed for the
actual output. Thus, the applied fixed overhead is:
Applied fixed overhead = Standard fixed overhead rate X Standard
hours
1. Fixed Overhead Spending Variance The fixed overhead
spending variance is defined as the difference between the actual
fixed overhead and the budgeted fixed overhead. The spending
variance is favorable because less was spent on fixed overhead items
than was budgeted.

2. Fixed Overhead Volume Variance The fixed overhead volume

variance is the difference between budgeted fixed overhead and
applied fixed overhead. The volume variance measures the effect of
the actual output differing from the output used
Nowadays,Companyforbothmanufactureorservicemusttakeaseriousactionto
decidestheirstandardcosting,becausemanagerscangetmoreefficientdatatoknowthe
accuratecostthatcompanymakes,andalsomakemanagerscangetmoreefficientdata
becausestandardcostingprovidesanaccurateinformationaboutthecostthatdirect
material,directlabors,andtheoverheadcostthatcompanymakesbythestandardcost

SUMMARY
sheet.Comparingactualoutcomeswithstandardsandbreakingthevarianceintoprice
andquantitycomponentsprovidedetailedfeedbackprovidedtomanagers.This
informationallowsmanagerstoexerciseagreaterdegreeofcostcontrolthanthatfound
inanormaloranactualcostingsystem.Decisionssuchasbiddingarealsomadeeasier
whenastandardcostingsystemisinplace.