1. Standard Costs ACG 4361 5-2 Prepared by Diane Tanner
University of North Florida
5-2

2. Standard Costs What is a standard cost?
The unit ‘cost’ that management believes should be incurred to produce a single good or service (cost object) under anticipated conditions
Not all budgeted costs are standards.
Budgeted costs can be standards, but only if a company employs a standard cost system.

3. Benefits of Standard Costing
Used to control costs
Allows for comparison to actual costs
Functions as a benchmark
Part of a continuous improvement plan
Compares production performance to best levels of performance in competitors
Differences are flagged for investigation if significant
Provide feedback to initiate corrective action

4. How are Standard Costs Developed?
Formulas or recipes
Price lists provided by suppliers
Time and motion studies conducted by industrial engineers
Union contracts
Analyses of past data
Insight from management
Expected economic changes
Historical costs
Once developed, standard costs must be monitored and updated periodically.

5. Determining a Material Cost Standard
Standard cost of materials =
Standard quantity allowed per unit ×
Standard price per raw material denomination
Material quantity standard
Based on the unit denomination in which the company orders its raw materials
E.g., pounds, feet, tons, ounces, kilograms
Material price standard
Based on the price a company purchases each ‘unit’ of of materials
E.g., $1 per pound, or $2 per square foot :

6. Determining a Labor Cost Standard
Standard cost of labor =
Standard hours allowed per unit ×
Standard price per labor hour
Labor quantity standard (or labor efficiency standard)
Based on hours because that is how direct labor wages are paid
Minutes must be converted to hours
Labor price standard (or labor rate standard)
Based on the hourly wage rate
Fringes are included as part of the hourly rate :

7. Ideal Versus Attainable Standards
Ideal standards
Assumption that no obstacles to the production process will be encountered
Highest efficiency must be employed
Called ‘perfection’ standards
Often discourages employees
Attainable Standards
Assumption that there will be occasional problems in the production process
Such as equipment failure, labor turnover, and materials defects
Motivates employees better than ideal standards

8. P Q Standard Costs Mind your P’s and Q’s Standard Quantity
Standard Price
Budgeted price of material (per RM denomination)
Budgeted price of labor (per hour) Q
Standard Quantity
Budgeted quantity of material (in RM denominations)
Budgeted quantity of labor hours

9. Investigation of Standard Cost Variances
Should be investigated if material in amount
Management by exception
Based on
Fixed percentage
Fixed dollar amount
Statistical analysis
Variances
Are not a clear sign of good or bad performance
Flag a potential problem
Have many reasonable explanations
Consider costs versus benefits

10. Standard Cost Example
Darco produces bins and uses a standard cost system. Its cost driver for overhead is the number of direct labor hours.
Budgeted units
800 bins
Budgeted materials
0.53 $5.00 per lb.
Budgeted labor
0.45 $13.00 per hour
Budgeted variable overhead
$1,872
Budgeted fixed overhead
$3.70 per DLH
Budget and Standards
VOH =
$1,872
0.45 × 800
Direct materials (0.53 × $5)
$2.65
Direct labor (0.45 × $13)
5.85
= $5.20 per DLH
VOH (0.45 × $5.20)
2.34
FOH (0.45 × $3.70)
1.67
$1,332
FOH = ?
0.45 × 800
Standard Cost
$12.51
= $3.70 per DLH

11. Standard Cost Transactions
The standard cost moves through the accounts as production occurs.
Raw Materials
Work in Process
Finished Goods
CGS
2.65
2.65
+ DL
+ MOH
12.51
12.51
12.51
12.51
For each unit started in production, $2.65 is moved from Raw Materials to WIP.
As each unit is completed, $12.51 is moved from WIP to Finished Goods.
As each unit is sold, $12.51 is moved from Finished Goods to Cost of Goods Sold.

12. The End