Standard Costing
(Set a BENCHMARK → Compare with ACTUAL → Find the VARIANCE → Fix It!)
Standard Costing = set estimated costs BEFORE production, then compare with ACTUAL costs after production. The difference = variance. Material price went up? Labour took more time? Overhead exceeded budget? Variance analysis pinpoints EXACTLY where the problem is — so management can FIX it!
Banky Becomes a Cost Detective! 🔍📊
A furniture factory estimated each table costs ₹2,000 to make. But actual cost was ₹2,100. WHERE did the extra ₹100 go? Was steel costlier (price variance)? Or was more wood used (usage variance)? Standard costing finds the EXACT answer!
Standard Costing — Standards, Variances & Control
📖 Part 1 — What is Standard Costing? Types of Standards
Standard Cost = estimated/expected cost BEFORE production starts. Based on analysis of past data + current market conditions. Actual Cost = known after production. Variance = Actual − Standard.
3 Types of Standards:
Basic: Set for LONG period. Provides consistent base for comparison. BUT: not useful if methods/prices change frequently. Limited practical use.
Ideal: Based on PERFECT performance (zero wastage, zero idle time). Too demanding → demotivates workers. Limited use.
Currently Attainable: Adjusted for current conditions. Accounts for normal wastage/idle time. Neither too easy nor impossible. MOST WIDELY USED in industry!
“Fixed standards” is NOT a standard type! Only Basic, Ideal, and Currently Attainable.
7 Applications: Planning, variance measurement, inefficiency detection, cost control, performance measurement, motivation/incentives, inventory valuation.
📋 Part 2 — Variance Analysis: Material + Labour + Overhead
Material Cost Variance = Material Price Variance + Material Usage Variance
Price Variance: Actual price ≠ standard price (same quantity). Causes: market price change, bulk purchase failure, emergency buying, inferior quality purchase.
Usage Variance: Actual quantity ≠ standard quantity (same price). Causes: theft, wastage, carelessness, inferior material quality, changed specifications. Analyse EACH material separately!
Labour Cost Variance = Labour Rate Variance + Labour Efficiency Variance
Rate Variance: Actual wages/hr ≠ standard wages/hr. Causes: new wage agreement, wrong mix of skilled/unskilled. Often UNCONTROLLABLE. Change in wages per hour = NOT a cause of efficiency variance!
Efficiency Variance: Actual hours ≠ standard hours (same rate). Causes: inferior material, non-standard procedures, new machines, poor maintenance, deficient supervision.
Overhead Variance = Variable OH Variance + Fixed OH Variance
Variable OH: Expenditure variance (rate/hr changed) + Volume/efficiency variance (hours changed).
Fixed OH Expenditure: Actual fixed OH ≠ budgeted fixed OH. Fixed costs CAN increase due to: supervisor salary hike, additional staff. NOT due to: activity level increase, selling price change, or inventory valuation method change.
🏢 Part 3 — Accounting, Benchmarking & Reporting
3 Ways to treat variances: (1) Transfer to Costing P&L (easiest — inventory stays at standard). (2) Allocate to finished goods, WIP, and cost of sales (proportionally). (3) Transfer to Reserve (carry forward positive to offset future negative).
Benchmarking: Look OUTSIDE your company for best practices. Compare with industry leader or global benchmark. Identify inefficiencies by comparing with best-in-class. Example: new refinery benchmarks against Singapore refining margin.
Reporting: Must be PROMPT. Show favourable and adverse variances SEPARATELY (don’t net them!). Separate by cost centre. Use graphs/charts per management preference. Don’t overload with details — highlight key variances.
Exam-Ready Points
🎯 Must Remember!
- Fixed overhead can increase due to: Supervisor salary hike (NOT activity level, NOT selling price, NOT inventory valuation!).
- “Fixed standards” is NOT a standard type! Only Basic, Ideal, Currently Attainable.
- Material cost variance = price variance + usage variance. Due to ALL: price change, quantity change, theft/pilferage.
- Change in wages per hour = NOT a cause of labour EFFICIENCY variance (it’s a RATE variance cause!).
- Important points for setting standards: All — benchmark, operational aspects, cost centre identification.
- Currently Attainable = most widely used. Realistic. Accounts for normal wastage/idle time.
- Variance = Actual − Standard. Favourable = actual < standard. Adverse = actual > standard.
- Benchmarking = compare with BEST PRACTICES externally, not just internal past data.
- Favourable variance: Also needs scrutiny (may indicate inferior quality purchase!).
📝 Past Exam Questions
Last-Minute Flash Cards
⚡ Module D • Chapter 5 (Unit 33) Done!
- Standard Cost: Estimated before production. Variance = Actual − Standard.
- 3 Types: Basic (long-term), Ideal (perfect), Currently Attainable (realistic — MOST USED). “Fixed” ≠ type!
- Material: Price + Usage variance. Labour: Rate + Efficiency. Overhead: Variable + Fixed.
- Wages/hr change = Rate variance, NOT efficiency. Fixed OH ↑ = supervisor salary, NOT activity.
- Benchmark externally. Report promptly. Show favourable & adverse separately.
Banky says: “Set standard → Compare actual → Find variance → Fix it! ‘Fixed’ ≠ standard type! Currently Attainable = best! Wages change = Rate variance, NOT efficiency! 2 more!” 🎉🔍📊
Next: Chapter 34 — Marginal Costing & Break-Even Analysis! 💪