Managerial Accounting
Module 3: Standard Cost Systems
Module Learning Outcomes
The nature of managerial accounting
3.1: Identify the objectives of a standard cost system
3.2: Identify direct cost standards and variances
3.3: Identify indirect cost standards and variances
Standard Costs
Learning Outcomes: Standard Cost Systems
3.1: Identify the objectives of a standard cost system
3.1.1: Identify the components of a standard cost system
3.1.2: Identify the benefits of a standard cost system
3.1.3: Understand the standard setting process
Identify the Components of a Standard Cost
System
A standard cost is a carefully predetermined
measure of what a cost should be under stated
conditions. Standard costs are not only estimates of
what costs will be but also goals to be achieved.
There are four major components of a standard cost
system:
● Standard Cost (SC)
● Standard Quantity (SQ)
● Actual Cost (AC)
● Actual Quantity (AQ)
Identify the benefits of a standard cost
system
There are five benefits that result from
a business using a standard cost
system:
● Improved cost control.
● More useful information for
managerial planning and
decision making.
● More reasonable and easier
inventory measurements.
● Cost savings in record-keeping.
● Possible reductions in
production costs.
Understand the Standard Setting Process
• The standard quantity of materials used in
making a product is largely a matter of
physical requirements or product
specifications, and therefore the engineering
department usually sets that standard.
• In developing standards, management must
consider the assumed conditions under
which these standards can be met.
Standards generally fall into two groups—
ideal and practical.
Practice Question 1
SleepyDogs, Inc. makes dog beds and has budgeted 5 yards of fabric for
each bed and 2 hours of labor. Each group of 10 assembly workers is
supervised by a person who makes $50 per hour. Labor costs run $25 per
hour and fabric costs $20 per yard currently. There is one yard of waste
material for each bed. What would the standard direct materials cost be for
each bed?
A. $50
B. $80
C. $100
D. $150
Direct Cost Variances
Learning Outcomes: Identify Direct Cost
Standards and Variances
3.2: Identify direct cost standards and variances
3.2.1: Compute the direct material cost variance
3.2.2: Compute the direct material efficiency variance
3.2.3: Compute the direct labor cost variance
3.2.4: Compute the direct labor efficiency variance
Compute the Direct Materials Cost Variance
Direct materials cost variance =
(Actual Cost – Standard Cost) x Actual Quantity
purchased
OR
(Actual Cost x Actual Quantity purchased) –
(Standard Cost x Actual Quantity purchased)
Compute the Direct Materials Efficiency
Variance
Direct materials efficiency variance =
(Actual Quantity – Standard Quantity) x Standard
Cost
OR
(Actual Quantity x Standard Cost) – (Standard
Quantity x Standard Cost)
Compute the Direct Labor Cost Variance
Direct labor cost variance =
(Actual Cost – Standard Cost) x Actual Quantity
OR
(Actual Cost x Actual Quantity) – (Standard Cost x
Actual Quantity)
Compute the Direct Labor Efficiency Variance
Direct labor efficiency variance =
(Actual Quantity – Standard Quantity) x Standard
Cost
OR
(Actual Quantity x Standard Cost) – (Standard
Quantity x Standard Cost)
Practice Question 2
SleepyDogs, Inc. makes dog beds and has budgeted 5 yards of fabric for
each bed and fabric costs $20 per yard currently. The company produced
1,000 beds for the month, which was the budgeted production. There is one
yard of waste material for each bed. The company purchased (and used)
4,800 yards of materials for a total cost of $105,600. The direct materials
efficiency variance is:
A. $4,000 Favorable
B. $4,400 Unfavorable
C. $5,600 Favorable
D. $9,600 Unfavorable
Indirect Cost Variances
Learning Outcomes: Identify Indirect Cost
Standards and Variances
3.3: Identify indirect cost standards and variances
3.3.1: Compute the variable manufacturing overhead cost
variance
3.3.2: Compute the variable manufacturing overhead efficiency
variance
3.3.3: Compute the fixed manufacturing overhead variance
Compute the Variable Manufacturing
Overhead Cost Variance
Variable overhead cost variance =
(Actual Cost – Standard Cost) x Actual Quantity
OR
(Actual Cost x Actual Quantity) – (Standard Cost x
Actual Quantity)
Compute the Variable Manufacturing
Overhead Efficiency Variance
Variable overhead efficiency variance =
(Actual Quantity – Standard Quantity) x Standard
Cost
OR
(Actual Quantity x Standard Cost) – (Standard
Quantity x Standard Cost)
Compute the Fixed Manufacturing Overhead
Variance
Fixed overhead variance =
Actual fixed overhead - Budgeted fixed overhead
Practice Question 3
SleepyDogs, Inc. makes dog beds and has budgeted 5 yards of fabric for
each bed. The company produced 1,000 beds for the month, which was the
budgeted production. There is one yard of waste material for each bed. The
company purchased (and used) 4,800 yards of materials. The standard
allocation rate for fixed overhead (rent, insurance, supervisor salaries, and
other non-direct product costs) is $2.80 per yard of direct materials. Actual
indirect fixed overhead came in at $14,400. The fixed overhead variance is:
A. $400 Unfavorable
B. $960 Unfavorable
C. $1,000 Unfavorable
D. $4,800 Favorable
Quick Review
• What are the components of a standard cost system?
• What are the benefits of a standard cost system?
• Describe the standard setting process.
• How do you compute the:
• Direct materials cost variance?
• Direct materials efficiency variance?
• Direct labor cost variance?
• Direct labor efficiency variance?
• Variable manufacturing overhead cost variance?
• Variable manufacturing overhead efficiency variance?
• Fixed manufacturing overhead variance?
