It can inculcate cost-conciousness in the staff.

It helps to motivate staff by setting realistic standards.

Using variance analysis performance ca be monitored and improvements in work methods can result.

Types of Standard

· Ideal standard - assumes perfect production conditions with no mechanical failure, no stock-outs, no staff absenteeism etc. It is unattainable but is an indication of what to strive for.

· Attainable standard - is a realistic target and is based on efficient working conditions with allowance made for machine breakdown, stockouts etc.

· Basic standard - is a standard set for use over a long period of time and is used to compare with current standards to to see the effect of changes in conditions over the years.

· Current standard - is set to reflect current conditions so has limited use in time. In times of inflation such standards may be set monthly.

Variance Analysis

Direct Material Variance

The main reason for actual and estimated costs being different are either a change in the price of materials or a change in the usage of material.

Materials price variance is the difference in cost that results from the price being different to the standard.

(Standard price - Actual price) x Actual material usage

Materials usage variance is the difference between the actual usage of material and the standard usage multiplied by the standard price.

(Actual usage - Standard usage) x Standard price

3 Total material variance = Actual Material cost - Standard Material cost

Direct Labour Variances

Labour rate variance is the difference between the actual wage rate and the standard rate of pay times the actual hours worked.

(Actual - Standard rate of pay) x Actual hours worked

Labour efficiency variance is the difference between the actual hours worked and the standard hours ie. the hours that should have been worked to produce the actual output.

(Actual hours - Standard hours) x Standard rate of pay

3 Total labour variance = Actual Labour cost - Standard L abour cost

Variable Overhead Variances

The variable overhead variance is the difference between the variable overhead cost actually incurred and the cost which should have been incurred for the actual hours worked. This assumes that variable overheads are directly attributable to labour hours.

Actual expenditure - (Standard hours worked x Variable Overhead rate)

The variable overhead efficiency variance is the difference between the amount of overheads recovered based on the standard hours of production and the amount which should have been recovered if the actual hours worked had been at standard efficiencey.

(Actual hrs. worked - Standard hrs. worked) x Variable Overhead rate

3 Total Variable O’H Variance = Actual Variable O’H cost - Standard Variable O’H cost

Fixed Overhead Variances

The fixed overhead expenditure variance is the difference between the expenditure actually incurred and that actually budgeted.

Actual expenditure - Budgeted expenditure

The fixed overhead volume variance measure the amount of any under or over recovery of overheads due to actual output (measure in terms of standard hours of actual production) being different to that budgeted.

Total Fixed Overhead Variance = Actual Cost - Standard Cost

Sales Variances

The sales margin price variance gives the effect on profits of a change in selling price.

(Actual price - Standard price) x Sales volume

The sales margin quantity variance is the difference in profit which results from a change in the sales volume.

(Actual sales - Budgeted sales) x Standard profit margin

3 Total Sales Variance = Actual Sales - Standard Sales

Problems with Standard Costing

Standard setting is a lengthy and costly procedure.

Standards are often seen by the staff as restrictions on their behaviour which can lead to dysfunctionalism.