Class Meeting 3

STANDARD COSTING

Riwayadi
Learning Objectives
Aftar studying this chapter, students are able to:
1. Explain 4 types of product costing related to
the types of resource costs used
2. Explain the limitation of actual costing
3. Explain the difference between standard cost
and estimated cost
4. Explain the advantages of standard costing
5. Define standard cost
6. Explain the relationship of standar cost and
budget
7. Explain the application of standard costing
8. Explain the impact of setting standard cost
inaccurately
9. Setting standard cost for each component of
manufacturing costs
10.Determine quantity standard of raw materials
and direct labor hour standard
11.Calculate the variances and analyze the
variances for each component of
manufacturing cost
12.Accounting for standard costing - process
costing
13.Describe cost flow for standard costing
Objective 1: Four kinds of cost
measurement
1. Actual costing: All manufacturing costs (raw
material cost, labor cost, and factory
overhead cost) are assigned to products
using actual costs. This costing is applied to
Process Costing
2. Normal costing: raw material cost and labor
cost are assigned to products using actual
costs while factory overhead cost using
predetermined rate (applied cost). This
costing is applied to Job Order Costing
3. Estimated costing: all manufacturing
costs are assigned to products using
estimated costs
4. Standard costing: all manufacturing
costs are assigned to products using
standard costs. This costing can be
applied to process costing and job order
costing
Objective 2: Limitation of Actual Costing

• Cost of product can only be calculated at the

end of period after all manufacturing costs
are accounted for.
• Actual costing can not be used for cost
control purpose because of no benchmark.
• Actual costing can not be used for tactical
decision making such as special order
decision.
Objective 3: Estimated Cost vs Standard
Cost

• Estimated cost is set roughly, only based

on experience.
• Standard cost is set based on scientific
research, such as time and motion study,
laboratory research. Hence, standard cost
is better for performance evaluation than
estimated cost.
Objective 4: Advantages of Standard
Costing
• Raw material and finished goods inventory
subsidiary ledgers are not anymore required.
• It will be easily to determine the cost of raw
material inventory and the cost of finished
goods inventory
• Standard cost can be used for cost control
(actual vs standard)
• Standard cost can be used for manager’s
performance evaluation
• Standard cost can be used as a basis for
preparing budget.
Objective 5: Standard Cost
• Standard cost is the cost to be achieved
to produce one unit (batch) of product.
Example:
Standard cost = Std Q x Std P
Standard raw material cost: 5 kg @ Rp 1.000 Rp 5.000
Standard labor cost: 2 DLH @ Rp 5.000 10.000
Standard variable FOH: 2 DLH @ Rp 2.000 4.000
Standard fixed FOH: 2 DLH @ Rp 4.000 8.000
Total unit cost Rp 27.000
Objective 6: Relationship of Standard Cost
and Budget

• Standard cost can be used as a basis for

preparing the budget. Standard cost is
stated in term of unit cost, while budget in
term of total cost. However, in preparing
budget, estimated cost can be also
possible.
Objetive 7: Application of Standard Costing

Standard costing can be applied to:

• Job order costing
• Process costing Cost accumulation method

• Hybrid costing
• Backflush costing
• Functional-based costing / FBC Costing approach
• Activity-based costing / ABC
Objective 8:Impact of Setting
Standard inaccurately
• Standard that is too loose or too tight will
discourage the workers.
• If standard is too loose, the workers will
work slowly, and will impact on the low
productivity
• If standard is too tight, the workers may
be frustrated and ignore the standard
because it is impossible to achieve.
Objective 9: Setting the Standard

• Setting raw material cost standard

– Setting raw material quantity standard
– Setting raw material price standard
• Setting labor cost standard
– Setting direct labor hour (DLH) standard
– Setting labor rate standard
• Setting factory overhead standard
– Setting direct labor hour standard
– Setting factory overhead rate standard
Objective 10: standard raw material quantity
and standard direct labor hours

• Determining standard raw material

quantity and direct labor hours depends
on whether or not there is work in process
inventory. If there is work in process
inventory, equivalent units need to be
determined first using average cost
method or FIFO method. Then, equivalent
units are multiplied by standard quantity
per unit of product.
Objective 11: Variance Analysis
• Variance happens if actual cost differs from
standard cost.
• Raw Material Cost (RMC) Variance
= Actual RMC – Standard RMC
= (AQ x AP) – (SQ x SP)
AQ = actual quantities used
AP = actual raw material price
SQ = Standard quantities
SP = standard raw material price
Favorable variance = Actual RMC < Standard RMC
Unfavorable variance = Actual RMC > Std RMC
• Material Price Variance
= (AP – SP) x AQ purchased or used
• Favorable variance = AP < SP
• Unfavorable variance = AP > SP
• Material Quantity or Usage Variance
= (AQ – SQ) x SP
• Favorable variance = AQ < SQ
• Unfavorable variance = AQ > SQ
 example
• Standard quantity of RM 3 kg per unit
• Standard price of RM Rp 1.000 per kg
• Actual production 5.000 units
• Actual quantity of RM purchased 20.000 kg and
used 16.000 kg
• Actual price of RM Rp 900 per kg
Required:
a. Determine the RMC variance and make the
variance analysis
b. Make journal
• LABOR COST VARIANCE
= Actual Labor Cost – Standard Labor Cost
= (AH x AR) – (SH x SR)
AH: actual labor hours
SH: standard labor hours
AR: actual labor rate
SR: standard labor rate
Favorable variance = Actual LC < Standard LC
Unfavorable variance = Actual LC > Std. LC
• Labor Rate Variance
= (AR – SR) x AH
• Favorable variance = AR < SR
• Unfavorable variance = AR > SR
• Labor Efficiency Variance
= (AH – SH) x SR
• Favorable variance = AH < SH
• Unfavorable variance = AH > SH
example
• Standard DLH: 0,5 hours per unit
• Standard labor rate : Rp 10.000 per DLH
• Actual production 5.000 units
• Actual DLH: 3.000 hours
• Actual labor rate: Rp 9.000 per DLH
Required:
a. Determine the DLC variance and make
the variance analysis
b. Make journal entries
• FOH VARIANCE
= Actual FOH – Standard FOH
= (AH x AFOHR) – (SH x SFOHR)
AH: actual direct labor hours
SH: standard direct labor hours
AFOHR: actual FOH rate
SFOHR: standard FOH rate

Favorable => actual FOH < std FOH

Unfavorable => actual FOH > std FOH
 Two-Variance Analysis
1. Controllable Variance
Actual FOH …………………………………………… xxx
Flexible budget at standard capacity:
Budgeted fixed FOH:
(normal capacity x fixed FOH rate) xxx
Budgeted variable FOH at standard capacity:
(standard capacity x variable FOH rate) ………… xxx
Total budgeted FOH cost xxx
Controllable variance……...……………….. Xxx
 • Favorable variance = actual FOH < flexible
budget at standard capacity
• Unfavorable variance = actual FOH > flexible
budget at standard capacity

2. Volume Variance
= (Normal Capacity – Standard Capacity)
Fixed FOH Rate
• Favorable variance = normal capacity < standard
capacity => overcapacity
• Unfavorable variance = normal capacity >
standard capacity => idle capacity
Three-Variance Analysis
1. Spending Variance or Budget Variance

Actual FOH ……………………………………… xxx

Flexible budget at actual capacity:
Budgeted fixed FOH:
(normal capacity x fixed FOH rate) xxx
Budgeted variable FOH at actual capacity:
(actual capacity x variable FOH rate) …….………… xxx
Total budgeted cost xxx
Spending variance..…………………………………… xxx
 • Favorable variance = actual FOH < flexible
budget at actual capacity
• Unfavorable variance = actual FOH > flexible
budget at actual capacity
2. Capacity Variance
= (Normal Capacity – Actual Capacity) x
Fixed FOH rate
• Favorable variance = normal capacity < actual
capacity => overcapacity
• Unfavorable variance = normal capacity > actual
capacity= > idle capacity
Marketing manager should be responsible for this
variance, because no of units produced depends
on the demand (sales)
3. Overhead Efficiency Variance
= (Actual Capacity – Standard Capacity)
x Total FOH Rate
• Favorable variance = actual capacity < standard
capacity
• Unfavorable variance = actual capacity >
standard capacity
Four-Variance Analysis
1. Spending Variance
2. Capacity Variance
3. Variable FOH Efficiency Variance
= (actual capacity – standard capacity) x
variable FOH rate
4. Fixed Overhead Efficiency Variance
= (actual capacity – standard capacity) x
fixed FOH rate
Five-Variance Analsysis
1. Variable Spending Variance
Actual variable FOH
(actual capacity x actual variable FOH rate) xxx
Budgeted variable FOH at actual capacity:
(actual capacity x standard variable FOH
rate)…………………… xxx
Variable spending variance………………….… xxx
 • Favorable variance = actual variable FOH < standard
variable FOH
• Unfavorable variance= actual variable FOH > standard
variable FOH

2. Fixed Spending Variance

actual fixed FOH:
(actual capacity x actual fixed FOH rate) Xxx
Budgeted Fixed FOH:
(normal capacity x standard fixed FOH
rate)……………………………. xxx
Fixed spending variance…………..…………. xxx

• Favorable variance= actual fixed FOH < budgeted fixed

FOH
• Unfavorable variance = actual fixed FOH > budgeted fixed
FOH
3. Capacity Variance
4. Variable Overhead Efficiency Variance
5. Fixed Overhead Efficiency Variance

Actual Capacity
Capacity Variance

Normal Capacity Efficiency Variance

Volume Variance
Standard Capacity

Relationship of Capacity and FOH Variance

example
• Standard capacity: 0,5 DLH per unit
• Standard variable FOH rate: $ 4 per DLH
• Standard fixed FOH rate: $ 6 per DLH
• Normal Capacity: 6.000 units or 3.000 DLH
• Actual production: 5.000 units
• Actual capacity: 2.700 DLH
• Total actual FOH $ 30.000 (40% variable cost)
Required:
a. Determine the FOH variance and analyze into
2, 3, 4 and 5 variances.
b. Make journal entries using 5 variances
COST OF GOODS SOLD
Beginning finished goods inventory……………….…………… xxx
Cost of goods manufactured….…………..…………………… xxx
Goods available for sale…….………………………………………. xxx
Ending finished goods inventory………………….………………. (xxx)
Standard cost of goods sold.……..……………………………… xxx
Adjustment:*)
Raw material price variance of quantity used xx
Raw material quantity variance…….. xx
Labor rate variance.……………..F (xx)
Labor efficiency variance……… xx
Variable spending variance……..…F (xx)
Fixed spending variance……… xx
Capacity variance……………… xx
Efficiency variable FOH variance……. xx
Efficiency fixed FOH variance………….. xx xxx
Actual cost of goods sold………………….…….……………………. xxx

Effect of Variances on Cost of Goods Sold

*)Favorable variance deducts COGS, and unfavorable variance adds COGS
 Class Meeting 4

STANDARD COSTING
(continuing)

Riwayadi
ILLUSTRATION
Standard cost to produce one box (1/2 kg
box size) of Galamai is as follows:
RMC: 1 kg @ Rp 5.000 Rp 5.000
DLC: 2 DLH @ Rp 10.000 20.000
FOH V: 2 DLH @ Rp 2.000 4.000
FOH F: 2 DLH @ Rp 3.000 6.000
Total Std Cost of Product 35.000
Normal capacity per year is 10.000 direct
labor hours (DLH) or 5.000 boxes.
Actual production for a year were 4.000 boxes.
Raw material purchased was 5.000 kg at Rp Rp 4.000
and 4,500 kg had been used.
Labor cost paid was Rp 81.000.000 for 9.000 DLH
(actual labor rate is Rp 9.000 per DLH).
Actual variable and fixed FOH were Rp 22.000.000
and Rp 28.000.000 respectively.
Required:
1. Calculate the variances and make variance
analysis (using two, three, four, and five-variance
analysis for FOH)
2. Make variance relationship diagram for FOH
3. Make journal entries needed
4. Prepare income statement if 80% of units
produced had been sold at Rp 50.000 per box.
Marketing and administrative expenses were Rp
20.000.000.
 2. RELATIONSHIP AMONG VARIANCES
1 variance 3 variances 4 variances 5 variances 2 variances
Variable Spend. Controlla
Spending Spending Variance ble
Actual 4 M UF
Variance Variance variance
FOH
2 M UF 4 M UF
2 M UF
50 M Fixed spend. Var

2MF

Overhead Efficiency Variable Variable efficiency

Variance Variance variance
Efficiency Var
2 M UF
10 M UF 5 M UF 2 M UF
Fixed efficiency
Fixed variance
Efficiency Var 3 M UF
Standard 3 M UF
FOH Capacity
Variance Volume
40 M 3 M UF Capacity Capacity
Variance
Variance variance
6 M UF
3 M UF 3 M UF
3. JOURNAL ENTRIES
RAW MATERIAL COST
There are three alternatives to record the price
variance:
1. Price variance is recorded when raw material
purchased
2. Price variance is recorded when raw material
used
3. Price variance is recorded when raw material
purchased and used
PRICE VARIANCE IS RECORDED
WHEN THE RM PURCHASED
• When the RM purchased, RM inventory is
recorded using standard price
1) To record the purchase of raw material
RM inventory: 5.000 kg x Rp 5.000 25 M
Cash: 5.000 x Rp 4.000 20 M
Price variance (4.000 – 5.000) 5.000 kg 5 M (F)
2) To record the raw material usage
WIP Inventory is recorded based on std
cost => SQ x SP
WIP inventory:
4.000 kg x Rp 5.000 20 M
Quantity Variance (UF) 2,5 M
RM Inventory: 4.500 kg x 5.000 22.5 M
Advantage of this alternative:
No need to maintain the RM Inventory
subsidiary ledger because RM inv has the
same price for a whole year
PRICE VARIANCE IS RECORDED
WHE THE RM USED
• When the RM purchased, RM inventory will be recorded
at actual price
1) To record the RM purchased
RM Inventory: 5.000 kg x Rp 4.000 20 M
Cash 20 M
2) To record the RM usage
WIP Inventory: 4.000 kg x 5.000 20 M
Quantity variance 2,5 M
RM inventory: 4.500 x Rp 4.000 18 M
Price variance4.000 – 5.000) 4.500 kg 4,5 M
Advantage: RM Price variance reflects the RM used
Disadvantage: RM inventory subsidiary ledger needs to be
maintained
PRICE VARIANCE IS RECORDED
WHEN THE RM PURCHASED AND
USED
• When the RM purchased, RM inventory is
recorded using standard price (same as
the first alternative)
1) To record the purchase of raw material
RM inventory: 5.000 kg x Rp 5.000 25 M
Cash: 5.000 x Rp 4.000 20 M
Purchase Price variance
(4.000 – 5.000) 5.000 kg 5 M (F)
• When RM used:
2) To reverse purchase price variance to
usage price variance
Purchase price variance 4.5 M
Usage price variance 4.5 M
Purchase price variance=> real account =>
balance sheet
Usage price variance => nominal account
=> income statement
3) To record the RM used (same as the first
alternative)
WIP inventory: SQ x SP
4.000 kg x Rp 5.000 20 M
Quantity Variance (UF) 2,5 M
RM Inventory: 4.500 kg x 5.000 22.5 M
DIRECT LABOR COST
1) To record the payment of direct labor cost
Payroll 81.000.000
Cash 81.000.000
2) To record the assignment of DLC to product
WIP inventory: std DLH x std rate
8.000 DLH x Rp 10.000 80 M
Labor Efficiency variance (UF) 10 M
Labor rate variance (F) 9M
Payroll 81 M
FOH COST
1) To record the actual FOH
FOH 50 M
Any credited accounts 50 M
2) To assign the FOH to product
WIP inventory (std DLH x std FOH rate)
8.000 DLH x Rp 5.000 40 M
Variable spending Var (UF) 4M
Capacity variance (UF) 3M
Variable efficiency Var. (UF) 2M
Fixed efficiency Var. (UF) 3M
Fixed spending Var. (F) 2M
FOH 50 M
UNITS COMPLETED
• To record the units completed
Finished goods Inventory (std cost)
4.000 boxes x Rp 35.000 140 M
WIP Inventory 140 M
Assume that 3.000 boxes were sold at Rp 50.000, the entry
will be:
1) Cash (3.000 x 50.000) 150 M
Sales 150 M
2) Cost of goods sold
(3.000 x 35.000) 105 M
Finished Goods Inventory 105 M
Objective 13: Cost Flow of standard
costing

RM Inventory WIP Inventory Finished Goods Inv.

Actual cost Actual Std cost Std cost Std Cost Std Cost
cost
Std cost
Std cost
Payroll
Cost of Goods Sold
Actual Actual
cost cost Std Cost
Unfavorable Favorable
FOH Variances

Actual Actual Unfavor Favorable

cost cost able
 EXERCISE 01
Data obtained from Minang Cement Corp. for
year 200X are as follows:
STANDARD ACTUAL
DRM price per kg Rp 1.000 Rp 1.200
DL rate per DLH Rp 5.000 Rp 4.500
Variable FOH rate per DLH Rp 500
Fixed FOH rate per DLH Rp 1.500
DRM quantity per unit 3 kg
DLH per unit ` 2 hours
 ACTUAL
Production for year 1.200 units
Sales for year 1.000 units
Selling price per unit Rp 25.000
Raw material purchases for year 4.200 kg
Raw material usage for year 3.700 kg
Direct labor hours for year 2.200 hours
FOH for year (40% variable) Rp 5.000.000
Minang Cement Corp. has a normal capacity of
2.000 direct labor hours
Required:
1. Calculate DRM cost variance and breakdown
into price variance and quantity variance
2. Calculate DLC variance and breakdown into
labor rate variance and labor efficiency variance
3. Calculate FOH variance and breakdown into 5
variances
4. Make journal entries needed using 3rd
altertative (price variance is recored when it is
pruchased)
5. Prepare income statement for year 200X.
Selling and administrative expenses were Rp
2.000.000.
EXERCISE 02

• Capacity variance $ 500 F

• Normal capacity 1.000 DLH
• Std variable FOH $ 50 / DLH
• Std fixed FOH $ 80 / DLH
a. Determine the actual DLH?
b. If spending variance $ 400 UF, determine
the actual FOH and efficiency variance.
Standard capacity 900 DLH
c. Make journal entries needed