STRATEGIC COST MANAGEMENT

STANDARD COSTING AND VARIANCE ANALYSIS

1. Nature of Standard Costing

Definition Standard cost is a carefully determined cost
based on efficient operations.
Purpose The purposes are to exclude past inefficiencies
and to take into account changes expected to
occur in the budget period.

2. Users of Standard Costs

Accounting Managers of the following industries: Manufacturing, service firms, food companies,
not-for-profit organizations and financial
institutions.

3. Benefits & Limitations of Standard Costs

Benefits (1) Managers and employees become cost
conscious because variances between standard
costs and actual costs are reported and
explained.
(2) They aid management planning by providing
the unit amount for budgeting.
(3) Standard cost systems integrate managerial,
accounting and engineering functions.
(4) It can save data processing costs.
Limitations (1) Determining significance of variance might be
difficult.
(2) Other useful information such as trends may
not be noticed at early stage since attention is
focused only on variances above a certain level.
(3) Conspiracy among subordinates can arise
because they want to cover up unfavorable
results for not achieving the standard costs set.

4. Setting Standard Costs

Direct Material Standards (1) Standard Quantity
Expected production at zero defects – charging
lost materials, scrap and inefficiencies in the
production process directly to the supervisor.

(2) Standard Price

The source of such standard might be coming
from the purchasing department. The supervisors
under the department will be responsible for any
price variance. The price must also consider the
cash discounts and other material handling cost
such as freight cost, receiving cost, etc.)
Direct Labor Standards (1) Standard Time
Payroll from the past cut off can assist in
determining the worker-hours used on various
jobs.

(2) Standard Labor Rate

The rates should be determined by considering
the current rates as well as the competitive
markets. Two ways that a Company can use to
determine the labor rate standards:
 a. A company may establish a standard rate for
the job; regardless of who performs the job, the
rate stays the same, or

b. A company may establish a rate for an

individual worker and the worker receives this
rate regardless of the work performed.

Factory Overhead Standard It uses budgeted rates based on standard hours

or other costs drivers allowed for actual
production. In other words, the Company will use
the Standard rate then multiply it to the actual
hours or other cost drivers.

Capacity level is selected as the volume basis or

denominator capacity. The Company must use
the Practical capacity rather than the theoretical
capacity.

After selecting the capacity level, costs are

allocated on volume related or non-volume
related base.

Multiple Choice Exercise Questions

Quarantine Corporation manufactures industrial-sized water coolers and uses budgeted machine-hours to allocate variable
manufacturing overhead. The following information pertains to the company’s manufacturing overhead data.

Budgeted output units 15,000 units

Budgeted machine hours 5,000 units
Budgeted variable manufacturing
Overhead costs for 15,000 units P 161,250

Actual output units produced 22,000 hours

Actual machine-hours used 7,200 hours
Actual variable manufacturing overhead costs P 242,000

1. What is the budgeted variable overhead cost rate per output unit?
a. P 10.75 c. P 32.25
b. P 11.00 d. P 48.40

2. What is the flexible budget amount for variable manufacturing overhead?

a. P 165,000 c. P 242,000
b. P 236,500 d. P 252,500

3. What is the flexible budget variance for variable manufacturing overhead?

a. P 5,500 favorable c. P 4,300 favorable
b. P 5,500 Unfavorable d. P 4,300 Unfavorable

4. Variable manufacturing overhead costs were ________ for actual output.

a. Higher than expected c. Lower than expected
b. The same as expected d. Just an average costs