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Standard Cost Card – Variable
Production Cost
A standard cost card for one unit of
product might look like this:
A x B A
Standard Standard Standard
Cost Price Quantity
per Unit or Rate or Hours Inputs
12.00$ per lb.4.00 $ 3.0 lbs. Direct materials
35.00 per hour 14.00 2.5 hours Direct labor
7.50 per hour 3.00 2.5 hours Variable mfg. overhead
54.50$ Total standard unit cost
B
7
Are standards the
same as budgets?
A budget is set for
total costs.
Standards vs. Budgets
A standard is a per
unit cost.
Standards are often
used when
preparing budgets.
Quantity Variance Price Variance
Standard Quantity Actual Quantity Actual Quantity
× × ×
Standard Price Standard Price Actual Price
A General Model for Variance Analysis
9
Glacier Peak Outfitters has the following direct
material standard for the fiberfill in its mountain
parka.
0.1 kg. of fiberfill per parka at $5.00 per kg.
Last month 210 kgs of fiberfill were purchased
and used to make 2,000 parkas. The material
cost a total of $1,029.
Material Variances Example
Responsibility for Material Variances
Materials Price Variance Materials Quantity Variance
Purchasing Manager Production Manager
The standard price is used to compute the quantity variance
so that the production manager is not held responsible for
the purchasing manager’s performance.
13
Glacier Peak Outfitters has the following direct
labor standard for its mountain parka.
1.2 standard hours per parka at $10.00 per hour
Last month, employees actually worked 2,
hours at a total labor cost of $26,250 to make
2,000 parkas.
Labor Variances Example
Labor Variances Summary
2,400 hours 2,500 hours 2,500 hours
× × ×
$10.00 per hour $10.00 per hour. $10.50 per hour
Standard Hours Actual Hours Actual Hours
× × ×
Standard Rate Standard Rate Actual Rate
Rate variance
$1,250 unfavorable Efficiency variance
$1,000 unfavorable
15
Responsibility for Labor Variances
Production Manager
Production managers are
usually held accountable
for labor variances
because they can
influence the:
Mix of skill levels
assigned to work tasks.
Level of employee
motivation.
Quality of production
supervision.
Quality of training
provided to employees.
Advantages of Standard Costs
Management by
exception
Advantages
Promotes economy
and efficiency
Simplified
bookkeeping
Enhances
responsibility
accounting
19
Potential
Problems
Emphasis on
negative may
impact morale.
Emphasizing standards
may exclude other
important objectives.
Favorable
variances may
be misinterpreted.
Continuous
improvement may
be more important
than meeting standards.
Standard cost
reports may
not be timely.
Invalid assumptions
about the relationship
between labor
cost and output.
Potential Problems with Standard Costs
3,200 hours 3,300 hours
× ×
$2.00 per hour $2.00 per hour
Variable Overhead Variances – Example
Spending variance
$140 unfavorable Efficiency variance
$200 unfavorable
$340 unfavorable flexible budget total variance
Flexible Budget Flexible Budget Actual
for Variable for Variable Variable
Overhead at Overhead at Overhead
Standard Hours Actual Hours Incurred
21
Fixed Total Variable Total
Overhead Fixed Overhead Variable Machine
Rate Overhead Rate Overhead Hours
3.00 $ 9,000 $ 2.00 $ 6,000 $ 3,
2.25 9,000 2.00 8,000 4,
budget for overhead: ColaCo prepared this
Overhead Rates and Overhead
Analysis – Example
