Standard Costing : Costing System—for Material, Labour, and Overhead, Variance Analysis for Materials

Standard Costing

Standard costing is a method of accounting that uses predetermined standards to estimate the costs of products or services. Standard costs are set in advance of production and are used to compare actual costs to budgeted costs. Standard costing can be used to help businesses control costs, set prices, and make decisions about production.

Costing System for Material, Labor, and Overhead

In standard costing, there are three main types of costs: material costs, labor costs, and overhead costs.

  • Material costs are the costs of the materials that are used to produce a product or service. Material costs are typically based on the standard price per unit of material and the standard quantity of material used per unit of product or service.
  • Labor costs are the costs of the labor that is used to produce a product or service. Labor costs are typically based on the standard wage rate per hour and the standard number of hours required to produce a unit of product or service.
  • Overhead costs are the costs of all of the other resources that are used to produce a product or service, such as rent, utilities, and insurance. Overhead costs are typically allocated to products or services based on a predetermined basis, such as machine hours or direct labor hours.

Variance Analysis for Materials

Variance analysis is the process of analyzing the differences between actual costs and standard costs. Variances can be favorable or unfavorable. Favorable variances indicate that actual costs are less than standard costs, while unfavorable variances indicate that actual costs are more than standard costs.

There are two main types of variances for materials:

  • Material price variance: The material price variance is the difference between the actual price per unit of material and the standard price per unit of material.
  • Material usage variance: The material usage variance is the difference between the actual quantity of material used per unit of product or service and the standard quantity of material used per unit of product or service.

Variance analysis can be used to identify the causes of variances and to take corrective action to improve performance.

Conclusion

Standard costing is a method of accounting that uses predetermined standards to estimate the costs of products or services. Standard costing can be used to help businesses control costs, set prices, and make decisions about production. The costing system for material, labor, and overhead in standard costing is based on predetermined standards for the price and quantity of materials, labor, and overhead used to produce a product or service. Variance analysis is the process of analyzing the differences between actual costs and standard costs. Variances can be favorable or unfavorable. Favorable variances indicate that actual costs are less than standard costs, while unfavorable variances indicate that actual costs are more than standard costs. Variance analysis can be used to identify the causes of variances and to take corrective action to improve performance.