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 Labor and Overheads
In standard costing, there are three main types of costs: material costs, labor costs, and overhead costs.
- 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 Labor
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 labor:
- Labor rate variance: The labor rate variance is the difference between the actual wage rate per hour and the standard wage rate per hour.
- Labor efficiency variance: The labor efficiency variance is the difference between the actual number of hours required to produce a unit of product or service and the standard number of hours required to produce a unit of product or service.
Variance Analysis for Overheads
Variance analysis for overheads is more complex than variance analysis for materials and labor. This is because overhead costs are typically allocated to products or services based on a predetermined basis, such as machine hours or direct labor hours. This means that the actual overhead costs may not be directly related to the actual quantity of materials or labor used.
There are two main types of variances for overheads:
- Overhead spending variance: The overhead spending variance is the difference between the actual overhead costs and the standard overhead costs.
- Overhead volume variance: The overhead volume variance is the difference between the actual level of production and the standard level of production.
Accounting Treatment of Variances
The accounting treatment of variances depends on the type of variance and the company’s policies. However, there are some general principles that are typically followed.
- Favorable variances: Favorable variances are typically credited to cost of goods sold or a similar account. This is because favorable variances represent an increase in profits.
- Unfavorable variances: Unfavorable variances are typically debited to cost of goods sold or a similar account. This is because unfavorable variances represent a decrease in profits.