## Thursday, 13 April 2017

### Standard Costing

Standard costing involves the setting of targets, or standards, for the different factors affecting costs.

Variances from the standard are then studied in detail.

For example:

Standard timber usage per unit of production                       4.00 meters
Standard timber price                                                      \$2.00 per meter
Actual production                                                                   3,500 posts
Actual timber usage                                                           14,140 meters
Actual cost of timber used                                                           \$27,714

Material Price Variance is                                      \$566 favourable (2%)
(14,140 x \$2.00) - \$27,714
= \$28,280 - \$27,714
= \$566

Material Usage Variance is                                          \$280 adverse (1%)
[(14,140 meters less 3,500 x 4.00 meters) x \$2]
= [(14,140 meters less 14,000 meters) x \$2]
= \$280

The material price variance happens because the standard cost of the 14,140 meters used was \$28,280 (at \$2 per meter).  The actual cost was \$27,714, a favourable variance of \$566.

On the other hand, 140 meters of timber too much was used resulting in an adverse material usage variance.