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.