Definition
A standard cost is a predetermined cost per unit of product, built from expected quantities and prices of materials, labour and overhead. Inventory and production move through the books at standard, and the differences from actual costs are recorded separately as variances, which show managers exactly where spending departed from plan.
How it works
Setting a standard means answering two questions for each input: how much should one unit use (quantity standard) and what should that cost (price standard). A chair might need 4 kg of wood at 5 per kg and 1.5 labour hours at 20 per hour.
Variances split the total difference into causes. A material price variance is the effect of paying more or less than standard for what was bought; a usage variance is the effect of using more or less than the standard quantity for the actual output. Labour and overhead have matching rate, efficiency and spending variances.
IAS 2 allows standard costs as a measurement technique if the results approximate actual cost, so standards must be reviewed regularly. In Ledgeriano a bill of materials rolls up to a standard cost, production orders close with their variances, and the job cost sheet shows material usage and price, labour rate and efficiency, and overhead variances.
Formula
Material price variance = (Actual price - Standard price) × Actual quantity
Material usage variance = (Actual quantity - Standard quantity for actual output) × Standard price
Example: material variances for 1,000 units
The standard is 2 kg per unit at 5 per kg, so 10 per unit. To make 1,000 units the factory used 2,100 kg bought at 5.20.
| Calculation | Variance | |
|---|---|---|
| Price variance | (5.20 - 5.00) × 2,100 | 420 adverse |
| Usage variance | (2,100 - 2,000) × 5.00 | 500 adverse |
| Total material variance | 10,920 actual - 10,000 standard | 920 adverse |