Standard costing system: formula sheet

Key formulas

Standard cost per unit

Standard cost = Σ (standard quantity × standard price) for materials + labour + overheads

Build the card by adding each element's cost per unit.

Standard material cost per unit

Standard kg per unit × standard price per kg

Standard kg includes normal waste allowance. Price includes carriage inwards and is net of expected discounts.

Standard labour cost per unit

Standard hours per unit × standard rate per hour

Standard hours include allowance for normal idle time and rest.

Overhead absorption rate

Budgeted overhead ÷ budgeted activity (labour hours or machine hours)

Standard overhead per unit = standard hours per unit × this rate.

Gross input for a given output with normal loss

Gross input = Net output ÷ (1 − normal loss %)

Use this to find the standard material quantity per good unit when waste is a percentage of input.

Types of standard

Ideal = perfect conditions; Attainable = tough but achievable; Current = present conditions; Basic = unchanged long term

Ideal standards assume perfect efficiency, so they give a lower standard cost per unit than attainable standards, all else equal. Attainable is the usual recommended basis.

Direct material cost per unit

Standard quantity of material × standard price per kg (or per unit)

Use the quantity needed per finished unit, including normal waste. Do this for each material.

Direct labour cost per unit

Standard hours per unit × standard rate per hour

Do this for each grade of labour. Standard hours include allowance for normal idle time if the question says so.

Overhead cost per unit

Standard hours per unit × overhead absorption rate per hour

Rate = budgeted overhead ÷ budgeted hours (or units). Keep variable and fixed overhead on separate lines.

Total standard cost per unit

Materials + Labour + Variable overhead + Fixed overhead (absorption costing)

Under marginal costing, leave out fixed overhead. The card then shows standard variable cost.

Standard selling price

Standard cost + standard profit

If profit is a margin on selling price: price = cost ÷ (1 − margin %). If a mark-up on cost: price = cost × (1 + mark-up %).

Normal loss adjustment

Input needed per good unit = good output required ÷ (1 − normal loss %)

The loss % is a percentage of input. If the loss is quoted as a percentage of output, multiply instead: output × (1 + loss %).

Flexed variable cost

Flexed variable cost = Budgeted variable cost per unit × Actual units

Use actual units produced for production costs and actual units sold for sales revenue and sales-related costs.

Flexed fixed cost

Flexed fixed cost = Original budgeted fixed cost

Fixed costs are not flexed, assuming activity stays within the relevant range.

Flexed budget total

Flexed total cost = Flexed variable cost + Fixed cost

Do the same for profit: flexed revenue − flexed costs.

Cost variance

Variance = Flexed budget cost − Actual cost

Positive means favourable, negative means adverse. For revenue and profit use Actual − Flexed budget.

Variable cost per unit

Variable cost per unit = Budgeted variable cost ÷ Budgeted units

Needed when the budget gives totals rather than unit costs.

Variance direction for costs

Actual cost < standard cost = F; actual cost > standard cost = A

Lower cost raises profit.

Variance direction for revenue and profit

Actual revenue or profit > standard = F; actual < standard = A

Higher revenue raises profit.

Reconciliation of profit

Budgeted profit + Σ favourable variances − Σ adverse variances = Actual profit

This is the operating statement. Use the same profit basis (standard marginal or absorption) throughout.

Total cost variance

Standard cost of actual output − Actual cost

Positive = F, negative = A. It equals the sum of its price and usage (or rate and efficiency) parts.

Management by exception

Investigate only significant variances

Significance depends on size, trend, controllability and cost of investigating.

Quick revision

• A standard cost is a planned unit cost made of standard quantity and standard price for each input.
• Standards help with planning, control, performance measurement and motivation.
• Standard types include ideal, attainable, current and basic. Attainable standards are usually the most motivating.
• The standard cost card lists each input, its quantity, price and cost per unit, and gives the total.
• A variance is the difference between actual and standard (or flexed budget) results.
• Cost higher than standard is adverse. Cost lower than standard is favourable.
• Revenue or profit higher than standard is favourable. Lower is adverse.
• A fixed budget does not change with activity. A flexed budget is restated for actual output.
• In flexing, variable costs change with output and fixed costs stay the same.
• Always compare actual results with the flexed budget, not the original fixed budget, for cost control.
• Variances should be reported to the manager who can control them, and investigated where they are significant.
• In number entry questions, check units, rounding and whether the sign (A or F) is asked for.

Common mistakes

• Choosing ideal standards as the best basis for motivation. Fix: Remember that ideal standards are almost never met, so they create adverse variances and can demotivate. Attainable standards are usually the best for motivation.
• Adding normal waste as a percentage of output instead of input. Fix: If 10% of input is lost, gross input = net output ÷ 0.90. Read whether the percentage refers to input or output.
• Using the finished output quantity instead of the input quantity when there is normal loss. Fix: Work out the input needed per good unit first, then multiply by the price. The cost of normal loss stays in the unit cost.
• Mixing up mark-up and margin. Fix: Mark-up is on cost: price = cost × (1 + %). Margin is on selling price: price = cost ÷ (1 − %). Read the wording carefully.
• Flexing fixed costs along with variable costs. Fix: Mark each line V or F before you calculate. Only V lines are multiplied by actual units.
• Comparing actual results with the original fixed budget and calling the difference a variance of performance. Fix: Always flex first. The fixed-budget comparison only shows the volume effect mixed with performance.
• Treating a higher actual figure as always adverse. Fix: Ask what it does to profit. Higher revenue is F. Higher cost is A.
• Adding adverse variances to budgeted profit. Fix: Convert each variance to a sign first: F is +, A is −.

Exam tips

• Learn the four standards by their clue words. Questions often describe the standard and ask you to name it.
• Attainable is usually the answer when a question asks which standard best motivates staff.
• In multiple response questions, select exactly the stated number of advantages or disadvantages and watch for statements that fit only unique, non-repetitive output.
• For number entry, work to the decimal places asked and enter the figure without currency signs or commas unless told otherwise.
• Check whether waste is a percentage of input or of output before you calculate.
• Check the first line of the question for marginal or absorption costing before you add anything up.
• Decide whether profit is a mark-up on cost or a margin on selling price. Margin questions need a division, not a multiplication.
• In multiple response questions, check each statement about standards on its own. Typical correct points are that standards are per unit and that normal loss is included.