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Standard Costs and Variance Analysis

Standard Costs

A standard cost is the estimated or expected cost per unit. When standards in budgets are discussed, two items are analyzed: price and quantity.

standard cost = standard price x standard quantity

For The Unknown Comic, Inc., you prepared standard costs for direct materials, direct labor, and variable factory overhead. To calculate the standard cost for direct materials, The Unknown Comic estimated that it would take one pound of direct materials to make one finished unit. The expected cost per pound is $3. Therefore, 

• the standard quantity is one pound per unit, and
• the standard price is $3 per pound.

To calculate the standard cost for direct labor, The Unknown Comic estimated that it would take 0.40 direct labor hours to make one finished unit. The expected direct labor cost per hour is $17. You would calculate the standard cost per unit as follows:

• standard cost = estimated direct labor hours needed / estimated units to be produced
• standard cost = 2,560 direct labor hours / 6,400 units
• standard cost = $0.40 per unit

Therefore,

• the standard quantity is 0.40 direct labor hours per unit, and
• the standard price is $17 per hour.

The Unknown Comic calculates the standard cost for factory overhead based on direct labor hours. It estimated that its total variable factory overhead costs for the year would be $7,680 and it they would use a total of 2,560 direct labor hours. The standard cost for factory overhead was calculated as follows:

• standard cost = estimated variable overhead costs / estimated direct labor hours for year
• standard cost = $7,680 /2,560 direct labor hours
• standard cost = $3.00 per direct labor hour

Variance Analysis

Variance analysis is the analysis of the difference between what the company thought would happen and what really happened. Companies perform variance analysis to try to maintain control of the business, using the analysis to take a closer look at the following production (manufacturing) costs:

• direct materials,
• direct labor, and
• variable factory overhead. 

For The Unknown Comic, you will calculate two variances for direct materials, direct labor, and variable factory overhead:

• cost (price) variance: This variance measures how well the company managed the costs for materials, labor, and overhead.
• efficiency (quantity) variance: This variance measures how efficiently the company used its resources.