Standard Costing Part1

ACCA F5 - Performance Management 

ACCA F2 - Management Accounting

Back in article "019 Absorption Costing", we went through different types of operating capacity, one of which is Master Budget capacity utilization. Master budget capacity utilization is the level of capacity that managers expect for the current time period, frequently one year. The capacity utilization is based on standard process and the cost incurred is supposed to be standard cost for the period. This gives overall cost for budgeted period. We see in earlier article that how a flexible budget is flexed in order to make comparison easier for like figures. Likewise, we can standardize the unit cost of goods and services for budgeted period under different costing systems (Absorption/Marginal/ABC).

Definition of a standard cost and standard costing: CIMA Official Terminology

A standard cost is "The planned unit cost of the products, components and services produced in a period".

Standard costing is "A control technique which compares standard costs and revenues with actual results to obtain variances which are used to stimulate improved performance".

Linking capacity and standards

Standard	Capacity	Operating condition	Example
Ideal	Theoretical	perfect	No idle time, No scrap, No breakdown
Attainable	Practical	efficient	Minimum idle time, scrap and breakdown
Basic	Normal	normal	average idle time, scrap and breakdown recorded over some years
Current	Master Budget	current	idle time, scrap and breakdown based on current condition (high if old machine)

Standard Cost is recorded and presented in standard cost card. Total standard cost is made up of unit activities cost. Like activities are grouped together under one heading.

Prime cost per unit	Direct material and labor for production
Marginal cost per unit	Prime cost + Variable overhead per unit of production
Absorption cost per unit	Marginal cost per unit + Fixed overhead per unit of production
Total Standard cost per unit	Absorption cost per unit + Non-production overhead

CPA Ireland article: Budget and variance