A standard cost card for one unit of a product may look like the following: $5.00 1.80 Direct materials (4 pounds $1.25 per pound) Direct labor (0.1 DLHO $18 per hour) Variable overhead (0.1 DLH @ $2.00 per hour) Fixed overhead (0.1 DLH @ $4.60 per hour) 0.20 0.46 Total cost per unit 57.46 The standard cost to produce one unit is $7.46. The standard cost to produce 600 units are take fixed and variable costs into account . Of course, this is a simplification as the standard cost does not However, if the firm is producing at or near capacity, then the cost per unit of $7.46 could be multiplied by total units to get total standard cost The standard cost card gives both unit and cost standards. The direct materials total of $5.00 is based on the use of four pounds of material at $1.25 pet pound, Similarly, it should take six minutes (0.1 direct labor hour) to produce one unit. This makes it easy to determine total quantities and cost would be for multiple units If 400 units were made, it should take pounds of direct materials with total standard cost of s TF 460 units were made, it should take pounds of direct materials with total standard cost of If 400 units were made, it should take direct labor hours with total standard cost of Standard coating is used for planning, control and decision making. Consider the following scenarios 1. Abel Company has a standard cost of $5 per unit. Next year, Abel plans to make 20,000 units at a total manufacturing cost of $100,000. Abel in using standard costing 2. Sanders Company has excess capacity and is considering a special order for 400 units at less than the usual price. In determining whether or not the company can accept the special order, Sanders calculates the standard variable cost per unit at 53. Sanders is using standard costing in 3. Clooney Company has a standard cost of $8 per unit. Last month, Clooney made 150 units at actual cost of $1,240, which Clooney compared to the total standard cost of $1,200. Clooney is using standard costing in Materials Price and Quantity Variances Companies compare the actual cost with the standard cost. Two basic ways the actual cost of direct materials can deviate from standard cost is: (1) through price or (2) the quantity used in production. Therefore, the materials price variance and the materials quantity variance are typically calculated in determining whether or not the cost of direct materials is as expected or not, When standard costing is used in this way it is used for The materials price variance compares the actual price paid per unit of direct materials to the standard price. That difference is multiplied by the actual quantity of materials Materials Price Variance - (Actual Price Actual Quantity) - (Standard Price x Actual Quantity) or Materials Price Variance - Actual Quantity (Actual Price - Standard Price) What is the actual quantity"? For the materials price variance, we typically mean the actual quantity purchased. This aligns the materials price variance with the Purchasing Department, which has responsibility for the price of materials. (Note: Responsibility in accounting means that this department has the most information about the reason for any price difference and can explain it.) For example, Filmont Company has the following standard cost card for prime costs: Direct materials (3 yards $1.75 per yard) $5.25 Direct labor (1.2 hours $20 per hour) 24.00 Last month, Filmont produced 450 units. Actual cost for direct materials was $2,408 for 1,400 yards of direct materials purchased Then, Materials price variance $2,408 (1,400 $1.75) - $2,408 $2,450 $42 Favorable or Materials price variance = 1,400 x (51.72 - $1.75) = 542 Favorable Notice that the second equation makes it easier to compare the actual price of $1.72 per yard (52,408/1,400 yds) with the standard price of $1.75 per yard. Clearly, Filmont Company has paid $0.03 per yard less than standard. Multiplied by 1,400 yards purchased, the variance between actual price paid and standard price expected is 542 from standard or vice versa. Instead, if a cost is higher than expected (standard) it is unfavorable and if it is lower than expected (standard) it is favorable. However, favorable does not mean "good" and "unfavorable" does not mean "bad." For example, suppose that the standard quantity of active ingredient in a drug was 1,000 pounds and the actual amount used was 800. That is a "favorable" quantity variance (less used than standard) however, the drug is 20% below the advertised strength of active ingredient - a bad result Suppose that Filmont had paid $2,520 for 1,400 yards of material. The materials price variance would be s The materials quantity variance compares the amount of direct material actually used with the amount of material that should have been used at standard for actual production. Thus, we are moving away from direct materials purchased to the direct materials used in production. We can only figure the standard amount if we know: (1) the number of units actually produced and (2) the unit materials standard. Materials usage variance - (Actual Quantity Standard price) - (Standard Quantity Standard Price) or Materials usage variance - Standard Price (Actual Quantity - Standard Quantity) Standard quantity - Actual units produced x unit standard direct materials Recall that Filmont Company, has the following standard cost card for prime costs: Direct materials (3 yards @ $1.75 per yard) 55.25 Direct labor (1.2 hours $20 per hour) 24.00 Last month, Filmont produced 450 units and used 1,410 yards of material. What is the standard quantity of direct materials allowed for Fimont last month? X yards Materials usage variance $1.7541,410 - 1.350) S105 Unfavorable The materials usage variance is unfavorable because more yards were used (1,410) than the standard amount allowed for the 450 units actually produced or 1,350 yards at standard (450 units x 3 yards). Suppose 1,306 yards had been used. The materials usage variance would have been X Filmont purchased 1,400 yards of material but actually used 1.410 yards. Where did the other 10 yards come from