Cost Accounting Labor Variance

CHAPTER 1

INTRODUCTION TO STANDARD COSTING

A standard cost is a planned or forecast unit cost for a product or service, which is assumed to hold good given expected efficiency and cost levels within an organization. It represents a target cost and is useful for planning, controlling and motivating within an organization. Variance analysis is a budgetary control process, which compares standard or budgeted costs and revenues with the actual results of an organization, in order to obtain information regarding any exceptions from budget, this information is also used to improve performance through control action e.g. correcting problems. It is the establishment of cost standards for activities and their periodic analysis to determine the reasons for any variances. Standard costing is a tool that helps management account in controlling costs.

For example, at the beginning of a year a company estimates that labor costs should be $2 per unit. Such standards are established either by historical trend analysis of the cost or by an estimation by any engineer or management scientist. After a period, say one month, the company compares the actual cost incurred per unit, say $2.05 to the standard cost and determines whether it has succeeded in controlling cost or not.

Who Uses Standard Costs?

Manufacturing, service, food, and not-for-profit organizations all make use of standards to some extent. Auto service centers like Firestone and Sears, for example, often set specific labor time standards for the completion of certain work tasks, such as installing a carburetor or doing a valve job, and then measure actual performance against these standards. Fast-food outlets such as McDonald's have exacting standards for the quantity of meat going a sandwich, as well as standards for the cost of the meat. Hospitals have standards costs (for food, laundry, and other items) for each occupied bed every day, as well as standard time allowances for certain routine activities, such...