Standard Costing

Uses predetermined fixed costs with variance tracking for differences between actual and standard.

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How Standard Costing Works

Standard Costing Concept
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Standard Cost = Predetermined fixed cost per unit
Variance = Actual Cost - Standard Cost

All inventory transactions use STANDARD cost
Differences captured in VARIANCE accounts

Example:
  Standard Cost: $10.00 per unit
  Actual Purchase: $12.00 per unit
  ─────────────────────────────────
  Purchase Variance: $2.00 unfavorable

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Cost Flow Diagram

Standard Costing Flow
─────────────────────────────────────────────────────────────────

Purchase: 100 @ $12 actual
         │
         ▼
┌─────────────────────────────────────────────┐
│                                             │
│  Inventory: 100 @ $10 standard = $1,000     │
│                                             │
│  Variance: ($12 - $10) × 100 = $200         │
│  (Goes to Purchase Price Variance account)  │
│                                             │
└─────────────────────────────────────────────┘
         │
         │ Sale: 50 units
         ▼
    COGS: 50 @ $10 standard = $500
    (Always at standard cost)

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Transaction Examples

Purchase Receipt

Purchase Receipt Example
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Standard Cost: $10.00 per unit

Receipt: 100 units @ $12.00 actual = $1,200 actual

Inventory recorded at: 100 × $10 = $1,000 (standard)
Variance: $1,200 - $1,000 = $200 (unfavorable)

GL Impact (Purchase)

Account	Debit	Credit	Why?
Inventory Asset	$1,000		At standard cost (Asset ↑)
Purchase Price Variance	$200		Unfavorable variance (Expense ↑)
IRNB (or A/P)		$1,200	Actual purchase price

Standard Costing GL Explained
─────────────────────────────────────────────────────────────────

Paid $12 per unit, but inventory records $10 per unit

Inventory           $1,000  Dr  ← 100 @ $10 standard
PPV (Variance)        $200  Dr  ← Unfavorable (paid more)
IRNB/A/P                    $1,200  Cr  ← Actual price paid

If actual < standard:
Inventory           $1,000  Dr
PPV (Variance)              $200  Cr  ← Favorable (paid less)
IRNB/A/P                    $800  Cr

Sale

Sale Example
─────────────────────────────────────────────────────────────────

Standard Cost: $10.00 per unit

Sale: 50 units

COGS: 50 × $10 = $500 (always at standard)

GL Impact (Sale)

Account	Debit	Credit	Why?
COGS	$500		At standard cost (Expense ↑)
Inventory Asset		$500	At standard cost (Asset ↓)

Note: No variance on sale - COGS always at standard.

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Variance Types

Standard Cost Variances
─────────────────────────────────────────────────────────────────

PURCHASE PRICE VARIANCE (PPV)
  └── Difference between actual and standard purchase price
  └── Captured at receipt

MATERIAL USAGE VARIANCE
  └── Actual quantity used vs standard quantity
  └── Manufacturing: using more/less material than expected

LABOR VARIANCE
  └── Actual labor vs standard labor
  └── Manufacturing: more/less labor hours

OVERHEAD VARIANCE
  └── Actual overhead vs applied overhead
  └── Manufacturing: overhead allocation differences

Variance Account Impacts

Variance	Favorable	Unfavorable
Purchase Price	Credit (paid less)	Debit (paid more)
Material Usage	Credit (used less)	Debit (used more)
Labor	Credit (less labor)	Debit (more labor)

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Manufacturing with Standard Costing

Work Order Standard Costing
─────────────────────────────────────────────────────────────────

Assembly: Widget
Standard Cost Breakdown:
  Materials: $50
  Labor: $20
  Overhead: $10
  ──────────────
  Total Standard: $80

Actual Build:
  Materials: $52 (used extra parts)
  Labor: $18 (faster than expected)
  Overhead: $11 (actual overhead)
  ──────────────
  Total Actual: $81

Variances:
  Material: $2 unfavorable
  Labor: $2 favorable
  Overhead: $1 unfavorable
  ──────────────
  Net Variance: $1 unfavorable

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Updating Standard Costs

Standard Cost Revision

Standard Cost Update
─────────────────────────────────────────────────────────────────

Before Update:
  Standard Cost: $10.00
  On Hand: 100 units
  Inventory Value: $1,000

Update Standard to $12.00:
  New Inventory Value: $1,200
  Adjustment: $200

GL Entry:
  Inventory             $200  Dr  ← Value increased
  Standard Cost Adj           $200  Cr  ← Revaluation gain

When to Update

Scenario	Action
Annual review	Update based on expected costs
Significant change	Major supplier/cost change
New product	Set initial standard
After analysis	Based on actual performance

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Advantages and Disadvantages

Advantages

Advantage	Description
Consistent COGS	Always same cost per unit
Variance analysis	Identify cost problems
Budget friendly	Easy to forecast
Simple pricing	Consistent cost for pricing decisions

Disadvantages

Disadvantage	Description
Standard maintenance	Must update periodically
Variance complexity	Need to analyze variances
Not actual cost	Doesn't reflect true cost paid
Implementation	Complex initial setup

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Quick Reference

Standard Cost GL Entries

Transaction	Inventory	COGS	Variance
Receipt (actual > std)	Std cost	—	Unfavorable
Receipt (actual < std)	Std cost	—	Favorable
Sale	—	Std cost	None
Build (actual > std)	Std cost	—	Unfavorable
Build (actual < std)	Std cost	—	Favorable

Key Formulas

Variance Calculations
─────────────────────────────────────────────────────────────────

Purchase Price Variance:
  PPV = (Actual Price - Standard Price) × Quantity

Material Usage Variance:
  MUV = (Actual Qty - Standard Qty) × Standard Price

Total Variance:
  TV = Actual Cost - Standard Cost

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Next Steps

• Average Costing - Weighted average method
• FIFO/LIFO Costing - Layer-based methods
• Costing Overview - Compare all methods