This tutorial explains the normal costing system and the main differences it has to an actual costing system and a standard costing system.
In a standard costing accounting system, fixed manufacturing overhead has two main variances budget and volume. Fixed overheads are those costs which do not vary in response to the level of production output. To operate a standard costing system and allocate fixed overhead, the business must first decide on the basis of allocation, and calculate the standard fixed overhead allocation rate.
In a standard costing accounting system, variable manufacturing overhead has two main variances rate and efficiency. Variable overheads are those costs which vary in response to the level of production output but which cannot be attributed to individual units of production. To operate a standard costing system and allocate variable overhead, the business must first decide on the basis of allocation.
In a standard costing accounting system, direct labor has two main variances price and efficiency. Unlike direct materials, direct labor is used at the same time as it is purchased, and therefore the price and efficiency variances occur at the same time on the same production run, and a single journal is needed post the variances together with the standard and actual cost to the accounting system.
The direct labor price variance sometimes referred to as the direct labour rate variance, is one of the main variances used in standard costing and represents the difference between the standard labor rate and the actual labor rate, multiplied by the number of units of labor used.
This tutorial deals with standard costing and variance analysis which is used by management to the monitor business performance against predetermined standard costs using variance reports. Standard costing is also a useful tool for valuing inventory and providing estimated selling prices to customers.