Page 222 - DCOM206_COST_ACCOUNTING_II

Unit 12: Standard Costing

Notes
Figure 12.2: Setting up of Standard Costs
Setting up of Standard Costs

Standard Standard Standard
Material Cost Labour Cost Overheads

Standard Standard Fixation of Fixation of
Material Material Standard Standard Variable Fixed
Quantity Price Time Rate Overheads Overheads

(i) Standard Material Cost: The cost of materials for any product depends upon the quantity
of materials and prices of materials. The setting of standard costs for direct materials
involves:
(a) Standard material quantity, and

(b) Standard material price.
Standards set in respect of all these two combined together shall give standard values or
costs of materials. Thus,

Standard Cost of Material = Standard quantity × Standard price
OR SCM = SQ × SP
(ii) Standard Labour Cost: The standard labour cost is equal to the standard time for each
operation multiplied by the standard labour rate. Setting of standard cost of direct labour
involves:
(a) Fixation of standard time, and

(b) Fixation of standard rate.
Standard labour time or hours and standard labour rate will give standard labour cost.
Thus,

Standard Labour Cost = Standard labour hours × Standard labour rate
OR SLC = SH × SR
(iii) Standard Overheads: Setting of standard cost of overheads involves:
(a) Determination of standard overhead costs,

(b) Estimation of production, and
(c) Computations of standard overhead rate are the problems of the fixation of standard
overhead cost.

Overheads are divided into fixed, variable and semi-variable. Standard overhead rate is
determined for these on the basis of past records and future trend of prices. It is calculated
for a unit or for an hour.
Standard variable overhead for the budget period
Standard Variable Overhead Rate =
Budgeted production units or budgeted hours for
the budgeted period

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