Standard costing

Revise Standard costing for Accounting 9706 (AS Level) — revision notes and instant AI marking.

📖 Revision notes · preview

Cambridge International AS & A Level Accounting 9706

Standard Costing

The big idea: A standard cost is what one unit should cost under efficient working. Comparing actual results with the standards gives variances, and each variance points a manager to a price, a quantity or a volume that went better or worse than planned.

Summary — What This Chapter Covers

A standard cost card sets the expected quantity and price of each input per unit: materials, labour and fixed overhead.
A variance is the difference between a standard (or budgeted) figure and the actual figure. Favourable (F) increases profit; adverse (A) reduces it. Every answer states the direction.
Material: price (SP − AP) × AQ and usage (SQ − AQ) × SP. Labour: rate (SR − AR) × AH and efficiency (SH − AH) × SR.
Fixed overhead: expenditure (budget − actual) and volume (actual − budgeted output) × standard fixed overhead per unit, which splits into capacity and efficiency sub-variances.
Sales: price (AP − SP) × actual units and volume (actual − budgeted units) × standard profit per unit.
Budgeted profit adjusted for every variance equals actual profit. Variances are linked: cheap material can cause wastage and slow working.

1. What a Standard Costing System Is

Syllabus 4.2.1 · A Level · Paper 4

Planned cost per unit

A standard cost is a predetermined cost of one unit, built from a standard quantity of each input (kilograms of material, hours of labour) and a standard price for it (cost per kilogram, rate per hour). Fixed production overhead is added at the budgeted overhead absorption rate. Standards are set from past records, work study, suppliers’ price lists and wage agreements.

An ideal standard assumes perfect conditions: no waste, no idle time, top speed. An attainable standard allows for normal waste and breaks. Attainable standards are usually preferred because staff see them as fair and achievable.

Kestrel Ceramics
Standard cost card: one vase		$
Direct materials	2 kg × $5.00	10.00
Direct labour	0.5 hours × $18.00	9.00
Fixed production overhead	0.5 hours × $24.00	12.00
Standard cost		31.00
Standard selling price		45.00
Standard profit		14.00

The budget is to make and sell 8,000 vases. Budgeted fixed overhead is $96,000 and budgeted labour hours are 8,000 × 0.5 = 4,000, so the OAR is 96,000 ÷ 4,000 = $24.00 per direct labour hour. Budgeted profit = 8,000 × $14 = $112,000.

Advantages of standard costing	Disadvantages of standard costing
Gives targets for each input, so costs can be controlled	Setting and updating standards takes time and money
Variances show where performance differed from plan (management by exception)	Standards soon become out of date when prices change
Simplifies inventory valuation and budgeting	An ideal standard can demotivate staff because it is never met
Helps set selling prices and quote for jobs	Staff may cut quality to achieve a favourable variance
Makes managers responsible for the variances they control	Less useful where products are one-off or change often

2. Direct Material and Direct Labour Variances

Syllabus 4.2.1 · A Level · Paper 4

Price × quantity, split into two parts

price quantity actual output

Abbreviations

Worked example

3. Fixed Overhead Variances and the Sub-variances

Syllabus 4.2.1 · A Level · Paper 4

Spending, volume, capacity, efficiency

expenditure volume capacity efficiency

Worked example

Memorise

Material

Labour

Sales

🔓 Read the full Standard costing note → You're seeing the preview · sign in to read it all

Also in the full note

From budgeted profit to actual profit
One decision, several variances
Act on the variances, weigh the non-financial

What's inside

📖 Revision notes 🎯 Learn mode ✦ AI flashcards ✓ Instant AI marking 🧊 3D explorers 🧪 Experiments & simulations 📈 Progress tracking

📄 Practise Standard costing with Accounting 9706 past papers Every paper with its mark scheme — answer online, marked instantly. Open →

Read the full Standard costing notes free

That's the preview — create a free account to read the rest, plus flashcards and practice questions with instant AI marking. No credit card.

Unlock the full notes free →

Standard costing