Standard Cost Method
Sometimes materials are charged in the factory at an estimated price which represents the normal price. This price is also known as pre-determined price or budgeted price or standard price or standard cost. The determination of a standard price is difficult because prices are controlled by market conditions than by the Board of Directors of the manufacturing company. The standard price is not fixed for all time but it is kept under constant review and is always subject to adjustments for regular increase or decrease in prices.
The standard cost of a material may or may not always coincide with actual price paid. In case the two prices differ, a standard price variance occurs.
Problem :
5,00 units of Material-C 5 with a standard price of Rs. 250 are purchased at Rs. 258. Calculate standard price variance and the unit cost difference.
Solution:
Quantity Units Unit cost Amount
Rs. Rs.
Actual 5,000 × 258 (Actual) 12, 90, 000
Actual 5,000 × 250 (Standard) 12, 50, 000
Standard Price Variance 5,000 × 8 40, 000
Unit Cost Difference 8
Sometimes a factory can work out not only the standard cost of the material but also the standard quantity of consumption of materials for a given job or process. Under these circumstances, we may have to calculate not only the price variance but also the quantity variance.
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