Standard Costing system is widely used costing method in a manufacturing environment. From the manufacturing Controller’s perspective, standard costing is the most effective way to control the cost of direct labor, material, and overhead. The Standard costing approach to costing product has three components of cost: Standard labor cost, Standard material cost, and Standard overhead cost.
The Standard labor cost includes hours required to complete a unit and hourly pay rate. La-Z-Boy manufacturing plant determines standard cost as follows: Labor hour is determine by time-study group by using process flow-chart and actual time-study of the production process to determine the time required to complete a unit. The material cost is determined by a raw material cost and a material usage requirement per Bill of Material (BOM) to complete a unit. The material cost is based on the negotiated price by purchasing department. Finally, setting standard overhead cost is a complex process. The total overhead cost is allocated to each department. Further, allocated department cost is divided by labor cost of that particular department. This result in a standard overhead rate per labor hour for a particular department.
These three standard costs collectively are the cost of goods sold for each …show more content…
The favorable variance occurs when actual costs are lower than the standard costs. The unfavorable occurs when actual costs are higher than the standard costs. The capability to see true variance is the biggest advantage of Standard Costing. The variances help understand the root cause of the inefficiency and waste to “plan and control” the cost. The variance analysis tool helps controller to ensure the plant is running at an optimal performance level. The key variances at La-Z-Boy manufacturing plant that managed on a weekly basis are volume variance, direct labor variance, material variance, and overhead
The Standard labor cost includes hours required to complete a unit and hourly pay rate. La-Z-Boy manufacturing plant determines standard cost as follows: Labor hour is determine by time-study group by using process flow-chart and actual time-study of the production process to determine the time required to complete a unit. The material cost is determined by a raw material cost and a material usage requirement per Bill of Material (BOM) to complete a unit. The material cost is based on the negotiated price by purchasing department. Finally, setting standard overhead cost is a complex process. The total overhead cost is allocated to each department. Further, allocated department cost is divided by labor cost of that particular department. This result in a standard overhead rate per labor hour for a particular department.
These three standard costs collectively are the cost of goods sold for each …show more content…
The favorable variance occurs when actual costs are lower than the standard costs. The unfavorable occurs when actual costs are higher than the standard costs. The capability to see true variance is the biggest advantage of Standard Costing. The variances help understand the root cause of the inefficiency and waste to “plan and control” the cost. The variance analysis tool helps controller to ensure the plant is running at an optimal performance level. The key variances at La-Z-Boy manufacturing plant that managed on a weekly basis are volume variance, direct labor variance, material variance, and overhead