# Standard costing

Standard inputs allowed for actual output, reconciled material and labour variances, overhead absorption and inventory-reporting limits.

Reviewed: 2026-11-01

Tags: costing, standard-costing, variance-analysis, manufacturing

## Purpose and standard cost card

A standard cost card separates the input quantity expected per unit from its expected price or rate. Compare actual cost with the standard allowed for actual output. [OpenStax, developing standard costs, §8.1](https://openstax.org/books/principles-managerial-accounting/pages/8-1-explain-how-and-why-a-standard-cost-is-developed)

The example allows **1,600 kg for 800 good units** at 2 kg per unit. Consuming 1,700 kg at $4.80 against a $5 standard gives $340 favourable price variance and $500 adverse usage variance, or **$160 adverse overall**. The bridge assumes purchases equal usage.

Document the product/process version, units of measure, effective period and expected operating conditions. An attainable operating standard allows for realistic conditions; an ideal standard assumes perfection and serves a different purpose. Review standards when prices, methods, material grades or staffing change. Otherwise an apparently adverse variance may reflect an obsolete baseline rather than a new operating problem. [OpenStax, §8.1](https://openstax.org/books/principles-managerial-accounting/pages/8-1-explain-how-and-why-a-standard-cost-is-developed)

## Compare against actual output

The **standard quantity allowed** is the standard input per unit multiplied by actual output. For labour, standard hours allowed are calculated the same way. This permits an input-efficiency comparison at the production level achieved. Comparing actual consumption directly with the original budget for a different output confounds volume with efficiency. [OpenStax, material quantity variances, §8.2](https://openstax.org/books/principles-managerial-accounting/pages/8-2-compute-and-evaluate-materials-variances)

This page uses **actual cost minus standard cost**: positive cost variances are adverse (A), negative cost variances favorable (F). Other sources reverse the sign, so keep the label and convention with the number.

| Cost variance | Formula under this convention |
| --- | --- |
| Material price, consumption basis | `Actual quantity used × (actual price − standard price)` |
| Material usage/quantity | `(actual quantity used − standard quantity allowed) × standard price` |
| Labour rate | `Actual hours × (actual hourly rate − standard hourly rate)` |
| Labour efficiency/time | `(actual hours − standard hours allowed) × standard hourly rate` |

Price/rate effects hold actual input constant; usage/efficiency effects value the input difference at the standard price/rate. Their sum reconciles actual direct cost to the standard allowed for actual output. [OpenStax, materials, §8.2](https://openstax.org/books/principles-managerial-accounting/pages/8-2-compute-and-evaluate-materials-variances); [labour, §8.3](https://openstax.org/books/principles-managerial-accounting/pages/8-3-compute-and-evaluate-labor-variances)

## Reconciled worked example

**Original illustrative assumptions:** one product, one month, USD; no opening/closing material inventory, WIP or finished-goods inventory; all material purchased is used and all 800 good units produced are sold. No separate idle-time variance is used. Budgeted output and normal capacity are assumed to be 1,000 units, equivalent to 500 labour-hours. All figures are hypothetical and the overhead pool excludes direct material and labour.

| Standard cost card | Standard/unit | Standard cost/unit |
| --- | --- | ---: |
| Material | 2 kg × $5/kg | $10 |
| Direct labour | 0.5 hour × $20/hour | $10 |
| Variable overhead | 0.5 hour × $4/hour | $2 |
| Fixed overhead | $6,000 budget ÷ 1,000 normal-capacity units | $6 |
| **Total** | | **$28** |

Actual production of **800 units** allows 1,600 kg of material and 400 labour-hours. Its standard production cost is therefore 800 × $28 = **$22,400**; the original 1,000-unit budget is not the efficiency comparator.

### Materials

Actual consumption is 1,700 kg at $4.80/kg, costing **$8,160**.

- Price: 1,700 × ($4.80 − $5) = **−$340**, or **$340 F**.
- Usage: (1,700 − 1,600) × $5 = **$500 A**.
- Net: −$340 + $500 = **$160 A**.

Reconciliation: $8,000 standard allowed + $160 net adverse = **$8,160 actual**. The cheaper purchase price does not offset all of the extra material consumption.

Price variance may be recognized on purchases rather than consumption. Where those quantities differ, inventory movements must be reconciled before combining purchase-price and usage variances. This example assumes purchases equal usage. [OpenStax, price-variance recognition, §8.2](https://openstax.org/books/principles-managerial-accounting/pages/8-2-compute-and-evaluate-materials-variances)

### Direct labour

Actual labour is 440 hours at $19/hour, costing **$8,360**.

- Rate: 440 × ($19 − $20) = **−$440**, or **$440 F**.
- Efficiency: (440 − 400) × $20 = **$800 A**.
- Net: −$440 + $800 = **$360 A**.

Reconciliation: $8,000 standard allowed + $360 = **$8,360 actual**. The labels identify arithmetic effects, not their causes. A different skill mix, process disruption or inaccurate standard can affect the result; hours and rates need investigation together. [OpenStax, labour variances, §8.3](https://openstax.org/books/principles-managerial-accounting/pages/8-3-compute-and-evaluate-labor-variances)

### Overhead and the complete bridge

For variable overhead, distinguish spending at actual activity from the efficiency of the allocation base. Under an hour-based model, spending variance is actual variable overhead minus actual hours at the standard rate; efficiency variance is the difference between actual and allowed hours at that rate. This measures the chosen cost driver, not necessarily a direct physical waste of every overhead resource. [OpenStax, overhead variances, §8.4](https://openstax.org/books/principles-managerial-accounting/pages/8-4-compute-and-evaluate-overhead-variances)

Assume actual variable overhead is $1,900: spending is $1,900 − (440 × $4) = **$140 A**; efficiency is (440 − 400) × $4 = **$160 A**. Total is **$300 A**, reconciling $1,600 standard allowed to $1,900 actual.

Assume actual fixed overhead is $6,200. Spending variance is $6,200 − $6,000 = **$200 A**. Standard absorption is 800 × $6 = $4,800, so the volume variance is $6,000 − $4,800 = **$1,200 A**. Total fixed-overhead under-absorption is **$1,400**. The volume effect is not an additional invoice: it arises because output absorbs less of the fixed budget. [ACCA, fixed overhead absorption](https://www.accaglobal.com/uk/en/student/exam-support-resources/fundamentals-exams-study-resources/f2/technical-articles/overhead-absorption.html)

| Cost component | Standard for 800 units | Net adverse variance | Actual incurred |
| --- | ---: | ---: | ---: |
| Material | $8,000 | $160 | $8,160 |
| Labour | $8,000 | $360 | $8,360 |
| Variable overhead | $1,600 | $300 | $1,900 |
| Fixed overhead | $4,800 | $1,400 | $6,200 |
| **Total** | **$22,400** | **$2,220** | **$24,620** |

Every cost appears once: **$22,400 + $2,220 = $24,620**. In a standard-cost ledger, this bridge does not mean all $24,620 is necessarily posted directly to output; separate variance accounts may explain the difference.

## Interpretation and reporting limits

A favorable variance is not automatically beneficial overall. Cheaper inputs can change material mix, yield, quality or processing requirements. With multiple input materials, mix and yield variances can further explain usage; they are a decomposition of usage, so adding them to usage again double-counts the same effect. Investigate linked variances and operational evidence before assigning responsibility. [ACCA, materials mix and yield variances](https://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-exams-study-resources/f5/technical-articles/mat-yield.html)

Financial-reporting acceptance is separate from managerial usefulness. Australia's AASB 102 paragraph 21 permits standard-cost techniques when they approximate cost and requires regular review. Paragraph 13 bases fixed production-overhead allocation on normal capacity and expenses the unallocated portion from low activity; paragraph 16 excludes abnormal waste from inventory. Thus closing variance accounts cannot simply make an outdated standard or idle-capacity allocation acceptable. These references concern the December 2021 Australian compilation applicable to periods beginning before January 1, 2027; apply the entity's governing framework and period. [AASB 102, paragraphs 13, 16 and 21](https://standards.aasb.gov.au/aasb-102-dec-2021)

## Related references

- [Actual costing](actual-costing.md)
- [Machine-hour rates](machine-hour-rates.md)
- [Process costing](process-costing.md)
- [Cost structure and cost bases](../cost-structure-and-cost-bases.md)