Standard Cost Formula

Formula to Calculate Total Standard Cost

Standard Cost Formula refers to the formula that is used by the companies in order to calculate the manufacturing cost of the product or the services produced by the company and according to the formula the standard cost of the product is calculated by adding the value of the direct material costs, value of the direct labor costs, value of the total variable overheads and the value of the total fixed overheads during the period of time.

Standard Cost = Direct Material Cost + Direct Labor Cost + Variable Overhead + Fixed Overhead
Standard-Cost-Formula

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Source: Standard Cost Formula (wallstreetmojo.com)

Calculation of Standard Cost (Step by Step)

Standard costingStandard CostingStandard cost is an estimated cost determined by the company for the production of the goods and services or for performing an operation under normal circumstances and are derived by the company from the historical analysis of the data or from the time and the motion studies.read more is more prevalent in the manufacturing industry and to calculate the same we need to follow below steps:

To calculate the Standard cost we need to follow below steps:

  1. Identify all the direct costs associated with the manufacturing cost, and these costs would be like if they don’t incur, then the manufacturing process would have impacted.

  2. Calculate the standard quantity and standard hours based on actual output.

  3. Categorize those costs into three significant buckets, which are Material, Labor, and Overheads, and then overheads can categorize into fixed and variable.

  4. Take the total of the cost that you calculated in step 3 that shall be the total standard cost for the firm.

Examples

You can download this Standard Cost Formula Excel Template here – Standard Cost Formula Excel Template

Example #1

Below is the summary extracted from PQR Ltd., which is in the business of manufacturing cotton. You are required to calculate the total Standard Cost.

  • Price (per kg): 13.20
  • Quantity(Kgs): 480.00
  • Hours: 360.00
  • Rate: 10.80
  • Output (kgs): 240.00

Solution:

First, we need to calculate the standard quantity and standard hours and then multiply them with standard rates.

Calculation of Standard Quantity and Standard Hours

Standard Cost Formula Example 1.1

Calculation of Direct Material Cost you can do using below formula as,

Direct Material Cost Formula = SQ * SP

Standard Cost Formula Example 1.2
  • =384*13.20
  • = 5,068.80

Calculation of Direct Labor Cost you can do using below formula as,

Direct Labor CostDirect Labor CostDirect labor costs refer to the total cost incurred by the company for paying the wages and other benefits to its employees against the task performed by them, which are straight away related to the manufacturing of the products or provision of the services.read more Formula = SH * SR

Example 1.3
  • =288.00*10.80
  • = 3,110.40

Therefore, the calculation of the total standard cost you can do as follows,

Example 1.4

=5068.80+3110.40

Total Standard Cost will be –

Example 1.5
  • Total Standard Cost = 8179.20

Therefore, the total standard cost will be 5,068.80 + 3,110.40, which is  8,179.20.

Example #2

Khaleel industries operating in the business of manufacturing of steel pipes are worried about its rising cost and want to make a budget starting this year. It has provided you with the below information and asked you to calculate the total budgeted or standard cost.

ParticularsStandard/BudgetedActual
Price (per kg)660.00500.00
Quantity (in kgs)800.00600.00
Hours12000.0014000.00
Rate500.00540.00
Output (in kgs)1000.001600.00
FOH rate per hour240.00220.00
FOH60000.0050000.00

Solution

We need to calculate the standard quantity and standard hours and then multiply them with standard rates.

Calculation of Standard Quantity and Standard Hours

Standard Cost Formula Example 2.1

Calculation of Direct Material Cost you can do using below formula as,

Direct Material Cost Formula  =  SQ * SP

Standard Cost Formula Example 2.2
  • = 1280*660
  • = 8,44,800.00

Calculation of Direct Labor Cost you can do using below formula as,

Direct Labor CostDirect Labor CostDirect labor costs refer to the total cost incurred by the company for paying the wages and other benefits to its employees against the task performed by them, which are straight away related to the manufacturing of the products or provision of the services.read more Formula = SH * SR

Standard Cost Formula Example 2.3
  • = 19200.00*500
  • = 96,00,000.00

Calculation of Fixed Overhead Cost you can do using below formula as,

Fixed Overhead Cost = SH * FSR

Standard Cost Formula Example 2.4
  • =(19200*240)
  • = 28,80,000.00

Therefore, the calculation of total standard cost you can do as follows,

Example 2.5

=844800.00+9600000.00+2880000.00

Total Standard Cost will be –

Example 2.6
  • =13324800.00

 Therefore, the total standard cost will be 8,44,800 + 96,00,000 + 28,80,000 which is  1,33,24,800.

Example #3

Gold ltd has been trying to increase its gross profit marginGross Profit MarginGross Profit Margin is the ratio that calculates the profitability of the company after deducting the direct cost of goods sold from the revenue and is expressed as a percentage of sales. It doesn’t include any other expenses into account except the cost of goods sold.read more; however, they have remained unsuccessful in doing the same, and now they want to analyze its issue. Hence, it decided to review its manufacturing cost-related matters, if any. Below are the details, and they first want to calculate to check whether the total standard cost is an overestimate?

ParticularsStandard/BudgetedActual
Price (per kg)10.6512.00
Quantity (in kgs)3000.003600.00
Hours3600.003300.00
Rate6.004.50
Output (in kgs)7500.008100.00
FOH rate per hour7.509.00
FOH15000.0021000.00

You are required to calculate the total standard cost.

Solution

We need to calculate the standard quantity and standard hours and then multiply them with standard rates.

Calculation of Standard Quantity and Standard Hours

Standard Cost Formula Example 3.1

Calculation of Direct Material Cost you can do using below formula as,

Direct Material CostDirect Material CostDirect Material Cost is the total cost incurred by the company in purchasing the raw material along with the cost of other components including packaging, freight and storage costs, taxes, etc. that are related directly to the manufacturing and production of various products of the company.read more = SQ * SP

Example 3.2
  • = 3240.00*10.65
  • = 34,506.00

Calculation of Direct Labor Cost you can do using below formula as,

Direct Labor Cost = SH * SR

Standard Cost Formula Example 3.3
  • =3888.00*6.00
  • = 23,328.00

Calculation of Variable Overhead you can do using below formula as,

Variable Overhead = SR * AO

Example 3.4
  • = 6 * 8100
  • = 48,600.00

Calculation of Fixed Overhead Cost you can do using below formula as,

Fixed Overhead Cost = SH * FSR

Example 3.5
  • =3888.00*7.50
  • =  29,160

Therefore, the calculation of total standard cost you can do as follows,

Example 3.6

=34506.00+23328.00+48600.00+29160.00

Total Standard Cost will be –

Example 3.7
  • =135594.00

 Therefore, the total standard cost will be 34,506 + 23,328 + 48,600 +  29,160 which is  1,35,594.00

Relevance and Uses

It is generally observed that rather than allocating the actual costs of direct labor, direct material, and the manufacturing overheadThe Manufacturing OverheadManufacturing Overhead is the total of all the indirect costs involved in manufacturing a product like Property Tax on the production premise, Remunerations of maintenance personnel, Rent of the manufacturing building, etc. read more, whether fixed or variable to the goods, many producers allocate the standard or the expected cost. It would mean that a producer’s cost of goods soldCost Of Goods SoldThe cost of goods sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company.read more and inventories shall start with the amounts which would reflect the standard costs and not the product’s actual costs.

On the contrary, the producers still have to bear the actual costs for the products. As a consequence, there shall always be differences between the standard costs and actual costs, and those differences can be called as the variances, and later management can analyze whether these costs were favorable or adverse.

Recommended Articles

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