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.
Calculation of Standard Cost (Step by Step)
Standard costing is more prevalent in the manufacturing industry and to calculate the same we need to follow below steps:
- Step #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.
- Step #2: Calculate the standard quantity and standard hours based on actual output.
- Step #3: Categorize those costs into three significant buckets, which are Material, Labor, and Overheads, and then overheads can categorize into fixed and variable.
- Step #4: Take the total of the cost that you calculated in step 3 that shall be the total standard cost for the firm.
Examples
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.
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
Calculation of Direct Material Cost you can do using below formula as,
Direct Material Cost Formula = SQ * SP
- =384*13.20
- = 5,068.80
Calculation of Direct Labor Cost you can do using below formula as,
Direct Labor Cost Formula = SH * SR
- =288.00*10.80
- = 3,110.40
Therefore, the calculation of the total standard cost you can do as follows,
=5068.80+3110.40
Total Standard Cost will be –
- 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.
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
Calculation of Direct Material Cost you can do using below formula as,
Direct Material Cost Formula = SQ * SP
- = 1280*660
- = 8,44,800.00
Calculation of Direct Labor Cost you can do using below formula as,
Direct Labor Cost Formula = SH * SR
- = 19200.00*500
- = 96,00,000.00
Calculation of Fixed Overhead Cost you can do using below formula as,
Fixed Overhead Cost = SH * FSR
- =(19200*240)
- = 28,80,000.00
Therefore, the calculation of total standard cost you can do as follows,
=844800.00+9600000.00+2880000.00
Total Standard Cost will be –
- =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 margin; 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?
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
Calculation of Direct Material Cost you can do using below formula as,
Direct Material Cost = SQ * SP
- = 3240.00*10.65
- = 34,506.00
Calculation of Direct Labor Cost you can do using below formula as,
Direct Labor Cost = SH * SR
- =3888.00*6.00
- = 23,328.00
Calculation of Variable Overhead you can do using below formula as,
Variable Overhead = SR * AO
- = 6 * 8100
- = 48,600.00
Calculation of Fixed Overhead Cost you can do using below formula as,
Fixed Overhead Cost = SH * FSR
- =3888.00*7.50
- = 29,160
Therefore, the calculation of total standard cost you can do as follows,
=34506.00+23328.00+48600.00+29160.00
Total Standard Cost will be –
- =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 overhead, 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 sold 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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