Standard Cost Formula (Table of Contents)
What is the Standard Cost Formula?
Standard Cost can be defined as the manufacturing cost which involves the use of material, labor cost, and other overheads. Total Standard Cost Formula is represented as follows,
Direct Material Cost Formula = SQ * SP
Direct Labor Cost Formula= SH * SP
Variable Overhead = SR * AO
Fixed Overhead = SH * FSR
Where,
- SQ = Standard Quantity for the actual output,
- SP = Standard Price
- SH = Standard Hours
- SR = Standard Rate
- FSR = Fixed Standard Overhead rate
- AR = Actual Rate
- AO = Actual Output
Explanation of the Standard Cost Formula
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 were not incurred 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 3 major buckets which are Material, Labor and Overheads and then overheads can be categorized into fixed and variable.
Step #4: Take the total of the cost that is calculated in step 3 that shall be the total standard cost for the firm.
Examples of Standard Cost Formula (with Excel Template)
Let’s see some simple to advanced practical examples to understand it better.
Standard Cost Formula – 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 can be done using below formula as,
4.9 (1,067 ratings)
Direct Material Cost Formula = SQ * SP
- =384*13.20
- = 5,068.80
Calculation of Direct Labor Cost can be done 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 can be done 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.
Standard Cost Formula – Example #2
Khaleel industries operating in the business of manufacturing of steel pipes is worried about its rising cost and wants to make a budget starting this year and it has provided you with the below information and asked you to calculate 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 can be done using below formula as,
Direct Material Cost Formula = SQ * SP
- = 1280*660
- = 8,44,800.00
Calculation of Direct Labor Cost can be done using below formula as,
Direct Labor Cost Formula = SH * SR
- = 19200.00*500
- = 96,00,000.00
Calculation of Fixed Overhead Cost can be done using below formula as,
Fixed Overhead Cost = SH * FSR
- =(19200*240)
- = 28,80,000.00
Therefore, the calculation of total standard cost can be done 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.
Standard Cost Formula – Example #3
Gold ltd has been trying to increase their gross profit margin but however, they have remained unsuccessful in doing the same and now they want to analyze its issue and hence it decided to review its manufacturing cost-related issues if any. Below are the details and they first want to calculate whether the total standard cost was not overestimated?
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 can be done using below formula as,
Direct Material Cost Formula = SQ * SP
- = 3240.00*10.65
- = 34,506.00
Calculation of Direct Labor Cost can be done using below formula as,
Direct Labor Cost Formula = SH * SR
- =3888.00*6.00
- = 23,328.00
Calculation of Variable Overhead can be done using below formula as,
Variable Overhead = SR * AO
- = 6 * 8100
- = 48,600.00
Calculation of Fixed Overhead Cost can be done using below formula as,
Fixed Overhead Cost = SH * FSR
- =3888.00*7.50
- = 29,160
Therefore, the calculation of total standard cost can be done 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. This 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.
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