ACCOUNTING FOR LABOR

EDNEL TANHUECO DATU, CPA, MBA

There are different types of labor costs, especially for different types of businesses but it is
commonly classified into two:
1. Direct labor- is also best known as "touch labor", it refers to the salaries and wages
paid to the employees or workers who are directly in touch or involved in the
production process of a specific product or performance of a service
2.Indirect labor- labor performed which is not traceable to a specific product or service, it
consists of labor other than those traceable to the manufacturing of a specific
product and is accounted under factory overhead.

Accounting for labor involves:

1. Recording the time worked or quantifying the output produced by a worker.
2. Analyzing the time rendered by the worker to determine the time to be charged.
3. Allocating the manufacturing labor costs the proper accounts.
4. Preparing the payroll.
Labor Cost Controls and Accounting for Labor Costs
There are two functions to effectively and efficiently control labor costs.
1. Timekeeping function – this function determines the number of labor hours the workers are
entitled to and the type of work the workers performed.
Some different documents or forms can be used for timekeeping:

a. Daily Time Sheets - This indicates time spent by each worker on the job.
These are daily passed on to the cost accounting department.
b. Weekly Time Sheets - Similar to daily time sheets except that they are
passed on to the cost accounting department at the end of the week.
c. Job Cards - prepared for each job or Ru operation and these keep tracking the
time spent on that job per worker Concerned.
d. Route Cards -carry the cost of all operations done on a job which is very useful for purposes
of control and they also include details of operations to be performed
3. Payroll Function – this function is responsible for computing employee gross
earnings, deductions, and net pay. There are two records maintained by payroll:
a. Payroll Record -provides information for one pay period containing pay rate, hours worked,
regular and overtime earnings, deductions, and net pay of all employees.
b. Employee Earnings Record - Is a record of the computation of a single employee for each
pay period with a running year-to-date total. This is used to compute the portion of
earnings subject to payroll taxes and the basis for reporting payroll information to governmental
agencies
Labor Cost Summary Form- It is prepared after labor time records. This is used for recording
purposes to general journals, this distributes the payroll to their proper accounts.
• Work in process is to be used for direct labor and factory overhead is to be used for indirect
wages. Both of these accounts are debited while payroll is to be credited for the total.
• Employees or workers are usually paid at a regular rate for an agreed number of hours worked
each day.
• Any excess from the agreed hours are usually paid at an overtime rate and the difference
between the regular rate and overtime rate is called overtime premium Rate.
Overtime resulted from a unique specification of the job then this should be charged to the
specific job that caused its occurrence, debiting work in process. On the other hand, ifit is a
result of random scheduling then it should be charged to total production and spread overall
jobs.
•Overtime Rate= Regular Rate + Overtime Premium Rate

Example:
Assume an employee regularly earns P50 per hour for an 8-hour day. If called to work for more
than 8 hours in a working day, the company pays an overtime premium. Assuming the
employee works 12 hours on Monday, is paid 5o% overtime premium, the earnings would be:

Note: The regular rate (P400 + P200) will

be charged to Work in Process, while the
overtime premium (P100) will be charged
to Factory Overhead Control unless the
job contract stipulated that it was a rush
contract, then it will charge the premium
pay to Work in Process.

Wages vs Salaries
An employee's gross earnings can be classified into two, depending on the base of the
Compensation.
• Wage is the gross earnings of an employee being paid per hour basis.
• Salary is the gross earnings of an employee paid per week or month regardless of the hours
worked in that period.

Methods of Remuneration
1. Time rate
Are also called day or flat rates. These are paid if due to the nature of the actual work done, it is
difficult to apply the rate to a specific product.
Advantages: Ease of application especially for indirect labor and this
can be applied to different skills and grades thus giving the incentive to produce quality work.
Disadvantages: No special incentive given, the employees may slack and
the efforts of workers may not be adequately rewarded while those lazy
workers may receive more pay than the hardworking workers.

2. Piecework rates - The pay of workers is calculated by taking into consideration the quantity
produced by such employees, multiplying the quantity produced, measured either in units or
standard hours, by the fixed rate per piece or unit.
Advantages: Strong incentive given to employees who can produce more and with this,
hardworking employees are rewarded.
Disadvantages: Quality of output are often sacrificed to produce more
quantity, high supervision and inspection costs are needed to make sure that the quality is
maintained.

3. Premium bonus rates

o Combination of both flat rate and
piecework rate because it relates earnings to both times worked and the number of output
produced. The bonus is based on the quantity Produced.
Employee's Earnings=(flat rate* number of hours worked)+bonus
Advantages: Provides high incentive and the earnings are based on the
effort of the worker.
o Disadvantages : Difficult to apply and understand, and they require more clerical work
compared to using time rates or piecework rates alone.
4. Collective bonus rates

Labor Costs Classification

1. Direct Labor - Costs connected to a specific cost object. This encompasses labor
incurred by employees or workers responsible for converting raw materials to finished goods.
For example, assembly line workers and factory workers in touch with the products.
2. Indirect Labor - is costs that cannot be traced to a specific cost object. These are
costs of labor that support the production process. For example, production supervisor,
purchasing staff, materials handling staff, materials management staff,
and quality control staff.
3. Labor Overhead
1.a. Overtime - normally paid at a rate over the normal rate imposed and this
a rate exceeding the basic or regular rate is called overtime premium. There are two frequently
used ways are allocating to the specific product or job or allocating to the whole production
process if it is a result of random scheduling.
Example: May worked for 5o hours during the week, the regular rate is P5o per hour and a
premium rate of half the regular rate, then:
Work in Process - 50 hours x P50 = P2500
Factory Overhead Contol- 10 hours x P 25 = P250

b. Idle Time- The usual reasons causing idle time are: Productive causes such as power failure
or machine breakdown Administrative causes such as policy changes or surplus capacity.
Economic causes such as seasonal fluctuations or changes in demand. These reasons could
be controllable or uncontrollable. Controllable idle time is considered normal and charged to
factory overhead or charged to the department that caused it. On the other hand, uncontrollable
idle time is directly charged to the profit and loss account.

Example:
May spent 3o hours on Job A and was idle for 10 hours during the week, the
regular rate is P5o per hour.
Work in Process - 30 hours x P50 = P1500
Factory Overhead Control - 10 hours x P50 = P500
c. Shift Premium - this is an extra pay above the regular rate for labor incurred during shifts
other than day shifts. This premium should be charged to the factory overhead control account.
Example:
May is assigned to night shift and is paid a shift premium of P20o per hour,
a regular rate of P50 per hour
Work in Process - 40 hours x P50 = P2000
Factory Overhead Control - 40 hours x P20 = P8oo
d. Employer's Payroll Taxes- employees working in the Philippines
are required to make contributions to the mandatory Philippine government
agencies for SSS premiums, Phil health contributions, and Pag-ibig
contributions.

Payroll Taxes
There are payroll taxes imposed on employers such as social security premiums, Phil health
premiums, and Pag-ibig premiums. Employers are required to observe a range of regulations in
compliance with the Department of Labor and Employment (DOLE) and Bureau of Internal
Revenue (BIR) because not filing or paying will result in civil or criminal penalties.
• Social Security System (SSS): This is the amount paid by the member in
exchange for government social benefits. This is computed at 12% of your average monthly
salary credit but not exceeding Php 20,000. Deductions are taken automatically from the
employee's salary every month and levied to both employer and employee.
• Home Development Mutual Fund (HDMF): or otherwise known as Pag-ibig
is a mandatory benefit given to employees. This is to provide not just home to every Filipino but
savings as well. Savings, total contribution plus accumulated dividends can be claimed after 20
years of contribution, at retirement, when the employee can no longer work because of injury,
illness, or sanity, or when the employee decided to migrate to another country. The maximum
compensation used to compute for the contribution shared by both the employer and employee
is up to Php 5,000.
• Philippine Health Insurance (Phil Health): Phil health aids Filipinos in sustaining the
growing need for medical care. As per the amendment, started in January 2018, the monthly
premium contributions shall be at a rate of 2.75% of the monthly basic salary. The salary floor is
Php 10,000 and the ceiling of Php 40,o00, to be equally shared by the employee and employer.

ACCOUNTING FOR FACTORY OVERHEAD

EDNEL TANHUECO DATU, CPA, MBA

FACTORY OVERHEAD
• Also referred to as manufacturing overhead or manufacturing support costs.
• Indirect factory-related costs are incurred in production but are not directly traceable to the
product. It also includes costs to maintain and run the production facility.

CLASSIFICATION OF OVERHEADS BASED ON BEHAVIOR

1. FIXED OVERHEAD
o The fixed overhead total remains constant regardless of a change in production or sales
volume thus fixed overhead per unit changes inversely with the change in production.
• Relevant range is the level where fixed overhead remains fixed or constant

II. VARIABLE OVERHEAD

The variable overhead total varies directly with production or sales
volume and variable overhead per unit remains constant.
III. SEMI-VARIABLE OVERHEAD
o Neither completely fixed nor variable. It is partly fixed and a part fluctuates
with the related volume or actively. This cost changes disproportionately with a volume change.
Increases as volume increase but not at the same rate

IV. STEP-FIXED OVERHEAD

o A cost that remains fixed within a relevant range and would change once
output exceeded beyond that range. It differs from semi-variable cost in
which this cost is fixed for a range of output and becomes variable whenever output exceeds
the range.
BUDGETING FACTORY OVERHEAD COSTS
• Exhibits the planned manufacturing costs other than those fall under the direct
material and direct labor budgets, essential to produce the budgeted production level
within a period. It is classified into a variable and fixed overhead costs.
• A flexible budget is the preparation of budgets at different levels of production

METHODS FOR CALCULATING OVERHEAD RATE

• Overhead may be attributed to a product or service using different bases such as direct labor
hours, machine hours, direct labor, etc.
• Overhead rate must be determined to identify what is to be charged for the overhead
expenses.
I. PERCENTAGE ON DIRECT MATERIAL METHOD
This method can be adopted where output is uniform, prices of materials are stable and
the proportion of the overhead from the total cost is significant.

II. DIRECT LABOR COST METHOD

• This is suitable when wages form the major part of the total cost, little variation in wage
rates from different categories of employees, there is uniform efficiency and productivity
among the workforce, and output is
uniform.

II. PRIME COST PERCENTAGE METHOD

Prime cost is the total of direct materials and direct labor, it is supported by the rationale that
both material and labor drive the overhead to be incurred and when a standard product is
produced requiring the hours spent on its production.

IV. DIRECT LABOR HOURS METHOD

• Most commonly used and is suitable when production is carried on manually and when
production is not uniform.
V. MACHINE HOURS METHOD
• This method is frequently used by companies that are highly automated and
manual labor plays a small part in the production process.

VI. UNITS OF PRODUCTION METHOD

The simplest because of the availability of the number of produced units. Although this
could only be used by a business producing one type of product.

Illustration:
The estimated factory overhead for next month is P360,000, P200,000 for direct materials, and
P250,00o for direct labor cost for 50,000 hours. The machine hours estimated to be used is
60,000 hours and the expected production will be 90,000 units. Compute for the predetermined
overhead rate.
1. PERCENTAGE ON DIRECT MATERIAL METHOD
=360,000/ 200,000
= 180%
2. DIRECT LABOR COST METHOD
= 360,0o0/ 250,000
=144%
3. PRIME COST PERCENTAGE METHOD
= 360,000/450,000
= 80%
4. DIRECT LABOR HOURS METHOD
360,00o/ 50,000
=7.2
5. MACHINE HOURS METHOD
=360,000/60,000
=6
6. UNITS OF PRODUCTION METHOD
= 360,000/90,0o0
=4
DEPARTMENTAL OVERHEAD RATE
• It is based on the output of activity produced by a business segment and is used
by businesses that require a more refined cost allocation to apply overhead costs with
an emphasis on precision.
I. ADVANTAGES IN USING DEPARTMENTAL OVERHEAD RATES
a. Allows quicker decision-making with regards to costs because it identifies departments
incurring higher overhead costs.
b. For multiple product companies, having separate overhead rates can be an advantage for
product differentiation.
e. It is less complex and costly compared
to Activity-Based Costing.

II. WHEN CALCULATING DEPARTMENTAL OVERHEAD RATES:

a. Determine the cost driver for each department
b. Estimate the factory overhead for each
c. Allocate the service department costs
d. Compute the factory overhead rates
Departmental Overhead Rate = .Estimated Departmental Factory Overhead/
Estimated Cost Driver for the Department
e. Apply the overhead rate to jobs or departments to the producing departments.
activities using the rate computed for each department and actual activity.
Applied Overhead= Departmental Factory Overhead Rate* Actual Activity
f. Add up the overhead from each department to compute for the total overhead applied.
ALLOCATION OF SERVICE DEPARTMENT COSTS
• Costs of service departments should be allocated to the operating departments responsible for
the actual production of goods because they serve as a support to the latter and to make
managers aware of the complete cost of the activities.
Cost drivers are used as an allocation base and when choosing consider factors such as
the type of services provided, the benefits received, and the fairness and appropriateness of the
allocation method.
• A problem exists when service departments provide services to each other in addition to
operating departments.
I. DIRECT METHOD - simplest and easiest to implement since it transfers cost directly
to operating departments and ignores service department's services rendered to each other.

II. STEP METHOD - is a method that uses a sequential process. It generally starts with
the service department that has incurred the greatest costs and so forth.

III. RECIPROCAL METHOD– also called algebraic method. A method that recognizes
the relationship between service departments and costs are allocated to and from each service
department for services provided.

Illustration:
Allocate the cost of these two service departments, cafeteria, and maintenance
department, to the printing and binding department. Use labor hours to allocate overhead
from the cafeteria and floor area for the maintenance department.
TYPES OF CAPACITY LEVEL
Capacity refers to how much a company can do. Determining capacity is important to
prevent over or inadequate investment.
I. MAXIMUM CAPACITY- Also called theoretical or ideal. The maximum possible a
company may use it in a perfect condition. In actual practice, this capacity is never achieved,
II PRACTICAL CAPACITY
Maximum productive capacity considering predictable and unavoidable factors.
NORMAL CAPACITY
Level of capacity that satisfies the average customer demand that considers seasonal, cyclical,
and trend factors. The practical capacity is reduced by the loss due to external factors.
III. ACTUAL CAPACITY
The volume of production achieved in actual production.
IV. PLANNED CAPACITY
Also called expected capacity. The level that the business plans to produce as stated in the
master budget.

CONTROLLING VS. NON-CONTROLLING ACCOUNT SYSTEM

• Controlling Account System - uses a "factory overhead control" account to accumulate the
overhead costs incurred and separately tracks each cost that is carried in the control account.
• Non-controlling Account System- does not make use of a control account instead, a
related expenses are charged for each overhead expense incurred.
APPLIED VS. ACTUAL FACTORY OVERHEAD
• Applied factory overhead cost- the amount of factory overhead assigned to goods
produced using the predetermined overhead rate.
• Actual factory overhead cost - the actual amount of factory overhead the company
incurred
MANUFACTURING OVERHEAD
● Actual Costs
● Applied Costs
• Mostly, applied factory overhead does notequal actual overhead, thus:
AppliedOverhead> Actual Overhead= Overapplied
Applied Overhead< Actual Overhead= Underapplied

• The goal is to zero out the factory overhead account to reflect the actual cost incurred.
To dispose of such variances, they may either:

ACTIVITY-
BASED
COSTING
• A method
of
identifying
the
activities in
the
production
and allocate
the cost of
each activity to all products and services according to the actual consumption of the Products.
• Compared to traditional costing, the ABC method assigns more indirect cost, deals with
multiple cost pools and cost drivers, and is more logical in terms of allocation and more reliable
in decision making.
ACTIVITY-BASED MANAGEMENT (ABM)
o Application of both activity-based costing and value chain analysis, an approach where
businesses identify the primary and supporting activities that add value to their final product.

II. ACTIVITY-BASED COSTING PROCESS

a. Identify activities, activity cost pools,
b. Assign overhead costs to activity cost
c. Calculate the activity cost application
d. Assign an overhead cost to cost objects
and activity drivers.pools.rates. using cost application rates or through consumption ratios
e. Prepare management reports.

GENERAL PROCESS COSTING PROCEDURES

EDNEL TANHUECO DATU, CPA, MBA
Process Costing
• It is applied when there is mass production of similar products, where costs associated
with units produced has equal amounts and cannot be differentiated from each other
• It involves a continuous flow of raw materials, labor, and overhead throughout
the various processing departments, and the produced units are considered to be
homogenous products
Summary of differences between job order and process costing

Product Cost in a Process Costing System

• The product cost associated with the use of a process costing system does not differ from
the job order costing. Raw materials are assigned based on the material requisition
forms, labor on time tickets, and factory overhead based on predetermined overhead rates.

Journal Entries
Direct Materials
Work in process - Department 1 XXX
Raw materials inventory XXX
Direct Labor
Work in process - Department 1 XXX
Work in process - Department 2 XXX
Factory Overhead Applied XXX

Work in process - Department1 XXX

Work in process - Department 2 XXx
Payroll XXX

When a department completes its process and the product is ready to be sold, the costs
associated with these products will then be transferred to the finished goods inventory from
work in process inventory.
Cost Flow in Process Costing
• The usual manner in which costs flow through the process costing system is that the direct
material costs are added to the beginning while direct labor and overhead are gradually added
throughout the production process

Methods of costing under Process Costing

1. FIFO Method - is a complex calculation where work in process beginning inventory
is not commingled with started in process units. It assumes that any units that were
not completed last period (work in process beginning) are finished before anything else
it started. Under this method, work in process beginning inventory is separate from started in
process units and it has a stage of completion which also needs to be considered and
significant. This method is applied normally when there is an ongoing and significant difference
from changes in product costs from period to period.

2 Weighted Average Method - is a simpler method of calculation where all costs

whether from the preceding period or the current one are commingled together under
total units completed and transferred during the period and considered to have
100% completion, and assigned to produce n units. This is normally applied to situations
where the fluctuations in costs from period to period are so small that there is no need
to use the FIFO method to attain more accuracy.
Cost of Production Report
• It provides information related to the material, labor, and overhead costs incurred
by the department during a period and it identifies how these costs are allocated to
the actual production.
A production report shows:
1. Total unit costs transferred to it from a preceding department.
2. Materials, labor, and factory overhead added by the department.
3. Unit cost added by the department.
4. Total and unit cost accumulated to the end
of operations in the department.
5. The cost of beginning and ending work in process inventories.
6. Cost transferred to a succeeding department or a finished goods storeroom.
The process costing system consists of the following steps to show the mentioned
information above
1. The physical flow of units
2. Equivalent units of production
3. Cost per equivalent unit
4. Assign costs to units completed and ending work in process inventory
5. Reconcile costs

There are three separate but highly interrelated sections of a production report:
1 Quantity Schedule- exhibits the computation of equivalent units and the
flow of units throughout the department during the period.
• Equivalent Units of Production (EUP) is a number expressing partially completed units
as a smaller number of completed units. For example, if we carry 1,000 units to a 60% stage of
completion, this will be equivalent to 600 units that are 100% complete. There should be careful
reasoning about the amount of material added into the production and the same as to labor and
overhead. In other words, 60% of the necessary direct materials may be in the process but only
40% of the direct labor and factory overhead which will result in 60 equivalent units of material
and 40 equivalent units of conversion (direct labor and overhead) over 100 total units.
Therefore. EUP is the total units completed plus units under ending inventory restated in
completed units using the stage of completion percentage.

● Equivalent Units = Units Completed + (Units in ending inventory *Percentage of

completion)

2. Costs per Equivalent Unit- calculate the total cost per equivalent unit produced, with
total costs and unit costs being provided for materials, labor and overhead. The equivalent unit
calculations are carried forward into the 'cost per equivalent unit
schedule' This shows how the beginning work in process cost and current period production
cost is divided using the equivalent units for every element in the production process.
Two methods could be used in allocating these costs: the weighted average method or
first-in-first-out (FIFO) method.
3. Cost Assignmnent and Reconciliation summarizes the cost flow through the
department for a period by adding the cost of goods manufactured with the ending
goods in the process to arrive at the total costs accounted for. In this section, the
equivalent units are combined with the computed cost per equivalent unit to assign
costs to units completed and transferred out which is also termed as cost of goods
manufactured and to remaining work in process inventory. For reconciliation, the
total cost allocated from the second sectionnshould agree with the assigned cost for
units completed and transferred and ending work in process to get the total units
accounted for.
Methods of Application of Cost Elements
1. Even Application (same EUPS) - this method depends on the stage of completion
where direct material, direct labor, and factory overhead are applied at the same
stage of completion.
2. Uneven Application (different EUPS) -mthis method considers that the three
elements: direct material, direct labor, and factory overhead are done at varying stages
of completion therefore there are multiple computations for EUP.

Accounting for Lost Units

Losses could be classified as normal and abnormal loss and both are accounted for differently.

Normal loss
• It is also called standard loss is considered to be unavoidable in the production process
and it occurs mainly due to the nature of the process itself or the nature of the raw
materials being processed.
• The cost of such loss is spread over the number of good units and increases the cost
per unit.
Abnormal loss
• It is unexpected and avoidable, it is the loss that should not occur under normal and
efficient working conditions. It is also beyond the tolerance limit set by the company or if a loss
is expected but beyond the limit.
• Contrary to normal loss which is spread out to the good units, abnormal losses are treated as
an outright expense.
Cost of Normal Lost Units
• Normal loss in the first department is fully ignored and is not made part of any
computation in the preparation of the cost of production report for the first
department. For the subsequent department, the unit cost from the preceding department has to
be adjusted for the units lost in the subsequent department.
The cost of the abnormal lost units is treated as an expense. It will be charged to the
factory overhead control account as a period cost.
ABSORBING GOOD UNITS
• This section only applies to normal loss because abnormal loss is not absorbed
rather treated as an outright expense. For the absorbing good units, assign costs only
to the units that have passed the inspection point.

DISCRETE
A loss that occurs at a specific point and will be detected when a quality control check is
performed.
• It is important to determine the point of inspection because the stage of completion will follow
the point of inspection. For the absorbing units, it is important to determine what units reached
the inspection point to identify the absorbing units.
Joint Products Vs. BY Products
METHOD FOR ALLOCATING JOINT COST
I. RELATIVE MARKET VALUE APPROACHES
• Uses market value measures for allocation.
a. Sales Value at Split-off Method- This method allocates joint cost based on the ratio of the
product's sales value at the split-off point.
b. Net Realizable Value Method (*)
This method allocates joint costs based on the relative net realizable value of
joint products. It assigns costs based on hypothetical sales value.
UNet Realizable Value= Final MarketmValue- Separable Costs
II. BENEFITS RECEIVED APPROACHED
Uses physical measures for allocation.
a. Physical Units Method
This method allocates joint cost using the basis of relative weight, volume, or other physical
measures that measure benefits received at the split-off point.
b. Weighted Average Method
This method uses weight factors and leads to joint products having uniform costs.
Weighted Physical Units= Number of Units* Weight Factor

ACCOUNTING FOR BY-PRODUCTS

I. Approach 1- do not assign costs to by- products.
a. Other income
Net sales from the by-products are recognized as "Other Income" or "Miscellaneous Income"
under the income statement.
b. Additional Revenue
Costs incurred on main and by- products are deducted from the
combined sales of the main and by-products,
c. Deduction to COGS
Net sales from the by-products are deducted from the total cost of the
production for the main product.
II. Approach 2 - assign costs to by-products.
a. Market Value Method or Net Realizable Value
Net realizable value of by-product expected sales value less further processing cost after split-
off plus selling and distribution cost, will be deducted from the total production
costs of the main product.
b. Reversal Cost Method
Work backward to compute for the estimated joint cost of the product at the spit-off point by
deducting selling, distribution, further processing costs after the split-off point, and estimated
profit from the expected sales value
c. Replacement Cost Method
Values the by-product based on its opportunity cost of purchasing or replacing the by-products
that will then be deducted from the total cost of production of the main product.n*Cost allocation
of joint and by-products should not affect the planning, control, and decision-making of the
management because the only reason companies apply these cost allocations is to achieve an
accurate cost valuation of the cost of goods sold and inventory for proper financial reporting-

Illustration
Melon incurred P128,000 joint costs in its current year's production. Use the following
information to allocate the joint cost.
]
 JIT AND BACKFLUSH
EDNEL TANHUECO DATU, CPA, MBA

JUST-IN-TIME, OR JIT
• an inventory management method in which goods are received from suppliers only as
they are needed.
• The main objective of this method is to reduce inventory holding costs and increase
inventory turnover.
 STANDARD COSTING
EDNEL TANHUECO DATU, CPA, MBA

STANDARD COSTING
• a system where all cost used to produce a product are based on standards or
predetermined costs. This aims to promote efficiency in the process and control cost as
planning of expenses is done ahead of time.
STANDARD COSTS
• These are costs established before production begins to provide management
with goals to achieve and basis for comparison for actual results
• Also known as planned costs, scheduled costs, predicted costs, specification costs.
USES OF STANDARD COSTS
1. Cost Control
2. Pricing decisions
3. Performance Appraisal
4. Cost Awareness
5. Management by objectives

STANDARDS
I. DIRECT MATERIAL STANDARDS
a. Direct Materials Price Standard
-Is the unit price at which direct materials should be purchased
b. Direct Materials Efficiency Standard
-Is the predetermined usage of direct materials for every unit produced
II. DIRECT LABOR STANDARDS
a. Direct Materials Price Standard
-Predetermined rate of pay of a direct labor needed to produce a product
b. Direct Materials Efficiency Standard
-Predetermined standard of performance for direct labor that should be used in production
III. FACTORY OVERHEAD STANDARDS
• Predetermined or budget of factory overhead costs including indirect materials,
indirect labor and other indirect manufacturing costs.
VARIANCE ANALYSIS
• is the technique used to measure performance of each production department
by comparing actual results to planned results

VARIANCE
the deviation or difference of actual results versus standards.
I. DIRECT MATERIAL VARIANCE
a. Material Price Variance
b. Material Quantity Variance

II. DIRECT LABOR VARIANCE

1. Labor Rate Variance
2. Labor Efficiency Variance