What is Standard Costs and Variances?
Standard costing is a managerial accounting technique that assigns predetermined (standard) costs to products and then compares them with the actual costs incurred. The difference is called a variance and is broken down into price/rate and quantity/efficiency components to identify the root cause of cost deviations.
How It Works
- Set standard costs per unit for direct materials, direct labour, and overheads.
- Record actual costs as production occurs.
- Calculate variances: material price and quantity, labour rate and efficiency, overhead spending and volume.
- Investigate material variances and adjust standards or operations as needed.
Saudi Context
Saudi manufacturers in industrial cities such as Jubail and Yanbu use standard costing for budgeting, transfer pricing files reviewed by ZATCA, and SIDF loan reporting. Variance analysis is a key part of monthly management reporting in Tadawul-listed industrial groups.
Example
A factory’s standard cost of a product is SAR 50; actual cost is SAR 55. The SAR 5 unfavourable variance is split into SAR 2 material price variance and SAR 3 labour efficiency variance, each investigated separately.