STANDARD COSTS AND VARIANCE ANALYSIS

STANDARD – a measure of acceptable performance established by management as a guide in making

economic decisions. A standard is a benchmark or “norm” for measuring performance. In
managerial accounting, standards relate to the cost and quantity of inputs used in
manufacturing goods or providing services.

STANDARD COST – pre—determined unit cost which is used as a measure of performance.

STANDARD vs. BUDGET

1. Both standards and budget are pre-determined costs

2. Primary difference: a standard is a nit amount, whereas a budget is a total amount
 A standard may be regarded as the budgeted cost per unit of product
3. In accounting: except in the application of manufacturing overhead to jobs and process, cost may
be incorporated into cost accounting systems.

ADVANTAGES OF STANDARD COSTS

Standard costs:
1. Facilitate management planning
2. Promote greater economy and efficiency by making employees more cost-conscious;
3. Are useful in setting selling prices;
4. Contribute to management control by providing basis for evaluation and cost control;
5. Are useful in highlighting variances in management by exception,
 Management by Exception – the practice of giving attention only to those situations in
which large variances occur, so that management may have more time for more
important problems of the business, not just routine supervision of subordinates.

6. Simplify costing of inventories and reduce clerical cost

STANDARD COSTING CONTROL LOOP

1. Establishing standards
2. Measuring actual performance
3. Comparing actual performance with standard
4. Taking corrective action when needed
5. Revising standards, if necessary

SETTING STANDARDS COSTING

Standards should be set so that they encourage efficient operations.

Ideal vs. Normal Standards:

Ideal Standards – based on the optimum level of performance under perfect operating conditions
Normal Standards - based on an efficient level of performance that are attainable under expected
operating conditions.

STANDARD COST COMPONENTS

1. Standard Price or Rate –the amount that should be paid for one unit of input factor.
2. Standard Quantity – the amount of input factor that should be used to make a unit of product.
 Both standards relate to the input factors: materials, direct labor, and factory overhead

Materials
Price Standard based on the delivered cost of materials plus an allowance for receiving and handling
Quantity Standard – establishes the required quantity plus an allowance for waste and spoilage.

Labor:
Price Standard – based on current wage rates and anticipated adjustments (e.g. C.O.L.A)
Quantity Standard – based on required production time plus an allowance for rest periods, clean-up,
machine setup, and machine downtime
 Manufacturing overhead:
A standard predetermined overhead rate is used based on an expected standard activity index such as
standard direct labor hours or standard direct labor cost.

VARIANCES:
Static budget variance = actual results – static (master) budget amounts.

Static budget refers to the budget that is set at the beginning of a budgeting period and that is geared to
only one level of activity-the budgeted level of activity.

Flexible budget variance = actual results – budgeted amounts for the actual level of activity

A flexible budget is geared to all levels of activity within the relevant range and is used to plan and control
spending. The flexible budget will show the cost formula for each variable cost and total cost (possibly
including fixed costs) at various levels of activity.

For Materials and Labor:

Price Variance (or rate, Budget, Spending Variances)
PV = (actual price – standard price) x actual quantity

Quantity Variance (or Usage or Efficiency Variances)

QN = (actual quantity – standard quantity) x standard price

 When production process involves combining several materials in varying proportions, the
materials quantity variance is supplemented by:

Mix variance:
Total actual quantities at standard prices
Less total actual input at average standard input cost (TAI x ASIC)
Mix variance

Yield variance:
Total actual input at average standard input cost (TAI X ASIC)
Less standard cost (AO x ASOC)
Yield variance

Or

Actual output
Less expected output from actual input
Yield difference
X Average standard output cost
Yield variance

For factory overhead

Variable overhead variances.

a. The variable overhead spending variance is computed as follows when the variable overhead rate
is expressed in terms of direct labor-hours:
Variable overhead spending variance = (actual overhead rate – Standard overhead rate) x Actual
input hours

b. The variable overheads efficiency variance is computed as follows when the variable overhead
rate is expressed in terms of direct labor-hours:

Variable overhead efficiency variance = (actual overhead rate – Standard overhead rate) x Actual
overhead rate

Fixed Overhead Variance in a Standard Cost System

 a. Budget Variance. The budget variance is the difference between the actual fixed overhead cost
incurred during the period and the budgeted fixed overhead costs contained in the flexible
budget. This variance is very useful in that it indicates how ell spending on fixed items was
controlled.
b. Volume Variance. The volume variance is the difference between the total budgeted fixed
overhead and the fixed overhead applied to production. Alternatively, it can be expressed as the
difference between the denominator level of activity and the standard hours allowed the output
of the period, multiplied by the fixed portion of the predetermined overhead rate.

Fixed portion of
Volume Denominator Standard hours allowed
= the predetermined -
Variance hours for the actual output
Overhead rate

The volume variance occurs because the denominator level of activity differs from the standard hours
allowed for production. Thus, an unfavorable variance means that the company operated at an activity
level below the denominator level of activity.

Conversely, a favorable variance means that the company operated at an activity level greater than the
denominator level of activity.

Under- and over applied Overhead. The sum of the four manufacturing overhead variances-variable
overhead spending, variable overhead efficiency, fixed overhead budget, and the fixed overhead volume-
equals the under- or over applied overhead for the period.

EXERCISES:
1. Each timepiece uses one display. The company produced 550 timepieces during March. However,
due to LCD defects, the company actually used 570 LCD displays during March. Each display has a
standard cost of P9.20. Six hundred LCD displays were purchased for March production at a cost
of P6,000.

REQUIRED:
Determine the price variance, quantity variance and total direct materials cost variance for March.

2. Alpine Bicycle Company manufactures mountain bikes. The following data for May of the current
year are available:
Quantity of direct labor used 600 hrs.
Actual rate for direct labor P12.50 per hr.
Bicycles completed in May 280
Standard direct labor per bicycle 2 hrs.
Standard rate for direct labor P12.75 per hr.
Planned bicycles for May 310

REQUIRED:
Determine the direct labor rate and time variances.

3. Stone head Statuary manufactures bust statues of famous historical figures. All statues are the
same size. Each unit requires the same amount of resources. The following information is from
the static budget for 2015:
Expected production and sales 6,000 units
Direct materials 72,000 pounds
Direct manufacturing labor 21,000hours
Total fixed costs P1,200,000

Standard quantities, standard prices, and standard unit costs follow for direct materials and direct
manufacturing labor:
Quantity Price Unit Cost
Direct materials 12 pounds P10 per pound P120
 Direct manufacturing labor 3.5 hours P50 per hour P175

During 2015, actual number of units produced and sold was 5,500. Actual cost of direct materials
used was P668,800, based on 70,400 pounds purchased at P9.50 per pound. Direct manufacturing
labor-hours actually used were 18,500, at the rate of P51.50 per hour. As a result, actual direct
manufacturing labor costs were P952,750. Actual fixed costs were P1,180,000/ there were no
beginning or ending inventories.

REQUIRED: Compute price and efficiency variances for direct materials and direct manufacturing
labor.

4. Missoula Manufacturing Company normal capacity is 10,000 units of product X each month. Each
unit requires 2 hours of direct labor, and factory overhead is applied on a direct labor hour basis.
Fixed costs and variable costs in factory overhead at the normal capacity are P5 and P3 per unit,
respectively. Cost and production data for May follow:

Production for the month 9,000 units

Direct labor hours used 18,500 hours
Factory overhead incurred:
Variable costs P28,500
Fixed costs P52,000

REQUIRED:
Computation and analysis of factory overhead variance.

5. At the beginning of 2015, Krayler Company had the following standard cost sheet for one of its
chemical products:

Direct materials (6 lbs/ @ 6.40) P38.40

Direct labor (1.8 hrs. @ P18.00) 32.40
Fixed overhead (1.8 hrs. @P8.00) 14.40
Variable overhead (1/8 hrs. @ P1.50) 2.70
Standard cost per unit P87.40

Krayler computes its overhead rates using practical volume, which is 288,000 units.

The actual results for 2015 are:

a. Units produced: 280,000
b. Materials purchased: 1,684,700 pounds at P6.60
c. Materials used: 1,684,000 pounds
d. Direct labor: 515,000 hours at P18.10
e. Fixed overhead: P4,140,200
f. Variable overhead: P872,000

REQUIRED:
1. Compute price and usage variances for materials.
2. Compute the labor rate and labor efficiency variances.
3. Compute the fixed overhead spending and volume variances.
4. Compute the variable overhead spending and efficiency variances.

6. A company manufactures a single product that requires a great deal of hand labor. Overhead cost
is applied on the basis of direct labor hours. The company’s condensed flexible budget for
manufacturing overhead is given below:

DIRECT LABOR HOURS

Overhead Costs Cost Formula 45,000 60,000 75,000
(per DL hour)
Variable costs P2.00 P90,000 P120,000 P150,000
Fixed costs 480,000 480,000 480,000
 TOTAL OVERHEAD COSTS P570,000 P600,000 P630,000

The company’s products require 3 kilos material that has a standard cost of P7 per kilo and 1.50
hour of direct labor time that has a standard rate of P6 per hour.

The company planned to operate a denominator activity level of 60,000 direct labor hours and to
produce 40,000 units of product during the most recent year. Actual activity and cost of the year
were as follows:

Number of units produced 42,000

Actual direct labor hours worked 65,000
Actual variable overhead cost incurred P123,500
Actual fixed overhead cost incurred 483,000

REQUIRED:
1. Compute the predetermined overhead rate and break it down into variable and fixed
elements.
2. What were the standard hours allowed for the year’s output?
3. Compute the variable overhead spending and efficiency variances and the fixed overhead
budget and volume variances.
4. Suppose the company had chosen 65,000 direct labor hours as the denominator activity
rather than 60,000 hours. State which, if any, of the variances computed in (3) above would
have changed and explain how the variance (s) would have changes. [No computations are
necessary.]

7. PRICE, MIX, AND YIELD VARIANCE ANALYSIS. Mukhasim Corporation produces canned fruit salad
known in the marker as “Sweet”. Mukhasim has in its budget the following standards for direct
materials inputs to produce 40 kilos of Sweet:

Materials Inputs Standard Quantity Standard Unit Cost TOTAL

Santol 25 kilos P10.00 P250.00
Mangga 15 5.00 75.00
Kamias 10 7.50 75.00
50 kilos P400.00
Note that 50 kilos of input quantities are required to produce 40 kilos of Sweet. No inventories of
direct materials are kept. Purchases are made as needed, so all price variances are related to
direct materials used. The actual direct materials inputs used to produce 540 kilos of Sweet for
the month of July were:

Materials Inputs Actual Quantity Actual Unit Price TOTAL

Santol 364 kilos P9.00 P3,276
Mangga 182 6.00 1,092
Kamias 154 7.00 1,078
P5,446

REQUIRED: Calculate the materials price, mix and yield variances

8. Norris Company produces telephones. To help control costs, Norris employs a standard costing
system and uses a flexible budget to predict overhead costs at various levels of activity. For the
most recent year, Norris used a standard overhead rate of P18 per direct labor hour. The rate was
computed using practical activity. Budgeted overhead costs are P792,000 for 36,000 direct labor
hours and P1,080,000 for 60,000 direct labor hours. During the past year, Norris generated the
following data:
a. Actual production: 100,000 units
b. Fixed overhead volume variance: P36,000 U
c. Determine variable overhead efficiency variance: P24,000 F
d. Actual fixed overhead costs: P380,000
e. Actual variable overhead costs: P620,000
 REQUIRED:
1. Calculate the fixed overhead rate:
2. Determine the fixed overhead spending variance.
3. Determine the variable overhead spending variance.
4. Determine the standard hours allowed per unit of product.
5. Assuming the standard labor rate is P13 per hour, compute the labor efficiency variance.

9. A company uses a standard costing system in the manufacture of its single product. The 35,000
units of raw materials purchased and used cost P105,000, and two units of raw materials are
required to produce one unit of final product. In October, the company produced 12,000 units of
product. The flexible budget for material was P60,000, and there was an unfavorable static budget
variance of P35,000.

REQUIRED:
1. The company’s standard price for one unit of material.
2. The company’s direct materials quantity variance.
3. The number of output planned for in the company’s static budget.

10. Golpol Company had recently acquired Jess, Inc., a small manufacturing firm located in the
Batangas. Unfortunately, Jess had very poor internal controls, and a master disk with some
fundamental cost data for the past year was accidentally erased. No backup existed. Mickey, an
internal auditor for Golpol, was assigned to Jess and given the task of reconstructing some of the
cost records. At first, she discouraged with assignment, but she became excited when she
discovered part of a computer printout containing some information about last year’s operations.

The information, pertaining to jess’s cost accounting system, follows:

Selected Actual Results:

Direct materials: 10,000 pounds purchased and used, costing P51,000
Production: 20,000 units
Labor cost: 4,400 hours, cost P34,320
Fixed overhead cost: P23,000
Variable overhead cost: P46,000

Variances:
Materials price variance P1,000U
Material usage variance 10,000 F
Labor efficiency variance 3,200 U
Variable overhead efficiency 4,000 U
Variable overhead spending 2,000 U
Underapplied fixed overhead 3,000 U
Volume variance 4,000 U

Mickey also interviewed Jess’s controller and discovered that overhead rates are based on
expected actual activity. Jess calculates two variances for variable overhead and two for fixed
overhead. However, before Mickey could analyze the information she had gathered, she had to
take emergency leave because of a family crisis. You have been given the task of performing the
analysis described by the following requirements.

REQUIRED:
1. Prepare a standard cost sheet in good form. Show fixed and variable overhead as separate
items.
2. Compute the fixed overhead spending variance.
3. Compute the labor rate variance.
4. Determine the expected actual activity used to compute the predetermined fixed overhead
rate.
11. Pieta Chemical Company manufactures a wide variety of chemical compounds and liquids for
industrial uses. The standard mix for producing a single batch of 500 gallons of one liquid is as
follows:

Liquid Chemical Qty. In Gallons Cost per Gallon Total Cost

Maxan 100 P2.00 P200
Salex 300 0.75 225
Cralyn 225 1.00 225
625 P650

There is a 20% loss in liquid volume during processing due to evaporation. The finished liquid is
put into 10-gallon bottles for sale. Thus, the standard materials cost for a 10-gallon bottle is P13.

A total of 4,000 bottles (40,000 gallons) were produced during November.t the actual quantities
and costs of the materials placed in production during November were as follows:

Liquid Chemical Quantity in Gallons Total Cost

Maxan 8,480 P17,384
Salex 25,200 17,640
Cralyn 18,540 16,686

Compute the materials price, mix and yield variances, including an analysis of the portion of the
mix variance attributable to each material.

12. The flexible budget formula for total overhead for Star Division of Waterbus Company is
P360,000 + P8 per direct labor hour. The combined overhead rate is P20 per direct labor hour.
The following data have been recorded for the year 2015.

Actual total overhead for 2015 P580,000

Total overhead spending variance 16,000U
Volume variance 24,000 U

Using a three-variance approach, determine the number of standard hours allowed and actual
hours of direct labor hours worked.