Standard Costing

(Variance Analysis)

Professor: John Anthony M. Labay, CPA, MBA

 Global Reciprocal Colleges
454 GRC Bldg. Rizal Ext. cor. 9th Avenue Grace Park, Caloocan City

TITLE: Standard Costing

I. Learning Outcomes
1. Definition and Concept of Standard Cost
2. Definition and Concept of Variances

II. Discussion

Standard costing is the establishment of cost standards for activities and their periodic analysis
to determine the reasons for any variances. Standard costing is a tool that helps management
account in controlling costs.

Ideal standards are those that can be attained only under the best circumstances. They allow for
no machine breakdowns or other work interruptions and they call for a level of effort that can be
attained only by the most skilled and efficient employees working at peak effort 100% of the time.

Practical standards are those standards that are tight but attainable. They allow for normal
machine downtime and employee rest period. They can be attained through reasonable, though
highly efficient, efforts by the average worker.

Purpose of Standard Costing

Standard cost systems aid in planning operations and gaining insights into the probable impact
of managerial decisions on cost levels and profits. Standard costs are used for:
1. Establishing budgets.
2. Controlling costs, directing, and motivating employees and measuring efficiencies.
3. Promoting possible cost reduction.
4. Simplifying costing procedures and expediting cost reports.
5. Assigning costs to materials, work in process, and finished goods inventories.
6. Forming the basis for establishing bids and contracts and for setting sales prices

The comparison of actual costs with standard costs is called variance analysis and it is vital for
controlling costs and identifying ways for improving efficiency and profitability. If actual cost
exceeds the standard costs, it is an unfavorable variance. On the other hand, if actual cost is less
than the standard cost, it is a favorable variance.

Direct Material Variances:

• Material Price Variance = (AQ × AP) – (AQ × SP)
• Material Quantity Variance = (AQ × SP) – (SQ × SP)
AQ – Actual Quantity / AP – Actual Price
SQ – Standard Quantity / SP – Standard Price

Direct Labor Variances:

• Labor Rate (Price) Variance = (AH × AR) – (AH × SR)
• Labor Efficiency (Quantity) Variance = (AH × SR) – (SH × SR)
AH – Actual Hours / AR – Actual Rate
SH – Standard Hours / SR – Standard Rate

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Four-Way Overhead Variances:

• VOH Spending (Rate) Variance = Actual VOH – Budgeted VOH based on AH
• VOH Efficiency Variance = Budgeted VOH based on AH – Budgeted VOH based on SH
• FxOH Spending (Budget) Variance =Actual FxOH – Budgeted FxOH
• FxOH Volume Variance = Budgeted FxOH – Applied FxOH
OR
= FxOH Rate (DH – SH)

Actual VOH = AH × AR
Budgeted VOH based on AH = AH × SR
Budgeted VOH based on SH = SH × SR
VOH – Variable Overhead / FxOH – Fixed Overhead / DH – Denominator Hours

Three-Way Overhead Variances:

• OH Spending Variance = Actual OH – Budgeted OH based on AH
• OH Efficiency Variance = Budgeted OH based on AH – Budgeted OH based on SH
• OH Volume Variance = Budgeted OH based on SH – Applied OH

Two-Way Overhead Variances:

• Controllable Variance = Actual OH – Budgeted OH based on SH
• Volume (Non-controllable) Variance = Budgeted OH based on SH – Applied OH

One-Way Overhead Variance:

• Total Overhead Variance = Actual OH – Applied OH

III. Learning Exercises

1. Green Company developed the following standard costs for its product:
GREEN COMPANY
Standard Cost Card

Cost Elements Standard Quantity × Standard Price = Standard Cost

Direct materials 4 pounds P 5 P20
Direct labor 2 hours 10 20
Variable overhead 2 hours 4 8
Fixed overhead 2 hours 2 4
P52

The company expected to work at the 30,000 direct labor hours level of activity and produce
15,000 units of product.

Actual results were as follows:

• 14,200 units of product were actually produced.
• Direct labor costs were P276,210 for 27,900 direct labor hours actually worked.
• Actual direct materials purchased and used during the year cost P271,660 for 57,800 pounds.
• Total actual manufacturing overhead costs were P170,000.
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 Global Reciprocal Colleges
454 GRC Bldg. Rizal Ext. cor. 9th Avenue Grace Park, Caloocan City

Required:
Compute the following variances for Green Company and indicate whether the variance is
favorable or unfavorable.

a. Direct materials price variance.

b. Direct materials quantity variance.

c. Direct labor price variance.

d. Direct labor quantity variance.

e. Overhead controllable variance.

f. Overhead volume variance.

2. Lid Company's standard and actual costs per unit for the most recent period, during which 400
units were actually produced, are given below:
Standard Actual
Materials:
Standard: 2 ft. at P1.50 per foot P 3.00
Actual: 2.1 ft. at P1.60 per foot P 3.36
Direct Labor:
Standard: 1.5 hr. at P6.00 per hour 9.00
Actual: 1.4 hr. at P6.50 per hour 9.10
Variable overhead:
Standard: 1.5 hr. at P3.40 per hour 5.10
Actual: 1.4 hr. at P3.10 per hour . 4.34
Total unit cost P 17.10 P 16.80

Required:
From the abovementioned information, compute the following variances. Show whether the
variance is favorable (F) or unfavorable (U):

a. Materials price variance.

b. Materials quantity variance.

c. Direct labor rate variance.

d. Direct labor efficiency variance.

e. Variable overhead rate variance.

f. Variable overhead efficiency variance.

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 Global Reciprocal Colleges
454 GRC Bldg. Rizal Ext. cor. 9th Avenue Grace Park, Caloocan City

3. Bunny Company manufactures a product effective in controlling beetles. The company uses a
standard cost system and a flexible budget. Standard cost of a gallon is as follows:
Direct material:
2 quarts of A P14
4 quarts of B 16
Total direct material P30
Direct labor:
2 hours 16
Manufacturing overhead 12
Total P58

The flexible budget system provides for P50,000 of fixed overhead at normal capacity of 10,000
direct labor hours. Variable overhead is projected at P1 per direct labor hour.

Actual results for the period indicated the following:

Production: 5,000 gallons

Direct material:
A 12,000 quarts purchased at a cost of P7.20/quart; 10,500 quarts used
B 20,000 quarts purchased at a cost of P3.90/quart; 19,800 quarts used
Direct labor: 9,800 hours worked at a cost of P79,380
Overhead: Fixed P48,100
Variable 21,000
Total overhead P69,100

Required:
Compute the following variances. Show whether the variance is favorable (F) or unfavorable (U):

a. Total Materials price variance.

b. Total Materials quantity variance.

c. Direct labor rate variance.

d. Direct labor efficiency variance.

e. OH volume variance.

f. OH efficiency variance.

g. OH spending variance, both fixed and variable

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454 GRC Bldg. Rizal Ext. cor. 9th Avenue Grace Park, Caloocan City

IV. Assessment

1. The following materials standards have been established for a particular product:
Standard quantity per unit of output 5.2 meters
Standard price P15.60 per meter

The following data pertain to operations concerning the product for the last month:
Actual materials purchased 8,500 meters
Actual cost of materials purchased P 139,400
Actual materials used in production 8,200 meters
Actual output 1,640 units

Required:
a. What is the materials price variance for the month?

b. What is the materials quantity variance for the month?

2. The following labor standards have been established for a particular product:
Standard labor hours per unit of output 0.3 hours
Standard labor rate P15.50 per hour

The following data pertain to operations concerning the product for the last month:
Actual hours worked 3,800 hours
Actual total labor cost P 59,470
Actual output 12,800 units

Required:
a. What is the labor rate variance for the month?

b. What is the labor efficiency variance for the month?

3. The following standards for variable overhead have been established for a company that makes
only one product:
Standard labor hours per unit of output 3.3 hours
Standard variable overhead rate P16.05 per hour

The following data pertain to operations for the last month:

Actual hours 8,700 hours
Actual total variable overhead cost P 142,245
Actual output 2,600 units

Required:
a. What is the variable overhead rate variance for the month?

b. What is the variable overhead efficiency variance for the month?

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454 GRC Bldg. Rizal Ext. cor. 9th Avenue Grace Park, Caloocan City

4. Prim Corporation has a standard cost system in which it applies overhead to products based
on the standard direct labor-hours allowed for the actual output of the period. Information
concerning the most recent year appear below:
Total budgeted fixed overhead cost for the year P250,000
Actual fixed overhead cost of the year P254,000
Budgeted standard direct labor-hours
(denominator level of activity) 25,000
Actual direct labor-hours 27,000
Standard direct labor-hours allowed for the actual output 26,000

Required:
a. Determine the fixed portion of the predetermined overhead rate for the year.

b. Determine the fixed overhead budget variance and volume variance.