Standard Costing

Cost Accounting and Control, 2019, De Leon, et al

Notes
► Standard costs represent the “planned” costs of a
production and are generally established well before
production begins. The establishment of standards thus
provide management with goals to attain (i.e. planning)
and bases for comparison with actual results (i.e. control).

► Standard costs are those expected to be achieved in a

particular production process under normal conditions.
Notes
► Standard cost is concerned with cost per unit and serves
basically the same purpose as a budget. Budgets, however,
quantify management expectations in terms of total costs
rather than in terms of per unit costs.

► Estimated costs are different from standard costs because

estimated costs have historically been used as projection of
what per unit costs will be for a period while standard costs
are what a unit cost of a product should be.
Notes
► The purpose of standard cost is to control costs and promote
efficiency.

► Any deviation from the standard can be quickly detected and

responsibility pinpointed so that appropriate action can be
taken to eliminate inefficiencies or to take advantage of
efficiencies.

► If cost analyses during the year indicate that a standard is

incorrect, or if a significant change has occurred in costs or
other related factors, management should not hesitate to
adjust the standard accordingly.
Uses of Standard Costs
1. Cost Control
2. Pricing decisions
3. Performance appraisal
4. Cost awareness
5. Management by objectives
Cost Control

This refers to identifying a cost with its related benefits

and making sure that the cost is justified given the
benefits derived.
Pricing Decisions

Companies now are operating in a competitive markets

it becomes vital to generate consistent and timely cost
information in pricing its products or services. Standard
costs provide this timely information.
Performance Appraisal

When standards are established for management

appraisal, they provide measurements that can be
applied uniformly to all personnel being evaluated.
Cost Awareness

Standard cost performance reports inform managers of

the cost implications of those actions and as a result
make them take steps to effectively control costs.
Management by Objectives

This means that specific objectives are established for

each business activity and the manager responsible for
that activity works to achieve the objectives.
Establishment of Standard
1. Direct materials price standards
2. Direct materials usage (efficiency) standards
3. Direct labor price (rate) standards
4. Direct labor efficiency standards
5. Factory overhead standards
Possible Causes of Material Price Variance
1. Fluctuations in market prices of materials
2. Purchasing from distant suppliers resulting in additional
transportation costs
3. Failure to avail of cash discounts
4. Purchasing materials of inferior quality
Possible Causes of Material Quantity Variance
1. Loss of materials due to poor handling
2. Use of defective or substandard materials
3. Lack of proper tools or machines
4. Spoilage or waste due to use of inferior quality materials
Possible Causes of Labor Rate Variance
1. Hiring of inexperienced workers
2. Change in labor rate
3. Hiring of workers with pay higher than that assumed when
the standard for a job was set
Possible Causes of Labor Efficiency Variance
1. Lack of training for workers
2. Poor scheduling of work
3. Lack of supervision
4. Faulty equipment
Possible Causes of Volume Variance
1. Poor production scheduling
2. Unusual machine breakdowns
3. Shortage of skilled workers
4. Decrease in demand from customers
5. Unused plant capacity
Possible Causes of Variable Efficiency Variance

1. Efficiency in using the bases on which variable overhead is

applied.
Factory Overhead Variances
1. One-Factor Analysis
Total Variance
2. Two-Factor Analysis
Controllable Variance, Volume Variance
3. Three-Factor Analysis
Spending Variance, Efficiency Variance, Volume Variance
4. Four-Factor Analysis
Variable Spending Variance, Fix Spending Variance, Efficiency
Variance, Volume Variance
Illustrative Problem
Last month, the following took place at Shangrila Company:
► Produced 50,000 plastic microcomputer case
► Standard variable costs per unit (per case)
Direct materials, 2 pounds at P1.00 P2.00
Direct labor, 0.10 hours at P15 1.50
Variable manufacturing overhead, 0.10 hrs at P5 0.50
► Fixed manufacturing overhead cost
Monthly budget for 40,000 cases or 4,000 hours P 80,000
► Actual production costs
Direct materials purchased 200,000 lbs at P1.20 P240,000
Direct materials used, 110,000 lbs at P1.20 132,000
Direct labor, 6,000 hours at P14 84,000
Factory Overhead 111,000
Fixed Factory Overhead 75,000
Important Notes
1. Total Factory Overhead is given at P111,000
2. Fixed Factory overhead is given at P75,000
3. We can derive the variable overhead at P36,000 (Total FOH – Fixed FOH)
4. Total 50,000 cases produced is given.
5. Actual total hours used to produce 50,000 cases at 6,000 hours is given.
6. We can derive the actual hour per case:
6,000 hours / 50,000 cases or 0.12 hour per case
7. We can derive the variable FOH rate
P36,000 / 6,000 hours = P6 per hour
8. We can derive the fixed FOH rate
P75,000 / 6,000 hours = P12.50 per hour
Material Variance
► Material Price Variance
(Actual Purchase Price – Standard Purchase Price) x No. of units Purchased
(1.20 – P1.00) x 200,000 = P40,000 unfavorable
Unfavorable because the actual price is higher than the standard price.

► Material Usage Variance

(Actual material usage – Standard material usage) x Standard Price

(110,000 – 100,000) x P1.00 = P10,000 unfavorable
Unfavorable because the actual usage is more than the standard usage for
50,000 cases (that is, 50,000 case x 2 lbs per case = 100,000 lbs)
Labor Variance
► Labor Rate Variance
(Actual Labor Rate – Standard Labor Rate) x Actual No. of Hours
(P14 – P15) per hour x 6,000 Hours = P6,000 favorable
Favorable because the actual rate is lower than the standard rate.

► Labor Efficiency Variance

(Actual Hours – Standard Hours Allowed) x Standard Price
(6,000 Hours – (50,000 cases x 0.10 Hours per case)) x P15.00 per hour
(6,000 Hours – 5,000 Hours) x P15 per hour = P15,000 Unfavorable
Unfavorable because the actual (6,000) hours used is more than the
standard hours allowed for 50,000 cases (that is, 50,000 case x 0.10 hour per
case = 5,000 hours)
Factory Overhead – One-Way Variance
► Total Variance = Actual Factory Overhead – Actual Volume at Standard Rates
Actual Factory Overhead:
Variable = 50,000 cases x 0.12 Hours x P6.00 = P 36,000
Fixed = 50,000 cases x 0.12 hours x P12.50 = 75,000
Total actual factory overhead P111,000

Actual Volume at Standard Rates:

Variable = 50,000 cases x 0.10 hours x P5 = P 25,000
Fixed = 50,000 cases x 0.10 hours x P20 = 100,000
Total actual volume at standard rates P125,000
or 50,000 units x 0.10 hours x (P5 + P20) = P125,000
Total variance, favorable P 14,000
Factory Overhead – Two-Way Variance
Controllable Variance + Volume Variance = Total Variance

Note: First, compute the volume variance. Then, deduct the volume variance from
the total variance to get the controllable variance.

Volume Variance: (Actual volume – Budget volume) x Std Hour x Std Fixed Rate
(50,000 cases – 40,000 cases) x 0.10 hour per case x P20 per hour = P20,000 Fav.

Controllable Variance: Total Variance – Volume Variance

P14,000 Fav – P20,000 Fav = P6,000 Unfavorable
Factory Overhead – Three-Way Variance
Spending Variance + Efficiency Variance + Volume Variance = Total Variance

Note: The volume variance in two-way variance is the same in the three-way
variance. Compute for the efficiency variance, then the difference from the total
variance is the spending variance.

Efficiency Variance: Actual volume x (Actual Hour – Std Hour) x Std Variable Rate
50,000 cases x (0.12 – 0.10) x P5 = 50,000 cases x 0.02 x P5 = P5,000 unfav.

Volume Variance: P20,000 Fav. (from two-way variance)

Spending Variance: Total Variance – Efficiency Variance - Volume Variance

P14,000 Fav – P5,000 Unfav – P20,000 Fav = P1,000 Unfavorable
Factory Overhead – Four-Way Variance
Variable Spending Variance + Fixed Spending Variance + Efficiency Variance
+ Volume Variance = Total Variance

Note:
1. The sum of variable spending variance and fixed spending variance is Spending
Variance.
2. The efficiency variance in the three-way variance is the same in the four-way
variance.
3. The volume variance in two-way, three-way and four-way are the same.
4. Compute for variable spending variance, then the difference from the total
variance is the fixed spending variance or compute for fixed spending variance to
get the variable spending variance.
Factory Overhead – Four-Way Variance
Variable Spending Variance: Actual Hours x (Actual Var. Rate – Std Var. Rate)
6,000 hours x (P6 – P5) = P6,000 Unfav.

Fixed Spending Variance: Actual Fixed FOH – Budgeted Fixed FOH

Actual: 50,000 cases x 0.12 hours/case x P12.50/case = P 75,000
Budgeted Fixed FOH: 40,000 cases x 0.10 hours/case x P20/case = 80,000
Fixed Spending Variance = Favorable P 5,000

Total Spending Variance = Variable Spending Variance + Fixed Spending Variance

P6,000 Unfav. + P5,000 Fav. = P1,000 Unfav.

Total Variance = Variable Spending Variance + Fixed Spending Variance + Efficiency

Variance + Volume Variance
P6,000 Unfav. + P5,000 Fav. + P5,000 Unfav. + P20,000 Fav. = P14,000 Fav.
What to do on the activities?
► Create a shared drive “Cost Accounting BSA 1__ 2020-2021” and subdrive “Chapter
11”
► Make every member of the class able to access, write/edit on the shared drive.
► The class mayor will assign persons (1-2) who will answer each activity and another
person (1-2) to edit/review the answers. By the end of the semester, everyone
must contribute to at least an activity. Class mayor to do the monitoring.
► Copy the activities on subdrive. One filename (use company name as filename) for
every activity. For every activity, the answer(s) follow.
► Inform your instructor your answers are ready for checking and putting grade. Per
activity: 5 points with correct answer; three points with almost correct answer; 1
point for mostly incorrect answer. No point for no answer.
► The grade earned in the activities will be grade in the project.
► Everyone can view/use the answers on the shared drive for studying.
Problem 13-1 Michelle Corporation (De Leon)
You have been given the following information of Michelle Corporation for June:
Actual labor hours used 3,150 hours
Actual labor rate per hour P 3.00
Standard labor hours 3,000 hours
Standard labor rate per hour P3.10
Actual quantity of materials purchased and used 4,450 units
Actual materials price P2.52 per unit
Standard quantity of materials used 4,050 units
Standard material price P2.50 per unit
Requirements: Compute the (1) material price variance; (2) material efficiency variance; (3)
Labor rate variance; and (4) labor efficiency variance.
Problem 13-2 Longview Hospital (De Leon)
Longview Hospital performs blood tests in its laboratory. The following standards have
been set for each blood test performed:
Item Std Price or Qty Std Rate for Hours
Direct materials 2 plates P 2.75 per plate
Direct labor 0.2 hour P15.00 per hour
Variable overhead 0.2 hour P 7.00 per hour

During May, the laboratory performed 1,500 blood tests. On May 1, there were no plates
on hand; after a plate is used for a blood test it is discarded. Variable overhead is
assigned to blood tests on the basis of direct labor hours. The following events occurred
during May:
A) 3,600 plates were purchased at a cost of P9,540.
B) 3,200 plates were used for blood tests.
C) 340 actual direct labor hours were worked at a cost of P5,100.
Required: Material and Labor variances, variable overhead efficiency variance.
Problem 13-3 Golden Shower Company (De Leon)
Golden Shower Company has a budgeted normal monthly capacity of 5,000 labor
hours with a standard production of 4,000 units at this capacity. Standard costs
are:
Materials 2 kilos at P1.00
Labor P8.00 per hour
Factory Overhead at normal capacity
Fixed expenses P5,000
Variable expenses P1.50 per labor hour
During January, actual factory overhead total P11,250 and 4,500 labor hours cost
P33,750. Production during the month was 3,500 units using 7,200 kilos of
materials at a cost of P1.02 per kilo.

Required: Two variances for materials, labor and overhead.

Problem 13-4 Fenton Company (De Leon)
The Fenton Company manufactures one product and provides you with the
following information for the year 2019:

Normal direct labor hour 155,000

Standard fixed overhead rate P 4.00
Standard fixed overhead cost per unit P 10.00
Units manufactured – actual 60,000
Actual direct labor hours 148,000
Actual overhead – variable P 475,000
Actual overhead – fixed P 632,500
Total budgeted overhead P1,085,000

Required: Compute the variances using 1-way, 2-way, 3-way and 4-way methods.
I hope the simplified approach in
the FOH variance analysis will
help you.

Thank you!