LCRC :MS 09_ STANDARD COSTING & VARIANCE ANALYSIS BATCH MAY 2020

Calamba Review Center - Laguna (LCRC)

2F MMCO Building, 8000 Lakeview Ph3 Angela Street, Halang, Calamba City Laguna, Philippines
Tel No. (02) 330-8617, (049) 523-6031; (02) 330-6057
CPA REVIEW (May 2020 Batch)
MAS Karim Abitago, CPA

MS09 – STANDARD COSTING & VARIANCE ANALYSIS

TOPIC OUTLINE
Uses/ Purpose

Standard Advantages &

Costs Disadvantages
Standard Cost Users
System
Basic Concepts
Types of
Standards
Standard Setting
Management
by Exception

DM Variances

STANDARD COSTING AND Variance

DL Variances
VARIANCE ANALYSIS Analysis

FOH Variances

Causes of Variances and

Responsibility for Variances

Disposition and
Treatement of Variances

LECTURE NOTES
BASIC CONCEPTS
STANDARD – a measure of acceptable performance established by
management as a guide in making decisions.
STANDARD COSTS - are predetermined or target unit cost of production which
should be attained under efficient conditions.
- it is the amount and costs of DM, DL and FOH required to
produce one unit of finished good.
STANDARD COSTS SYSTEMS - is an accounting system which uses standard costs rather
than actual costs to account for units as they flow through
the manufacturing processes.
Uses of Standard Costs
(a) Inventory valuation (e) Motivating employees
(b) Planning and controlling costs (f) Price setting
(c) Measurement of performance (g) Instrument of coordination
(d) Budget preparation
Advantages of Standard Costs
(1) Standard costs serve as a key element in the application of management by exception, management by
objectives, and responsibility accounting.
(2) Standard costs promote economy and efficiency among employees.
(3) The use of standard costs simplifies bookkeeping and costing procedures.
Limitations of Standard Costs
(1) Difficulty in determining which variances is material.
(2) Other useful information may not be noticed since attention is focused on variances.
(3) Subordinates may be tempted to cover-up unfavourable exceptions or not report them at all.
(4) Costly to implement.
Users of Standard Costs
Standard costs are used by manufacturing firms, service firms and non-profit organizations. Standard cost
system may be used in BOTH job-order and process costing systems.
Types of Standards
Basic Standards - are standards that are unchanged year after year.

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LCRC :MS 09_ STANDARD COSTING & VARIANCE ANALYSIS BATCH MAY 2020
Ideal / Perfect / Theoretical Standards - highest and optimum level of performance under
perfect operating conditions.
Currently Attainable / Normal Standards - efficient level of performance that are attainable
under expected operating conditions.
Management By Exception
It is 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.
STANDARD SETTING
To set standard costs, the following are its 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.
NOTE: Both standards relate to the input factors: materials, direct labor and factory overhead.
VARIANCE ANALYSIS
Variance is the DIFFERENCE between STANDARD and ACTUAL costs.
Actual Cost > Standard Cost = UNFAVORABLE VARIANCE or DEBIT VARIANCE; added to COGS.
Actual Cost < Standard Cost = FAVORABLE VARIANCE or CREDIT VARIANCE; deducted from COGS.
DIRECT MATERIAL VARIANCES

AQ x AP = xx Price Variance
AQ x SP = xx
SQ x SP = xx Use Variance
SQ – Standard Quantity, computed as (SQ per unit x Actual Production)
AQ – Actual Quantity SP – Standard Price
AP – Actual Price
DIRECT LABOR VARIANCES

AH x AR = xx Rate Variance
AH x AR = xx
SH x SR = xx Efficiency Variance
SH – Standard Hours, computed as (SH per unit x Actual Production)
AH – Actual Hours SR – Standard Rate
AR – Actual Rate
FACTORY OVERHEAD VARIANCES
2 WAY ANALYSES
Actual Overhead (AH x AR) xx Controllable
BASH (Budget allowed for standard hours): Variance
Budgeted Fixed Overhead xx
Variable Overhead (SH x Std. VOH Rate) xx xx Volume
Standard Overhead (SH x SR) xx Variance
3 WAY ANALYSES
Actual Overhead (AH x AR) xx
Spending
BAAH (Budget allowed for actual hours):
Budgeted Fixed Overhead xx Variance
Variable Overhead (AH x Std. VOH Rate) xx xx
Efficiency
BASH (Budget allowed for standard hours):
Variance
Budgeted Fixed Overhead xx
Variable Overhead (SH x Std. VOH Rate) xx xx Volume
Standard Overhead (SH x SR) xx Variance
4 WAY ANALYSES
VARIABLE OVERHEAD

AH x AR = xx Spending Variance
AH x AR = xx
SH x SR = xx Efficiency Variance
FIXED OVERHEAD
Actual Fixed Overhead xx Spending Variance
Budgeted Fixed Overhead (Normal Capacity x Std. FOH Rate) xx
Applied Fixed Overhead (SH x Std. FOH Rate) xx Volume Variance

CAUSES OF VARIANCES
(A) MATERIAL PRICE VARIANCES
(1) Fluctuations in market prices of materials
(2) Purchasing from distant suppliers, which result in additional costs
(3) Failure to take cash discounts
(4) Purchasing materials from substandard quality
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LCRC :MS 09_ STANDARD COSTING & VARIANCE ANALYSIS BATCH MAY 2020
(5) Purchase contract terms
(B) MATERIAL QUANTITY VARIANCES
(1) Waste and loss of material in handling and processing
(2) Substitution of defective or non-standard materials
(3) Spoilage or production of excess scrap because of inexperienced workers or poor supervisors
(4) Lack of proper tools or machines
(5) Variation in yields from materials
(C) DIRECT LABOR RATE VARIANCES
(1) Inexperienced workers hired
(2) Change in labor rate particularly peak season
(3) Use of an employee having a wage classification other than that assumed when the standard for a
job was set
(4) Use of a great number of higher paid employees in the group than anticipated
(D) DIRECT LABOR EFFICIENCY VARIANCES
(1) Good or poor training of workers
(2) Poor materials or faulty equipment
(3) Good or poor supervision and scheduling of work
(4) Experienced or lack of experience on the job
(5) Machine breakdowns
(E) VARIABLE OVERHEAD VARIANCE
(1) Increase in energy costs
(2) Waste in using supplies
(3) Avoidable machine break-downs
(4) Lack of operators
(5) Wrong grade of indirect material and indirect labor
(F) VOLUME VARIANCE
(1) Poor production scheduling (5) Decrease in customer demand
(2) Unusual machine break-downs (6) Excess plant capacity
(3) Storms or strikes (7) Shortage of skilled workers
(4) Fluctuations over time
RESPONSIBILITY FOR VARIANCES
The ultimate officer accountable for the production cost variances is the CHIEF EXECUTIVE OFFICER (CEO).

COST VARIANCES OFFICER RESPONSIBLE

Material Price Variance Purchasing Head
Material Quantity Variance Production Head
Labor Rate Variance HR Head / Production Head
Labor Efficiency Variance Production Head
Variable OH Variance Production Head / HR Head
Fixed OH Variance Production Head
DISPOSING VARIANCES
• If the variance is INSIGNIFICANT, it should be closed or charged to COGS.
• If the variance is SIGNIFICANT, it should be closed or charged proportionately to COGS, WIP and FG.

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LCRC :MS 09_ STANDARD COSTING & VARIANCE ANALYSIS BATCH MAY 2020

DISCUSSION EXERCISES
STRAIGHT PROBLEMS:
STANDARD SETTING
1. LOS ANGELES COMPANY manufactures a powerful cleaning solvent. The main ingredient in the solvent is a
raw material called Echol. Information on the purchase and use of Echol follows:
Purchase of Echol: Echol is purchased in 15-gallon container at a cost of P115 per container. A discount
of 2% is offered by the supplier for payment within 10 days, LOS ANGELES takes all discounts. Shipping
costs, which LOS ANGELES must pay, amount to P130 for an average shipment of 100 15-gallon
containers of Echol.
Use of Echol: The bill of materials calls for 7.6 quarts of Echol per bottle of cleaning solvent. (There are
four quarts in a gallon.) About 5% of all Echol used is lost through spillage or evaporation (the 7.6 quarts
above is the actual content per bottle.) In addition, statistical analysis has shown that every 41st bottle
is rejected at final inspection because of contamination.
REQUIREMENTS:
1. Compute the standard purchase price for one quart of Echol.
2. Compute the standard quantity of Echol (in quarts) per salable bottle of cleaning solvent.
3. Using the data from (1) and (2) above, prepare a standard cost card showing the standard cost of
Echol per bottle of cleaning solvent.
2. COLORADO INC. is a chemical manufacturer that supplies various products to industrial users. The
company plans to introduce a new chemical solution, called Nysap, for which it needs to develop a
standard product cost. The following information is available on the production of Nysap:
• Nysap is made by combining a chemical compound (nyclyn) and a solution (salex), and boiling the
mixture. A 20% loss in volume occurs for both the salex and the nyclyn during boiling. After boiling,
the mixture consists of 9.6 liters of salex and 12 kilograms of nyclyn per 10-liter batch of Nysap.
• After the boiling process is complete, the solution is cooled slightly before 5 kilograms of protet are
added per 10-liter batch of Nysap. The addition of the protet does not affect the total liquid volume.
The resulting solution is then bottled in 10-liter containers.
• The finished product is highly unstable, and one10-liter batch out of six is rejected at final
inspection. Rejected batches have no commercial value and are thrown out.
• It takes a worker 35 minutes to process one 10-liter batch of Nysap. Employees work an eight-hour
day, including one hour per day for rest breaks and cleanup.
REQUIREMENTS:
1. Determine the standard quantity for each of the raw materials needed to produce an acceptable 10-
liter batch of Nysap.
2. Determine the standard labor time to produce an acceptable 10-liter batch of Nysap.
3. Assuming the following purchase prices and costs, prepare a standard cost card for materials and
labor one acceptable 10-liter batch of Nysap:
Salex P1.50 per liter
Nyclyn 2.80 per kilogram
Protet 3.00 per kilogram
Direct labor cost 9.00 per hour
MATERIAL & LABOR VARIANCES
3. TEXAS INC. has the following information available for the current year:
Standard:
Material 3.5 feet per unit @ P2.60 per foot
Labor 5 direct labor hours @ P8.50 per unit
Actual:
Material 95,625 feet used (100,000 feet purchased @ P2.50 per foot)
Labor 122,400 direct labor hours incurred per unit @ P8.35 per hour
25,500 units were produced
REQUIREMENT: Compute for the direct material and direct labor variances
4. Each of the following independent situations relates to direct labor. Fill in the blanks.
A B C D
Units produced 4,000 _____ 3,000 _____
Actual hours worked 1,900 8,400 _____ _____
Standard hours for
production achieved 2,000 _____ _____ 6,000
Standard hours per unit _____ 0.5 2 3
Standard rate per hour P12 P10 P12 _____
Actual labor cost _____ P83,600 _____ P24,500
Rate variance P310U _____ P900U P300F
Efficiency variance _____ P2,000U P1,800F P800 U

5. CALIFORNIA CORP. manufactures candles in various shapes, sizes, colors, and scents. Depending on the
orders received, not all candles require the same amount of color, dye, or scent materials. Yields also
vary, depending upon the usage of beeswax or synthetic wax. Standard ingredients for 1,000 lbs. of
candles are:

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LCRC :MS 09_ STANDARD COSTING & VARIANCE ANALYSIS BATCH MAY 2020

Input: Standard Mix Standard Cost per Pound

Beeswax 200 lbs. P1.00
Synthetic wax 840 .20
Colors 7 2.00
Scents 3 6.00
Totals 1,050 lbs.
Standard output 1,000 lbs.
Price variances are charged off at the time of purchase. During January, the company was busy
manufacturing red candles for Valentine's Day. Actual production then was:
Input:
Beeswax 4,100
Synthetic wax 13,800
Colors 2,200
Scents 60
Totals 20,160 lbs.
Actual output 18,500 lbs.
REQUIREMENT: Compute the materials mix variance and the materials yield variance. (Indicate whether
each variance is favorable or unfavorable and round to three decimal places.)
OVERHEAD VARIANCES
6. The manager of the AUTOMOBILE REGISTRATION DIVISION of the state of NEBRASKA has determined
that it typically takes 30 minutes for the department's employees to register a new car. The following
predetermined overhead costs are applicable to LANCASTER COUNTY. Fixed overhead, computed on an
estimated 4,000 direct labor hours, is P8 per DLH. Variable overhead is estimated at P3 per DLH.
During July 2001, 7,600 cars were registered in LANCASTER COUNTY, taking 3,700 direct labor hours. For
the month, variable overhead was P10,730 and fixed overhead was P29,950.
REQUIREMENTS:
A. Compute overhead variances using a four-variance approach.
B. Compute overhead variances using a three-variance approach.
C. Compute overhead variances using a two-variance approach.
7. NEW JERSEY CORP. uses a standard cost system in which manufacturing overhead is applied to units of
product on the basis of direct labor-hours. The company's total budgeted variable and fixed manufacturing
overhead costs at the denominator level of activity are P20,000 for variable overhead and P30,000 for
fixed overhead. The predetermined overhead rate, including both fixed and variable components, is P2.50
per direct labor-hour. The standards call for two direct labor-hours per unit of output produced. Last year,
the company produced 11,500 units of product and worked 22,000 direct labor-hours. Actual costs were
P22,500 for variable overhead and P31,000 for fixed overhead.
REQUIRED: (M)
(a) What is the denominator level of activity?
(b) What were the standard hours allowed for the output last year?
(c) What was the variable overhead spending variance?
(d) What was the variable overhead efficiency variance?
(e) What was the fixed overhead budget variance?
(f) What was the fixed overhead volume variance?
8. ARIZONA CORP. manufactured 1,000 units during April with a total overhead budget of P12,400.
However, while manufacturing the 1,000 units the microcomputer that contained the month's cost
information broke down. With the computer out of commission, the accountant has been unable to
complete the variance analysis report. The information missing from the report is lettered in the following
set of data:
Variable overhead:
Standard cost per unit: 0.4 labor hour at P4 per hour
Actual costs: P2,100 for 376 hours
Flexible budget: a
Total flexible-budget variance: b
Variable overhead spending variance: c
Variable overhead efficiency variance: d
Fixed overhead:
Budgeted costs: e
Actual costs: f
Flexible-budget variance: P500 favorable
REQUIREMENT: Compute the missing elements in the report represented by the lettered items.
9. PENNSYLVANIA makes engine additives. Standard costs for a gallon of its major product follow, along with
actual results for March.
Materials, 5 pounds at P6 per pound P30
Direct labor at P12 per hour 24
Variable overhead at P6 per DLH 12
Total standard variable cost P66
Actual results for March:

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LCRC :MS 09_ STANDARD COSTING & VARIANCE ANALYSIS BATCH MAY 2020
A. Production was 1,200 gallons.
B. Material purchases were 3,200 pounds at P5.90 per pound.
C. The company used 6,200 pounds of materials in production.
D. Direct laborers worked 2,250 hours at P12.10, earning P27,225.
E. Variable overhead was P13,800.
REQUIREMENT: Compute all variable cost variances.
MULTIPLE CHOICE: THEORIES
1. Using standard costs
A. can make management planning more difficult.
B. promotes greater economy.
C. does not help in setting prices.
D. weakens management control.
2. Standard costs
A. are estimates of costs attainable only under the most ideal conditions.
B. are difficult to use with a process costing system.
C. can, if properly used, help motivate employees.
D. require that significant unfavorable variances be investigated, but do not require that significant
favorable variances be investigated.
3. Which kinds of variances should be investigated?
A. Those that are large and unfavorable.
B. Those that are large and either favorable or unfavorable.
C. All variances, despite their size.
D. Only use variances.
4. Which of the following choices correctly notes a characteristic associated with perfection standards and
one associated with practical standards?
Perfection Standards Practical Standards
A. Attainable in an ideal environment Incorporate abnormal occurrences when setting
quantity and efficiency targets
B. Result in many unfavorable variances Are often attainable by workers
C. Tend to boost worker morale Generally preferred by behavioral scientists
D. Generally, are easily achieved by workers Result in both favorable and unfavorable
variances
E. Generally preferred by behavioral scientists Are easier to achieve than perfection standards
5. A company using very tight standards in a standard cost system should expect that
A. No incentive bonus will be paid
B. Most variances will be unfavorable
C. Employees will be strongly motivated to attain the standard
D. Costs will be controlled better than if lower standards were used
6. The material price variance is calculated
A. the same as the labor rate variance.
B. on the quantity of materials bought, not the quantity used.
C. on the quantity of materials used, not the quantity bought.
D. by multiplying the difference between the actual and standard price of materials times the quantity
of materials used.
7. If the labor quantity variance is unfavorable and the cause is inefficient use of direct labor, the
responsibility rests with the
A. sales department. C. budget office.
B. production department. D. controller's department.
8. A company would most likely have an unfavorable labor rate variance and a favorable labor efficiency
variance if
A. the mix of workers used in the production process was more experienced than the normal mix.
B. the mix of workers used in the production process was less experienced than the normal mix.
C. workers from another part of the plant were used due to an extra heavy production schedule.
D. the purchasing agent acquired very high quality material that resulted in less spoilage.

9. A large labor efficiency variance is prorated to which of the following at year-end?

A. B. C. D.
WIP Inventory No No Yes Yes
FG Inventory No Yes No Yes
Cost of Goods Sold No Yes No Yes
10. Which department is typically responsible for a materials price variance?
A. Engineering. C. Purchasing.
B. Production. D. Sales.
11. A debit balance in the labor efficiency variance indicates that
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LCRC :MS 09_ STANDARD COSTING & VARIANCE ANALYSIS BATCH MAY 2020
A. Actual hours exceed standard hours. C. Standard hours exceed actual hours.
B. Actual rate exceeds standard rate. D. Standard rate exceeds actual rate.

12. Which set of terms describes the same type of variance?

A. Price variance, rate variance, use variance.
B. Price variance, rate variance, efficiency variance.
C. Use variance, efficiency variance, quantity variance.
D. Use variance, efficiency variance, spending variance.

13. An unfavorable price variance occurs because of

A. Price increases for raw materials.
B. Price decreases for raw materials.
C. Less-than-anticipated levels of waste in the manufacturing process.
D. More-than-anticipated levels of waste in the manufacturing process.

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