Quantity standards rate (price)

specify how much of standards

an input should be specify how much
used to make a should be paid for
product or provide a each unit
service. of the input.
Deviations from standard deemed significant are brought to the
attention of management, a practice known as management by
exception.

Standard
Amount

Direct
Material
Direct Manufacturing
Labor Overhead

Type of Product Cost

Cost Standards are set by:
➢ Accountants,
➢ Engineers,
➢ Purchasing agents, and
➢ production managers combined efforts to encourage
efficient future production.

Engineer Managerial Accountant

 Price Quantity
Standards Standards

Final, delivered Summarized in

cost of materials, a Bill of Materials.
net of discounts.
 Rate Time
Standards Standards

Often a single Use time and

rate is used that reflects motion studies for
the mix of wages earned. each labor
operation.
 Rate Activity
Standards Standards

The rate is the The activity is the

variable portion of the base used to calculate
predetermined overhead the predetermined
rate. overhead.
A standard cost for one unit of product might may look like this:

A B AxB
Standard Standard Standard
Quantity or Price or Rate Cost per
Inputs Hours Unit

Direct materials 3 unit Br. 4.00 per unit Br. 12.00

Direct labor 2.5 hours 14.00 per hour 35.00
Variable mfg. overhead 2.5 hours 3.00 per hour 7.50
Standard unit cost Br. 54.50
 Price and quantity standards are
determined separately for two reasons:

 The purchasing manager is responsible for raw material

purchase prices and the production manager is
responsible for the quantity of raw material used.

 The buying and using activities occur at different times.

Raw material purchases may be held in inventory for a
period of time before being used in production.
 Variance Analysis

Price Variance Quantity/efficiency Variance

Difference between actual price and Difference between actual quantity and
standard price(budgeted price) standard quantity(budgeted quantity )

Materials price variance Materials quantity variance

Labor rate variance VOH Labor efficiency variance VOH
spending variance efficiency variance
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity/efficiency Variance

 Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity Variance

•Actual quantity is the amount of direct materials, direct labor, and variable
manufacturing overhead actually used.
•Standard quantity is the standard quantity allowed for the actual output for the
period.
•Actual price is the amount actually paid for the for the input used
•Standard price is the amount that should have been paid for the input used
 Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price

Price Variance Quantity Variance

(AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP)

AQ = Actual Quantity AP SP = Standard Price SQ
= Actual Price = Standard Quantity
▪ Assume a product has the following direct material standard :

▪ 0.1 kg per a unit of product at Br. 5.00 per kg.

▪ Last month 210 kgs of DM were purchased and used to make 2,000
products .Total direct material cost of the month was Br. 1,029.

▪ Compute price variance and quantity variance?

▪ Standard quantity for unit produced=0.1*2,000= 200kg

▪ Actual quantity for unit produced=210kg

▪ Standard price of material = Br. 5/kg

▪ Actual price of material = Br. 1,029/210kg = Br. 4.9

 Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price
210 kgs. 210 kgs. 200 kgs.
× × ×
Br. 4.90 per kg. Br. 5.00 per kg. Br. 5.00 per kg.
= Br. 1,029 = Br. 1,050 = Br. 1,000

Price variance Quantity variance

Br. 21 Br. 50
favorable unfavorable
Materials price variance
MPV = AQ (AP - SP)
= 210 kgs (Br. 4.90/kg - Br. 5.00/kg)
= 210 kgs (-Br. 0.10/kg)
= Br. 21 F
Materials quantity variance
MQV = SP (AQ - SQ)
= Br. 5.00/kg (210 kgs - (0.1 kg/Product 2,000 Product))
= Br. 5.00/kg (210 kgs - 200 kgs)
= Br. 5.00/kg (10 kgs)
= Br. 50 U
 The price variance is
computed on the entire
How are the variances quantity purchased.
computed if the amount The quantity variance is
purchased differs from the computed only on the
amount used? quantity used.
❖ A company has the following direct labor standard for its product
❖ 1.2 standard hours per unit at Br. 10.00 per hour
❖ Last month employees actually worked 2,500 hours at a total labor
cost of Br. 26,250 to make 2,000 units of product.

❖ Compute price variance and quantity variance?

❖ Standard quantity (hours) for unit produced=1.2*2,000= 2,400hrs

❖ Actual quantity for unit produced=2,500hrs

❖ Standard price of labor = Br. 10/hr

❖ Actual price of labor = Br. 26,250/2,500hrs = Br. 10.5

 Actual Hours Actual Hours Standard Hours
× × ×
Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours
× × ×
Br. 10.50 per hour Br. 10.00 per hour. Br. 10.00 per hour
= Br. 26,250 = Br. 25,000 = Br. 24,000

Rate variance Efficiency variance

Br. 1,250 Br. 1,000
unfavorable unfavorable
• Labor rate variance
• LRV = AH (AR - SR)
• = 2,500 hours (Br. 10.50 per hour – Br. 10.00 per hour)
• = 2,500 hours (Br. 0.50 per hour)
• = Br. 1,250 unfavorable

• Labor efficiency variance

• LEV = SR (AH - SH)
• = Br. 10.00 per hour (2,500 hours – 2,400 hours)
• = Br. 10.00 per hour (100 hours)
• = Br. 1,000 unfavorable
❖Assume the following variable manufacturing overhead cost standard
for a product .
❖1.2 standard labor hours per unit at Br. 4.00 per hour
❖Last month employees actually worked 2,500 hours to make 2,000 units.
Actual variable manufacturing overhead for the month was Br. 10,500.

Compute price variance and quantity variance?

• Standard quantity (hours) for unit produced=1.2*2,000= 2,400hrs

•Actual quantity(hours) for unit produced=2,500hrs

•Standard price of labor = Br. 4/hr

•Actual price of labor = Br. 10,500/2,500hrs = Br. 4.2

 Actual Hours Actual Hours Standard Hours
× × ×
Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours
× × ×
Br. 4.20 per hour Br. 4.00 per hour Br. 4.00 per hour
= Br. 10,500 = Br. 10,000 = Br. 9,600

Spending variance Efficiency variance

Br. 500 Br. 400
unfavorable unfavorable
McGraw-
Variable manufacturing overhead spending variance
VMSV = AH (AR - SR)
= 2,500 hours (Br. 4.20 per hour – Br. 4.00 per hour)
= 2,500 hours (Br. 0.20 per hour)
= Br. 500 unfavorable

Variable manufacturing overhead efficiency variance

VMEV = SR (AH - SH)
= Br. 4.00 per hour (2,500 hours – 2,400 hours)
= Br. 4.00 per hour (100 hours)
= Br. 400 unfavorable
23-28
How Do Managers Use Budgets to Control Business
Activities?

LO 1
Item Actual Result Static (Master)Budget

Sales (Q) 10,000 units 8,000 units

Unit selling price Br. 12.1 Br. 12
Unit variable cost Br. 8.6 Br. 8

Total Fixed Cost Br. 19,000 Br. 20,000

 Green Plc
Static Budget Performance report
For the year ended decemeber31,2020

Static/ Master Static/Master Budget

Particulars Actual
Budget /Variances

Units 10,000 units 8,000 units 2,000 units F

Sales Br. 121,000 Br. 96,000 25,000 F

Variable Expenses 86,000 64,000 22,000U

Contribution Margin 35,000 32,000 3,000 F

Total Fixed Expenses 19,000 20,000 1000 F

Level 1
Operating Income 16,000 12,000 4,000 F
Show revenues and expenses that should
have occurred at the actual level of activity.

May be prepared for any activity level in the

relevant range.

Reveal variances due to rate( price ) and due

to volume (quantity)

Improve performance evaluation

(gives more detail variance analysis)

3
Item Actual Result Static (Master) Budget

Output(Q) 10,000 units 8,000 units

Unit selling price Br. 12.1 Br. 12

Unit variable cost Br. 8.6 Br. 8

Total Fixed Cost Br. 19,000 Br. 20,000

 Green Manufacturing Plc
Flexible Budget
For the year ended december31,2020

Units 5,000 units 8,000 units 10,000 units

Sales Br. 60,000 Br. 96,000 Br. 120,000

Variable Expenses 40,000 64,000 80,000

Contribution Margin 20,000 32,000 40,000

Fixed Expenses 20,000 20,000 20,000

Operating Income 0 12,000 20,000

23-43
 Actual Results Flexible Budget Static Budget
Actual rate @ actual Budgeted rate @ actual Budgeted rate @
outputs outputs budgeted outputs

Flexible Budget Variance Sales Volume Variance

Static Budget Variance

 Sales Volume Variance Static /Master/ Budget

Flexible Budget

Flexible Budget Variance Flexible Budget

45 Actual results
 Green Manufacturing Plc
Flexible Budget variance report
For the year ended december31,2020
Actual Result Flexible Flexible Budget Sales Volume Master/Static
(1) Budget (2) Variance budget(3)
Variance =2-3
= 1-2

Units 10,000 0 10,000 2000F 8,000 units

Sales Br. 121,000 1,000F Br. 120,000 24,000F Br. 96,000

Variable Expenses 86,000 6,000 U 80,000 16,000U 64,000

Contribution 35,000 5,000 U 40,000 8,000F 32,000

Margin
Fixed Expenses 19,000 1,000F 20,000 0 20,000
Net income 16,000 4,000U 20,000 8,000F 12,000
Flexible budgets variance Br. 4,000 U Sale volume variance Br. 8,000 F

Static budget variance Br. 4,000F

 Cost Variance/flexible budget variance

Price Variance Quantity Variance

The difference between The difference between

the actual price and the the actual quantity and
budgeted price. the budgeted quantity.

To assess the impacts of these two factors in a cost

variance, let’s look at the model on the next slide.
 Price
Variance = { Actual Price
Of Input - Budgeted Price
Of Input } Actual Quantity
Of Input

Efficiency
Variance ={
Actual Quantity
Of Input Used - Budgeted Quantity of Input
Allowed for Actual Output } Budgeted Price
Of Input
 Product Cost Qt(hrs) per Price per Cost per Unit of
output Qt(hr) finished good
Budgeted DMC 1unit $1.75 $1.75
Data DLC 0.25hr $12 $3
(Standard)
Variable OH Cost 0.25 DL hr $3 $0.75

Fixed OH Cost 0.25 DL hr $2 $0.5

Production and sales 50,000 units
DL hours 12,500 hrs
Actual Data DMC …… $104,000 1.25units $1.6 $2
DLC …… $145,600 0.2hr $14 $2.8
Variable OH Cost 30,160 0.2hr $2.9 $0.58
Fixed OH Cost $23,920 0.2hr $2.3 $0.46
Production and sales 52,000units
DL hours 10,400 hrs
Type Formula Answer
Material Price variance= (AP – SP) * AQ
Material Quantity (Usage) Variance = (AQ – SQ) * SP
Labor Rate Variance = (AR – SR) * AH
Labor Efficiency Variance = (AH – SH) * SR
Variable OH Rate Variance = (AP – SP) * AH
Variance OH Efficiency Variance = (AH – SH) * SR
Fixed OH Rate Variance= (AP – SP) * AH
Fixed OH Efficiency Variance= (AH – SH) * SR
Type Formula Answer
Material Price variance= (AP – SP) * AQ Br. 9,750 F
Material Quantity (Usage) Variance = (AQ – SQ) * SP Br. 22,750 U
Labor Rate Variance = (AR – SR) * AH Br. 20,800 U
Labor Efficiency Variance = (AH – SH) * SR Br. 31,200 F
Variable OH Rate Variance = (AR – SR) * AH Br. 1040 F
Variance OH Efficiency Variance = (AH – SH) * SR Br. 7,800 F
Fixed OH Rate Variance= (AR – SR) * AH Br. 3120U
Fixed OH Efficiency Variance= (AH – SH) * SR Br. 5,200 F
a. Flexible Budget variance
Green Manufacturing Plc
Flexible Budget variance report
For the year ended december31,2020
Actual Result (1) Flexible Budget Flexible Budget (2)
Q= 52,000 Variance Q=52,000
= 1-2

Direct Material Cost $104,000 13,000U $91,000(a)

Direct Labor Cost $145,600 10,400F $156,000(b)

Variable Overhead Cost $30,160 8,840F $39,000(c)

Fixed Overhead Cost $23,920 2,080F $26,000(d)

Total Product cost Flexible 8,320F

Budget Variance

*a=52,000* 1.75, b=52,000*3, c= 52,000*0.75,d=52,000*0.5

 Price
Variance = { Actual Price
Of Input - Budgeted Price
Of Input }  Actual Quantity
Of Input

Price Variance=(1.6-1.75)X65,000units= $9,750F

Efficiency
Variance = { Actual Quantity
Of Input Used - Budgeted Quantity of Input
Allowed for Actual Output } Budgeted Price
Of Input

Efficiency Variance=(65,000units-52,000units)X $1.75 = $22750U

 Price
Variance = { Actual Price
Of Input - Budgeted Price
Of Input }  Actual Quantity
Of Input

Price Variance=(14-12)X10,400 hrs= $20,800U

Efficiency
Variance = { Actual Quantity
Of Input Used - Budgeted Quantity of Input
Allowed for Actual Output } Budgeted Price
Of Input

Efficiency Variance=(10,400units-13,000hrs)X $12 = $31,200F

 Price
Variance = { Actual Price
Of Input - Budgeted Price
Of Input }  Actual Quantity
Of Input

Price Variance=($2.9-$3)X10,400 hrs= $1,040F

Efficiency
Variance = { Actual Quantity
Of Input Used - Budgeted Quantity of Input
Allowed for Actual Output } Budgeted Price
Of Input

Efficiency Variance=(10,400units-13,000hrs)X $3 = $7,800F

 Price
Variance = { Actual Price
Of Input - Budgeted Price
Of Input }  Actual Quantity
Of Input

Price Variance=($2.3-$2)X10,400 hrs= $3,120U

Efficiency
Variance = { Actual Quantity
Of Input Used - Budgeted Quantity of Input
Allowed for Actual Output } Budgeted Price
Of Input

Efficiency Variance=(10,400units-13,000hrs)X $2 = $5,200F

 Green Manufacturing Plc
Price and Efficiency variance report
For the year ended december31,2020
Price Variance Efficiency Variance Flexible Budget
Variance

Direct Material Cost $9,750F $22,750U 13,000U

Direct Labor Cost $20,800U $31,200F 10,400F

Variable Overhead Cost $1,040F $7,800F 8,840F

Fixed Overhead Cost $3,120U $5,200F 2,080F

Total 13,130U 21,450F 8,320F

 Material Mix
Material Variance
Quantity
Material Cost Variance Material Yield
Variance Variance
Material Price
Variance
Materials Quantity Variance Materials Price Variance

Production Manager Purchasing Manager

The standard price is used to compute the quantity variance

so that the production manager is not held responsible for
the purchasing manager’s performance.
 Your poor scheduling
I am not responsible for this sometimes requires me to
unfavorable material rush order material at a higher
quantity variance. price, causing unfavorable
You purchased cheap price variances.
material, so my people had
to use more of it.
Production managers are
usually held accountable
for labor variances
because they can
influence the:

Production Manager
Rate(price) Related Issues
• Increments / high labor wages
• Overtime
• Labor shortage leading to higher rates
• Union agreement 71 Dr. Varadraj Bapat
Variable Overhead Cost
• Inflation
• Lack of planning
• Lack of cost control

72
73
Cost Price Variance Efficiency variance

Direct Materials Responsibility: Purchasing Responsibility:

managers Production managers
& engineers

Direct Labor Responsibility: Human Responsibility:

resource managers Production managers
& engineers

Manufacturing Responsibility: Production managers

Overhead
 Larger variances, in Birr
How do I know which amount or as a
variances to investigate? percentage of the
standard, are
investigated first.
McGraw-
 Warning signals for investigation

Favorable Limit • •
• • •
Desired Value
•
Unfavorable Limit •
•
1 2 3 4 5 6 7 8 9
Variance Measurements
Management by Promotes economy and
exception efficiency

Advantages
Enhances
responsibility
Simplified
accounting
bookkeeping