8) REQ The Kerrew School of Accor tom y Gd Management liduisory Servvces MAS-06: STANDARD COSTING STANDARD ~ a benchmark set by management 1 ald of performance measurement. In manufacturing companies, standards are classified ingo two (2! “ategonie + QUANTITY Standard ~ indicates the quantity of raw materials or tabar time required to produce @ unit of product. This 1s normally expressed per unit of output (€.9., 3 pieces per unit) + COST Standard - indicates what the vost of the quantity standard should be. This 1s normally expressed per unit of mput (e.9., ® 2.00 per piace) STANDARD COSTS — systematically pre-determined costs established by Management to be used as a basis for companson with actual cost. BUDGETS vs. STANDARDS f BUDGETS STANDAROS | | Purpose | Budgets are statements of exvected | Gtardards pertain to what costs should be | costs. geen 9 certain level of performance. Budgets emphasize cost levels that | Standards emphasize the levels to which costs | uld not be exceeded. houtd be reduced. 7 asl | Budgets are set for all departments -- | Standards are set only for the production or | i sales, administration & manufacturing. | manufacturing division of the firm i Analysis | When actual data differ from the | Material arnounts of variance are revieweo | budget, it may be an indication of | and investigated so that necessary corrective | either good or bad performance. __|_actroiss are implemented. 7 ms Emphasis | Coverage STANDARD COST VARIANCE ANALYSIS. VARIANCE = Actual Costs (AC) AC > SC: Unfavorable {debit katance/adverse) AG « SC: Favorabie (credit balance/desirable) DIRECT MATERIAL Variance ‘Actual Matenal Cost € Actual Quantity (AQ) x Actual Price (AP) _- Standard Material Cost € Standard Quantity (SQ) x Standard Price (SP) Materials Cost Variance Analysis. Quantity variance: = AQXSP = _Bitference im quantities x Standard price Brice variance: AQXAP = ‘ctUal quantity x Difference in prices DIRECT LABOR Variance ‘Actual Labor Cost € Actual Hours (Ati) x Actual Rate (AR) Standard Labor Cost € Standard Hours (SH) x Standard Rate (SR) Labor Cost Variance Analysis. Efficiency variance: AHxSR = Difference in hours x Standard rate Rate variance: AHXAR Actual hour x Difference in rates FACTORY OVERHEAD (FOH) Variance = _(Actuat FO! coss) ~ (Standard FOH cost) (Refer to page 2 for complete FOH Variance 4nlvsis) (MATERIAL PRICE, MIX and YIELD Variances Mix and yield variances are normally calculated when production requires combining several materials to produce a unit of product. Actual Material Cost - Standard Material Cost Material varianc Analysis: Price vanance: AQxaP Mix variance: (AQxSP) » TAQASP Yield variance: TAQASP - Standar:i Cost Legend ‘AQ - Actual quantity AP - Difference in prices SP = Standard price TAQASP - Total Actual Quantity at Average Standard Price NOTE: Mix and yield variances may also apply to diucit Jabor, specifically in situations where varior labor skills are required to produce units of products. Page 1 of 6 pagesRSG. he Revrew School of Gecommtoncry MAS-06 STANDARD COSTING IMPORTANT NOTES on MATERIAL and LABOR VARIANCE ANALYSIS 1 Metenal PRICE variance 1s alsa known as Matenal spending variance, maternal money vanance, matenal rate vanance 2) Material QUANTITY vanance is also known as Maternal usa. e, mater a eifcency vanance 3. Material usage vanance +54 ¢ e whl 7 ce variance 29e vanance |S 9 quantity variance while mate! price usage vanance 1s a price vari 4. Labor RATE vanance 1s also known as Labor price variance, labor spanding vananie, iabor money variance S._ Labor EFFICIENCY variance #s also knows ___ Labor hours variance, labor sage vanance, labor time variance Labor efficiency vanance excluces idle time spent in the production. If any, idle time 1s separately expioinea through the Idle Time Varianc 2, which 1s regarded as unfavorable. LE TIME variance = Idle Time x Standard Labor Rate FACTORY OVERHEAD (FOH) VARIANCE ANALYSIS. One-way variance analysis Computation Legens FOH Vanance AFOH ~ SFOH AFOH: Actual FOH SFOM: Standard FON = (SH x SR) Two-way vanance analysis: Controtlable vanance AFON ~ BASH BASH: Budget Adjusted for Standard Hours Volume vanance BASH ~ SFOH BASH = Budgeted FFOH + (SH x Vanabie FOH Rate) FFOM: Fixed Factory Overnead Three-way variance analysis: Spending vanance AFOH- BAAH BAAH: Budget Adjusted for Actual Hours Efficiency variance BAAN - 8 Se BAAN = Budgeted FFOH + (AH x Vanable FOH Rate) Volume variance BASH ~ SFOH. Four-way variance analysis. Vanable Spending variance AFOH (¥} = BAAH (Vv) AFOH (V): Actual Variable FOH Fixed Spending vanance AFOH (F) - BAAH (fF) AFOH (F)> Actual FFOH Efficiency variance (variable) BAA ~ BASH BAAH (v): Actual Hours x Vanable FOH Rate Volume variance (fixed) BASH ~ SFOH SAAM (F): Budgeted FFOH IMPORTANT NOTES on FACTORY OVERHEAD VARIANCE ANALYSIS 1. Standard Factory Overhead (SFOH) = Standard ours x Standard FOK Rate. Under standard costing, SFOH 's hkewise referred to as tne Applied Factory Overead. 2. IF AFOH is more than SFOH (appii2d), then factory ovevhead 1s said to be under-applied, hence, under: application indicates an unfavorable variance, wnne over application indicates a favorable variance 3, The term capacity variance 1s also usec! to rican the volume variance 4. Budget Variance = Actual Cost - Buriaeted Cost = Actual FCH ~ Budgeted FOH (8FOH) + Under 2-way analysis where BASH 1s deducted trem AFOH, budget variance = controllable variance 2 Under 3-Way analysis where 88AH is detucted fram AFOM, budget variance = spending variance 5. Volume variance is actually the fixed voume variance, there is no such thing as a variable volume or vanable capacity variance 6. Under the 3-way approach, the FOH Efficiency Variance is actually the Variable Efficiency Variance. Other than ‘BAAH ~ BASH, "vanable overtiead efficiency variance may also be computed based on Change in hours x variabie FOH rate = (&H - SH) VR 7. FOH variances may ciassified into™ + Variable FOH Vanances = Vanable Spending Variance + (variable) Efficiency Variance + Fixed FOH Variances ~ Fixed Spending Variance + (fixed) Volume Variance 8. Alternatively, another FOH varicnce analysis may iciude the following variances (NOTE: these Variances aré not included ini the boara exam syllabus for Management Advisory Services) + IDLE capacity variance: BAAH ~ (AH x $8) + TOTAL efficiency variance: 4 Hx SR 2 FIXED efficiency (effectiveness) variance’ & H x FR (where: FR is the fixed FOH Rate) 9. The Manufacturing Efficiency Variance mcorsorates the effect of both FOH Efficiency Vanance and Labor Efficiency Variance. In some cases, the matenai quantity variance may also be included. 10. DM Variance + DL Variance + FOH Variance = Production or Manufacturing Cost Variance USES OF STANDARD COSTS STANDARD COSTING PROCEDURES. Cost control 1. Establish standards Pricing decisions Measure actuai performance Costing of inventories Coinpare actual performance with standards Motivation and performance appraisal Take corrective action when needed Cost awareness and cost reduction Rovise standards when needed Preparation of budgets Preparation of cost report Management by exception Page 2 ot pagesReSQ. The Review School of lecountoncy MAS-06 STANDARD COSTING EXERCISES: STANDARD COSTING 1 Materials and Labor Vanance Analy s" Cow Duck Company has establishes th: following stancards for a single unit of its main product, Selfie Camera Tnipod (Staintess Edition): Inputs Standards Direct materials 3 metal bars at P'S per bar Direct labor 2 labor hours at P 10 per hour + At the start of the year, the budget includes a planned production of 100 units of tripod based on normal capacity «At the end of the year, actual prcduction was 120 units of triped, which resulted to using 400 bars of metal, purchased at a cost of ? 6 per par. REQUIRED. 1. Based on the BUDGETED preduictie of 100 units. A) How many bars must the company plan to use? (Budgeted quantity) 8) How much materials cost 1s included in the budget? (Budgeted cost) Determine the actual cost of materials used. (Actual cost) Based on the ACTUAL production of 120 unis: A) How many bars shou'd have been used? (Standard quantity) 8) How much materials cost should have been curred? (Standard materials cost) ©) How many labor hours shoufo nave seen spent? (Standard hours) 1) How much labor cost shud nave been incurred? (Standard labor cost) 4. Determine the following A) Materials budget vaniar.e B) Materials standard cost vanance C)_ Materials quantity and price variance 5. Inthe following year, Phote purchased 500 oars at a total cost of P 2,000 while only 400 bars out of these were used; the standard quantity allowed for the actual production was 380 bars. Determine the following: A) Total materials variance B) Materials quantity variance C) Materials price usage variance 1D) Materials purchase price varience 6 During the month, a total payroll of P ° produce the 120 units of Tripod. bet A) Total labor variance B) Labor efficiency variance ) Labor rate variance 200 was paid to laborers, working 200 labor hours, to the following: Solution guide to. requirernent i ACTUAL AQ uses = AP = DIRECT MATERIAL Variance = AC - SC = - Materials Quantity Variance (MQW) Materials Price usage Variance (MPV) AQ seo (AP ~ SP) AQK AP: x = Miernatie Gp AQ SP: x = shaw Sulution SQ x SP: x J mqv — Solution guide £0 requirement no, 6 ACTUAL AH = AR DIRECT LABOR Variance = AC ~ SC = - = Labor Efficiency Variance (LEV) © (sl ~ SH) SR = ( Labor Rate Variance (LRV) = AH (AR ~ SR) = (+ AH x ARS xk es Manne ge ye SRe kp = {ation SH x SR; x a eve ~ Page 3 of 6 pages & 5)