Republic of the Philippines

Central Philippines State University

VICTORIAS CAMPUS
Hda. Estrella, Barangay XIV, Victorias City, Negros Occidental 6119

TOPIC 4: STANDARD COST VARIANCE ANALYSIS

STANDARD – a measure of acceptable performance by management as a guide in making economic decisions.

QUANTITY STANDARD indicate the quantity of raw materials or labor time required to produce a unit of a product or
to provide services.
COST STANDARD – indicate what cost of the quantity standards (materials and labor) should be.

A STANDARD COST may be used in both JOB ORDER AND PROCESS COSTING.

ADVANTAGES OF USING STANDARD COST.

1. Standard cost serve as a key element in the application of MANAGEMENT BY EXCEPTION, MANAGEMENT BY
OBJECTIVES AND RESONSIBILTY ACCOUNTING.
2. Standard cost promote economy and efficiency among employees.
3. The use of standard cost simplifies bookkeeping and costing procedures.

VARIANCE – the difference between ACTUAL COST and STANDARD COST. Either FAVORABLE (when actual cost is less
than standard cost) or UNFAVORABLE (when actual cost is greater than standard cost).

STANDARD COSTING CONTROL LOOP

1. Establish standard.
2. Measure actual performance.
3. Compare actual performance with standard.
4. Analyze the variances.
5. Investigate the variances that are material and significant in amount.
6. Take corrective action when needed. This may include revision of standard.

TWO TYPES OF STANDARD

1. IDEAL STANDARD – attainable only the best circumstances. Also called the theoretical or maximum – efficiency
standards. They require perfect performance, no allowance for breakdown, work interruption, wastages. 100% of the
time.
2. PRACTICAL STANDARD OR CURRENTLY ATTAINABLE STANDARD – tight but attainable standards. Normally used for
production costing and cash budgeting purposes.

MATERIAL STANDARDS
STANDARD PRICE PER UNIT – should reflect the final delivered cost of materials, net of any discount and inclusive of
allowance for handling cost.
STANDARD QUANTITY PER UNIT – should reflect the units of materials required to produce each unit of a product
including allowances or unfavorable wastage, spoilage as well as other normal inefficiencies.

DIRECT LABOR STANDARDS

STANDARD RATE PER HOUR – should include the wages, fringe benefit and other labor cost.
STANADARD TIME (HOUR) PER UNIT – the amount of labor time (or number of hours) required to produce each unit of
product including allowances for employee rest periods and normal machine downtime.
 Republic of the Philippines
Central Philippines State University
VICTORIAS CAMPUS
Hda. Estrella, Barangay XIV, Victorias City, Negros Occidental 6119

VARIABLE MANUFACTURING OVERHEAD STANDARDS – computed in the same manner as the standard for labor cost are
computed. The quantity and time factors used are time (hours) and variable overhead rate per hour.

FIXED MANUFACTURING OVERHEAD STANDARDS – usually expressed in total figures. To set standard rate for fixed
overhead, the total fixed OH cost is computed using the practical or normal capacity level as bases. The standard time
for overhead is usually expressed in terms of direct labor standard time or machine hours.

STANDARDS AND BUDGETS - both are predetermined amounts. However, a standard is a unit amount, whereas the
budget is a total amount.

TOTAL BUDGETED COST – cost that should be incurred for budgeted production.

TOTAL STANDARD COST – cost that should have been incurred for actual production.

VARIANCE ANALYSIs

In materials, labor and variable factory overhead cost, the variances are analyzed using TWO – WAY METHOD.
1. Efficiency Variance or Quantity Variance or Time Variance
2. Spending Variance or Price Variance or Rate Variance

Analysis for Materials Cost Variance:

(ASS)

(ASA)

Analysis for Labor Cost Variance:

ASS)
 Republic of the Philippines
Central Philippines State University
VICTORIAS CAMPUS
Hda. Estrella, Barangay XIV, Victorias City, Negros Occidental 6119

(ASA)

Analysis for Variable FOH Variance:

ASS)

(ASA)

Analysis for Fixed FOH Variance:

Analysis for Total Factory Overhead Variance:

Four-Way Analysis: 1. Variable spending (same as two – way analysis)

2. Variable Efficiency (same as two – way analysis)
3. Fixed spending (same as two – way analysis)
4. Volume or Capacity (same as two – way analysis)

Three-Way Analysis:
1. Spending variance:
Variable spending
Fixed spending
2. Variable Efficiency (same
3. Volume or Capacity (same
(same as two – way analysis)
(same as two – way analysis)
as two – way analysis)
as two – way analysis)

Exercise:

A Company produces a single product that has the following standard cost:
Materials 5 pieces at P4 per piece P 20
Labor 3 hours at P10 per hour 30
Variable FOH 3 hours at P15 per hour 45
Fixed FOH 3 hours at P5 per hour 15
Total manufacturing cost 110

The total budgeted FOH is P15, 000. This is for budgeted production (the normal capacity level) of 1,000 units requiring
total budgeted time of 3,000 hours.
 Republic of the Philippines
Central Philippines State University
VICTORIAS CAMPUS
Hda. Estrella, Barangay XIV, Victorias City, Negros Occidental 6119

During the period, the company produced 1,100 units and incurred the following cost:

Materials 5,600 pieces at P3.80 per piece P 21,280

Labor 3,250 hours at P11 per hour 35,750
Variable FOH 3,250 hours at P14.5 per hour 47,125
Fixed FOH 16,000
Total manufacturing cost 120,155

How much is the?

1. Total manufacturing cost variance

2. Total material cost variance
3. Efficiency variance for materials
4. Spending variance for materials
5. Total labor cost variance
6. Efficiency variance for labor
7. Spending variance for labor
8. Total variable factory overhead variance
9. Variable efficiency variance
10. Variable spending variance
11. Total fixed factory overhead variance
12. Fixed spending or budget variance
13. Volume or capacity variance
14. Total factory overhead variance