ACLC COLLEGE OF TACLOBAN

BUSINESS AND ACCOUNTANCY DEPARTMENT

MANAGEMENT ACCOUNTING – STANDARD COSTING and VARIANCE ANALYSIS

Standards are expected norms of performance. It is a basis for meaningful evaluation. It maybe
qualitatively expressed. Qualitative standards may be expressed in terms of laws, policies, rules, order,
promulgations, and the like. Quantitative standards may be expressed in pesos or in any metric expression
such as meters, pounds, grams, frequency, hours, pesos, liters, and more.

STANDARD COSTING AND STANDARD COST

Standard costing is the “preparation and use of standard costs their impression comparison with actual
costs, and the analysis of variances to their causes and points of incidence”.

Standard cost is a “predetermined costs which is calculated from management’s standards of efficient
operation and the relevant necessary expenditure. It may be used as a basis for price fixing and for cost
control through variance analysis”

STANDARD COSTS VS BUDGETED COSTS

 Standard costs and budgeted costs are both estimated costs.

 Standard costs are estimates based on actual conditions or capacity. It is sometimes referred to
as the flexible budget.
 Budgeted costs are estimates based on projected or budgeted capacity. It is sometimes referred
to as the master budget.
 Estimated costs may refer to budgeted costs, standard costs, predicted costs, forecasted costs,
and other future costs.

ADVANTAGES OF STANDARD COSTING

 Used as a basis in managerial planning

 As an instrument of coordination
 As a reference in cost control
 Used in formulating price and production policies
 Serve as a basis of giving incentives to employees

CONSIDERATIONS IN ESTABLISHING STANDARDS

 Appropriateness – applicability or sustainability of a given standard in a given environment

 Attainability – achievability under the best possibility operating conditions.

VARIANCE COMPUTATIONS AND ANALYSIS

 Generally, a variance (i.e. error or planning gap) is the difference between the actual and
standards (i.e. expectations).
 Cost Variance = Actual Costs – Standard Costs

IF COST VARIANCE TREATMENT OTHER LABEL

Actual Costs > Unfavorable Add to Standard Cost Debit Variance
Standard Cost (underabsorbed or of Sales
underapplied)
Actual Costs < Favorable Deduct from Credit Variance
Standard Cost (overabsorbed or Standard Cost of
overapplied) Sales

ACCOUNTANTABILITY OF THE VARIANCE

COST VARIANCES PRIMARILY ACCOUNTABLE

Material price variance Purchasing manager
Material quantity variance Production manager
Direct labor rate variance Human resource manager
 Direct labor efficiency variance Production manager
Variable OH Variance Production manager, HR manager, Purchasing
manager, and others
Fixed OH Variance Production manager

MATERIAL COST VARIANCES

 MATERIAL COST VARIANCE

ACTUAL MATERIAL COST MINUS STANDARD MATERIAL COST

 MATERIAL PURCHASE PRICE VARIANCE (used actual purchased if the problem is silent)

(ACTUAL PRICE MINUS STANDARD PRICE) X ACTUAL QUANTITY PURCHASED

Note: If the term for this variance is “ Material Usage – Price variance”, multiply the
difference to actual quantity used.

 MATERIAL QUANTITY VARIANCE

(ACTUAL QUANTITY PURCHASED MINUS STANDARD QUANTITY PURCHASED) X STANDARD PRICE

 The sum of material quantity variance and material price variance must equal to the material cost
variance.
 If material price variance was computed based on production, material quantity variance shall be
computed as well based on production. This is to achieve consistency on computation.

LABOR COST VARIANCE

 LABOR COST VARIANCE

ACTUAL LABOR COST MINUS STANDARD LABOR COST

Note: Total Standard Hours = Actual Production X Standard Hours per Unit. In case, actual
production and equivalent production are given, the equivalent production should be
used.
 LABOR RATE VARIANCE (used actual purchased if the problem is silent)

(ACTUAL PRICE MINUS STANDARD PRICE) X ACTUAL HOURS USED

 LABOR EFFICIENCY VARIANCE

(ACTUAL HOURS USED MINUS STANDARD HOURS USED) X STANDARD PRICE

 The sum of labor efficiency variance and labor rate variance must equal to the labor cost variance.

MATERIAL (LABOR) MIX and YIELD VARIANCES

Material Mix Variance

Actual material input x Standard prices XX
- Total actual materials inputs x Average Standard Input Costs XX
Material Mix Variance XX

Material Yield Variance

Total Actual materials inputs x Average Standard Input Costs XX
- Actual Output X Average Standard output costs XX
Material Yield Variance XX

Average Standard Input Cost

= Budgeted Standard Materials Costs Divided by Budgeted Standard Material Input
 Average Standard Output Cost
= Budgeted Standard Materials Costs Divided by Budgeted Standard Output

OVERHEAD VARIANCES

 TOTAL OVERHEAD VARIANCES

= ACTUAL FACTORY OVERHEAD (AFOH) – STANDARD FACTORY OVERHEAD (SHSR)

 CONTROLLABLE VARIANCE

= ACTUAL FACTORY OVERHEAD (AFOR) – BUDGETED ALLOWANCE BASED ON STANDARD HOURS (BASH)

 VOLUME VARIANCE

= BUDGETED ALLOW. BASED ON STANDARD HOURS (BASH) – STANDARD FACTORY OVERHEAD (SHSR)

 SPENDING VARIANCE

= ACTUAL FACTORY OVERHEAD (AFOH) – BUDGETED ALLOWANCE BASED ON ACTUAL HOURS (BAAH)

 IDLE CAPACITY VARIANCE

= BUDGETED ALLOW. BASED ON ACT. HOURS (BAAH) – ACT. HOURS BASED ON STAND. RATE(AHSR)

 EFFICIENCY VARIANCE

= ACTUAL HOURS BASED ON STAND. RATE(AHSR) – STAND. RATE BASED ON STANDARD HOURS(SHSR)

EXERCISES

1. Materials and Labor cost variances. 2wentyOne Corporation has just developed a new product
called Fire. Standard cost system was established to help control costs based on the following
standard cists of materials and direct labor.

Direct Material: 4 diodes per unit at P0.60 per diode.

Direct Labor: 2.5 hours per unit at P9 per hour

In June, the company produced 5,200 units of Fire. Production data for June follow:

Direct Materials: 23,000 diodes were purchased for use in the production at a cost of P0.58
per diode. Some 2,500 of these diodes were still in inventory at the end
of the month. There were 3,000 diodes on June 1.

Direct Labor: 12,820 direct labor hours were worked at a cost of P117,944.00

Required:

a. Compute the following:

i. Direct Material Variance based on purchases and Direct Material Variance based
on usage.
ii. Direct Price and Quantity Variance based on usage and purchases.
iii. Direct Labor Variance, Direct Labor Rate Variance and Direct Labor Efficiency
Variance.
2. The standard overhead cost for a product manufactured by Continental Corporation is given
below:

Per unit
Variable Overhead 15 mins @ P12 per hr P3.00
Fixed overhead 15 mins @ P5 per hr P1.25

Last period, the company produced 32,000 units and worked 8,200 actual direct labor hours.
Overhead is applied to production on the basis of direct labor hours. The company’s normal
capacity is 30,000 units or 7,500 hours (i.e. 30,000 x 15 mins/60 mins). Actual variable overhead
is P99,400 and actual fixed overhead is P38,200.

Required:
Compute the following:
a. Total Overhead Variance
b. Controllable Variance
c. Volume Variance
d. Spending Variance
e. Idle Capacity Variance
f. Efficiency Variance
g. Variable Efficiency Variance
h. Fixed Efficiency Variance

3. MSN Corporation provided the following production data relative to its February 2019 operations:

Standard Data Actual Data

Material Standard Standard Standard Purchases Used
Quantity Price Cost
A 300 P 20 P6,000 2,200 @ P21.50 2,060
B 600 12 7,200 4,500 @ P11.80 4,350
C 100 40 4,000 750 @ P41.00 790

1 batch = 800 lbs Actual production = 7 batches

Required: Compute the material price variance, mix and yield variance.