Standard Costing and Variances (OK Na!)

UNIVERSITY OF SAINT LOUIS-TUGUEGARAO
School of Business Administration and Accountancy, 2013-2014

Junior Philippine Institute of Accountants
MEMORY AID IN MANAGEMENT ADVISORY SERVICES
Any form of reproduction of this copy is strictly prohibited!!!
________________________________________________________________________________________________________
CHAPTER 5:
Standard Costing and Variance Analysis
and to institute corrective measures in
☛STANDARD times of unnecessary deviations from
 is a measure of acceptable performance plans
established by management as a guide in 4. Evaluation – end-of-line evaluation of
making economic decisions. A benchmark results in relation to standards
or “norm” for measuring performance.
☛CONSIDERATIONS IN ESTABLISHING STANDARDS
☛QUANTITY STANDARDS
1. Appropriateness – applicability or
 indicate the quantity of raw materials suitability or a given standard in a given
or labor time required to produce a unit environment
of product or to provide services 2. Attainability – achievability under the best
possible operating conditions
☛COST STANDARDS
 indicate what the cost of the quantity ☛PRODUCTION STANDARD COST SHEET
standards (materials quantity and labor  is a product of a long series and
time) should be technical studies conducted under the
supervision of the management
☛IMPORTANCE OF STANDARDS committee (budget committee)
 Primarily, standards are established to Cost IF Treatment Other

systematically manage people by defining Variance Label
harmony, order and normalcy Unfavorable Actual Added to Debit
 In relation to its primary reason, standards- cost > Std. COGS Variance
setting in business has the following uses: Standard
1. Motivation – to set objectives, reward cost
system, recognition and models for Favorable Actual Deducted Credit
performance evaluation cost < from Std. Variance
2. Planning – predicting the future based Standard COGS
on normal conditions; planning could cost
also be done through scenario or
simulation analysis; it follows the ☛MANAGEMENT BY EXCEPTION
process of predicting the future event  only those variances that are material
given the changes in its relevant or significant in amount, whether
variables or parameters favourable or unfavourable, should be
3. Monitoring or controlling – on-line
investigated
evaluation of activities in relation to
plans to maintain operating normalcy
☛COST VARIANCE DISPOSITION
1 Management Advisory Services (MAS) Committee : Hazeleen Martinez; Jimmy Joe Miranda; Cliff Mark
Confidente; Corina Bariuan; Kristina Gaddon; Rizalyn Taguibao ;Niῆo Rey Mangupag; Marjhon Maramag; Leo
Jay Labasan
Adviser: Mary Queen Ramos, CPA
________________________________________________________________________________________________________
 Normal cost variances – closed to cost of Standard time (hours/per unit) – the amount of
goods sold labor time (or number of hours) required to produce
 Material (or abnormal) cost variances – each unit of product, including allowances for
allocated among WIP inventory, FG employee rest periods, personal needs of
inventory and CGS employees, and even normal machine downtime
☛ TYPES OF STANDARDS: VARIABLE MANUFACTURING OVERHEAD

STANDARDS
1. Ideal (or Theoretical) standards – highest
performance WITHOUT allowances for  The standards for variable manufacturing
errors, mistakes, delays, inefficiencies, costs are computed in the same manner as
production stoppages, machine the standards for labor costs are computed.
breakdowns, etc. The quantity and price factors used are time
2. Practical standards – highest standards less (hours) and variable overhead rate per hour
NORMAL allowances for errors, mistakes,
delays, inefficiencies, production stoppages, FIXED MANUFACTURING OVERHEAD STANDARDS
machine breakdowns, etc.
 Fixed overhead costs are usually expressed
3. Boogey (or tax) standards – highest
in terms of total figures. To set the standard
standards less MAXIMUM allowances for
rate for fixed overhead, the total fixed
errors, mistakes, delays, inefficiencies,
overhead costs is computed using the
production stoppages, machine
practical (or normal) capacity level as the
breakdowns, etc.
base
4. Expected standards – predetermined level
of capacity based on actual performance The standard time for overhead is usually
5. Normal standard – the average expressed in terms of direct labor standard time
performance of the firm over the long-term or machine hours.
under normal business condition
MATERIALS STANDARDS
Standard price per unit – should reflect the final,

delivered cost of materials, net of any discount and
inclusive of allowances for handling cost
Standard quantity per unit – should reflect the units

of materials required to produce each unit of
product, including allowances for unavoidable
wastages, spoilage, as well as other normal
inefficiencies
DIRECT LABOR STANDARDS
Standard rate per hour – should include wages,

fringe benefits, and other labor costs
Jay Labasan
________________________________________________________________________________________________________
TOTAL TOTAL
BUDGETED STANDARD
COST COST
Predetermined Yes Yes
amounts
Amount Total Unit
Definition Cost should Cost should
be incurred have been
for budgeted incurred for
production actual
production
In accounting Not May be
(except in journalized incorporated
applying in cost into cost
manufacturing accounting accounting
overhead to jobs systems systems
and processes)
MATERIALS PRICE, MIX, AND YIELD VARIANCE ANALYSIS
Price Variance – difference in prices x actual quantity (computed for each type of materials, and then summarized
to get the net price variance)
Mix Variance – total actual quantities at standard prices less total actual input at average standard input cost
Yield Variance – total actual input at average standard input cost less standard cost (actual output x ave. Std.
Output cost)
Quantity Variance= Mix Variance + Yield Variance
Total Std. Input Cost
ASIC = Total Std. Input Yield % Std. Output Quantity
Quantity = Std. Input Quantity
Total Std. Input Cost
Total Std. Output
ASOC Actual Mix x Actual Mix x Standard Mix x Standard Mix x
Quantity
= Actual Quantity x Actual Quantity x Actual Quantity x Standard Quantity x
Actual Rate Standard Rate Standard Rate Standard Rate
Alternative Variance
Rate Variance Mix Variance Yield Variance
Overhead One-, Two-, Three-, and Four Variance Approaches:
(a) + (c) (b) (d)
Spending Variance Efficiency Variance Volume Variance
(a) + (b) + (c) (d)
Budget Variance Volume Variance
(a) + (b) + (c) + (d)
Total Overhead Variance
(Total Underapplied / Overapplied Overhead Variance)
Jay Labasan
________________________________________________________________________________________________________
Budget Based
Budget Based on Output
Actual on Input Hours Hours Applied
Actual VOH VOH Rate x AQ VOH Rate x SQ VOH x SQ
+ Actual FOH + Budgeted OH + Budgeted FOH + FOH Rate x SQ
Illustration:
Glamour Contractors paints interiors of residences and commercial structures. The firm’s management has
established cost standards per 100 square feet of area to be painted.
Direct Material (P18 per gallon of paint) P 1.50

Direct Labor 2.00
Variable Overhead 0.60
Fixed Overhead (based on 600,000 square feet per month) 1.25
Management has determined that 400 square feet can be painted by the average worker each hour. During May,
the company painted 600,000 square feet of space and incurred the following costs:
Direct Material (450 gallons purchased and used) P 8,300.00

Direct Labor (1,475 hours) 12,242.50
Variable Overhead 3,480.00
Fixed Overhead 7,720.00
P200U P900F
a. Compute the direct material
Material Price Variance Material Quantity Variance
variances P700F
b. Compute Total Material Variance the direct labor
variances
a. Use the four-, three- and two-variance approaches to compute overhead variances
Solution:
Actual SP x AQ SP x SQ
P18 x 450 P18 x (6,000/12)
P8,300 P8,100 P9,000
a.
Jay Labasan
________________________________________________________________________________________________________
b. Actual SP x AQ SP x SQ
P8 x 1475 P8 x (6,000/4)
P8,300 P11,800 P12,000
P 160 U P 60 F P0
OH Spending Variance OH Efficiency Variance Volume Variance
P 100 U P0
Budget Variance Volume Variance
P 100 U
c. Underapplied Overhead
Actual Budget @ Input Budget @ Output Applied
VOH P3,480 P 3,540 P 3,600 P 3,600
FOH 7,720 7,500 7,500 7,500
P 11,200 P 11,040 P 11,100 P 11,100
Illustration:
Dolio Corp. Employs engineers and draftspeople. The average hourly rates are P80 for engineers and P40 for
draftspeople. For one project, the standard rate was set at 375 hours of engineer time and 625 hours of
draftsperson time. Actual hours works on this project were:
Engineers – 500 hours at P85 per hour

Draftspeople – 500 hours at P42 per hour
Determine the labor rate, mix and yield variances for this project.
Solution:
Actual Mix: 50% Engineers and 50% Draftspeople
Total time = 375 + 625 =
1000; E = P442.50U P200F 37.5% and D =
62.5% Labor Rate Variance Labor Efficiency Variance
P242.50U
Total Labor Variance
Engineers Draftspeople
Actual Cost P85 x 500 = P42,500 P42 x 500 = P21,000
Actual Mix and quantity; P80 × 500 = P40,000 P40 × 500 = P20,000
Standard Rate
Actual quantity; Standard rate P80 × .375 × 1,000 = P30,000 P40 × .625 × 1,000 = P25,000
Jay Labasan
________________________________________________________________________________________________________
and mix
Standard P80 x .375 x 1,000 = P30,000 P40 x .625 x 1,000 = P25,000
Actual Mix x Actual Mix x Standard Mix x Standard Mix x

Actual Hours x Actual Hours x Actual Hours x Standard hours x
Actual Rate Standard Rate Standard Rate Standard Rate
Engineers P 42, 500 P 40, 000 P 30, 000 P 30, 000
Draftspeople 21, 000 20, 000 25, 000 25, 000
P 63, 500 P 60, 000 P 55, 000 P 55, 000
P 3, 500 U P 5, 000 U 0
Labor Rate Variance Labor Mix Variance Labor Yield Variance
Jay Labasan

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UNIVERSITY OF SAINT LOUIS-TUGUEGARAO

School of Business Administration and Accountancy, 2013-2014

 Primarily, standards are established to Cost IF Treatment Other

☛ TYPES OF STANDARDS: VARIABLE MANUFACTURING OVERHEAD

Standard price per unit – should reflect the final,

Standard quantity per unit – should reflect the units

DIRECT LABOR STANDARDS

Standard rate per hour – should include wages,

MATERIALS PRICE, MIX, AND YIELD VARIANCE ANALYSIS

Direct Material (P18 per gallon of paint) P 1.50

Direct Material (450 gallons purchased and used) P 8,300.00

Engineers – 500 hours at P85 per hour

Actual Mix x Actual Mix x Standard Mix x Standard Mix x

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