Determination of Standard Costs based on Equivalent Production

The preceding discussions on the computations of variances were based on the actual
production of finished goods with the assumption that there is no work in process inventories.
However, when work-in-process inventories are present, the basis in computing variance should be
the equivalent production. Equivalent units of production may be computed using the FIFO method
or the average method.

ILLUSTRATION:

Copycat Corporation is engaged in manufacturing and selling product C. The following

information pertains to its operation for the month of August:

Work in process, beg. (50% complete) 6,500 units

Started in process 14,500 units
Work in process, end. (80% complete) 5,000 units
Direct materials cost (P16/kg) 1,280,000
Direct labor cost (P21/DLH) 336,000
Factory Overhead cost 160,000
Actual hours used 6,000 DLH
Finished goods in units 16,000 units
Actual direct materials used 80,000 units

Standard costs based on normal capacity of 15,000 units:

 Direct materials (5 kgs @ P15/kg) P75
Direct labor (1 hr @ P20) 20
Factory overhead based on DLH
Fixed (1 hr @P2) 2
Variable (1 hr @ P8) 8
Standard cost per unit P105

The computations of equivalent production using the two methods are as follows:
FIFO AVERAGE
Work Work
Actual Done EUP Done EUP
Work in process, beg 6,500 50% 3,250 100% 6,500
Started and finished 9,500 100% 9,500 100% 9,500
Work in process, end 5,000 80% 4,000 80% 4,000
Equivalent production 16,750 20,000

The standard costs for the two methods are:

A. FIFO DM DL FOH
Equivalent Production 16,750 16,750 16,750
Multiply by: Standard rate/unit P75 P20 P10
Standard costs P1,256,250 P335,000 P167,500

B. AVERAGE FOH
DM DL
Equivalent Production 20,000 20,000 20,000
Multiply by: Standard rate/unit P75 P20 P10
Standard costs P1,500,000 P400,000 P200,000

Assuming further that the standard costs using FIFO method was used in computing direct
materials, direct labor and overhead variances, the computations would be:
DM DL FOH
Actual costs P1,280,000 P336,000 P160,000
Standard costs 1,256,250 335,000 167,500
Variance (F) UF P23,750 P1,000 (P7,500)

The direct materials and direct labor variances are further analyzed as:
Price Variance DM DL
Actual price P16 P21
Standard price 15 20
Difference in price P1 UF P1 UF
x Actual quantity 80,000 16,000
Price Variance P80,000 UF P16,000 UF
Quantity Variance
Actual quantity 80,000 16,000
Standard quantity 83,750 16,750
Difference in quantity (3,750) P15 F (750) P20 F
x Standard price (P56,250) P15,000
Quantity Variance F F

The factory overhead variances are further analyzed as:

CONTROLLABLE VARIANCE
AFOH P160,000
BASH
FxOH P30,000
VOH (P8 x 16,750) 134,000 164,000 (P4,000) F
VOLUME VARIANCE
BASH P164,000
SORSH (P10 x 16,750) 167,500 (3,500)
TOTAL OVERHEAD VARIANCE F