Standard Costs Analysis

Standards cost systems enhance planning and control and improve

performance measurement . Unit standards are a base for flexible budgeting
system , which is a key future of a meaningful planning and control system .
Can be determine variances by comparing actual costs with budgeted costs .
Variances are the difference between the actual and planned costs for the
actual level of activity . By developing unit price and quantity standards , an
overall variance can be divided into a price variance and quantity or
efficiency variance .

Variance Analysis : Materials and Labor :

Direct Materials variance : Total Direct materials variance measures the
difference between the actual cost of materials and their standard costs for
the actual level of activity .
TMV = ( AP × AQ ) - ( SP × SQ )
TMV : Total materials variance .
AP , SP : Actual and standard price .
AQ , SQ : Actual and standard quantity .

In standard cost system , The total variance is broken down into price
and efficiency variance .

1 - Materials price variance ( MPV ) : The materials price variance

measures the difference between what should have been paid for raw
materials and what was actual paid .
MPV = ( AP× AQ ) - ( SP× AQ )
MPV = ( AP - SP ) AQ

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 It is the difference between the actual and standard unit price of an
input multiplied by the number of input used for actual level of production.
The responsibility for controlling the materials price variance is usually the
purchasing . In the same time , materials price variance can be influenced by
such factors as quality , quantity discounts , distance of the source from the
plant , and so on .

The materials price variance can be computed at one of two points

(1) when the raw materials are issued for use in production or (2) when they
are purchased . It is better to have information on variance earlier than later.

If the materials price variance is computer at the point of purchased ,

The AQ need to be redefined as the actual quantity of materials purchased ,
rather than actual materials used . Since the materials purchased may differ
from the materials used , The overall materials standard variance is not
necessarily the sum of the materials price variance and materials efficiency .

2 - Material Efficiency variance (MEV) : The material efficiency variance

measures the difference between the direct materials actually used and the
direct materials that should have been used for the actual output . The
formula for computing this variance is :

MEV = ( SP × AQ ) - ( SP × SQ )
MEV = ( AQ - SQ ) SP
It is the difference between the actual and standard quantity of inputs
for actual level of production multiplied by the standard unit price of the
input
The production manager is generally responsible for materials efficiency .
However , at times , the cause of the variance is attributable to others outside

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the production area . for example, the purchase of lower-quality materials
may produce bad out-put . In this case , responsibility would be assigned to
purchasing rather than production .
Unfavorable ( U ) variance occur whenever actual prices or quantity of
inputs are greater than standard prices or standard quantity .
Favorable ( F ) variance occur whenever actual prices or quantity of
inputs are less than standard prices or standard quantity .

Direct Lober variance : Total Direct labor variance measures the difference
between the actual cost of lober and their standard costs for the actual level
of activity .
TLV = ( AR × AH ) - ( SR × SH )
TLV : Total labor variance .
AR , SR : Actual and standard rate .
AH , SH: Actual and standard hours .

1 - Labor Rate Variance ( LRV ) : LRV computes the difference between

what was paid to direct employees and what should have been paid .
LRV = ( AR × AH ) – ( SR × AH )
LRV = ( AR – SR ) AH
It is the difference between the actual and standard rate of hour
multiplied by the number of hours used .
Labor rates are largely determined by such external forces as labor
markets and union contracts . when labor rate variances occur , they often do
so because an average wage rate is used for the rate standard or because
more skilled and more highly paid employees are used for less skilled tasks .

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2 - Labor Efficiency Variance ( LEV ) : LEV measures the difference
between the labor hours that were actually used and the labor hours that
should have been used .
LEV = ( AH × SR ) – ( SH × SR )
LEV = ( AH – SH ) SR
It is the difference between the actual and standard quantity of hours
for actual level of production multiplied by the standard rate of hour .
Generally speaking , production managers are responsible for the
productive use of direct labor . However , as is true of all variance , once the
cause is discovered , responsibility may be assigned elsewhere .

General Example 1
ABC Manufacturing has the following standard cost sheet and actual
costs for one of its products :
Items Standards Actual
Direct materials 2.5 gram per unit 78000 gram
Price $0.20 per gram $0.22 per gram
Direct labor 1.75 hours per unit 2 hours per unit
Salary rate $ 3.20 per hours $3 per hours
production 30000 units
Required : Compute direct materials and labor variances .

Solution :
Materials variance

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TMV = ( AP × AQ ) - ( SP × SQ )
= ( 0.22 × 78000 ) – ( 0.20 × 2.5 × 30000 ) = $2160 (U)

MPV = ( AP - SP ) AQ
= ( 0.22 – 0.20 ) 78000 = $1560 (U)

MEV = ( AQ - SQ ) SP
= ( 78000 – ( 2.5 × 30000 ) ) 0.20 = $600 (U)

Labor variance
TLV = ( AR × AH ) - ( SR × SH )
= ( 3 × ( 2 × 30000 ) – ( 3.2 × ( 1.75 × 30000 ) = $ 12000 (U)

LRV = ( AR – SR ) AH
= ( 3 – 3.2 ) ( 2 × 30000 ) = $12000 (F)

LEV = ( AH – SH ) SR
= {( 2 × 30000 ) – ( 1.75 × 30000 )} 3.2 = $24000 (U)