STANDARD

 A measure of acceptable performance established by management as a

guide in making economic decisions
 A benchmark or “norm” for measuring performance

QUANTITY STANDARDS
 Indicate the quantity of raw materials or labor time required to
produce a unit of product or to provide services.

COST STANDARDS
 Indicate what the cost of the quantity standards should be.

VARIANCE
 The difference between actual costs and standard costs.
 It should be described as favorable or unfavorable.

STANDARD COSTING CONTROL LOOP

1. Establish standards
2. Measure actual performance
3. Compare actual performance with standard
4. Analyze the variances
5. Investigate the variances that are material or significant in amount
6. Take corrective action when needed. This may include revision of
standards
MATERIAL STANDARDS
1. Standard price per unit – should reflect the final, delivered cost
of materials, net of any discount and inclusive of allowances for
handling costs.
2. 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.

VARIANCE ANALYSIS
In materials, labor and variable factory overhead costs, the variances are
analyzed using the two-way method:
a. Efficiency variance or Quantity or Time variance, and
b. Spending variance or Price or Rate variance
VARIANCE COMPUTATION AND ANALYSIS (MATERIALS)
Actual Materials Cost xx,xxx Actual Quantity * Actual Price
Standard Materials Cost xx,xxx Standard Quantity * Standard
Price; or
Actual Production * Standard
Materials Cost per unit
Material Cost Variance x,xxx
Analysis:
Actual Quantity * Actual Price (AQ * AP) xx,xxx
Actual Quantity * Standard Price (AQ * SP) xx,xxx
Spending or Price Variance x,xxx

Actual Quantity * Standard Price (AQ * SP) xx,xxx

Standard Quantity * Standard Price (SQ * SP) xx,xxx
Efficiency or Quantity Variance x,xxx
Illustration
A manufacturer of portable DVD players buys components from subcontractors
for assembly into complete DVD players. Each player requires 6 units of
Part A, which has a standard cost of P100 per unit. During May, the company
records showed the following with respect to Part A:
Purchases 15,000 units
Purchase price 110 per unit
Units of players produced 2,000
Units of Part A used in production 12,400
Required: Compute the following:
1. Materials purchase price variance
2. Materials usage variance
VARIANCE COMPUTATION AND ANALYSIS (DIRECT LABOR)
Actual Labor Cost xx,xxx Actual Hours * Actual Rate
Standard Labor Cost xx,xxx Standard Hours * Standard Rate;
or
Actual Production * Standard
Labor Cost per unit
Labor Cost Variance x,xxx

Analysis:
Actual Hours * Actual Rate (AH * AR) xx,xxx
Actual Hours * Standard Rate (AH * SR) xx,xxx
Spending or Rate Variance x,xxx

Actual Hours * Standard Rate (AH * SR) xx,xxx

Standard Hours * Standard Rate (SH * SR) xx,xxx
Efficiency or Time Variance x,xxx
ILLUSTRATION
Aristeo Company produced 3,200 units of product. Each unit requires 2
standard hours. The standard labor rate is P15 per hour. Actual direct
labor for the period was P79,200 (6,600 hours x P12).

Required: Compute the following:

1. Direct labor time variance
2. Direct labor rate variance
VARIANCE COMPUTATION AND ANALYSIS (FACTORY OVERHEAD)

Variable Factory Overhead

Computation and analysis of variable factory overhead variance are the same
as in direct labor cost variance, except that the rates to be used are the
variable factory overhead rates.

Actual VFOH xx,xxx Actual Hours * Actual Rate

Standard VFOH xx,xxx Standard Hours * Standard Rate
VFOH Variance x,xxx

Actual Hours * Actual Rate (AH * AR) xx,xxx

Actual Hours * Standard Rate (AH * SR) xx,xxx
VFOH Spending or Rate Variance x,xxx

Actual Hours * Standard Rate (AH * SR) xx,xxx

Standard Hours * Standard Rate (SH * SR) xx,xxx
VFOH Efficiency or Time Variance x,xxx
Fixed Factory Overhead

Actual FFOH xx,xxx

Standard FFOH xx,xxx Standard Hours * Standard FFOH Rate
FFOH Variance x,xxx

Actual FFOH xx,xxx

Budgeted FFOH xx,xxx
FFOH Spending or Budget Variance x,xxx

Budgeted FFOH xx,xxx

Standard FFOH xx,xxx
Volume or Capacity Variance x,xxx
ILLUSTRATION
Villaverde Corporation’s standard cost system contains the following
overhead costs, computed based on a monthly normal volume of 25,000 units
or 50,000 direct labor hours: Variable factory overhead, P12 per unit;
Fixed factory overhead, P8 per unit.

The following information pertains to the month of April 2020:

Actual factory overhead costs incurred:
Variable 316,680
Fixed 225,000
Actual production 26,000 units
Actual direct labor hours worked 54,600 hours

Required: Determine the following:

1. Variable overhead variance
2. Variable overhead spending variance
3. Variable overhead efficiency variance
4. Fixed overhead variance
5. Fixed overhead spending or budget variance
6. Fixed overhead volume or capacity variance
7. Total factory overhead cost variance
8. Controllable variance using the two-variance method
9. Budget or spending variance using the three-variance method
10. Efficiency variance under the three-variance method
TOTAL FACTORY OVERHEAD VARIANCE ANALYSIS AND COMPUTATION

2-WAY ANALYSIS
1. Controllable variance: Variable spending, Variable efficiency and
Fixed spending
Controllable variance:
AFOH xx,xxx
Less: BASH (Budget Allowed for Standard Hours)
VFOH (SH * SR) x,xxx
Budgeted fixed overhead x,xxx xx,xxx
Controllable variance x,xxx
2. Volume or capacity variance
Volume or Capacity variance:
BASH xx,xxx
Less: Standard factory overhead xx,xxx
Volume or Capacity variance: x,xxx

3-WAY ANALYSIS
1. Spending variance: Variable spending and fixed spending
Spending variance:
AFOH xx,xxx
Less: BAAH (Budget Allowed for Actual Hours)
VFOH (AH * SR) x,xxx
Budgeted fixed overhead x,xxx xx,xxx
Spending variance x,xxx
 2. Efficiency variance: Variable efficiency
Efficiency variance:
BAAH xx,xxx
Less: BASH xx,xxx
Efficiency variance x,xxx

3. Volume or capacity variance

Volume or Capacity variance:
BASH xx,xxx
Less: Standard factory overhead xx,xxx
Volume or Capacity variance: x,xxx

4-WAY ANALYSIS
1. Variable spending or rate variance
2. Variable efficiency or time variance
3. Fixed spending or budget variance
4. Volume or capacity variance