Colegio de San Gabriel Arcangel

Area E, City of San Jose del Monte, Bulacan

LEARNING MODULE IN STRATEGIC COST MANAGEMENT

Unit Title: STANDARD COSTS & VARIANCE ANALYSIS
(SINGLE PRODUCT)
Duration: 3 hours

Objectives / Competencies:
At the end of the session, the learner will be able to:

1.  Know the meaning of standard costing

2.  Understand the advantages of standard costing system
3. Understand the different kinds of variances with special reference to material
variance and labor variance
4. Understand the reasons for these variances
5. Realize the importance of variance analysis

Pretest
Multiple choice. Select your answer by encircling the letter of the correct answer.
1. The difference between actual cost and standard cost is called
a. Favorable variance
b. Unfavorable variance
c. Variance
d. variable
2. The following describe ideal standards, except
a. Currently attainable standards
b. Theoretical or maximum-efficiency standards
c. make no allowance for waste, machine downtime and spoilage
d. perfection standards
3. For a recent month, the accountant’s standard cost variance analysis report
showed a significant amount of unfavorable materials efficiency variance that
warrants an investigation. The investigation of this variance should begin with
the
a. Personnel manager
b. Purchasing manager only
c. Production manager only
d. Production manager or purchasing manager

4. The difference between the actual time used and the amount of time that should
have been used for actual production, multiplied by the standard labor rate per
time is called
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 a. Efficiency variance
b. Price variance
c. Spending variance
d. Rate variance
5. In two-way variance analysis, materials, labor and variable overhead variances
may be broken down into
a. Price variance and spending variance
b. Quantity or time variance and efficiency variance
c. Spending variance and efficiency variance
d. Spending variance and volume or capacity variance

Lesson Proper / Course Methodology:

A. Introduction of New Lesson
During the evolutionary stage of costing, the focus was only on the determination of
actual cost i.e. The main activity of the cost accountants was determining the actual
cost of production. This resulted in the non-availability of cost control measures to
the management. Standard costing was developed by cost accountants to meet
these contingencies.

Definitions:
Standard – a measure of acceptable performance established by management as a
guide in making economic decisions. It is basically 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 (materials
quantity and labor time) should be.

Uses of Standard Costs

1. Manufacturing firms
2. Service firms
3. Non-profit organizations

A standard cost system may be used in both job order and process costing systems.

Variance – the difference between actual costs and standard costs. It should be
described either as favorable (when actual costs is less than standard costs) or
unfavorable (when actual costs is greater than standard costs)

Materials Standards

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(a) Standard price per unit – should reflect the final delivered cost of materials, net of
any discount and inclusive of allowances for handling costs.
(b) 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.
(c) Standard cost of materials per unit of product
¿ Standard quantity per unit of product x standard price per unit of materials

Direct Labor Standards

(a) Standard rate per hour – should include the wages, fringe benefits, and other
labor costs
(b) Standard hour per unit – the amount of labor time or number of hours required to
produce each unit of product, including allowances for employee rest periods,
personal needs of employees, and even normal machine downtime.
(c) Standard labor cost per unit of product
¿ Standard hours per unit of product x standard labor rate per unit of materials

Variable Manufacturing Overhead Standards

The standards for variable manufacturing overhead costs are computed in the same
manner as the standards for labor costs are computed. The quantity and price
factors used are time (hours) and variable overhead rate per hour

Fixed Manufacturing Overhead Standards

Fixed manufacturing costs are usually expressed in terms of total figures. To set the
standard rate for fixed overhead, the total fixed overhead costs is computed using
the practical (or normal) capacity level as the base.

The standard time for overhead is usually expressed in terms of direct labor
standard time or machine hours.

Standards and Budget

Both standards and budget are predetermined amounts. However, a standard is a
unit amount, whereas a budget is a total amount.

Total Budgeted Costs and Total Standard Costs

- the cost that should be incurred for budgeted production
= Budgeted production x Standard cost per unit

Total Standard Costs

- the cost that should have been incurred for actual production
= Actual production x Standard cost per unit

Example
To produce a unit of product, 3 pieces of materials are required. The standard price
per piece of materials is P2.00. Budgeted production for the month of August was
1,000 units. Actual production for such month was 1,100 units

(a) Standard Material Cost per unit = Standard Quantity per unit x Standard price per piece
= 3 pieces x P2.00 = P6.00 per unit

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 (b) Total Budgeted Materials Cost = Budgeted production x Standard Materials Cost per unit
(per unit) = 1,000 units x P6.00 per unit = P6,000
(c) Total Standard Materials Cost = Actual production x Standard Materials Cost per unit
(per unit) = 1,100 units x P6.00 per unit = P6,600

Budget Variance and Standard Cost Variance

Example
Consider the previous example where total budgeted cost is P6,000 and total
standard cost is P6,600. Assume that the actual cost of materials incurred for the
actual production of 1,100 units in August was P5,800

(a) Budget Variance = Actual cost – Budgeted cost

= P5,800 – P6,000 = (P200) favorable

(b) Standard Cost Variance = Actual cost – Standard cost

= P5,800 – P6,600 = (P800) favorable

Variance Analysis
1. Materials
(a) Materials Cost Variance = (AQ x AP) – (SQ x SP)
(b) Materials Spending or Price Variance = (AQ x AP) – (AQ x SP)
(c) Materials Efficiency or Quantity Variance = (AQ x SP) – (SQ x SP)
2. Labor
(a) Labor Cost Variance = (AH x AR) – (SH x SR)
(b) Labor Rate Variance = (AH X AR) – (AH x SR)
(c) Labor Efficiency Variance = (AH x SR) – (SH x SR)
3. Variable Factory Overhead
(a) Variance Computation
= Actual Variable Factory Overhead – Standard Variable Factory Overhead
(b) Actual Variable Factory Overhead
= Actual time x Actual Factory Overhead Rate
(c) Standard Variable Factory Overhead
= Standard time x Standard Variable Factory Overhead Rate
(d) Variable overhead spending variance
(e) Variable overhead efficiency variance
(f) (d) + (e) = Variable factory overhead variance

4. Fixed Factory Overhead

a. Variance Computation
= Actual Fixed Factory Overhead – Standard Fixed Factory Overhead
b. Standard Fixed Factory Overhead
= Standard time x Standard Fixed Factory Overhead Rate

Total Factory Overhead Analysis

Variance Computation

Factory Overhead Variance = Actual Factory Overhead – Standard Factory Overhead

2 – way Analysis
(a) Controllable Variance
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 = Variable spending + Variable efficiency + Fixed Spending
(b) Volume or Capacity Variance
3 – way Analysis
(a) Spending Variance
= Variable Spending + Fixed Spending
(b) Efficiency Variance
= Variable efficiency
(c) Volume or Capacity Variance
4 – way Analysis
(a) Variable spending or rate variance
(b) Variable efficiency or time variance
(c) Fixed spending or budget variance
(d) Volume or capacity variance
Example Problem 1
The standard cost card shows the following details relating to the materials needed to
produce 1 kg of groundnut oil:
 Quantity of groundnut oil required: 3 kg
 Price of groundnut oil: P2.5/kg

Actual production data are given as follows:

 Production during the month: 1,000 kg
 Quantity of material used: 3,500 kg
 Price of groundnut oil: P3/kg

Required:
1. Calculate the material cost variance
2. Calculate the material price variance
3. Material efficiency variance

Example Problem 2
Calculate different labor cost variances from the following data, which cover the month
of January 2019.

Budgeted Data Actual Data

Production (units) 1,000 1,200

Units Produced (per hr.) 8 6
Rate of Wages (per hr.) P8 P10
Hrs. of Unbudgeted Holidays – 15
Idle Time (hrs.) 5 8

Required:
1. Calculate the labor cost variance
2. Calculate the labor rate variance
3. Calculate the labor efficiency variance

Example Problem 3
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Delta Woods Inc., manufactures wood products for the use in small and medium size
offices. One of its products is a chair.

Last month Delta manufactured 4,000 chairs for which company purchased and used
11,000 feet of wood. The total cost of 11,000 feet of wood was P37,400.

According to direct materials price and quantity standards, one chair requires 2.5 feet of
wood at a cost of P3.60.

Required:

1. Compute the standard cost of wood needed to manufacture 4,000 chairs.

2. Compute direct materials price and quantity variance for the last month.

Example Problem 4

Universal Electronics Inc., manufactures a voice recording device. The following

information has been obtained from direct labor standards that the company has set for
this device.

 Standard time to complete one unit: 24 minutes

 Standard direct labor rate: P12 per hour

During the month of June, 8,500 hours were worked and 20,000 units were
manufactured. The actual direct labor and variable manufacturing overhead costs
incurred for the month of June were as follows:

 Direct labor cost: P98,600

 Variable manufacturing overhead cost: P78,200

The budgeted variable manufacturing overhead rate of Universal Electronics Inc., was

P8.

Required:

1. Compute labor rate variance and labor efficiency variance for June.

2. Compute variable overhead spending and efficiency variances for June.

Example Problem 5

P&G company produces large size bags for the use of tourists. Company uses standard
costing system to control costs. The standards for materials and labor costs to
manufacture 1 bag are as follows:

 Direct materials: 7.2 lbs. @ P5 per lb.

 Direct labor: 0.4 hours @ P20 per hour

During the last month, P&G produced 2,500 large bags. 20,000 lbs. of direct materials
were purchased @ P4.8 per lb. There was no direct materials inventory at the beginning
and at the end of the month. 900 direct labor hours were recorded @ P24 per hour.

Required:

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 1. Compute direct materials price and quantity variance.
2. Compute direct labor rate and efficiency variance.

Example Problem 6
A company produces a single product that has the following standard costs:

Materials 5 pieces at P4 per piece P20.00

Labor 3 hrs. @ P10 per hour 30.00
Variable overhead 3 hrs. @ P15 per hour 45.00
Fixed overhead 3 hrs. @ P5 per hour 15.00
Total P110.00

The total budgeted fixed overhead is P15,000. This is for the budgeted production (the
normal capacity level) of 1,000 units requiring budgeted time of 3,000 hours.

During the period, the company produced 1,100 units and incurred the following costs:

Materials 5,600 pcs. @ P3.80 per piece P21,280.00

Labor 3,250 hrs. @ P11.00 per hour 35,750.00
Variable overhead 3,250 hrs. @ P14.50 per hour 47,125.00
Fixed overhead 16,000.00
Total P120,155.00

Required: Prepare the analysis of Variance for the following cost elements:
a. Materials
b. Labor
c. Variable Overhead
d. Fixed Overhead

Example Problem 7

P&G company produces many products for household use. Company sells products to
storekeepers as well as to customers. Detergent-DX is one of the products of P&G. It is
a cleaning product that is produced, packed in large boxes and then sold to customers
and storekeepers.

P&G uses a traditional standard costing system to control costs and has established the
following materials, labor and overhead standards to produce one box of Detergent-DX:

 Direct materials; 1.5 pounds @ P12 per pound: P18.00

 Direct labor; 0.6 hours P24 per hour: P14.40
 Variable manufacturing overhead; 0.6 hours @ P5.00: P3.00

During August 2012, company produced and sold 3,000 boxes of Detergent-DX. 8,000
pounds of direct materials were purchased @ P11.50 per pound. Out of these 8,000
pounds, 6,000 pounds were used during August. There was no inventory at the
beginning of August. 1600 direct labor hours were recorded during the month at a cost
of P40,000. The variable manufacturing overhead costs during August totaled P7,200.

Required:
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 1. Compute materials price variance and materials quantity variance. (Assume that
the materials price variance is computed at the time of purchase.)
2. Compute direct labor rate variance and direct labor efficiency variance.
3. Compute variable overhead spending variance and variable overhead efficiency
variance.

Example Problem 8

The Exide company is a single product company and uses a standard costing system to
control its various production costs. The standard and actual costs data for the most
recent month to produce one unit of product is given below:

Standard Cost Actual Cost

Direct materials

Standard: 4kg @ P7.20 per kg P 28.80

Actual: 4.4 kg @ P6.70 per kg P 29.48

Direct labor

Standard: 1.6 hr. @ P9.00 per hr. 14.40

Actual: 1.4 hr. @ P9.70 per hr. 13.58

Variable Overhead

Standard: 1.6 hr. @ P3.60 per hr. 5.76

Actual: 1.4 hr. @ P4.30 6.02

Total P48.96 P49.08

During the most recent month, 4,800 units of product were produced. The comparison
of standard and actual cost on the basis of total cost is given below:

Actual cost – (4,800 units x P49.08) P235,584

Standard cost – (4,800 units x P48.96) 235,008
Unfavorable P 576

During the month, the company purchased 21,120 kilograms of materials from its
vendors. There was no inventory of materials in stock at the start and at the end of
month.

Required:

1. (a) Compute direct materials price and quantity variances.

(b) Make journal entries to record direct materials related activities during the month.
2. (a) Compute direct labor rate and efficiency variances.
(b) Make journal entry to record direct labor direct labor cost during the month.
3. Compute variable manufacturing overhead spending and efficiency variances.
4. The total cost variance of P576 is only 0.25% of P235,008 standard cost which means
the company’s costs are well under control. Do you agree? Explain.
5. What are possible causes of variances that you have computed in part 1, 2 and 3.

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