Chapter 10: Standard Costing & Variance Analysis

CHAPTER 10

STANDARD COSTING

AND VARIANCE ANALYSIS

OBJECTIVE

At the end of this chapter, students will be able to:

• Explain the definition of standard cost.

• Describe the use of standard cost for control and performance measurement
purposes.

• Calculate the standard cost per unit.

• Describe the ideal standard, practical standard and normal standard.

• Elaborate the variance analysis of direct materials, direct labour and factory
overhead ;

# Calculate price variance and quantity variance for direct materials

# Calculate rate variance and efficiency variance for direct labour.

# Calculate spending variance and efficiency variance of variable overhead.

# Calculate spending variance and volume variance of fixed overhead.

• Explain the implications of variance analysis ;

# Interpreting variance results.

# Identifying parties that are responsible for variances.

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 Chapter 10: Standard Costing & Variance Analysis

10.1 DEFINITION OF STANDARD COST

A standard cost is a planned cost for a unit of product or service

rendered.

A standard cost is used as a basis for cost control and as an

efficiency measure for productivity.

10.2 THE USE OF STANDARD COST

Cost Control - Provides a basis for more effective control over

costs.
- Allows for the separation between the variance
caused by the usage or variance caused by the
cost.

Performance - Measures the performance of a company as a whole

Measure or according to certain departments.
- Provides a standard for comparison with actual
costs when evaluating an activity for a given period.

10.3 COMPUTATION OF STANDARD COST

Standard Cost per Unit

Direct materials Standard usage of direct materials x Standard cost of direct materials

Direct labour Standard usage of direct labour x Standard cost of direct labour

Standard usage of cost drive x Standard variable overhead rate

Manufacturing
overhead
Standard usage of cost drive x Standard fixed overhead rate

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 Chapter 10: Standard Costing & Variance Analysis

10.4 TYPES OF STANDARD

Ideal Standard - Ideal standard is a standard which can be attained

under the most perfect or favourable operating
condition, i.e. maximum efficiency (100%), lowest
cost usage, no interruptions and best quality
products.
- Ideal standard is considered high and difficult or
impossible to achieve.
- Ideal standard is not widely used in practice
because it may influence employees’ motivation
adversely.

Attainable - Attainable standard is a standard which can be

Standard attained if a standard unit of work is carried out
efficiently
- Costs are expected to be incurred in a normal
operating condition. Allowances are made for
normal shrinkage, waste and machine breakdowns.
- The standard represents future performance and
objectives which are reasonably attainable.

Basic Standard - Basic standard is a standard established for use

over a long period from which a current standard
can be developed.
- The main disadvantage of this standard is that,
since it remained unaltered over a long period of
time, it may be out of date. The likelihood of
significant variances to occur is very high.
- The main advantage is, it shows the changes in
trend of price and efficiency from year to year.

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 Chapter 10: Standard Costing & Variance Analysis

10.5 ANALYSIS OF VARIANCE

An analysis on the difference of actual value with the appropriate

value according to the standard.

i. Direct Materials Variance

a. Direct materials price variance
= Actual cost of direct materials - (Standard price (SP) x Actual quantity purchased)

(Actual price (AP) x Actual quantity purchased (AQ))

b. Direct materials quantity variance

= (Actual quantity used* x Std price) - (Std quantity x Actual production x Standard price)

* Actual quantity used = Beginning inventory. + Purchase – Ending inventory

ii. Direct Labour Variance

a. Direct labour rate variance
= Actual cost of direct labour – (Standard rate (SR) x Actual hour)

(Actual rate (AR) x Actual hour (AH))

b. Direct labour efficiency variance

= (Actual hour x Standard rate) - (Standard hour x Actual production x Standard rate)

iii. Variable Factory Overhead Variance

a. Variable overhead spending variance
= Actual cost of variable overhead – (POR variable overhead (SR) x Actual cost drive)

b. Variable overhead efficiency variance

= (Actual cost drive x POR variable overhead) - (Std hour x Actual production x POR
variable overhead)

iv. Fixed Factory Overhead Variance

a. Fixed overhead spending variance
= Actual fixed overhead – Budgeted fixed overhead

(Standard rate of fixed overhead x [Standard hour x normal production])

b. Fixed overhead volume variance

= Budgeted fixed overhead – (POR fixed overhead x [Standard hour x Actual production])

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 Chapter 10: Standard Costing & Variance Analysis

10.6 IMPLICATION OF VARIANCE ANALYSIS

10.6.1 Interpreting Variance Result

Actual cost < Standard cost = F (Favourable)

Actual cost > Standard cost = U (Unfavourable)

10.6.2 Responsible Parties

Purchasing manager
Direct materials price variance Production manager
Store manager
Production manager
Supervisor
Direct materials quantity variance
Human resource manager
Equipment maintenance department

Internal trade union

Direct labour rate variance
Human resource manager

Production manager
Direct labour efficiency variance Supervisor
Human resource manager

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 Chapter 10: Standard Costing & Variance Analysis

Sample Question :

Assume the standard cost per unit is as follows :

Direct Materials 3 kg @ RM 1
Direct Labour 2 hours @ RM 2.50
Manufacturing Overhead :
Variable 2 hours @ RM 1
Fixed 2 hours @ RM 1.50*

* Based on the normal use of 12,000 hours of direct labour

Assume the actual information is as follows :

Production 5,000 units

Direct materials purchased 20,000 kg at RM 1.10 per kg
Direct materials used 16,000 kg
Direct labour hours 10,500 hours
Direct labour rate per hour RM 2.45
Manufacturing overhead costs :
Variable RM 11,130
Fixed RM 19,000

Required :

a. Compute standard cost per unit.

b. Calculate the following ;

i. Direct materials price variance
ii. Direct materials quantity variance
iii. Direct labour rate variance
iv. Direct labour efficiency variance
v. Variable overhead spending variance
vi. Variable overhead efficiency variance
vii. Fixed overhead spending variance
viii. Fixed overhead volume variance

Solution :

a. Standard cost per unit :

Direct materials RM 1 x 3 kg RM 3.00

Direct labour RM 2.50 x 2 hours 5.00
Variable overhead RM 1.00 x 2 hours 2.00
Fixed overhead RM 1.50 x 2 hours 3.00
RM 13.00

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b.
i. Direct materials price variance
ii. Direct materials quantity variance
* actual quantity used
** SQ = (Standard quantity x Actual production)
iii. Direct labour rate variance
iv. Direct labour efficiency variance
** SH = (Standard hour x Actual production)
v. Variable overhead spending variance
vi. Variable overhead efficiency variance
vii. Fixed overhead spending variance
viii. Fixed overhead volume variance
Chapter 10: Standard Costing & Variance Analysis
= (AP x AQ) – (SP x AQ)
= (AP – SP) x AQ
= (RM 1.10 – RM 1.00) x 20,000 kg
= RM 2,000 (U)
= (AQ x SP) – (SQ x SP)
= (AQ – SQ) X SP
= (16,000 kg * – [3 kg x 5,000 units]**) x RM 1.00
= (16,000 kg – 15,000 kg) x RM 1.00
= RM 1,000 (U)
= (AR X AH) – (SR X AH)
= (AR – SR) x AH
= (RM 2.45 – 2.50) X 10,500 hours
= RM 525 (F)
= (AH X SR) – (SH X SR)
= (AH – SH) x SR
= (10,500 hours – [2 hrsx 5,000 units]**) x RM 2.50
= (10,500 – 10,000) x RM 2.50
= RM 1,250 (U)
= (AR x AH) – (SR x AH)
= RM 11,130 – (RM 1.00 x 10,500 hours)
= RM 11,130 – RM 10,500
= RM 630 (U)
= (AH x SR) – (SH x SR)
= (AH – SH) x SR
= (10,500 hours – [2 hrs x 5,000 units]) x RM 1.00
= (10,500 – 10,000) x RM 1.00
= RM 500 (U)
= Actual fixed overhead – Budgeted fixed overhead
= (AR x AH) – (SR x Normal Hour)
= RM 19,000 – (RM 1.50 x 12,000 hours)
= RM 19,000 – RM 18,000
= RM 1,000 (U)
= Budgeted fixed overhead – Absorbed fixed overhead
= (SR x Normal Hour) – (SR x Absorbed Hour)
= (RM 1.50 x 12,000 hours) – (RM 1.50 x [2 hours x 5,000 units
= RM 18,000 – RM 15,000
= RM 3,000 (U)
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 Chapter 10: Standard Costing & Variance Analysis

TUTORIAL QUESTIONS

QUESTION 1

Jerai Limited manufactures agricultural fertilizer. The following information is related to

production for February 2022 :

Standard cost per unit : RM

Direct material (20 grams @ RM 0.50) 10
Direct labour (5 hours @ RM 3.00) 15
Variable overhead (5 hours @ RM 0.40) 2
Fixed overhead (5 hours @ RM 0.20) 1

Normal production 600 units

Cost incurred in February 2022 : RM

Direct material (12,000 grams) 7,200
Direct labour (4,800 hours) 12,000
Variable overhead 1,680
Fixed overhead 1,000

Production 800 units

Required :

1. Calculate the following variances. For each variance, label F for favourable variance and
UF for unfavourable variance.

i. Direct material usage variance [RM2,000 (F)]

ii. Direct material price variance [RM1,200 (UF)]

iii. Direct labour efficiency variance [RM2,400 (UF)]

iv. Direct labour rate variance [RM2,400 (F)]

v. Variable overhead efficiency variance [RM320 (UF)]

vi. Variable overhead spending variance [RM240 (F)]

vii. Fixed overhead volume variance [RM200 (F)]

viii. Fixed overhead spending variance [RM400 (UF)]

2. State two (2) uses of cash budget.

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 Chapter 10: Standard Costing & Variance Analysis

QUESTION 2

Lagenda Limited provides the following standard cost data for one of its products :

Direct material (4 meters @ RM 5) RM 20

Direct labour (0.5 hour @ RM 10) 5
Variable variable (0.5 hour @ RM 6) 3
Fixed overhead (0.5 hour @ RM 2) 1
Standard cost per unit RM 29

Below is the actual data for the year 2021 :

Production 6,000 units

Direct material purchased (24,000 meters) RM 124,800
Direct material used (23,500 meters) RM 122,200
Direct labour (2,900 hours) RM 29,580
Variable overhead RM 10,500
Fixed overhead RM 6,000

Budgeted activity is 2,500 direct labour hours.

Required :

Calculate the following variances. For each variance, label F for favourable variance and UF for
unfavourable variance.

1. Direct material usage variance [RM2,500 (F)]

2. Direct material price variance [RM4,800 (UF)]

3. Direct labour efficiency variance [RM1,000 (F)]

4. Direct labour rate variance [RM580(UF)]

5. Variable overhead efficiency variance [RM600 (F)]

6. Variable overhead spending variance [RM6,900 (F)]

7. Fixed overhead volume variance [RM1,000 (F)]

8. Fixed overhead spending variance [RM1,000 (UF)]

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 Chapter 10: Standard Costing & Variance Analysis

QUESTION 3

Jappy Company manufactures kitchen appliances. The company uses standard costing
system. One of its best-seller products is bread toaster.

Below is the standard production cost for each bread toaster :

Direct material (3 kg @ RM 4.50) RM 13.50

Direct labour (0.6 hour @ RM 9.50) 5.70
Variable overhead (0.6 hour @ RM 6.00) 3.60
Fixed overhead (0.6 hour @ RM 3.00) 1.80
RM 24.60

The activities below are related to the production of the bread toaster for the year 2021 :

1. Total production is 50,000 units.

2. Total purchases of direct material is 150,000 kg at a price of RM4.00 per kg.

3. Total direct material used is 160,000 kg.

4. Total direct labour hour used is 32,000 hours at a cost of RM 312,000.

5. Actual fixed overhead is RM83,400.

6. Actual variable overhead is RM112,000.

Inventory of direct material as at January 1, 2021 is 10,000 kg worth RM40,000. Normal

production volume is 45,000 units per year. Standard overhead rate is calculated based on
normal production activities related to standard hours of direct labour.

Required :

1. Calculate the following variances. For each variance, label F for favourable variance and
UF for unfavourable variance.
i. Direct material usage variance [RM45,000 (UF)]
ii. Direct material price variance [RM75,000 (F)]
iii. Direct labour efficiency variance [RM19,000 (UF)]
iv. Direct labour rate variance [RM8,000 (UF)]
v. Variable overhead efficiency variance [RM12,000 (UF)]
vi. Variable overhead spending variance [RM80,000 (F)]
vii. Fixed overhead volume variance [RM9,000 (F)]
viii. Fixed overhead spending variance [RM2,400 (UF)]

3. Prepare journal entries to record :

i. purchase of raw material
ii. usage of raw material

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 Chapter 10: Standard Costing & Variance Analysis

QUESTION 4

Comtab Company manufactures computer tables. Below is the standard cost for each
computer table :

Direct material 20 meter @ RM 9.00 per meter RM 180

Direct labour 40 hours @ RM 6.00 per hour RM 240

Overhead absorbed :
Variable 40 hours @ RM 3.00 = RM 120
Fixed 40 hours @ RM 2.00 = RM 80 RM 200

Selling and administration expenses :

Variable RM 120
Fixed 70
Standard cost per unit RM 810

Standard cost is based on the normal activity of 24,000 direct labour hours. Actual activities for
the month of March are as follows :

Production units 500

Direct material purchased : 18,000 meters @ RM9.20 per meter RM 165,600
Direct material used : 9,500 meters
Direct labour : 21,000 hours @ RM6.10 per hour RM 128,100
Total manufacturing overhead RM 111,000

Required :

Calculate the following variances. For each variance, label F for favourable variance and UF for
unfavourable variance.

1. Direct material usage variance [RM4,500 (F)]

2. Direct material price variance [RM3,600 (UF)]

3. Direct labour efficiency variance [RM6,000 (UF)]

4. Direct labour rate variance [RM2,100 (UF)]

5. Variable overhead efficiency variance [RM3,000 (UF)]

6. Overhead spending variance [RM0]

7. Fixed overhead volume variance [RM8,000 (UF)]

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 Chapter 10: Standard Costing & Variance Analysis

QUESTION 5

Orange Limited manufactures metal screen door for commercial buildings. Standard cost for a
unit of metal screen door are as follows :

Direct material : RM
Aluminium 4 pieces at RM3 per piece 12
Copper 3 pieces at RM5 per piece 15

Direct labour 7 hours at RM9 per hour 63

Variable overhead 5 machine hours at RM3 per hour 15
Fixed overhead 5 machine hours at RM2 per hour 10

Overhead rate is based on the normal capacity of 6,000 machine hours monthly.

In August 2021, 850 units of metal screen doors have been manufactured. The following
activities occurred in August 2021 :

Direct material :
Aluminium 4,000 pieces purchased at RM3 per piece ;
3,500 pieces used
Copper 3,000 pieces purchased at RM5.20 per piece ;
2,600 pieces used

Direct labour 6,100 hours at RM9.30 per hour

Variable overhead RM11,700 (based on 4,175 machine hours)

Fixed overhead RM9,300 (based on 4,175 machine hours)

Required :

Calculate the following variances. For each variance, label F for favourable variance and UF for
unfavourable variance.

1. Direct material usage variance [RM300 (UF), RM250 (UF)]

2. Direct material price variance [RM0, RM600 (UF)]

3. Direct labour efficiency variance [RM1,350 (UF)]

4. Direct labour rate variance [RM1,830 (UF)]

5. Variable overhead efficiency variance [RM225 (F)]

6. Variable overhead spending variance [RM825 (F)]

7. Fixed overhead volume variance [RM3,500 (UF)]

8. Fixed overhead spending variance [RM2,700 (F)]

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 Chapter 10: Standard Costing & Variance Analysis

QUESTION 6

Bowl Company manufactures a product called “Superbowl”. The company uses standard
costing system in recording operations.

Standard established that 1.5 kg of direct material and 90 minutes of direct labour hour are
needed to produce one unit of finished goods. Standard costs are RM15.00/unit for direct
material and RM12.00/unit for direct labour.

Variable overhead is calculated on the basis of direct material input (in kg) at a rate of
RM4.00/kg, whereas the fixed overhead is calculated on the basis of direct labour hours.

Total annual budgeted overhead is RM100,000. Normal annual production is 10,000 units.

During 2021, a total of 12,000 units of finished goods were produced. 18,000 kg of direct
material were purchased at a price RM8.20/kg and 17,200 kg were used. A total of 18,800
hours of direct labour were used and paid at RM9.50/hour. The amount of overhead incurred
was RM90,000, of which 40% was fixed component.

Required :

1. Calculate the pre-determined fixed overhead rate.

2. Calculate the standard production cost per unit of “Superbowl”.

3. Calculate the following variances. For each variance, label F for favourable variance and
UF for unfavourable variance.
i. Direct material usage variance
ii. Direct material price variance
iii. Direct labour efficiency variance
iv. Direct labour rate variance
v. Variable overhead efficiency variance
vi. Variable overhead spending variance
vii. Fixed overhead volume variance
viii Fixed overhead spending variance

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 Chapter 10: Standard Costing & Variance Analysis

QUESTION 7

Below are the details relating to the budget that Rasilla Company has prepared for toys
products and the actual results for the year 2021 :

Budgeted Actual
Production volume 30,000 units 33,000 units
Direct labour hours 18,000 hours 15,800 hours
Direct materials used 60,000 kg 61,000 kg
Direct materials cost RM 30,000 RM 28,300
Direct labour cost RM 21,600 RM 18,900
Variable overhead cost RM 23,400 RM 22,320
Fixed overhead cost RM 25,200 RM 24,000

Variable overhead is calculated on the basis of direct labour hours.

Fixed overhead is calculated on the basis of direct materials used (kg).

Required:

Calculate the following :

i. Standard cost per unit . [RM3.34]

ii. Direct materials quantity variance and price variance. [RM2,500(F), RM2,200(F)]

iii. Direct labour efficiency variance and rate variance. [RM4,800(F), RM60(F)]

iv. Variable overhead efficiency variance and spending variance. [RM5,200(F), RM1,780(UF)]

v. Fixed overhead volume variance and spending variance [RM2,520(F), RM1,200(F)]

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 Chapter 10: Standard Costing & Variance Analysis

QUESTION 8

Mooi Limited produces a product and uses standard costing system. Below is the standard cost
per unit of the product :

Direct material (3 kg x RM 4.00) RM 12.00

Direct labour (0.8 hour x RM 12.50) 10.00
Variable overhead (0.8 hour x RM 6.00) 4.80
Fixed overhead (0.8 hour x RM 3.00) 2.40
Standard cost per unit 29.20

The following information is the actual activity and cost incurred during 2021 :

1. Fixed overhead cost is RM95,000 and variable overhead cost is RM230,000.

2. Production is 50,000 units.

3. Mooi Limited has used 41,000 hours of direct labour at a total cost of RM533,000.

4. A total of 130,000 kilograms of direct material were purchased at a price of RM3.70 per
kg.

5. Opening inventory of direct material is 25,000 kg. No closing inventory of direct material.

Normal production is 45,000 units per year. The standard overhead rate is calculated based on
normal activities on the basis of direct labour hours.

Required :

Calculate the following variances. For each variance, label F for favourable variance and UF for
unfavourable variance.

1. Direct material usage variance [RM20,000 (UF)]

2. Direct material price variance [RM39,000 (F)]

3. Direct labour efficiency variance [RM12,500 (UF)]

4. Direct labour rate variance [RM20,500 (UF)]

5. Variable overhead efficiency variance [RM6,000 (UF)]

6. Variable overhead spending variance [RM16,000 (F)]

7. Fixed overhead volume variance [RM12,000 (F)]

8. Fixed overhead spending variance [RM13,000 (F)]

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