04/04/2022

STANDARD COSTING
 I. Opening Prayer
 II. Announcements
 III. Overview of the topic

 IV. Discussion and Recitation

Standard:
STANDARD COSTING: Materials: 3 pcs per unit – P2 per piece

Standard Labor: 2 hours per unit – P3 per hour

- is a benchmark set by management in aid of performance measurement.

- in manufacturing, standards are classified into two (2) categories,
1) Quantity Standard
- indicates the quantity of raw materials or labor time required to produce a
unit of product.
- this is normally expressed per unit of output. (e.g., 3 pcs per unit)
2) Cost Standard
- indicates what the cost of the quantity standard should be.
- this is normally expressed per unit of input. (e.g., P2 per piece)

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STANDARD COSTING:
Standard Costs
- systematically predetermined costs established by management to be used as a
basis for comparison with actual cost.

STANDARD COSTING:
Budgets vs Standards

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STANDARD COSTING:
Uses of Standard Costs
1) Cost Control
2) Pricing Decisions
3) Costing of Inventories
4) Motivation and Performance Appraisal
5) Cost Awareness and Cost Reduction
6) Preparation of Budgets
7) Preparation of Cost Report
8) Management by Exception

STANDARD COSTING:
Standard Costing Procedures
1) Establish standards
2) Measure actual performance
3) Compare actual performance with standards
4) Take corrective action when needed
5) Revise standards when needed

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STANDARD COSTING:
Standard Cost Variance Analysis
VARIANCE = ACTUAL COSTS (AC) – STANDARD COSTS (SC)

AC > SC  Unfavorable (Debit Balance / Adverse)

AC < SC  Favorable (Credit Balance / Desirable)

STANDARD COSTING:
Direct Material Variance
VARIANCE = ACTUAL COSTS (AC) – STANDARD COSTS (SC)

Actual Material Cost  Actual Quantity (AQ) x Actual Price (AP)

- Standard Material Cost  Standard Quantity (SQ) x Standard Price (SP)
Material Cost Variance

Analysis:
Price Variance  ΔP x AQ MPV

Quantity Variance  ΔQ x SP MQV

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STANDARD COSTING:
Important Notes on Material Variance Analysis
1) Material Price Variance (MPV)
- is also known as Material Spending Variance, Material Money Variance and
Material Rate Variance.
2) Material Quantity Variance (MQV)
- is also known as Material Usage Variance, Material Efficiency Variance.
3) Material Usage Variance is a quantity variance while,
Material Price Usage is a price variance.

STANDARD COSTING:
Direct Labor Variance
VARIANCE = ACTUAL COSTS (AC) – STANDARD COSTS (SC)

Actual Labor Cost  Actual Hours (AH) x Actual Rate (AR)

- Standard Labor Cost  Standard Hours (SH) x Standard Rate (SR)
Labor Cost Variance

Analysis:
Rate Variance  ΔR x AH LRV

Efficiency Variance  ΔH x SR LEV

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STANDARD COSTING:
Important Notes on Labor Variance Analysis
1) Labor Rate Variance (LRV)
- is also known as Labor Price Variance, Labor Spending Variance and
Labor Money Variance.
2) Labor Efficiency Variance (LEV)
- is also known as Labor Hours Variance, Labor Usage Variance and
Labor Time Variance.
3) Labor Efficiency Variance excludes idle time spent in the production.
If any, idle time is separately explained through the Idle Time Variance, which is
regarded as unfavorable.
Idle Time Variance – Idle Time x Standard Labor Rate

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STANDARD COSTING:
Material Price, Mix and Yield Variance
- Mix and Yield Variance are normally calculated when production requires combining
several materials to produce a unit of product.

Material mix variance - measures the impact of the deviation from the standard mix on
material costs.
(Reason of variance is the standard mix of ingredients)

Material yield variance - reflects the impact on material costs of the deviation from the
standard input material allowed for actual production.
(Reason is difference in standard cost from actual production)

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STANDARD COSTING:
Material Price, Mix and Yield Variance

Material Variance = Actual Material Cost – Standard Material Cost

Analysis:
Price Variance  ΔP x AQ
Mix Variance  ΔQ x SP - TAQASP
Yield Variance  TAQASP – Standard Costs
TAQASP – Total Actual Quantity at Average Standard Price
TAQ – total of the actual quantity produced
ASP – weighted average standard price based on the standard mix

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STANDARD COSTING:
Material Price, Mix and Yield Variance
Analysis:
Price Variance  ΔP x AQ
Mix Variance  ΔQ x SP - TAQASP
Yield Variance  TAQASP – Standard Costs

MPV
MMxV MQV
MYV

SC = Actual Production x SP

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STANDARD COSTING:
Material Price Material Price
Variance (MPV) Variance (MPV)

Material
Standard Cost
Variance
Material Mix
Variance (MMxV)

Material Quantity
Variance (MQV)
Material Yield
Variance (MYV)

1-way 2-way 3-way

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STANDARD COSTING:
FACTORY OVERHEAD VARIANCE
FOH VARIANCE = ACTUAL FOH COST – STANDARD FOH COSTS

1) One-way Variance
2) Two-way Variance – Controllable, Volume
3) Three-way Variance – Spending, Efficiency, Volume
4) Four-way Variance – Spending (V), Spending (F), Efficiency, Volume

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STANDARD COSTING:
FOH: 1-WAY VARIANCE

AFOH SFOH
AHAR SHSR
Actual Hours x Actual Standard Hours x
Rate Standard Rate

FOH Variance

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STANDARD COSTING:
FOH: 2-WAY VARIANCE
Controllable Volume

AFOH BASH SHSR

Actual FOH Budget Adjusted for Standard Hours x
Actual Hours x Actual Rate Standard Hours Standard Rate

Use Cost Formula:

Difference: Variable Cost y = a + bx Difference: Fixed Cost
AFOH – VC is actual y = fixed + variable/unit x activity BASH – FxC is budgeted
BASH – VC is budgeted SHSR – FxC is standard
y = BFFOH + (VC/u x SH)

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STANDARD COSTING:
FOH: 3-WAY VARIANCE
Spending Efficiency Volume

AFOH BAAH BASH SHSR

Actual Hours x Actual Budget Adjusted for Budget Adjusted for Standard Hours x
Rate Actual Hours Standard Hours Standard Rate

Use Cost Formula: Use Cost Formula:

y = a + bx y = a + bx
y = fixed + variable/unit x activity y = fixed + variable/unit x activity
y = BFFOH + (VC/u x AH) y = BFFOH + (VC/u x SH)

Difference: Variable Cost Difference: Variable Cost Difference: Fixed Cost

AFOH – VC is actual BAAH – VC is budgeted based on AH BASH – FxC is budgeted
BAAH – VC is budgeted based on AH BASH – VC is budgeted based on SH SHSR – FxC is standard

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STANDARD COSTING:
FOH: 4-WAY VARIANCE
Spending Efficiency Volume

AFOH BAAH BASH SHSR

Actual Hours x Budget Adjusted for Budget Adjusted for Standard Hours x
Actual Rate Actual Hours Standard Hours Standard Rate

AFOH (V) BAAH (V) Variable Spending

AFOH (F) BAAH (F) Fixed Spending

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Spending (F)
STANDARD COSTING:
Spending
Spending (V)

Controllable

Efficiency Efficiency
FOH Variance

Volume Volume Volume

1-way 2-way 3-way 4-way

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STANDARD COSTING:
Important Notes on Factory Overhead Variance Analysis
1) Standard Factory Overhead (SFOH)
- Standard Hours x Standard FOH Rate (SHSR)
- SFOH is likewise referred to as the Applied Factory Overhead
2) If AFOH > SFOH  FOH is under-applied / unfavorable
If AFOH < SFOH  FOH is over-applied / favorable
3) The term capacity variance is also used to mean volume variance
4) Budget variance = Actual Cost – Budgeted Cost = Actual FOH – Budgeted FOH
Under 2-way analysis  AFOH – BASH = Controllable Variance
Under 3-way analysis  AFOH – BAAH = Spending Variance

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STANDARD COSTING:
Important Notes on Factory Overhead Variance Analysis
5) Volume variance is actually the Fixed Volume Variance, there is no such thing as
Variable Volume Variance or Variable Capacity Variance.
6) Under 3-way approach, the FOH Efficiency Variance is actually the Variable
Efficiency Variance.
Other Than BAAH-BASH, Variable Overhead Efficiency Variance may also be
computed based on:
Δ Hours x Variable FOH rate = (AH – SH) VR

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STANDARD COSTING:
Important Notes on Factory Overhead Variance Analysis
7) FOH variances may classified into:
◘ Variable FOH Variance = Variable Spending Variance + Variable Efficiency Variance
◘ Fixed FOH Variance = Fixed Spending Variance + Fixed Volume Variance
8) The Manufacturing Efficiency Variance incorporates the effect of both FOH Efficiency
Variance and Labor Efficiency Variance.
In some cases, the Material Quantity Variance may also be included.
9) DM Variance + DL Variance + FOH Variance = Production or Manufacturing Cost
Variance.

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