MAS 2305

Standard Costing and Variance Analysis

John Carlos S. Wee, CPA MBA and Ralph Jorline M. Chua, CPA RCA

CONCEPT NOTES

Basic Standard Costing Concepts

Standard – a measure of acceptable performance established by management as a guide in making

economic decision. It serves as a “benchmark” or “norm” for measuring performance.

Types of Standards
1. Ideal Standards – also called Theoretical Standards, these are measure of optimum performance.
These standards are established based on a perfect working condition – no delays, breakdowns,
wastages, materials and manpower shortages, work stoppage, or any error of any sort.
2. Practical Standards – these are measure of tight but attainable performance. These standards are
established for a normal level of operation and efficiency, allowing for certain expected or normal
production problems.

Standard Costs – pre-determined cost of manufacturing a unit of product during a specified period of time.
These are determined by multiplying the quantity standards and cost standards.

Elements of Standard Costs:

1. Quantity Standards – indicate the quantity of materials and labor time required to produce a unit
of product or provide a service.
2. Cost Standards – specify the amount of payment that should be made for each unit of input.

Users of Standard Costs

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

Purposes of Standard Costs

1. Cost control
2. Pricing decisions
3. Motivation and performance appraisal
4. Cost awareness and cost reduction
5. Preparation of budgets
6. Costing of inventories
Cost Elements Actual Costing Normal Costing Standard Costing
Direct Materials Actual Actual Standard
Direct Labor Actual Actual Standard
Factory Overhead Actual Applied Standard
7. Preparation of cost reports
8. Management by objective

Setting Up Standard Costs

MATERIALS STANDARDS

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.
Standard Price per Unit – should reflect the final, delivered cost of materials, net of any discount and
inclusive of allowances for handling costs.

Materials
Std. Qty. per Unit Std. Price per Unit
Standard Cost = X
of Product of Materials
per Unit

DIRECT LABOR STANDARDS

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Standard Time (Hours) 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.
Standard Rate per Hour – should include the wages, fringe benefits, and other labor costs.

Labor Std. Time (Hours)

Std. Rate per
Standard Cost = per Unit of X
Labor Hour
per Unit Product

VARIABLE MANUFACTURING OVERHEAD STANDARDS

The standards for variable manufacturing costs are computed in the same manner as the standards for
labor costs are computed.

Standard Hours per Unit – the amount of allocation base from a company’s predetermined overhead rate
that is required to produce one unit of finished goods. Commonly used allocation bases are direct labor
hours and machine hours.
Standard Rate per Hour – represents the amount of variable overhead the company expects to pay for
every capacity hour used.

Variable
Std. Allocation Std. Rate per
Manufacturing
= Base (Hour) per X Allocation Base
Overhead
Unit of Product (Hour)
Standard Cost

FIXED MANUFACTURING OVERHEAD STANDARDS

Fixed overhead costs are usually expressed in terms of total figures.

Standard Hours per Unit – the amount of allocation base from a company’s predetermined overhead rate
that is required to produce one unit of finished goods. Commonly used allocation bases are direct labor
hours and machine hours.
Standard Rate per Hour – represents the amount of budgeted fixed overhead allocated to each capacity
hour used.

Fixed
Budgeted Fixed Overhead Std. Allocation
Manufacturing
= X Base (Hour) per
Overhead Normal/Practical Capacity
Unit of Product
Standard Cost (Allocation Base)

BUDGET VS. STANDARD COSTS

There is essentially no difference between these two terms. Both budget and standard costs are
predetermined amounts, and are set prior to the actual recording of costs in the books of the company.
However, BUDGET is used to denote a predetermined total cost, while STANDARD is used to denote a
predetermined unit cost.

Variance Analysis

Definition and General Model for Variance Analysis

Variance – also called as error or planning gap, is the variation in the amount of the actual cost incurred by
an entity compared to the standard cost that would have been incurred at a given level of actual activity.

Variance Computation:
Actual Cost P XXX
Standard Cost XXX
Total Cost Variance P XXX

In analyzing variance, analysts may decompose it into two elements: the price element and the quantity
element.

Price Variance – the difference between the actual amount paid for an input and the standard amount that
should have been paid, multiplied by the actual input.

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Quantity Variance – the difference between how much of an input was actually used and how much
should have been used and is stated in dollars term using the standard price of the input.

Price and quantity elements in the variance analysis can be used for all production costs elements. Terms
may vary depending on the element analyzed.

Production Cost Element Price Element Variance Quantity Element Variance

Direct materials Price Variance Quantity Variance
Direct labor Rate Variance Efficiency Variance
Variable factory overhead Spending/Budget Variance Efficiency Variance
Fixed factory overhead Spending/Budget Variance Capacity/Volume Variance

General model of the analysis:

Actual Cost P XXX
Actual Cost P XXX Expected Cost XXX
Standard Cost XXX Price Variance P XXX Price Variance P XXX
Total Cost Variance P XXX
Quantity Variance XXX Expected Cost P XXX
Total Cost Variance P XXX Standard Cost XXX
Quantity Variance P XXX

- A variance is FAVORABLE when the actual cost incurred is lower than the standard cost.
- A variance is UNFAVORABLE when the standard cost is lower than the actual cost incurred.

DIRECT MATERIALS VARIANCE

Total direct materials variance can be computed as follows:

Actual Materials Cost P XXX

Standard Materials Cost XXX
Materials Cost Variance P XXX

DM Variance can be analyzed through the two elements of the variance cost:

DM Price Variance

Actual Materials Cost (AP X AQ) P XXX

Expected Materials Cost (SP X AQ) XXX
DM Price Variance P XXX
or
DM Price Variance = (AP - SP) X AQ

Note that the direct materials price variance are computed using quantity of materials purchased rather
than the quantity used for the purposes of simplifying bookkeeping and timely determination of variances.

DM Quantity Variance

Expected Materials Cost (SP X AQ) P XXX

Standard Materials Cost (SP X SQ) XXX
DM Quantity Variance P XXX
or
DM Quantity Variance = (AQ - SQ) X SP

In case the production process involves combination or mixture of two or more materials in varying
proportions, the Quantity Variance can be analyzed further into two elements, the materials input (MIX)
and the product output (YIELD).

DM Quantity Mix Variance

Mix Variance – the difference between the actual combination or mixture of materials to produce certain
quantity of output and the standard mixture at a given actual total input of materials.

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 Total Actual Input at SP Σ(SP X AQU) P XXX
Total Actual Input at ASIC (ASIC* X TAI**) XXX
DM Quantity Mix Variance P XXX
or
DM Quantity Mix Variance = Σ(AMAI***- SMAI****) X SP
*ASIC = Average Standard Input Cost. The average of the standard cost per input of materials in a standard mixture.
Computed as: Total Standard Cost/Total Standard Input Quantity
**TAI = Total Actual Input.
***AMAI = Actual Mix based on total actual input.
****SMAI = Standard Mix based on total actual input.

DM Quantity Yield Variance

Yield Variance – the difference between the actual unit of output produced based on the actual inputs
placed into the production and the standard output that should have been produced.

Total Actual Input at ASIC (ASIC X TAI) P XXX

Total Actual Output at ASOC (ASOC* X TAO) XXX
DM Quantity Yield Variance P XXX
or
DM Quantity Yield Variance = (AO**- SO***) X ASOC
*ASOC = Average Standard Output Cost. The average of the standard cost per quantity of standard output.
Computed as: Total Standard Cost/Total Standard Output
**AO = Actual quantity of output produced.
***SO = Standard quantity of output that should have been produced based on the actual quantity of input used.
Computed as: TAI X Yield %****
****Yield % = The percentage of expected output over the standard input.
Computed as: Total Standard Output Quantity/Total Standard Input Quantity

DIRECT LABOR VARIANCE

Total direct labor variance can be computed as follows:

Actual Labor Cost P XXX
Standard Labor Cost XXX
Labor Cost Variance P XXX

DL Variance can be analyzed into two factors:

DL Rate Variance
Actual Labor Cost (AR X AH) P XXX
Expected Labor Cost (SR X AH) XXX
DL Rate Variance P XXX
or
DL Rate Variance = (AR - SR) X AH

DL Efficiency Variance
Expected Labor Cost (SR X AH) P XXX
Standard Labor Cost (SR X SH) XXX
DL Efficiency Variance P XXX
or
DL Efficiency Variance = (AH - SH) X SR

In case the production process involves combination or mixture of two or more types of labor in varying
efficiency proportions, the Efficiency Variance can be analyzed further into two elements, the labor input
(MIX) and the product output (YIELD).

DL Efficiency Mix Variance

Mix Variance – the difference between the actual combination of labor to produce certain quantity of
output and the standard mixture at a given actual total hours worked.
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 Total Actual Input at SP Σ(SP X AH) P XXX
Total Actual Input at ASIC (ASIC* X TAI**) XXX
DL Efficiency Mix Variance P XXX
or
DL Efficiency Mix Variance = Σ(AMAI***- SMAI****) X SP
*ASIC = Average Standard Input Cost. The average of the standard cost per input of materials in a standard mixture.
Computed as: Total Standard Cost/Total Standard Input Quantity
**TAI = Total Actual Input.
***AMAI = Actual Mix based on total actual input hours.
****SMAI = Standard Mix based on total actual input hours.

DL Efficiency Yield Variance

Yield Variance – the difference between the actual unit of output produced based on the actual input hours
placed into the production and the standard output that should have been produced.
Total Actual Input at ASIC (ASIC X TAI) P XXX
Total Actual Output at ASOC (ASOC* X TAO) XXX
DL Efficiency Yield Variance P XXX
or
DL Efficiency Yield Variance = (AO**- SO***) X ASOC
*ASOC = Average Standard Output Cost. The average of the standard cost per quantity of standard output.
Computed as: Total Standard Cost/Total Standard Output
**AO = Actual quantity of output produced.
***SO = Standard quantity of output that should have been produced based on the actual input hours.
Computed as: TAI X Yield %****
****Yield % = The percentage of expected output over the standard input.
Computed as: Total Standard Output Quantity/Total Standard Input Hours

FACTORY OVERHEAD VARIANCE

Total direct labor variance can be computed as follows:
Actual Overhead Cost P XXX
Standard Overhead Cost XXX
Overhead Cost Variance P XXX

The analysis on factory overhead is quite unique. Instead of using the traditional two-way variance
breakdown (rate and efficiency) for the entire overhead cost, the overhead must first be broken into
variable and fixed overhead costs before the analysis on budget and efficiency/capacity variances can be
made. In addition, variances on overhead costs can be analyzed using two-way, three-way or four-way
breakdown of costs.

Two-way Variance Analysis

In two-way analysis, the costs are broken down into two overhead cost control classification: Controllable
and Capacity/Volume-related costs.
CONTROLLABLE VARIANCE
Actual Overhead Cost (AFOH) P XXX
Actual Variable Overhead Cost XXX
Actual Fixed Overhead Cost P XXX
Budget Allowed at Standard Hours (BASH)
Standard Variable Overhead Cost (SVFOHR X SH) P XXX
Budgeted Fixed Overhead Cost XXX XXX P XXX
CAPACITY/VOLUME VARIANCE
Budget Allowed at Standard Hours (BASH)
Standard Variable Overhead Cost (SVFOHR X SH) P XXX
Budgeted Fixed Overhead Cost XXX P XXX
Standard Overhead Cost (SFOH)
Standard Variable Overhead Cost (SVFOHR X SH) P XXX
Standard Fixed Overhead Cost (SFxFOHR X SH) XXX XXX XXX
P XXX

Alternative computations for Capacity/Volume Variance:

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 CAPACITY/VOLUME VARIANCE
Budgeted Fixed Overhead Cost (SFxFOHR X DH*) P XXX
Standard Fixed Overhead Cost (SFxFOHR X SH) XXX
P XXX
*DH= Denominator level hours. The amount of hours used in determining the standard or pre-determined
factory overhead cost per unit. Usually the Normal Capacity.
Or
Capacity/Volume Variance = (DH - SH) X SFxFOHR

Three-way Variance Analysis

In the three-way analysis, the controllable variance is simply split into two variance: the Spending/Budget
Variance and Efficiency Variance

SPENDING/BUDGET VARIANCE
Actual Overhead Cost (AFOH)
Actual Variable Overhead Cost P XXX
Actual Fixed Overhead Cost XXX P XXX
Budget Allowed at Actual Hours (BAAH)
Standard Variable Overhead Cost at AH (SVFOHR X AH) P XXX
Budgeted Fixed Overhead Cost XXX XXX P XXX

EFFICIENCY VARIANCE
Budget Allowed at Actual Hours (BAAH)
Standard Variable Overhead Cost at AH (SVFOHR X AH) P XXX
Budgeted Fixed Overhead Cost XXX P XXX
Budget Allowed at Standard Hours (BASH)
Standard Variable Overhead Cost at SH (SVFOHR X SH) P XXX
Budgeted Fixed Overhead Cost XXX XXX P XXX

CAPACITY/VOLUME VARIANCE
Budget Allowed at Standard Hours (BASH)
Standard Variable Overhead Cost (SVFOHR X SH) P XXX
Budgeted Fixed Overhead Cost XXX P XXX
Standard Overhead Cost (SFOH)
Standard Variable Overhead Cost (SVFOHR X SH) P XXX
Standard Fixed Overhead Cost (SFxFOHR X SH) XXX XXX XXX
P XXX

Alternative computations for Efficiency Variance:

EFFICIENCY VARIANCE
Standard Variable Overhead Cost at AH (SVFOHR X AH) P XXX
Standard Variable Overhead Cost at SH (SVFOHR X SH) XXX
P XXX
Or
Efficiency Variance = (AH - SH) X SVFOHR

Four-way Variance Analysis

The four-way variance analysis reflects the complete analysis of the spending/budget and efficiency or
volume/capacity elements of the variable and fixed portion of the overhead cost. Thus, from the three-way
analysis, the spending/budget variance is split into variable and fixed components.

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VARIABLE SPENDING/BUDGET VARIANCE
Actual Overhead Cost (AFOH)
Actual Variable Overhead Cost - Variable P XXX
Budget Allowed at Actual Hours (BAAH)
Standard Variable Overhead Cost at AH (SVFOHR X AH) XXX P XXX

FIXED SPENDING/BUDGET VARIANCE

Actual Overhead Cost (AFOH)
Actual Variable Overhead Cost - Variable P XXX
Budget Allowed at Actual Hours (BAAH)
Budgeted Fixed Overhead Cost XXX XXX

EFFICIENCY VARIANCE
Budget Allowed at Actual Hours (BAAH)
Standard Variable Overhead Cost at AH (SVFOHR X AH) P XXX
Budgeted Fixed Overhead Cost XXX P XXX
Budget Allowed at Standard Hours (BASH)
Standard Variable Overhead Cost at SH (SVFOHR X SH) P XXX
Budgeted Fixed Overhead Cost XXX XXX P XXX

CAPACITY/VOLUME VARIANCE
Budget Allowed at Standard Hours (BASH)
Standard Variable Overhead Cost (SVFOHR X SH) P XXX
Budgeted Fixed Overhead Cost XXX P XXX
Standard Overhead Cost (SFOH)
Standard Variable Overhead Cost (SVFOHR X SH) P XXX
Standard Fixed Overhead Cost (SFxFOHR X SH) XXX XXX XXX
P XXX

Alternative computations for Variable Spending/Budget Variance:

Variable Spending/Budget Variance = (AVFOHR - SVFOHR) X AH

VARIANCES IN A DIAGRAM APPROACH

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Accounting for Standard Cost Variances

 At year-end, adjusting entries are made to eliminate standard cost variances. The entries depend on
whether the variances are, in total, insignificant or significant.
a. If insignificant, unfavorable variances are closed as debits to Cost of Goods Sold; favorable
variances are credited to Cost of Goods Sold.
b. If significant, variances are prorated at year-end among ending inventories and Cost of
Goods Sold so that the balances in those accounts approximate actual costs.
i. Proration is based on the relative size of the account balances. Disposition of significant
variances is similar to the disposition of large amounts of underapplied or overapplied
overhead.
 The theoretically correct allocation of the material price variance would use actual material cost in
each account at year-end.
 All variances other than the material price variance occur as part of the conversion process, and are
prorated only to Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold.
 Note that all unfavorable variances have debit balances and favorable variances have credit
balances. Unfavorable variances represent excess production costs; favorable variances represent
savings in production costs.

Pro-forma Entries (assuming ALL variances are FAVORABLE):

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Materials Purchase

Raw Material Inventory (@ AQXSP) XXX

Accounts Payable (@ AQXSP) XXX
Material Purchase Price Variance XXX

Materials Issuance

Work in Process Inventory (@ SQXSP) XXX

Raw Material Inventory (@ AQXSP) XXX
Material Quantity Variance XXX

Labor Cost Incurrence

Work in Process Inventory (@ SHXSR) XXX

Wages Payable (@ AHXAR) XXX
Labor Rate Variance (@ (AR-SR)XAH) XXX
Labor Efficiency Variance (@ (AH-SH)XSR) XXX

Incurrence of Overhead Cost

Variable Factory/Manufacturing Overhead Control (@ Actual) XXX

Fixed Factory/Manufacturing Overhead Control (@ Actual) XXX
Various Accounts XXX
Application of Overhead Cost to Production

Work in Process Inventory (@Standard) XXX

Applied Variable Factory/Manufacturing Overhead (@ SHXSR) XXX
Applied Fixed Factory/Manufacturing Overhead (@ SHXSR) XXX

Closing Applied Overhead to Control Accounts

Applied Variable Factory/Manufacturing Overhead XXX

Applied Fixed Factory/Manufacturing Overhead XXX
Variable Factory/Manufacturing Overhead Control XXX
Fixed Factory/Manufacturing Overhead Control XXX

Closing Overhead Variance to Control Accounts

Variable Factory/Manufacturing Overhead Control XXX

Fixed Factory/Manufacturing Overhead Control XXX
Variable Overhead Spending Variance (@ (AR-SR)XAH) XXX
Variable Overhead Efficiency Variance (@ (AH-SH)XSR) XXX
Fixed Overhead Spending Variance (@ Actual - Budget) XXX
Fixed Overhead Capacity/Volume Variance (@ Budget - Applied) XXX

Disposition of Variances (Insignificant)

Material Purchase Price Variance XXX

Material Quantity Variance XXX
Labor Rate Variance (@ (AR-SR)XAH) XXX
Labor Efficiency Variance (@ (AH-SH)XSR) XXX
Variable Overhead Spending Variance (@ (AR-SR)XAH) XXX
Variable Overhead Efficiency Variance (@ (AH-SH)XSR) XXX
Fixed Overhead Spending Variance (@ Actual - Budget) XXX
Fixed Overhead Capacity/Volume Variance (@ Budget - Applied) XXX
Cost of Goods Sold XXX

Disposition of Variances (Significant)

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Material Purchase Price Variance XXX
Material Quantity Variance XXX
 Variable Overhead Efficiency Variance (@ (AH-SH)XSR) XXX
Fixed Overhead Spending Variance (@ Actual - Budget) XXX
Fixed Overhead Capacity/Volume Variance (@ Budget - Applied) XXX
Cost of Goods Sold XXX

Disposition of Variances (Significant)

Material Purchase Price Variance XXX

Material Quantity Variance XXX
Labor Rate Variance (@ (AR-SR)XAH) XXX
Labor Efficiency Variance (@ (AH-SH)XSR) XXX
Variable Overhead Spending Variance (@ (AR-SR)XAH) XXX
Variable Overhead Efficiency Variance (@ (AH-SH)XSR) XXX
Fixed Overhead Spending Variance (@ Actual - Budget) XXX
Fixed Overhead Capacity/Volume Variance (@ Budget - Applied) XXX
Cost of Goods Sold XXX
Raw Material Inventory (for MPV only) XXX
Work in Process Inventory XXX
Finished Goods Inventory XXX

Advantages and Limitations of Standard Costing

Advantages:
1. They facilitate management planning;
2. They promote greater economy and efficiency by making employees more "cost-conscious";
3. They are useful in setting selling prices;
4. They contribute to management control by providing basis for evaluation and cost control;
5. They are useful in highlighting variances in management by exception;
 Management by Exception - the practice of giving attention only to those situations in
which large variances occur, so chat management may have more time for more important
problems of the business, not just routine supervision of subordinates.
6. They simplify recording through simplified costing of inventories and reduction in clerical costs

Limitations:
1. Standard cost variance reports are usually prepared on a monthly basis and often are released days
or even weeks after the end of the month, thus, the information in the reports may be so outdated
that it is almost useless.
2. If managers use variances only to assign blame and punish subordinates, morale may suffer.
Furthermore, subordinates may be tempted to cover up unfavorable variances or take actions that
are not in the best interests of the company to make sure the variances are favorable.
3. Labor-hour standards and efficiency variances may create problems:
a. Assumption: They assume that the production process is labor-paced; if labor works faster,
output will go up.
Reality: Many companies are technology-intensive, thus outputs are based on hours worked
on machines.
Potential Problem: Association of efficiency variances to low or high outputs may be
distorted.
b. Assumption: The computations assume that labor is a variable cost.
Reality: Direct labor can often be a fixed cost.
Potential Problem: An undue emphasis on labor efficiency variances creates pressure to
build excess inventories.
4. In some cases, a “favorable” variance can be worse than an “unfavorable” variance.
5. Too much emphasis on meeting the standards may overshadow other important objectives (e.g.
maintaining and improving quality, on-time delivery, and customer satisfaction).
6. Just meeting standards is not sufficient because companies need to continually improve to remain
competitive. For this reason, some companies focus on the trends in their standard cost variances—
aiming for continual improvement rather than just meeting the standards. In other companies,
engineered standards are replaced either by a rolling average of actual costs, which is expected to
decline, or by very challenging target costs.

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Materials and Labor Variances
PROBLEM 1. The per-unit standards for direct materials are 2 pounds at P4 per pound. Last month, 11,200
pounds of direct materials that actually cost P42,400 were used to produce 6,000 units of product.
Determine Direct Materials Quantity Variance and DM Price Variance

PROBLEM 2. The per-unit standards for direct labor are 1.5 direct labor hours at P12 per hour. If in
producing 2,400 units, the actual direct labor cost was P36,800 for 3,000 direct labor hours worked,
determine Labor Hours Variance and Rate Variance.

Variable Overhead Variances

PROBLEM 3. The variable overhead rate for the company is derived as follows:
Budgeted Variable Overhead P50,000
Budgeted DLH (5,000 units x 2 hrs per unit) 10,000 hrs
Variable Overhead Rate P5 per hour
Data on production is as follows:
Variable overhead actually paid P54,000
Actual hours used 8,000
Actual units produced 6,000
Compute for VOH Spending and Efficiency Variances

PROBLEM 4. Warp Manufacturing Corporation uses a standard cost system to collect costs related to the
production of its ski lift chairs. Warp uses machine hours as an overhead base. The variable overhead
standards for each chair are 1.2 machine hours at a standard cost of P18 per hour.
During the month of September, Warp incurred 34,000 machine hours in the production of 32,000 ski lift
chairs. The total variable overhead cost was P649,400. What is Warp's variable overhead spending
variance for the month of September?

Fixed Overhead Variances

PROBLEM 5. The fixed overhead rate for the company is derived as follows:
Budgeted Fixed Overhead P200,000
Budgeted DLH (8,000 units x 5 hrs per unit) 40,000 hrs
Fixed Overhead Rate P5 per hour
Data on production is as follows:
Fixed overhead actually paid P210,000
Actual hours used 10,000
Actual units produced 9,000
Compute for A) FOH Spending Variance and B) FOH Volume Variance

Four Way/Three-way/Two-way overhead analysis

PROBLEM 6. Simon Enterprises applies variable overhead at a rate of P1.50 per direct labor hour and fixed
overhead at a rate of P1.75 per direct labor hour. The company budgets two direct labor hours for each of
the 6,000 units that are scheduled for production. Total budgeted fixed overhead is at P21,000. Simon
incurred actual variable overhead totaling P18,700 and actual fixed overhead totaling P21,500 last year for
the production of 5,900 units. In addition, 11,900 direct labor hours were actually incurred.
1. Calculate overhead variances using the four-way approach
2. Calculate overhead variances using the three-way approach
3. Calculate overhead variances using the two-way approach

Mix and Yield Variances

PROBLEM 7.PMY Company makes Collesterite, a new health food. For a 50-kilo batch, the standard costs for materials
are as follows:
Materials Inputs Quantity Unit Price TOTAL
Lard 25 kilos P 0.20 per kilo P 5.00
Sugar 25 kilos 0.10 per kilo 2.50
Egg yolk 10 kilos 0.05 per kilo 0.50
60 kilos P 8.00
During June, the following materials were used in producing 600 batches of Collesterite:
Lard 18,000 kilos at P0.22 per kilo P 3,960
Sugar 14,000 kilos at P0.11 per kilo 1,540
Egg yolk 10,000 kilos at P0.04 per kilo 400
Calculate the materials price, mix, and yield variances.

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 PROBLEM 8. Universal Company operates with a standard cost accounting system and uses cost
variances as a means of detecting costs that may require more control. A standard cost sheet for a
component that is manufactured exclusively in one plant is as follows:
Direct materials (5 units @ P8) P 40.00
Direct labor (0.5 hours @ P40) 20.00
Variable overhead (0.5 direct labor hour @ P6) 3.00
Fixed overhead (0.5 direct labor hour @ P10) 5.00
Standard unit cost P 68.00

Data from the past year as follows:

a. Purchased 1,550,000 units of materials at a cost of P12,430,000.
b. Manufactured 295,000 units of product and sold 275,000 units.
c. Budgeted P1,500,000 for fixed overhead for the year.
d. Used 1,480,000 units of materials in production.
e. Used 150,000 direct labor hours.
f. Spent P5,960,000 for direct labor.
g. Spent P910,000 for variable overhead.
h. Spent P1,525,000 for fixed overhead.

REQUIRED: Using standard costing system, determine the following variances:

a. Materials price variance
b. Materials usage (efficiency) variance
c. Labor rate variance
d. Labor efficiency variance
e. Variable overhead spending variance
f. Variable overhead efficiency variance
g. Fixed overhead volume variance

PROBLEM 9. "Wonderful! Not only did our salespeople do a good job in meeting the sales budget
this year, but our production people did a good job in controlling costs as well," said the president
of a company. "Our P18,000 overall manufacturing cost variance is only 1.5% of the P1,200,000
standard cost of products sold during the year. That's well within the 3% parameter set by
management for acceptable variances. It: looks like everyone will be in line for a bonus this year."

The company procuces and sells a single product. A standard cost card for the product shows the
following:
Direct materials, 2 feet at P8.45 P 16.30
Direct labor, 1.40 hours at P8 11.20
Variable overhead, 1.40 hours at P2.50 3.50
Fixed overhead, 1.40 hours at P6 8.40
Standard cost per unit P 40.00

The following information is available for the year just completed:

a. The company manufactured 30,000 units of product during the year.
b. A total of 64,000 feet of material was purchased during the year at a cost of P8.55 per foot.
All of this material was used to manufacture the 30,000 units. There were no beginning or
ending inventories for the year.
c. The company worked 45,000 direct labor hours during the year at a cost of P7.80 per hour.
d. Overhead is applied to products on the basis of direct labor hours. Data relating to
manufacturing overhead costs follow:
Denominator activity level (direct labor hours) 35,000
Budgeted fixed overhead costs (from the overhead
flexible budget) P210,000
Actual variable overhead costs incurred 108,000
Actual fixed overhead costs incurred 211,800

REQUIRED:
1. Compute the direct materials spending and efficiency variances for the year.
2. Compute the direct labor spending and efficiency variances for the year.
3. For the manufacturing overhead, compute:
a. the variable overhead spending and efficiency variances for the year.
b. the fixed overhead budget and volume variances for the year.

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 4. Total the variances you have computed, and compare the net amount with the P18,000 mentioned
by the president. Do you agree that bonuses should be given to everyone for good cost control
during the year. Explain.

PROBLEM 10. The Michigan Company has made the following information available for its production
facility for the month of June. Fixed overhead was estimated at 19,000 machine hours for the production
cycle. Actual machine hours for the period were 18,900, which generated 3,900 units.
Material purchased (80,000 pieces) ₱ 314,000
Material quantity variance ₱ 6,400 U
Machine hours used 18,900 hours
VOH spending variance ₱ 50 U
Actual fixed overhead ₱ 60,000
Actual labor cost ₱ 40,120
Actual labor hours 5,900

Michigan’s standard costs are as follows:

Direct material 20 pieces @ ₱4 per piece
Direct labor 1.5 hours @ ₱6 per hour
Variable overhead (applied on a machine hour basis) 4.8 hours @ ₱2.50 per hour
Fixed overhead (applied on a machine hour basis) 4.8 hours @ ₱3 per hour

Determine the following items:

a. material purchase price variance
b. standard quantity allowed for material
c. total standard cost of material allowed
d. actual quantity of material used
e. labor rate variance
f. standard hours allowed for labor
g. total standard cost of labor allowed
h. labor efficiency variance
i. actual variable overhead incurred
j. standard machine hours allowed
k. variable overhead efficiency variance
l. budgeted fixed overhead
m. applied fixed overhead
n. fixed overhead spending variance
o. volume variance
p. total overhead variance

MULTIPLE CHOICE QUESTIONS

1. True/False. In standard costing, practical standards can be used to forecast cash flows and to plan
inventory, as well as to signal abnormal deviations in costs.

2. True/False. Ideal standards can only be attained under the best circumstances and allow for no work
interruptions.

3. The standards that allow for no machine breakdowns or other work interruptions and that require
peak efficiency at all times are referred to as:
A. normal standards. C. ideal standards.
B. practical standards. D. budgeted standards.

4. Which of the following statements concerning practical standards is incorrect?

A. Practical standards can be used for product costing and cash budgeting.
B. Practical standards can be attained by the average worker.
C. When practical standards are used, there is no reason to adjust standards if an old machine is
replaced by a newer, faster machine.
D. Under practical standards, large variances are less likely than under ideal standards.

Materials Standard Cost and Variance Analysis

5. True/False. In standard costing, the standard quantity allowed refers to the output that should have
been achieved based on the planned inputs for the period.

6. True/False. Quantity standards indicate how much of an input should be used for manufacturing a unit
of product or in providing a unit of service.

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7. True/False. Purchase of poor quality materials will generally result in a favorable materials price
variance and an unfavorable labor rate variance.

8. True/False. From a standpoint of cost control, the most effective time to recognize materials price
variances is when the materials are placed into production.

9. True/False. The materials quantity variance is computed based on the amount of materials purchased
during the period.

10. An unfavorable materials quantity variance indicates that:

A. actual usage of material exceeds the standard material allowed for output.
B. standard material allowed for output exceeds the actual usage of material.
C. actual material price exceeds standard price.
D. standard material price exceeds actual price.

11. The materials price variance should be computed:

A. when materials are purchased.
B. when materials are used in production.
C. based upon the amount of materials used in production when only a portion of materials purchased
is actually used.
D. based upon the difference between the actual quantity of inputs and the standard quantity allowed
for output times the standard price.

12. A favorable materials price variance coupled with an unfavorable material usage variance would most
likely result from:
A. labor efficiency problems.
B. machine efficiency problems.
C. the purchase and use of higher than standard quality material.
D. the purchase and use of lower than standard quality material.

13. Under a standard cost system, the materials price variances are usually the responsibility of the:
A. production manager. C. purchasing manager.
B. sales manager. D. engineering manager.

14. Misemer Corporation is developing standards for its products. One product requires an input that is
purchased for P57.00 per kilogram from the supplier. By paying cash, the company gets a discount of
8% off this purchase price. Shipping costs from the supplier's warehouse amount to P3.60 per
kilogram. Receiving costs are P0.26 per kilogram. The standard price per kilogram of this input should
be:
A. P57.70 B. P56.30 C. P65.42 D. P57.00

15. Mcgann Corporation is developing standards for its products. Each unit of output of the product
requires 0.53 kilogram of a particular input. The allowance for waste and spoilage is 0.06 kilogram of
this input for each unit of output. The allowance for rejects is 0.12 kilogram of this input for each unit of
output. The standard quantity in kilograms of this input per unit of output should be:
A. 0.53 B. 0.35 C. 0.71 D. 0.47

The following July information is for Marley Company:

Standards:
Material 3.0 feet per unit @ P4.20 per foot
Actual:
Production 2,750 units produced during the month
Material 8,700 feet used; 9,000 feet purchased @ P4.50 per foot
16. What is the material price variance (calculated at point of purchase)?
A. P2,700 U B. P2,700 F C. P2,610 F D. P2,610 U

17. What is the material quantity variance?

A. P3,105 F B. P1,050 F C. P3,105 U D. P1,890 U

18. In October, 5,000 meters of raw material were purchased at an actual cost of P4.50 per meter. During
October, 4,850 meters of the raw material were used to produce 2,400 units of the completed product.
Standards call for 2 meters of the raw material for each unit of the completed product. The standard
price of the raw material is P4.70 per meter. The materials quantity variances for October were:
A. P225 U B. P225 F C. P235 U D. P235
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19. Under a standard cost system, the materials quantity variance was recorded at P1,970 unfavorable, the
materials price variance was recorded at P3,740 favorable, and the Goods in Process was debited for
P51,690. Ninety-six thousand units were completed. What was the per unit price of the actual materials
used?
A. P0.52 each C. P0.54 eac
B. P0.53 each D. P0.51 each

20. Blake Company has a standard price of P5.50 per pound for materials. July’s results showed an
unfavorable material price variance of P44 and a favorable quantity variance of P209. If 1,066 pounds
were used in production, what was the standard quantity allowed for materials?
A. 1,104 C. 1,066
B. 1,074 D. 1,100

21. Sheridan Company has a standard of 15 parts of component BB costing P1.50 each. Sheridan
purchased 14,910 units of component BB for P22,145. Sheridan generated a P220 favorable price
variance and a P3,735 favorable quantity variance. If there were no changes in the component
inventory, how many units of finished product were produced?
A. 994 units. C. 1,000 units
B. 1,090 units. D. 1,160 units

22. The Bohol Company uses standard costing. The following data are available for October:
Actual quantity of direct materials used 23,500 pounds
Standard price of direct materials P2 per pound
Material quantity variance P1,000 U
The standard quantity of materials allowed for October production is:
A. 23,000 lbs C. 24,000 lbs
B. 24,500 lbs D. 25,000 lbs

Information on Dulce’s direct material costs for May is as follows:

Actual quantity of direct materials purchased and used 30,000 lbs.
Actual cost of direct materials P84,000
Unfavorable direct materials usage variance P 3,000
Standard quantity of direct materials allowed for
May production 29,000 lbs
For the month of May, Dulce’s direct materials price variance was:
A. P2,800 favorable C. P2,800 unfavorable
B. P6,000 unfavorable D. P6,000 favorable

23. Information on Katrina Company’s direct material costs is as follows:

Standard unit price P 3.60
Actual quantity purchased 1,600
Standard quantity allowed for actual production 1,450
Materials purchase price variance – favorable P 240
What was the actual purchase price per unit, rounded to the nearest centavos?
A. P3.06 C. P3.11
B. P3.45 D. P3.75

24. Samson Candle Co. manufactures candles in various shapes, sizes, colors, and scents. Depending on the
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 orders received, not all candles require the same amount of color, dye, or scent materials. Yields also
vary, depending upon the usage of beeswax or synthetic wax. Standard ingredients for 1,000 pounds of
candles are:
Input: Standard Cost per
Standard Mix Pound
Beeswax 200 lbs. 1.00
Synthetic wax 840 lbs. 0.20
Colors 7 lbs. 2.00
Scents 3 lbs. 6.00
Totals 1,050 lbs. 9.20
Standard output 1,000 lbs.

Price variances are charged off at the time of purchase. During January, the company was busy
manufacturing red candles for Valentine’s Day. Actual production then was:
Input: In Pounds
Beeswax 4,100
Synthetic wax 13,800
Colors 2,200
Scents 60
Total 20,160
Actual output 18,500
The material yield variance is:
A. P 280 unfavorable C. P 280 favorable
B. P3,989 unfavorable D. P3,989 favorable

Labor Standard Cost and Variance Analysis

25. True/False. The standard direct labor rate should not include fringe benefits.
26. True/False. The production manager is usually held responsible for the labor efficiency variance.
27. A labor efficiency variance resulting from the use of poor quality materials should be charged to:
A. the production manager. C. manufacturing overhead.
B. the purchasing agent. D. the engineering department.

28. A favorable labor rate variance indicates that

A. actual hours exceed standard hours. C. the actual rate exceeds the standard rate.
B. standard hours exceed actual hours. D. the standard rate exceeds the actual rate.

29. If the actual labor hours worked exceed the standard labor hours allowed, what type of variance will
occur?
A. Favorable labor efficiency variance. C. Unfavorable labor efficiency variance.
B. Favorable labor rate variance. D. Unfavorable labor rate variance.

30. Daughdrill Corporation is developing direct labor standards. The basic direct labor wage rate is P10.95
per hour. Employment taxes are 9% of the basic wage rate. Fringe benefits are P4.00 per direct labor-
hour. The standard rate per direct labor-hour should be:
A. P5.96 B. P4.99 C. P10.95 D. P15.94

31. Zellner Corporation is developing direct labor standards. A particular product requires 0.94 direct
labor-hours per unit. The allowance for breaks and personal needs is 0.02 direct labor-hours per unit.
The allowance for cleanup, machine downtime, and rejects is 0.10 direct labor-hours per unit. The
standard direct labor-hours per unit should be:
A. 0.82 B. 0.92 C. 0.94 D. 1.06

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McCoy Company has the following information available for October when 3,500 units were produced
(round answers to the nearest peso).
Standards:
Material 3.5 pounds per unit @ P4.50 per pound
Labor 5.0 hours per unit @ P10.25 per hour
Actual:
Material purchased 12,300 pounds @ P4.25
Material used 11,750 pounds
17,300 direct labor hours @ P10.20 per hour
32. What is the labor rate variance?
A. P875 F B. P865 F C. P865 U D. P875 U
33. What is the labor efficiency variance?
A. P2,050 F B. P2,050 U C. P2,040 U D. P2,040 F
34. The standard hourly rate was P4.10. Standard hours for the level of production are 4,000. The actual
rate was P4.27. The labor rate variance was P654.50, unfavorable. What were the actual labor hours?
A. 3,700 C. 3,850
B. 4,150 D. 4,000

35. Hingis had a P750 unfavorable direct labor rate variance and an P800 favorable efficiency variance.
Hingis paid P7,150 for 800 hours of labor. What was the standard direct labor wage rate?
A. P8.94 C. P8.00
B. P7.94 D. P7.80
36. Powerless Company’s operations for April disclosed the following data relating to direct labor:
Actual cost P10,000
Rate variance 1,000 favorable
Efficiency variance 1,500 unfavorable
Standard cost P 9,500
Actual direct labor hours for April amounted to 2,000. Powerless’ standard direct labor rate per hour in
April was:
A. P5.50 C. P5.00
B. P4.75 D. P4.50

37. Clean Harry Corp. uses two different types of labor to manufacture its product. The types of labor,
Mixing and Finishing, have the following standards:
Labor Type Standard Mix Std Hourly Rate Standard Cost
Mixing 500 hours P10 P5,000
Finishing 250 hours P5 P1,250
Yield: 4,000 units
During January, the following actual production information was provided:
Labor Type Actual Mix
Mixing 4,500 hours
Finishing 3,000 hours
Yield: 36,000 units
What is the labor mix variance?
A. P2,500 F C. P2,500 U
B. P5,000 F D. P5,000 F

38. Referring to Clean Harry Corp., how much labor yield variances should be reported?
A. P6,250 U C. P5,250 F
B. P6,250 F D. P5,250 U

Overhead Standard Cost and Variance Analysis

39. True/False. The variable overhead efficiency variance measures how efficiently variable overhead
resources were used.
40. True/False. Whoever is responsible for the control of the denominator activity in the predetermined
overhead rate should also be responsible for the variable overhead efficiency variance.

41. If variable overhead is applied on the basis of direct labor-hours and the variable overhead rate
variance is favorable, then:
A. actual variable overhead rate exceeded the standard rate.
B. standard variable overhead rate exceeded the actual rate.
C. actual direct labor-hours exceeded the standard direct labor-hours allowed for the actual output.
D. standard direct labor-hours allowed for the actual output exceeded the actual hours.

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Forrest Company uses a standard cost system for its production process and applies overhead based on
direct labor hours. The following information is available for August when Forrest made 4,500 units:

Standard:
DLH per unit 2.50
Variable overhead per DLH P1.75
Fixed overhead per DLH P3.10
Budgeted variable overhead P21,875
Budgeted fixed overhead P38,750

Actual:
Direct labor hours 10,000
Variable overhead P26,250
Fixed overhead P38,000

42. Refer to Forrest Company. Using the one-variance approach, what is the total overhead variance?
A. P6,062.50 U B. P3,625.00 U C. P9,687.50 U D. P6,562.50 U

43. Refer to Forrest Company. Using the two-variance approach, what is the controllable variance?
A. P5,812.50 U B. P5,812.50 F C. P4,375.00 U D. P4,375.00 F

44. Refer to Forrest Company. Using the two-variance approach, what is the noncontrollable variance?
A. P3,125.00 F B. P3,875.00 U C. P3,875.00 F D. P6,062.50 U

45. Refer to Forrest Company. Using the three-variance approach, what is the spending variance?
A. P4,375 U B. P3,625 F C. P8,000 U D. P15,750 U

46. Refer to Forrest Company. Using the three-variance approach, what is the efficiency variance?
A. P9,937.50 F B. P2,187.50 F C. P2,187.50 U D. P2,937.50 F

47. Refer to Forrest Company. Using the three-variance approach, what is the volume variance?
A. P3,125.00 F B. P3,875.00 F C. P3,875.00 U D. P6,062.50 U

48. Refer to Forrest Company. Using the four-variance approach, what is the variable overhead spending
variance?
A. P4,375.00 U B. P4,375.00 F C. P8,750.00 U D. P6,562.50 U

49. Refer to Forrest Company. Using the four-variance approach, what is the variable overhead efficiency
variance?
A. P2,187.50 U B. P9,937.50 F C. P2,187.50 F D. P2,937.50 F

50. Refer to Forrest Company. Using the four-variance approach, what is the fixed overhead spending
variance?
A. P7,000 U B. P3,125 F C. P750 U D. P750 F

51. Refer to Forrest Company. Using the four-variance approach, what is the volume variance?
A. P3,125 F
B. P3,875 F
C. P6,063 U
D. P3,875 U

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52. Edney Company employs standard absorption system for product costing. The standard cost of its
product is as follows:
Raw materials P14.50
Direct labor (2 DLH x P8) 16.00
Manufacturing overhead (2 DLH x P11) 22.00
The manufacturing overhead rate is based upon a normal activity level of 600,000 direct labor hours.
Edney planned to produce 25,000 units each month during the year. The budgeted annual
manufacturing overhead is
Variable P3,600,000
Fixed 3,000,000
During November, Edney produced 26,000 units. Edney used 53,500 direct labor hours in November at
a cost of P433,350. Actual manufacturing overhead for the month was P260,000 fixed and P315,000
variable. The total manufacturing overhead applied during November was P572,000.
The variable manufacturing overhead variances for November are:
Spending Efficiency
A. P9,000 unfavorable P3,000 unfavorable
B. P6,000 favorable P9,000 unfavorable
C. P4,000 unfavorable P1,000 favorable
D. P9,000 favorable P12,000 unfavorable

53. The fixed manufacturing overhead variances for November are:

Spending
A. P10,000 favorable
B. P10,000 unfavorable
C. P 6,000 favorable
D. P 4,000 unfavorable
Volume
P10,000 favorable
P10,000 favorable
P 3,000 unfavorable
P22,000 favorable

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Comprehensive
Questions No. 68 through 73 are based on the following information:
You have recently graduated from a university and have accepted a position with Villar Company, the
manufacturer of a popular consumer product. During your first week on the job, the vice president has
been favorably impressed with your work. She has been so impressed, in fact, that yesterday she called you
into her office and asked you to attend the executive committee meeting this morning for the purpose of
leading a discussion on the variances reported for last period. Anxious to favorably impress the executive
committee, you took the variances and supporting data home last night to study.
On your way to work this morning, the papers were laying on the seat of your new, red convertible. As you
were crossing a bridge on the highway, a sudden gust of wind caught the papers and blew them over the
edge of the bridge and into the stream below. You managed to retrieve only one page, which contains the
following information:
Standard Cost Summary
Direct materials, 6 pounds at P3 P18.00
Direct labor, 0.8 hours at P5 4.00
Variable overhead, 0.8 hours at P3 2.40
Fixed overhead, 0.8 hours at P7 5.60
P30.00

Total VARIANCES REPORTED

Standard Price or Spending Quantity Volume
Cost Rate or Budget or
Efficiency
Direct P405,000 P6,900 P9,000 U
materials F
Direct labor 90,000 4,850 U 7,000 U
Variable 54,000 P1,300 F ?@
overhead
Fixed overhead 126,000 500 F P14,000U
Applied to Work in process during the period
@ Figure obliterated.
You recall that manufacturing overhead cost is applied to production on the basis of direct labor-hours
and that all of the materials purchased during the period were used in production. Since the company
uses JIT to control work flows, work in process inventories are insignificant and can be ignored.
It is now 8:30 A.M. The executive committee meeting starts in just one hour; you realize that to avoid
looking like a bungling fool you must somehow generate the necessary “backup” data for the variances
before the meeting begins. Without backup data it will be impossible to lead the discussion or answer
any questions.

54. How many pounds of direct materials were purchased and used in the production of 22,500 units?
A. 138,000 lbs. C. 135,000 lbs.
B. 132,000 lbs. D. 137,300 lbs.
55. What was the actual cost per pound of material?
A. P3.00 C. P2.95
B. P3.05 D. P3.10
56. How many actual direct labor hours were worked during the period?
A. 18,000 C. 19,400
B. 16,600 D. 18,970
57. How much actual variable manufacturing overhead cost was incurred during the period?
A. P55,300 C. P56,900
B. P58,200 D. P59,500
58. What is the total fixed manufacturing overhead cost in the company’s flexible budget?
A. P112,500 C. P139,500
B. P140,000 D. P125,500
59. What were the denominator hours for last period?
A. 18,000 hours C. 20,000 hours
B. 22,000 hours D. 25,000 hours

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