FROM THE DESK OF MAESAM RAZA

Standard Costing-Variances
Standard Costing
Standard Costing involves the establishment of predetermine estimates of the costs of
products or services, the collection of actual costs and the comparison of the actual
costs with the predetermined estimates. The predetermined costs are known as
standard costs and the difference between standard and actual cost is known as
Variance. The process by which the total difference between standard and actual results
is analysed is known as Variance analysis.

Types of Standard
There are four types of standard
(i) Ideal standard
An Ideal standard is a standard which can be attained under perfect operating
conditions: no wastage, no inefficiencies, no idle time, no breakdowns.

(ii) Attainable standard

An attainable standard is a standard which can be attained if production is carried out
efficiently, machines are properly operated and materials are properly used. Some
allowance is made for wastage and efficiencies.

(iii) Current standard

A current standard is standard based on current working conditions (current wastage,
current inefficiencies).

(iv) Basic Standard

A basic standard is a long-term standard which remains unchanged over the years and is
used to show trends.

Question # 1
ESPN Enterprises manufactures a food product, details of which are as under:
Standard cost per unit:
Materials 60 kgs @ Rs.48 per kg
Labour 480 hours @ Rs.8 per hour

Actual cost for the month:

Material 5,900 kgs @ Rs.50 per kg
Labour 47,500 hours @ Rs.9 per hour
Actual production 100 units

Required:
(i) Calculate the material and labour cost variances;
(ii) Reconcile the standard and actual cost

STANDARD COSTING
 FROM THE DESK OF MAESAM RAZA

Question # 2
Parrot Steel's FOH rate is Rs.5 per hour. Budgeted overhead for 5,000 hours per month
is Rs.30,000 and at 7,000 hours is Rs.37,000. Actual overhead for the month is Rs.29,000
and actual volume is 7,000 hours.

Required:
(i) Variable overhead rate
(ii) Budgeted fixed overhead
(iii) Applied FOH
(iv) Over or Under absorbed FOH

Question # 3
The standard material required manufacturing one unit of product X is 10 kg and the
standard price of material is Rs. 2.50 per kg. The cost accountants record revealed that
11,500 kgs of material costing Rs.27,600 was used to manufacture 1,000 units of
product X.
Required:
Compute the following:
(i) Material price variance
(ii) Material quantity variance

Question # 4
Muzaffar Enterprises produced 2,000 units of product Y during January, 2007 at the
direct labour cost of Rs.198,000, working for 4,125 hours. The standard labour cost
determined was 2 hours per unit at Rs.50 per hour.
Required:
Calculate direct labour cost variance.

Question # 5
The information are collected from the record of Delta Company Limited for the month
of September 2008 for material ‘X' consumed and labour used for production of item
‘A'. Two (2) units of material ‘X' used and the predetermined purchase price for material
‘X' is Rs.6 per unit. Labour required to produce one (1) unit in 3 hours and the labour
rate per hour is Rs.10.

The actual production for item ‘A' was 15,000 units and the materials consumed with
price, labour worked and wages paid were as follows.

Material ‘X' used 33,000 units @ Rs.7 per unit

Labour worked 48,000 hours and rate paid to workers Rs.12.50 per hour.

Required:
· Material price variance and Material quantity (usage) variance.
· Labour rate (wage) variance and Labour efficiency (time) variance

STANDARD COSTING
 FROM THE DESK OF MAESAM RAZA

Question # 6
The normal capacity of a plastic extrusion plant is 40,000 direct labour hour per month.
At normal capacity the budgeted factory overhead are Rs.21.00 per direct labour hour
consisting of Rs.200,000 fixed expenses and Rs.16.00 per hour variable expenses. During
a month the plant operated 36,000 direct labour hours, with actual factory overhead of
Rs.800,000. The standard for the capacity attained is 35,000 hours.

Required:
Calculate the following:
(i) Variable Efficiency variance

(ii) Total variance

Question # 7
On October 1, 2004 Danish Company started manufacturing a new product Q. the
company has installed a standard cost system to account for manufacturing costs. The
standard cost for account of product Q is:
Particular Rs.
Material, 6 kgs@Rs.10 per kg 60
Direct Labour, 1 hour@Rs.40 per hour 40
Factory overhead, 75% of direct labour cost 30
130

The following data was obtained from Danish's record for October, 2004:
Actual production 4,000 units
Unit sold 2,500 units
Sales (Rs.) Rs.500,000
Purchase of Raw material (26,000 kg) Rs.273,000
Material price variance Rs.13,000 Unfavourable
Material quantity variance Rs.10,000 Unfavourable
Direct Labour rate variance Rs.7,600 Unfavourable
Direct Labour efficiency Rs.8,000 Favourable
Total Factory overhead variance Rs.5,000 Unfavourable
Required:
(i) Standard quantity of material allowed (ii) Actual quantity of material used)
(iii) Standard hours allowed (iv) Actual hours worked
(v) Actual direct labour rate (vi) Actual total factory overhead

Question # 8
A company produces and sells one product only, the Thing, the standard cost for one
unit being as follows:
$
Direct material A – 10 kg at $20 per kg 200
Direct material B – 5 litres at $6 per litre 30
Direct wages – 5 hours at $6 per hour 30
Fixed production overhead 50
Total standard cost 310

STANDARD COSTING
 FROM THE DESK OF MAESAM RAZA

The fixed overhead included in the standard is base on an expected monthly output of
900 units. Fixed production overhead is absorbed on the basis of direct labour hours.
During April the actual results were as follows.

Production 800 units

Material A 7,800 kg used, costing $159,900
Material B 4,300 litres used, costing $ 23,650
Direct wages 4,200 hours worked for $ 24,150
Fixed production overhead $47,000

Required:
(a) Calculate price and usage variances for each material
(b) Calculate labour rate and efficiency variance.
(c) Calculate fixed production overhead expenditure and volume variance.

Question # 9
A company manufactures one product, and the entire product is sold as soon it is
produced. There are no opening or closing inventories and work in progress is negligible.
The company operates a standard costing system and analysis of variance is made every
month. The standard cost card for the product, widget, is as follows
Standard cost card: $
Direct material 0.50 kilos at $4 per kilo 2.00
Direct wages 2 hours at $2.00 per hour 4.00
Variable overhead 2 hours at $0.30 per hour 0.60
Fixed overhead 2 hours at $3.70 per hour 7.40
Standard cost 14.0
Standard profit 6.0
Standard selling price 20.0

Budgeted output for January was 5,100 units. Actual results for January were as follows.
Production of 4,850 units was sold for $95,600
Materials consumed in production amounted to 2,300 kilos at a total cost of $9,800
Labour hours paid for amounted to 8,500 hours at a cost of $16,800
Actual operating hours amounted to 8,000 hours
Variable overhead amounted to $2,600
Fixed overheads amounted to $42,300

Required:
(a) Calculate all variances and prepare an operating statement for January under
absorption costing method.

Question # 10
A company manufactures a chemical, Dynamite, using two compounds Flash and Bang.
The standard material usage and cost of one unit of dynamite are as follows.
$
Flash 5 kg at $2 per kg 10
Bang 10 kg at $3 per kg 30
STANDARD COSTING
 FROM THE DESK OF MAESAM RAZA

40
In a particular period, 80 units of Dynamite were produced from 500 kg of Flash and 730
kg of Bang.

Required:
Calculate the material usage

Question # 11
The standard material cost of product D456 is as follows:
$
Material X 3 kg at $2.00 per kg 6
Material Y 5 kg at $3.60 per kg 18
24
During period 2,000 kgs of material X (Costing $4,100) and 2,400 kgs of material Y
(Costing $9,600) were used to produced 500 units of D456.

Required:
Calculate the material price

Question # 12
The material cost record of Bias Company showed the following information.
Actual Standard Standard
Material Result Quantity Price
One unit of Grinding motor 10 kgs Rs.7 per kg
Actual Grinding motor produced 5,000 units
Actual material purchased 58,300 kgs
Actual material costs Rs.424,700

Required:
(i) Material purchase price variance
(ii) Material quantity variance

Question # 13
The labour time sheet and payroll record of Ikhlaq Company showed the following
information.
Actual Standard Standard Result
Hours rate
One unit of compressor motor 7 hours Rs.30
per hours
Actual Compressor motor produced 4,400 units
Actual hours worked 31,800 hours
Actual direct labour cost Rs.927,950

Required:
Labour efficiency variance.

Question # 14

STANDARD COSTING
 FROM THE DESK OF MAESAM RAZA

Calculate the quantity of material used from the following data in:
Budgeted Actual
Material for one unit 5 kg
Cost / kg Rs.5
Unit produced 575 Nos.
Adverse material usage Rs.150

Question # 15
M/S Sabir (Pvt) Ltd uses standard costing system. Data given below relates to labour.

Actual hours worked 20,800 hours

Standard allowance for actual production 16,640 hours
Standard rate per hour Rs.2.50
Rate variance (adverse) Rs.2,080

Required:
What is actual rate of pay per hour?

Question # 16
Calculate the standard cost of direct material and direct labour using the following data?
Department A B C
Standard labour hour / unit 04 2.50 06
Standard labour rate / hour 08 12 10

Direct material Quantity Rate

Tyre 50 0.10 each
Wire 2.5 0.05
Nut / bolts 500 0.02

STANDARD COSTING