SYNTHESIS 1 3rd Trinal, 1st Semester AY 2022-2023

Mae Alma C. Pedrosa, CPA, MBA Accountancy Department, Notre Dame University

STANDARD COSTING AND VARIANCE ANALYSIS

A standard is something set up and established by those in authority to provide a common rule,
guideline, or definition, to measure and evaluate attributes and/or performances. For example, an airline
company requires a female attendant to have at least 212cm arm-reach because this is the airline’s arm-
reach standard for a flight attendant to reach the emergency equipment located in the overhead bin of an
aircraft. In a school, students have to earn a grade of at least 75% because this is the standard grade of
the school to pass in a class.

In a business or any organization, standards are established primarily by its management as measures of
acceptable performance, and serve as guides in making economic decisions by providing the needed
framework for informative and timely reporting of performance, which is used also in monitoring and
controlling business activities.

Standards are classified according to the ease with which they can be achieved, and the frequency of their
revision. They come in different types as follows:
▪ Ideal Standards expect perfection as these standards reflects maximum level of activity and
efficiency. These standards do not provide for wastes, machine breakdowns, human errors, power
interruptions, and the likes. As these standards are extremely tight, its sustainability is impossible,
and will result to more and high unfavorable variances, hence, also called Theoretical Standards.

▪ Practical Standards are set to normal working conditions as they consider the impact of reasonable
downtimes, unavoidable wastages, and other conditions considered as normal work interruptions as
they are part and parcel of the operations. Thus, variances that might come about reflect inefficiencies,
or most likely contain abnormal elements, or due to atypical factors, which in some ways might
necessitate immediate attention for corrective action/s. Practical standards could be tight and
challenging yet achievable.

Standard Costing is the practice of establishing cost standards of a production process under current or
expected working condition, and the analysis of the factors that caused variances of the actual results
from the standards.

Standard Cost is a carefully predetermined cost established by the management for the company’s
production process, a unit of production, or of a specific level of activity, because the actual costs cannot
be determined yet. It is used as a basis for comparison with actual cost, since it is considered as a
reflection of what management expects a cost ‘should be’.

A standard cost has two components:

1) Monetary Standard
- refers to the standard price or rate of an input.

2) Physical Standard
- refers to the standard quantity of the input that should be used per unit of the output.

Variance Computation and Analysis

Since the actual is compared with the standard, the difference is called the variance, computed as:
Variance = Actual - Standards. This computation of the variance can be used for all the three elements
of a production cost – direct materials, direct labor, and factory overhead. In the formula, the placement
that standard is deducted from the actual, or if the actual is deducted from the standard, should not be an
issue. The interpretation of the positive or negative difference depends on what comes first. The more
important point is knowing how to interpret if one is greater or less than the other, as follows:
if: then, the variance is
Actual cost > Standard cost unfavorable
Actual cost < Standard cost favorable

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To facilitate our computations, the following codes are used:
AR – Actual Price SR – Standard Rate
SP – Standard Price AH – Actual Hours
AQ – Actual Quantity SH – Standard Hours
SQ – Standard Quantity F – Favorable
AR – Actual Rate UF – Unfavorable

DIRECT MATERIAL VARIANCES

Material Price Variance – the difference between the actual price and the standard price of the actual
quantity of the materials purchased or used.

Purchase Price Variance = (AP – SP) AQ Purchased if the price variance is recognized at
the time of purchase
Price Usage Variance = (AP – SP) AQ Used if the price variance is recognized later
on the materials issued to production

Material Quantity Variance – refers to the difference between the actual and the standard quantities of
materials used in the actual production at the standard price. Also called the Materials Usage variance.
In formula:
Materials Quantity Variance
= (AQ Used – SQ of the input for the actual quantity of the output) SP

ILLUSTRATION 1: Direct Material Variances

One unit of Product Zibi of Flora Company is produced from 5 kilos of the raw materials costing ₱35
per kilo. Actual data on production and material costs from the previous month included the following:
Actual production – 5,000 units of Product Zibi
Raw materials purchased – 30,000 kls. at ₱35.50 per kilo
Quantity of materials used in production – 24,000 kls.
Required:
a) Determine the total material cost variance.
b) Compute the purchase price variance, price usage variance, and the material quantity variance.

Solutions:
a) Actual cost of materials used (₱35.50 x 24,000 kls.) ₱852,000
Standard cost of materials used (₱35 x 25,000 kls.*) 875,000
Total material cost variance ₱ 23,000 F

*Actual output x Standard quantity of the input = 5,000 units x 5 kls.

b) Purchase price variance = (₱35.50 - ₱35) 30,000 kls.

= ₱0.50 UF x 30,000 kls.
= ₱15,000 UF

Price usage variance = (₱35.50 - ₱35) 24,000 kls.

= ₱0.50 UF x 24,000 kls.
= ₱12,000 UF
Monetary variance (Price)
Material quantity variance = (24,000 kls. – 25,000 kls.) ₱35 + Physical variance (Quantity)
= 1,000 F x ₱35
= ₱35,000 F = Total material cost variance

The total material cost variance should equal to the total of the price variance and the quantity variance.
Between the two price variances, price usage variance is preferably used, to match with the quantity
variance because of two basic reasons: (1) the determination of the quantity variances considers the actual
quantity of materials used and the standard quantity of material which should have been used with the
actual production; while (2) the purchase price variance was determined with the quantity purchased.

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However, the purchase price variance is used to hold the purchasing department responsible for the price
difference – which is multiplied to the actual quantity of the purchases because actual price is ascertained
only at the time of the purchase.

DIRECT LABOR VARIANCES

Labor Rate Variance – is the monetary component of the total labor variance, and is the difference
between the actual labor rate and the standard labor rate, of the actual direct labor hours consumed.

Labor Efficiency Variance – also called the labor usage variance. It measures the ability to utilize the
labor resources according to the standards.

Labor Rate Variance = (AR – SR) AH

Labor Efficiency variance = (AH – SH) SR

ILLUSTRATION 2: Direct Labor Variances

Tagbusan Corporation pays its workers at a rate of ₱25 per hour based on the company’s expectation that
each worker should produced a unit of the product in 15 hours. Last month’s production records showed
that 2,600 units were produced in 40,500 direct labor hours, and total payroll for direct labor amounted
to ₱986,580.

Required: Compute for the following

a) Total direct labor cost variance
b) Direct labor rate variance and efficiency variance

Solutions:
a) Actual labor cost ₱986,580
Standard labor cost (₱25 x 39,000 hrs.1) 975,000
Total direct labor cost variance ₱ 11,580 UF
1
Actual output x Standard hours per unit = 2,600 units x 15 hrs.

b) Labor rate variance = (₱24.362 - ₱25) 40,500 hrs.

= ₱0.64 F x 40,500 hrs.
= ₱25,920 F
Monetary variance (Rate)
2
Actual labor cost  Actual labor hours = ₱986,580  40,500 hrs.
+ Physical variance (Efficiency)
Labor efficiency variance = (40,500 hrs. – 39,000 hrs.) ₱25
= 1,500 UF x ₱25 = Total labor cost variance
= ₱37,500 UF

Computations of the variances is just a beginning of a meaningful analysis for managerial decision
making. For examples, in Illustration 1, the unfavorable material price variance could be due to an
unforeseen increase in the price of the materials, or maybe because materials of higher quality were used
– which could also be the reason for a favorable materials quantity variance, and that perhaps, the
materials actually used were of better quality and so wastages were reduced.

In Illustration 2, the unfavorable total labor cost variance was majorly caused by the company’s labor
efficiency variance. It may be thought that perhaps less skilled workers have worked on the production
which also could be the reason why lesser payroll cost was incurred.

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FACTORY OVERHEAD VARIANCES
Overhead variances result when the incurred actual overhead costs are different from how much they
should be. The total factory overhead variance is influenced by different factors, which the management
should understand. Take note that unlike the direct materials and direct labor cost elements, factory
overhead is an indirect cost and includes both variable and fixed costs. The general components of the
factory overhead variance are:

1) Controllable Variance – the rate or the monetary standard component of the total overhead variance,
and is under the responsibility of the production department.

2) Volume Variance - is said to be an uncontrollable variance because it is the difference between the
budgeted and applied factory overhead. It is the physical standard component of the total overhead
variance.

Different ways of analyzing the factory overhead variances are:

o Two-Variance Method (Two-Way Approach)
Controllable Variance:
Actual Factory Overhead xx
Less: Budgeted Allowance based on Standard Hours
Fixed as budgeted xx
Variable (SH x Std. VOH rate) xx xx xx

Volume Variance:
Budgeted Allowance based on Standard Hours xx
Less: Standard Factory Overhead
(SH x SR) xx xx
Total Factory Overhead Variance xx

o Three-Variance Method (Three-Way Approach; SVV)

Spending Variance:
Actual Factory Overhead xx
Less: Budgeted Allowance based on Actual Hours
Fixed as budgeted xx
Variable (AH x Std. VOH rate) xx xx xx

Variable Efficiency Variance:

Budgeted Allowance based on Actual Hours xx
Less: Budgeted Allowance based on Standard Hours
Fixed as budgeted xx
Variable (SH x Std. VOH rate) xx xx xx

Volume Variance:
Budgeted Allowance based on Standard Hours xx
Less: Standard Factory Overhead
(SH x SR) xx xx
Total Factory Overhead Variance xx

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o Four-Variance Method (Four-Way Approach)
Spending Variance:
Actual Factory Overhead xx
Less: Budgeted Allowance based on Actual Hours
Fixed as budgeted xx
Variable (AH x Std. VOH rate) xx xx xx

Variable Efficiency Variance:

Budgeted Allowance based on Actual Hours xx
Less: Budgeted Allowance based on Standard Hours
Fixed as budgeted xx
Variable (SH x Std. VOH rate) xx xx xx

Fixed Efficiency Variance:

(AH – SH) Std. Fixed FOH rate xx

Capacity Variance:
Budgeted Allowance based on Actual Hours xx
Less: AH x SR xx xx
Total Factory Overhead Variance xx

Other alternative approaches (for 3-way, 4-way, and there’s even 5-way for some) also exist, depending
on the analyst as to what component will be broken down. But these approaches should arrive at the
same cost of the total factory overhead variance.

Figure 1: Components of the Total Factory Overhead Variances

Total Factory Overhead Variance

Controllable Variance Volume Variance 2-way

3-way
Spending Variance Variable Efficiency

4-way
Fixed Capacity
Efficiency Variance

Variable Fixed Efficiency

Spending Spending Variance

Alternative 3-way method (SEC)

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ILLUSTRATION 3: Factory Overhead Variances
Kadaklan Company has the following standard and budgeted figures in the production of its product:
Normal capacity – 15,000 machine hours
Budgeted fixed factory overhead at normal capacity – ₱30,000
Machine hours required per unit – 2.5 hours
Standard variable overhead rate – ₱4 per machine hour

During the month of June, the company completed 5,800 units of the product using 14,850 machine
hours. Actual factory overhead incurred during the month totaled ₱89,220, of which ₱56,133 is variable.

Required:
a) Determine total factory overhead variance
b) Analyze the variance using:
b1. Two-variance method
b2. Three-variance method
b3. Four-variance method

Solutions:
a) Actual factory overhead cost ₱89,220
Standard factory overhead cost (₱6 x 14,500 hrs.1) 87,000
Total factory overhead variance ₱ 2,220 UF

b) Two-Variance Method
Controllable Variance:
Actual Factory Overhead ₱89,220
Less: Budgeted Allowance based on Standard Hours
Fixed as budgeted ₱30,000
Variable (₱4 x 14,500 hrs.) 58,000 88,000
Total ₱ 1,220 UF

Volume Variance:
Budgeted Allowance based on Standard Hours ₱88,000
Less: Standard Factory Overhead
(₱62 x 14,500 hrs.) 87,000
Total 1,000 UF
Total Factory Overhead Variance ₱2,220 UF

1
Standard hours = 5,800 units x 2.5 hrs. = 14,500 hrs.
2
Total FOH Std. rate = ₱4 + (₱30,000/15,000 hrs.) = ₱6

c) Three-Variance Method (Three-Way Approach; SVV)

Spending Variance:
Actual Factory Overhead ₱89,220
Less: Budgeted Allowance based on Actual Hours
Fixed as budgeted ₱30,000
Variable (₱4 x 14,850 hrs.) 59,400 89,400
Total ₱ 180 F

Variable Efficiency Variance:

Budgeted Allowance based on Actual Hours ₱89,400
Less: Budgeted Allowance based on Standard Hours
Fixed as budgeted ₱30,000
Variable (₱4 x 14,500 hrs.) 58,000 88,000
Total 1,400 UF*

Volume Variance 1,000 UF

Total Factory Overhead Variance ₱2,220 UF

*Alternatively: (AH -SH) Std. Variable OH Rate = (14,850 – 14,500) ₱4 = ₱1,400 UF

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d) Four-Variance Method (Four-Way Approach)
Spending Variance ₱ 180 F

Variable Efficiency Variance 1,400 UF

Fixed Efficiency Variance:

(14,850 hrs. – 14,500 hrs.) ₱2 700 UF

Capacity Variance:
Budgeted Allowance based on Actual Hours ₱89,400
Less: AH @ SR (14,850 hrs. x ₱6) 89,100 300 UF
Total Factory Overhead Variance ₱2,220 UF

MIX AND YIELD VARIANCES

In some cases, even if a business produces only one product, it is also possible that the product requires
more than one type or class of raw materials, and/or different classes of workers are employed in the
direct production of the product.

The Mix Variance (also called the Blend Variance) is determined from the standard cost of a resource
combined, or mixed in a proportion different from the standard ratio. It is the monetary component of
the related element cost variance.

A yield is the quantity of output of a given input quantity of a production resource. Yield Variance,
therefore, is the difference of obtaining a yield different from the expected yield of the actual input.

Figure 2: Material Price, Mix, and Yield Variances

Actual Quantity Actual Quantity Actual Quantity Standard Quantity

x Actual Mix x Actual Mix x Standard Mix x Standard Mix
x Actual Price x Standard Price x Standard Price x Standard Price

Mix Variance Yield Variance

Price Variance Quantity Variance

Total Material Variance

The total of the mix and yield variances is the material quantity variance which is actually similar to the
one discussed previously, except that the cause of the variance here considers the influenced of the
multiplicity of the materials used.

Figure 3: Labor Rate, Mix, and Yield Variances

Actual Hours Actual Hours Actual Hours Standard Hours

x Actual Mix x Actual Mix x Standard Mix x Standard Mix
x Actual Rate x Standard Rate x Standard Rate x Standard Rate

Mix Variance Yield Variance

Rate Variance Efficiency Variance

Total Labor Variance

The determination of the labor variances looks like that in the material variances, just be mindful of the
terms and items used.

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ILLUSTRATION 3: Mix and Yield Variances
Sinaya Company makes food condiment from a mixture of different ingredients and uses standard
costing. The company’s production workers are also classified into two. Each kilogram of the product
has the following standard material and labor requirements:
Tomatoes 500 grams @ ₱30 per kilo
Banana 400 grams @ ₱25 per kilo
Sugar 200 grams @ ₱45 per kilo
Spices 150 grams @ ₱40 per kilo
Labor 1 45 minutes @ ₱80 per hour
Labor 2 15 minutes @ ₱60 per hour

Last year, Sinaya Company produced 10,000 kilos of the product and used the following inputs
Tomatoes 4,700 kls. @ ₱32 per kilo
Banana 4,100 kls. @ ₱27 per kilo
Sugar 1,900 kls. @ ₱43 per kilo
Spices 1,500 kls. @ ₱45 per kilo
Labor 1 7,400 hours @ ₱80.50 per hour
Labor 2 2,560 hours @ ₱58 per hour

Required: Compute the following

a) For the materials b) For the labor
a1. total materials cost variance b1. total labor cost variance
a2. total materials price variance b2. total labor rate variance
a3. total materials quantity variance b3. total labor efficiency variance
a4. materials mix and yield variances b4. labor mix and yield variances

Solutions:
a1) Actual cost of materials used (AQ x AP):
Tomatoes (4,700 kls. x ₱32) ₱150,400
Banana (4,100 kls. x ₱27) 110,700
Sugar (1,900 kls. x ₱43) 81,700
Spices (1,500 kls. x ₱45) 67,500 ₱410,300

Standard cost of the materials (SQ x SP):

Tomatoes (5,000 kls.* x ₱30) ₱150,000
Banana (4,000 kls.* x ₱25) 100,000
Sugar (2,000 kls.* x ₱45) 90,000
Spices (1,500 kls.* x ₱40) 60,000 400,000
Total material cost variance ₱ 10,300 UF

a2) Materials Actual Price Standard Price Actual Quantity Price Variance
Tomatoes ₱ 32 ₱ 30 4,700 kls. ₱ 9,400 UF
Banana 27 25 4,100 kls. 8,200 UF
Sugar 43 45 1,900 kls. 3,800 F
Spices 45 40 1,500 kls. 7,500 UF
Total ₱ 21,300 UF

a3) Actual Standard Standard Quantity

Materials Quantity Quantity Price Variance
Tomatoes 4,700 kls. 5,000 kls. ₱ 30 ₱ 9,000 F
Banana 4,100 kls. 4,000 kls. 25 2,500 UF
Sugar 1,900 kls. 2,000 kls. 45 4,500 F
Spices 1,500 kls. 1,500 kls. 40 -
Total 12,200 kls. 12,500 kls. ₱ 11,000 F

*
The total the total standard quantity of the inputs for 1,000 kls. of output is 1,250 kls. Therefore, expected inputs for 10,000
kls. of output is 12,500 kls. Allocated as follows:
Tomatoes (12,500 kls. x 500/1,250) = 5,000 kls. Sugar (12,500 kls. x 200/1,250) = 2,000 kls.
Banana (12,500 kls. x 400/1,250) = 4,000 kls. Spices (12,500 kls. x 150/1,250) = 1,500 kls.

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 a4) Actual Qty. Actual Qty. Standard Mix
Materials @ Actual Mix @ Std. Mix1 Price Variance
Tomatoes 4,700 kls. 4,880 kls. ₱ 30 ₱ 5,400 F
Banana 4,100 kls. 3,904 kls. 25 4,900 UF
Sugar 1,900 kls. 1,952 kls. 45 2,340 F
Spices 1,500 kls. 1,464 kls. 40 1,440 UF
Total 12,200 kls. 12,200 kls. ₱ 1,400 F

should
Actual Qty. Standard Qty. Standard Yield equal to the
Materials @ Std. Mix @ Std. Mix Price Variance
Tomatoes 4,880 kls. 5,000 kls. ₱ 30 ₱ 3,600 F Quantity
Banana 3,904 kls. 4,000 kls. 25 2,400 F
Variance
Sugar 1,952 kls. 2,000 kls. 45 2,160 F
Spices 1,464 kls. 1,500 kls. 40 1,440 F
Total 12,200 kls. 12,500 kls. ₱ 9,600 F

To check and relate:

Total Material Cost Variance
(₱10,300 UF)

Material Price Variance Material Quantity Variance

(₱21,300 UF) (₱11,000 F)

Material Mix Variance Material Yield Variance

(₱1,400 F) (₱9,600 F)

b1) Actual cost of direct labor (AH x AR):

Labor 1 (7,400 hrs. x ₱80.50) ₱595,700
Labor 2 (2,560 kls. x ₱58) 148,480 ₱744,180

Standard cost of the direct labor (SH x SR):

Labor 1 (7,500 hrs.2 x ₱80) ₱600,000
Labor 2 (2,500 hrs.2 x ₱60) 150,000 750,000
Total labor cost variance ₱ 5,820 F

1 Tomatoes (12,200 kls. x 500/1,250) = 4,880 kls.

Banana (12,200 kls. x 400/1,250) = 3,904 kls.
Sugar (12,200 kls. x 200/1,250) = 1,952 kls.
Spices (12,200 kls. x 150/1,250) = 1,464 kls.

2
Labor 1 (10,000 kls. x 45/60) = 7,500 hrs.
Labor 2 (10,000 kls. x 15/60) = 2,500 hrs.

b2) Labor Category Actual Rate Standard Rate Actual Hours Rate Variance
Labor 1 ₱ 80.50 ₱ 80 7,400 ₱ 3,700 UF
Labor 2 58 60 2,560 5,120 F
Total ₱ 1,420 F

b3) Labor Category Actual Hrs. Standard Hrs. Standard Rate Efficiency Variance
Labor 1 7,400 7,500 ₱ 80 ₱ 8,000 F
Labor 2 2,560 2,500 60 3,600 UF
Total 9,960 10,000 ₱ 4,400 F

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 b4) Actual Hrs. Actual Hrs. Standard Mix
Labor Category @ Actual Mix @ Std. Mix1 Rate Variance
Labor 1 7,400 7,470 ₱ 80 ₱ 5,600 F
Labor 2 2,560 2,490 60 4,200 UF
Total 9,960 9,960 ₱ 1,400 F

should
Actual Hrs. Standard Hrs. Standard Yield
Labor Category @ Std. Mix @ Std. Mix Rate Variance equal to the
Labor 1 7,470 7,500 ₱ 80 ₱ 2,400 F Efficiency
Labor 2 2,490 2,500 60 600 F
Total 9,960 10,000 ₱ 3,000 F Variance

To check and relate:

Total Labor Cost Variance
(₱5,820 F)

Labor Rate Variance Labor Efficiency Variance

(₱1,420 F) (₱4,400 F)

Labor Mix Variance Labor Yield Variance

(₱1,400 F) (₱3,000 F)

Although standards provide guidance on the acceptable performance by those in authority, yet, they are
not absolute measures of performance. While they are supposed to be stable, by and by, they are
reviewed to consider the ever changing business environment. These changes, in forms of events and
circumstances, both internal and external to the business, are factors that determine if the present
standards are still realistic, objective, and reasonable.
Whether the variance is favorable or unfavorable could possibly entail a necessity for investigation.
Significant variances should be used for managerial discussion on the improvement of performances.

The previous discussions and illustrations are on ‘costs’ variances. Interpretations will be the exact
opposite when it comes to revenues. Revenues are also projected, budgeted, planned, thus, standards
also are set. However, variances on the revenues are basically interpreted as follows:
if: then, the variance is
Actual revenue > Standard revenue favorable
Actual revenue < Standard revenue unfavorable

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 Give what are asked in each case that follow. Show your
computations on yellow papers. Label and properly
identify (encircle or box) your final answer. Make a clean,
clear, and coherent record of your answers.
Assignment for 11/14 submission, onsite
3:00PM
…by pair of your choice
1) Marilag Company established a standard cost system to help management control costs. Variances
are determined at the earliest possible time. Production of its single product has the following materials
and labor standards:
Direct material – 10 pieces per unit at ₱2.00 per piece
Direct labor – 1.5 hours per units at ₱45 per hour

In April, the company produced 2,500 units of the product, and incurred the following prime costs:
Direct materials – 28,000 pieces were purchased at ₱1.85 per piece
- 2,200 pieces remained in the inventory at the end of April
Direct labor – 3,550 hours were worked at a total cost of ₱167,560

Required: Compute the following variances for April

a) total direct material cost variance
b) direct material price and quantity variances
c) total direct labor cost variance
d) direct labor rate and efficiency variances

2) Likabutan Manufacturing Co.’s factory overhead is ₱325,000 based on a monthly capacity of 25,000
machine hours, plus ₱12 per machine hour. Each unit of the product requires 5 machine hours. The
following data have been recorded for the month of June:
Actual overhead cost ₱ 657,600
Total overhead spending variance 18,380 UF
Actual production 4,800 units

Required: Determine the following

a) total standard hours allowed for the June production
b) total actual machine hours worked
c) overhead volume variance
d) fixed overhead efficiency variance
e) overhead capacity variance
f) total overhead variance

3) Sinagtala Corporation manufactures a product that requires three types of materials. The production
process is done by batch of 200 kilos per batch. The standard costs of the materials for each batch are as
follows:
Standard Quantity Standard Price Total
Material AA 54 kls. ₱ 20 ₱ 1,080
Material BB 90 kls. 15 1,350
Material CC 36 kls. 25 900
Total 180 kls. ₱ 3,330

During 2022, Sinagtala Company produced 30,000 kls. of the product in 150 batches, with the following
actual material costs:
Quantity Price Total
Material AA 7,950 kls. ₱ 21.60 ₱ 171,720
Material BB 13,850 kls. 14.20 196,670
Material CC 5,500 kls. 25.20 138,600
Total 27,300 kls. ₱ 506,990

Required: Compute for the following

a) total material cost variance
b) total material price variance
c) total material quantity variance, and break it into its two components (mix and yield variances)

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