Managerial Accounting

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Standard Costing

Module 005: Standard Costing

Course Learning Outcomes:

At the end of this module, the student will be able to:
1. Define standard and standard costs.
2. Know the differences between budgets and standards.
3. Compute the different standard cost variances.

Definition of Standard
Standard is a benchmark set by management in aid of performance measurement. In
manufacturing companies, 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
pieces 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., P2.00 per piece).

Definition of Standard Costs

Standard costs are systematically pre-determined costs established by management to be
used as a basis for comparison with actual cost.

Budgets vs. Standards

BUDGETS STANDARDS
Purpose Budgets are statements of expected Standards pertain to what costs
costs. should be given a certain level of
performance.
Emphasis Budgets emphasize cost levels that Standards emphasize the levels to
should not be exceeded. which costs should be reduced.
Coverage Budgets are set for all departments – Standards are set only for the
sales, administration and production or manufacturing
manufacturing. division of the firm.
Analysis When actual data differ from the Material amounts of variance are
budget, it may be an indication of reviewed and investigated so that
either good or bad performance. necessary corrective actions are
implemented

Course Module
Standard Cost Variance Analysis
VARIANCE = Actual Costs (AC) – Standard Costs (SC)

AC > SC: Unfavorable (debit balance/adverse)

AC < SC: Favorable (credit balance/desirable)

DIRECT MATERIAL Variance

Actual Material Cost ← Actual Quantity (AQ) x Actual Price (AP)
- Standard Material Cost ← Standard Quantity (SQ) x Standard Price (SP)
Materials Cost Variance
Note: Materials Cost Variance is the difference between the actual material cost and
standard material cost.
Analysis:
Quantity variance: ∆Q x SP = Difference in quantities x Standard price
Price variance: AQ x ∆P = Actual quantity x Difference in prices

DIRECT LABOR Variance

Actual Labor Cost ← Actual Hours (AH) x Actual Rate (AR)
- Standard Labor Cost ← Standard Hours (SH) x Standard Rate (SR)
Labor Cost Variance
Note: Labor Cost Variance is the difference between the actual labor cost and
standard labor cost.
Analysis:
Efficiency variance: ∆H x SR = Difference in hours x Standard rate
Rate variance: AH x ∆R = Actual hours x Difference in rates

FACTORY OVERHEAD (FOH) Variance = (Actual FOH cost) – (Standard FOH cost)
(Refer to page 3 for complete FOH Variance Analysis)

MATERIAL PRICE, MIX AND YIELD Variances

Mix and yield variances are normally calculated when production requires combining
several materials to produce a unit of product.
Material variance = Actual Material Cost – Standard Material Cost
Analysis:
 Managerial Accounting
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Standard Costing

Price variance: AQ x ∆P
Mix Variance: (AQ x SP) - TAQASP
Yield Variance: TAQASP – Standard Cost
Legend
AQ – Actual quantity
∆P – Difference in prices
SP – Standard Price
TAQASP – Total actual quantity at average standard price
NOTE: Mix and yield variances may also apply to direct labor, specifically in situations
where various labor skills are required to produce units of products.

Important Notes on Material and Labor Variance Analysis

1. Material PRICE variance is also known as:
Material spending variance, material money variance, material rate variance
2. Material QUANTITY variance is also known as:
Material usage variance, material efficiency variance
3. Material usage variance is a quantity variance while material price usage variance is a
price variance.
4. Labor RATE variance is also known as:
Labor price variance, labor spending variance, labor money variance
5. Labor EFFICIENCY variance is also known as:
Labor hour variance, labor usage variance, labor time variance
6. 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

Factory Overhead (FOH) Variance Analysis

One-way variance analysis Computation Legend
FOH Variance AFOH – SFOH AFOH: Actual FOH
SFOH: Standard FOH = (SH x SR)
Two-way variance analysis
Controllable Variance AFOH – BASH BASH: Budget Adjusted for Standard Hours

Volume variance BASH - SFOH BASH = Budgeted FFOH + (SH x Variable FOH Rate)

FFOH: Fixed Factory Overhead

Course Module
 Three-way variance analysis
Spending variance AFOH – BAAH BAAH: Budget Adjusted for Actual Hours

Efficiency variance BAAH – BASH BAAH = Budgeted FFOH + (AH x Variable FOH Rate)

Volume variance BASH – SFOH

Four-way variance analysis

Variable spending variance AFOH (V) – BAAH (V) AFOH (V): Actual Variable FOH

Fixed spending variance AFOH (F) – BAAH (F) AFOH (F): Actual FFOH

Efficiency variance (variable) BAAH – BASH BAAH (V): Actual Hours x Variable FOH Rate

Volume variance (fixed) BASH – SFOH BAAH (F): Budgeted FFOH

Important Notes on Factory Overhead Variance Analysis

1. Standard Factory Overhead (SFOH) = Standard Hours x Standard FOH Rate. Under
standard costing, SFOH is likewise referred to as the Applied Factory Overhead.
2. If AFOH is more than SFOH (applied), then factory overhead is said to be under-applied;
hence, under-application indicates an unfavorable variance, while over-application
indicates a favorable variance.
3. The term capacity variance is also used to mean the volume variance.
4. Budget Variance = Actual Cost – Budgeted Cost = Actual FOH – Budgeted FOH (BFOH)
 Under 2-way analysis where BASH is deducted from AFOH, budget variance =
controllable variance.
 Under 3-way analysis where BAAH is deducted from AFOH, budget variance =
spending variance.
5. Volume variance is actually the fixed volume variance; there is no such thing as a
variable volume or variable capacity variance.
6. Under the 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:
Change in hours x variable FOH rate = (AH –SH) VR
7. FOH variances may be classified into:
 Variable FOH Variances = Variable Spending Variance + (Variable) Efficiency
Variance
 Fixed FOH Variances = Fixed Spending Variance + (Fixed) Volume Variance
8. Alternatively, another FOH variance analysis may include the following variances:
 Idle capacity variance: BAAH – (AH x SR)
 Total efficiency variance: ∆H x SR
 Fixed efficiency (effectiveness) variance: ∆H x FR (where: FR is the fixed FOH rate)
9. 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.
10. DM Variance + DL Variance + FOH Variance = Production or Manufacturing Cost
Variance
 Managerial Accounting
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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

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

Illustrative Example:
A company produces a single product that has the following standard costs:
Materials 5 pieces at P4 per piece P 20
Labor 3 hours at P10 per hour 30
Variable overhead 3 hours at P15 per hour 45
Fixed overhead 3 hours at P5 per hour 15
Total manufacturing cost variance P110

The total budgeted fixed overhead is P15,000. This is for the budgeted production (the
normal capacity level) of 1,000 units requiring the budgeted time of 3,000 hours.
During the period, the company produced 1,100 units and incurred the following costs:
P21,28
Materials 5,600 pieces at P3.80 per piece 0
Labor 3 ,250 hours at P11 per hour 35,750
Variable overhead 3 hours at P14.50 per hour 47,125
Fixed overhead 3 hours at P5 per hour 16,000
P120,15
Total 5

COMPUTATION AND ANALYSIS OF THE VARIANCES:

Actual manufacturing costs P120,155
Less: Standard manufacturing costs (1,100 units x P110) 121,000
Total manufacturing cost variance P 845F

Course Module
  For purposes of analysis, it is best if the total favorable variance of P845 is broken down
into the cost elements (materials, labor, variable overhead, and fixed overhead).

MATERIALS
COMPUTATION:
Quantity Price Total
Actual 5,600 P3.80 P21,280
Less: Standard
AP x SQ/u (1,100 x 5) 5,500 4 22,000
Variance 100U P0.20F P720F
DQ DP
where:
AP = actual production
SQ/u = standard quantity per unit
DQ = difference in quantities
DP = difference in prices
U = unfavorable
F = favorable
ANALYSIS:
Spending or Price Variance:
AQ x AP (5,600 x P3.80) P21,280
- AQ x SP (5,600 x P4.00) 22,400
Spending or price variance P1,120F

Efficiency or Quantity Variance:

AQ x SP (5,600 x P4.00) P22,400
- SQ x SP (5,500 x P4.00) 22,000
Efficiency or quantity variance P 400F

where:
AQ = actual quantity
AP = actual price
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Standard Costing

SQ = standard quantity
SP = standard price
Alternative solution:
Spending/Price variance: AQ x ∆P = 5,600 x 0.20 F = P1,120F
Efficiency/Quantity variance: ∆Q x SP = 100 U x P4 = P400U
where:
AQ = Actual quantity
∆P = difference in prices
∆Q = difference in quantities
SP = standard price
Spending/Price variance P1,120 F
Efficiency/Quantity variance 400 U
Total materials cost variance P 720 F

DIRECT LABOR
COMPUTATION:
Hours Rate Total
Actual 3,250 P11.00 P35,750
Less: Standard
AP x SH/u (1,100 x 3) 3,300 10.00 33,000
Variance 50F P1.00U P2,750U
DH DR

where:
AP = actual production
SH/u = standard hours per unit
DH = difference in hours
DR = difference in rate
U = unfavorable
F = favorable

ANALYSIS:

Course Module
 Spending or Rate Variance:
AH x AR (3,250 x P11.00) P35,750
- AH x SR (3,250 x P10.00) 32,500
Spending or rate variance P3,250 U

Efficiency or Time Variance:

AH x SR (3,250 x P10.00) P32,500
- SH x SR (3,300 x P10.00) 33,000
Efficiency or time variance P 500 F

Where:
AH = actual hours
AR = actual rate
SR = standard rate
SH = standard hours

Alternative solution:
Spending or Rate variance: AH x ∆R = 3,250 x P1.00U = P3,250 U
Efficiency or Time variance: ∆H x SR = 50F x P10 = P500 F
Where:
AH = actual hours
∆R = difference in rates
∆H = difference in hours
SR = standard rate

Spending/Rate variance P3,250 U

Efficiency/Time variance 500 F
Total labor cost variance P 2,750 U

VARIABLE FACTORY OVERHEAD

COMPUTATION:
Hours Rate Total
Actual 3,250 P14.50 P47,125
Less: Standard
AP x SH/u (1,100 x 3) 3,300 15.00 49,500
Variance 50F P0.50F P2,375 F
DH DR
 Managerial Accounting
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Standard Costing

ANALYSIS:
Spending or Rate Variance:
AH x AR (3,250 x P14.50) P47,125
- AH x SR (3,250 x P15.00) 48,750
Spending or rate variance P1,625F

Efficiency or Time Variance:

AH x SR (3,250 x P15.00) P48,750
- SH x SR (3,300 x P15.00) 49,500
Efficiency or time variance P 750 F

Where:
AH = actual hours
AR = actual rate
SR = standard rate
SH = standard hours

Alternative solution:
Spending or Rate variance: AH x ∆R = 3,250 x P0.50F = P1,625 F
Efficiency or Time variance: ∆H x SR = 50F x P15 = P750 F
Where:
AH = actual hours
∆R = difference in rates
∆H = difference in hours
SR = standard rate

Spending/Rate variance P1,625 F

Efficiency/Time variance 750 F
Total variable FOH variance P 2,375 F

FIXED FACTORY OVERHEAD

COMPUTATION:
Actual fixed overhead P16,000
Less: Standard fixed overhead (SH x SFxR (1,100 units x P110) 16,500

Course Module
 Fixed overhead variance P 500F
Where:
SH = standard hours
SFxR = standard fixed rate
ANALYSIS:
Fixed Spending or Budget Variance
Actual fixed overhead P16,000
Less: Budgeted fixed overhead 15,000 P1,000 U

Volume or Capacity Variance

Budgeted fixed overhead P15,000
Less: Standard fixed overhead 16,500 1,500 F
Total fixed overhead variance P 500 F

TOTAL FACTORY OVERHEAD

COMPUTATION:
Actual factory overhead
(AFOH) (P47,125 + P16,000) P 63,125
Less: Standard factory overhead (SFOH) (3,300 x P20) 66,000
Total factory overhead variance P 2,875 F
ANALYSIS:
Four-Way Analysis:
Variable spending P1,625F
Variable efficiency 750F
Fixed spending 1,000U
Volume or capacity 1,500F
Total overhead variance P2,875F

Three-Way Analysis:
Spending variance:
P1,625
Variable spending F
Fixed spending 1,000U P625F
Efficiency variance (variable) 750F
Volume or capacity 1,500F
Total overhead variance P2,875F

Two-Way Analysis:
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Standard Costing

Spending variance:
P1,625
Variable spending F
Fixed spending 1,000U
Variable efficiency 750F P1,375F
Volume or capacity 1,500F
Total overhead variance P2,875F

Illustrative Example #2:

A company combines three types of materials to produce its product. For a 100-kilo batch,
the standard cost for materials are as follows:
Standard Quantity Standard Price Total
Material A 60 kilos P5 P300
Material B 36 kilos 4 144
Material C 24 kilos 3 72
Total 120 kilos P516

During August, the company produced 200 batches or 20,000 kilos of its product. Materials
used from this production were:

Standard Quantity Standard Price Total

Material A 12,600 kgs. P4.80 P60,480
Material B 7,300 kgs. 4.10 29,930
Material C 4,700 kgs. 3.40 15,980
Total 24,600 kgs. P106,390

References and Supplementary Materials

Books and Journals
1. Rodelio S. Roque (2016). Management Advisory Services. CM Recto, Manila. GIC
Enterprises and Co., Inc.
2. Leonardo E. Aliling, Ma. Flordeliza L. Anastacio (2015). Management Accounting 1.
856 Nicanor Reyes, Sr. St., CM Recto Avenue, Manila. Rex Book Store, Inc.
3. Franklin T. Agamata (2019). Management Services. Certs Publications. Agdao, Davao
City, Philippines
4. Ray H. Garrison, Eric W. Noreen, Peter C. Brewer, 16 th ed. Managerial Accounting. The
McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York
Course Module
Online Supplementary Reading Materials
1. http://www.accountingnotes.net/cost-accounting/standard-costing/standard-
costing-meaning-and-objectives-cost-accounting/10576
2. http://washburn.edu/faculty/espahbod/A225_files/Presentation-ch10.pptx
3. http://www.csun.edu/~hcbus012/acct380/guides/chapter09.doc
4. http://cbafaculty.org/CMCC/Standard%20Costing%202.pdf
5. https://ecommons.udayton.edu/cgi/viewcontent.cgi?
article=1064&context=acc_fac_pub