STANDARD COSTS AND VARIANCE

ANALYSIS
Standard
- a measure of acceptable performance

- established by management

- a guide in making economic decisions

Uses of standard costing:
1. Pricing Decisions
* reflects the desired or expected costs
* basis for bids and contract prices.
2. Controlling costs
* allow timely reports
3. Performance evaluation
* common basis for comparison
4. Budget preparation
* use to estimate selling and cost
of production
5. Motivating employees
VARIANCE ANALYSIS
VARIANCE – difference between standard and
actual costs
2 components of Materials variance:

1. Price variance

2. Efficiency variance
 [actual unit
Price variance = price of - [Standard [Actual
unit price of X quantity of
input] input] input]

Materials price variance

Actual price PXX
Less: Standard Price XX
Unfavorable( Favorable) XX
X Actual quantity used/purchased X
Unfavorable(Favorable) PXX
====
 [Actual
Efficiency =
variance
quantity - [Standard [Standard
quantity of X unit price]
of input] input]

Materials quantity variance:

Actual quantity XX
Less: Standard quantity XX
Unfavorable( Favorable) XX
X Standard price P X
Unfavorable(Favorable) P XX
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When different materials are used in the manufacturing
process, quantity variance may be broken down into:

a. Materials Mix variance

Actual quantity X standard price (per material) P xx
Less: Total actual input X Average standard Price x
Unfavorable ( Favorable) P xx
===
and

b. Materials yield variance

Total actual input X average standard price P xx

Less: Standard quantity X standard price ( per material) x
Unfavorable ( Favorable) P xx
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Direct labor Variance analysis:
2 components of direct labor variance:

1. Labor rate variance

Labor rate variance

Actual labor rate PXX
Less: Standard labor rate XX
Unfavorable( Favorable) XX
X Actual hours X
Unfavorable(Favorable) PXX
====
2. Labor Efficiency or Time Variance:

Actual hours XX
Less: Standard hours XX
Unfavorable(Favorable) XX
X Standard labor rate P X
Unfavorable(Favorable) P XX
====
When different materials are used in the manufacturing process, labor
usage variance may be broken down into:

a. Labor efficiency variance

Actual hours X standard labor rate P xx

Less: Standard hours based on the standard input (SHAI)
X standard labor rate x
Unfavorable ( Favorable) P xx
===
and

b. Labor rate yield variance

SHAI X standard labor rate P xx

Less: Standard hours based on actual output (SHAO)
X standard labor rate x
Unfavorable ( Favorable) P xx
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Problem:
The STD Household Company has established
standard costs for the cabinet department, in which
one size of MX is made. The standard costs of making
this cabinets are as follows:

Standard Cost Card- MX Cabinet

Direct Material: lumber 50 board ft at P4 P 200
Direct labor: 8 hours at P10 80
Overhead costs: Variable-8 hours at P5 40
Fixed -8 hours at P3 24
Total Unit cost P 344
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 During 2010, 500 of these cabinets were produced. The
cost of operations during the month is shown below: There are
no work-in-process at the beginning and end of month.

Direct materials purchased:

30,000 board feet at P 4.10 P 123,000
Direct materials used: 24,000 board feet
Direct labor: 4,200 hours at P 9.50 33,900
Overhead costs: Variable costs 22,000
Fixed costs 11,000
The budgeted overhead for the cabinet department based on
normal monthly activity of 4,500 is P 36,000 of which P
22,500 is variable and P13,500 is fixed overhead.
Required:
1. Compute for the following variances for prime costs:
a. Direct material price variance
b. Direct material usage variance
c. Direct labor rate variance
d. Direct labor efficiency variance
Factory Overhead
 If the company is using a flexible budget, the total overhead variance may
be analyzed as follows:
I. Under the Two-Variance Method
II. Three- Variance Method
III. Four –Variance Method
Controllable Variance
Actual Manufacturing Overhead P XX
Less: Budget allowed based on Standard hours
Fixed ( at normal capacity) P XX
Variable (Standard Hours* x var. Overhead
rate) XX XX
Unfavorable(favorable) P XX
______
Capacity Variance
Budget allowed based on Standard hours P XX
Less: Standard hours X Standard Overhead rate XX
Unfavorable (Favorable) P XX
Total Manufacturing Overhead Variance P XX
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*Standard Hours = Equiv. Production or
Allowed hours based on actual production X
Standard hours per unit
 Three variance Method
Spending Variance
Actual Manufacturing Overhead P XX
Less: Budget allowed on actual hours
Fixed ( at normal capacity) P XX
Variable (Actual Hours x var. Overhead
rate ) XX XX
Unfavorable(favorable) P XX

Variable Efficiency Variance

Budget allowed on Actual Hours P XX
Less: Budget allowed on Standard Hours
Fixed ( at normal capacity) XX
Variable (Standard hours x variable overhead rate) XX XX
Unfavorable (Favorable) XX

Volume Variance
Budget allowed based on Standard hours P XX
Less: Standard hours X Standard overhead rate XX
Unfavorable(favorable) P XX
Total Overhead Variance P XX
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