MS 05– Standard

Costing & Variance

Analysis
MANAGEMENT ADVISORY SERVICES ONLINE
REVIEW
 TOPIC OUTLINE
 BASIC CONCEPTS
 STANDARD SETTING
 VARIANCE ANALYSIS
 CAUSES & RESPONSIBILITY FOR VARIANCES
 DISPOSITION OF VARIANCES
 BASIC CONCEPTS
STANDARD
a measure of acceptable performance established by management as a
guide in making decisions.

STANDARD COSTS
are predetermined or target unit cost of production which should be
attained under efficient conditions.
it is the amount and costs of DM, DL and FOH required to produce one
unit of finished good.

STANDARD COSTS SYSTEMS

is an accounting system which uses standard costs rather than actual costs
to account for units as they flow through the manufacturing processes.
 BASIC CONCEPTS
USES OF STANDARD COSTS
(PIM PIM B)
(a) Planning and controlling costs
(b) Instrument of coordination
(c) Measurement of performance
(d) Price setting
(e) Inventory valuation
(f) Motivating employees
(g) Budget preparation
 BASIC CONCEPTS
ADVANTAGES DISADVANTAGES
 Standard costs serve as a  Difficulty in determining
key element in the which variances is material.
application of  Other useful information
management by exception may not be noticed since
 Standard costs promote attention is focused on
variances.
economy and efficiency
among employees.  Subordinates may be
tempted to cover-up
 The use of standard costs
unfavourable exceptions or
simplifies bookkeeping not report them at all.
and costing procedures.  Costly to implement.
 BASIC CONCEPTS
MANAGEMENT BY EXCEPTION
It is the practice of giving attention only to
those situations in which large variances
occur, so that management may have more
time for more important problems of the
business, not just routine supervision of
subordinates.
 BASIC CONCEPTS
USERS OF STANDARD COSTS
1) Manufacturing Firms
2) Service Firms
3) Non-profit Organization

NOTE: Standard cost system may be used in BOTH job-

order and process costing systems.
 BASIC CONCEPTS
TYPE OF STANDARDS
1. Basic Standards - are standards that are
unchanged year after year.
EXAMPLE:
ELEMENTARY – MAYAMAN, MATALINO,
MABAIT, MABANGO
HIGHSCHOOL – MAYAMAN, MATALINO, MABAIT
COLLEGE – MAYAMAN, MATALINO
WORKING - MAYAMAN
 BASIC CONCEPTS
TYPE OF STANDARDS
Ideal / Perfect / Currently Attainable /
Theoretical Standards Normal Standards
 highest and optimum  efficient level of
level of performance performance that are
under perfect attainable under
operating conditions. expected operating
conditions.
 STANDARD SETTING
To set standard costs, the following are its components:
Standard Price or Rate – the amount that should be paid
for one unit of input factor.
Standard Quantity – the amount of input factor that
should be used to make a unit of product.
STANDARD COSTS PER UNIT = PRICE
STANDARDS X QUANTITY STANDARDS

Std. Costs Std. Costs Input

x
Unit Input Unit
 STANDARD SETTING
PRICE STANDARDS
Inventoriable costs or product costs

QUANTITY STANDARDS
Quantity stated in Bill of Materials (net quantity)
Net quantity is net of
 Evaporation
 Rejection
 Idle time
GOAL: Convert it to gross quantity
 EXERCISE 1
(1)
[(P115 x 0.98)+ P1.30] ÷ 15 ÷ 4 = 1.90

(2)
(7.6 ÷ 95%) x 41/40 = 8.20

(3)
(8.20 x 1.90) = P15.58
 EXERCISE 2
Quantity Unit Cost Amount
Salex 9.6 0.8 x 6/5 14.40 P1.50 21.60
Nyclyn 12 0.8 x 6/5 18.00 2.80 50.40
Protet 5 x 6/5 6.00 3.00 18.00
DL 8 7 x 35/60 x 6/5 0.80 9.00 7.20
TOTAL 97.20
 VARIANCE ANALYSIS
Variance is the DIFFERENCE between STANDARD and
ACTUAL costs.

ACTUAL COST > STANDARD COST

 UNFAVORABLE VARIANCE
 DEBIT VARIANCE
 GENERALLY ADDED TO COGS

ACTUAL COST < STANDARD COST

 FAVORABLE VARIANCE
 CREDIT VARIANCE
 GENERALLY DEDUCTED FROM COGS
 VARIANCE ANALYSIS
DM VARIANCES
AQ x AP = xx
DM PRICE
VARIANCE
AQ x SP = xx
DM
SQ x SP = xx QUANTITY
VARIANCE

ACTUAL STD. QTY

PRODUCTIO per UNIT ACTUAL QTY
N PURCHASED =
ACTUAL QTY USED
 VARIANCE ANALYSIS
DM VARIANCES
AQ x AP = xx
DM PRICE
VARIANCE
AQ (P) x SP = xx

AQ (U) x SP = xx
DM
SQ x SP = xx QUANTITY
VARIANCE

ACTUAL STD. QTY ACTUAL QTY

PRODUCTIO per UNIT PURCHASED ≠
N ACTUAL QTY USED
 VARIANCE ANALYSIS
DL VARIANCES
AH x AR = xx
DL RATE
VARIANCE
AH x SR = xx
DL
SH x SR = xx EFFICIENCY
VARIANCE

ACTUAL STD. HRS

PRODUCTIO per UNIT
N
 EXERCISE 3
100,000 x 2.50 = 250,000
10,000 F
100,000 x 2.60 = 260,000

95,625 x 2.60 = 248,625

16,575 U
89,250 x 2.60 = 232,050

25,500 3.50
 EXERCISE 3
122,400 x 8.35 = 1,022,040
18,360 F
122,400 x 8.50 = 1,040,400

43,350 F
127,500 x 8.50 = 1,083,750

25,500 5.00
 EXERCISE 4
1,900 x = 23,11O
310 U
1,900 x 12.00 = 22,800

1,200 F
2,000 x 12.00 = 24,000

4,000 0.50

CASE A
 EXERCISE 4
8,400 x = 83,600
400 F
8,400 x 10.00 = 84,000

2,000 U
8,200 x 10.00 = 82,000

16,400 0.50

CASE B
 EXERCISE 4
5,850 x = 71,100
900 U
5,850 x 12.00 = 70,200

1,800 F
6,000 x 12.00 = 72,000

3,000 2.00

CASE C
 EXERCISE 4
6,200 x = 24,500
300 F
6,200 x 4.00 = 24,800

800 U
6,000 x 4.00 = 24,000

2,000 3.00

CASE D
 VARIANCE ANALYSIS
MIX AND YIELD VARIANCE
AQ x AP = xx
DM PRICE
VARIANCE
AQ x SP = xx
DM MIX
VARIANCE
AQ x WASP = xx
DM YIELD
SQ x SP = xx VARIANCE

(Total Standard Cost ÷ WASP = Total Total

Total Standard Yield) x Standard Cost ÷ Total
Actual Yield Standard Quantity
 EXERCISE 5
AQ x AP = XXX

AQ x SP = 11,620
3,939 U
20,160 x 0.381 = 7,681
281 U
SQ x SP = 7,400

(4,100 x 1.00) + (13,800 x 400 ÷ 1,050

0.20) + (2,200 x 2.00) + (60 x
6.00) (400 ÷ 1,000) x
18,500
 VARIANCE ANALYSIS
OVERHEAD VARIANCES
2 WAY 3 WAY 4 WAY
ANALYSIS ANALYSIS ANALYSIS
VOH
Spending
Spending
Variance
Variance FOH Spending
Controllable Variance
Variance
Efficiency Efficiency
Variance Variance

Volume Volume Volume

Variance Variance Variance
 VARIANCE ANALYSIS
OVERHEAD VARIANCES
TWO WAY ANALYSIS (ConVo)
Actual Overhead (AH x AR) xx
BASH (Budget allowed for standard hours): Controllabl
Budgeted Fixed Overhead (NC x SR) xx e Variance
Variable Overhead (SH x Std. VOH Rate) xx xx Volume
Standard Overhead (SH x SR) xx Variance
 VARIANCE ANALYSIS
OVERHEAD VARIANCES
THREE WAY ANALYSIS (SEVo)
Actual Overhead (AH x AR) xx
BAAH (Budget allowed for actual hours): Spending
Budgeted Fixed Overhead (NC x SR) xx Variance
Variable Overhead (AH x Std. VOH Rate) xx xx
BASH (Budget allowed for standard hours): Efficiency
Budgeted Fixed Overhead (NC x SR) xx Variance
Variable Overhead (SH x Std. VOH Rate) xx xx
Volume
Standard Overhead (SH x SR) xx Variance
 VARIANCE ANALYSIS
OVERHEAD VARIANCES
FOUR WAY ANALYSIS
VARIABLE OVERHEAD
AH x AR = XX
Spending Variance
AH x SR = XX
SH x SR = XX Efficiency Variance
FIXED OVERHEAD
ACTUAL OH (AH x AR) = XX
BUDGETED OH (NC x SR)= XX Spending Variance
APPLIED OH (SH X SR) = XX Volume Variance
 EXERCISE 6
FOUR WAY ANALYSIS
Variable Overhead:
3,700 x _____ = P10,730
P370 F
3,700 x P3.00 = P11,100
3,800 x P3.00 = P11,400 P300 F

Fixed Overhead:
Actual P29,950
Budgeted (4,000
32,000x 8) P2,050 F

Applied (3,800 x 8) 30,400 P1,600 U

 EXERCISE 6
THREE WAY ANALYSIS (SEVo)
Actual Overhead (P10,730 + P29,950) P40,680
BAAH
2,420 F
Budgeted Fixed Overhead 32,000
VOH (3,700 x 3) 11,100 43,100
BASH 300 F
Budgeted Fixed Overhead 32,000
VOH (3,800 x 3) 11,400 43,400
Standard Overhead (3,800 x 11) 41,800 1,600 U
 EXERCISE 6
TWO WAY ANALYSIS (SEVo)
Actual Overhead (P10,730 + P29,950) P40,680
BASH
2,720 F
Budgeted Fixed Overhead 32,000
VOH (3,800 x 3) 11,400 43,400
Standard Overhead (3,800 x 11) 41,800 1,600 U
 EXERCISE 7
(a)
Total overhead at the denominator level of activity P50,000
Predetermined overhead rate ÷ P2.50
Denominator activity (normal capacity) 20,000 DLHs

(b)
Actual production 11,500 units
Standard DL hrs. per unit x 2
Standard hours 23,000
 EXERCISE 7
FOUR WAY ANALYSIS
Variable Overhead:
22,000 x _____ = P22,500
P500 U
22,000 x P1.00 = P22,000
23,000 x P1.00 = P23,000 P1,000 F

Fixed Overhead:
Actual P31,000
Budgeted (20,000
30,000x 1.50) P1,000 U

Applied (23,000 x 1.50) 34,500 P4,500 F

 EXERCISE 7
FLEXIBLE BUDGET VARIANCE (BUDGET
VARIANCE)
Variable Cost (DM, DL & VOH) Total Variance
Fixed OverheadSpending Variance
 EXERCISE 8
FOUR WAY ANALYSIS
Variable Overhead:
376 x _____ = P2,100
P596 U
376 x P4.00 = P1,504
400 x P4.00 = P1,600 P96 F

Fixed Overhead:
Actual P10,300
Budgeted (12,400
10,800 P500 F
- 1,600)
 RESPONSIBILITY FOR VARIANCES
The ultimate officer accountable for the production cost
variances is the CHIEF EXECUTIVE OFFICER (CEO).

TYPE OF RESPONSIBLE
VARIANCE DEPARTMENT
Material Price VariancePurchasing
Material Quantity Variance Production
Labor Rate Variance Human Resources
Labor Efficiency Variance Production
Overhead Variances Production
 CAUSE OF VARIANCES
(A)MATERIAL PRICE VARIANCES
(1) Fluctuations in market prices of materials
(2) Purchasing from distant suppliers, which result in additional
costs
(3) Failure to take cash discounts

(B)MATERIAL QUANTITY VARIANCES

(1) Waste and loss of material in handling and processing
(2) Substitution of defective or non-standard materials
(3) Spoilage or production of excess scrap because of
inexperienced workers or poor supervisors
 CAUSE OF VARIANCES
(C)DIRECT LABOR RATE VARIANCES
(1) Inexperienced workers hired
(2) Change in labor rate particularly peak season

(D)DIRECT LABOR EFFICIENCY VARIANCES

(1) Good or poor training of workers
(2) Poor materials or faulty equipment
(3) Good or poor supervision and scheduling of work
 CAUSE OF VARIANCES
(E)VARIABLE OVERHEAD VARIANCE
(1) Increase in energy costs
(2) Waste in using supplies
(3) Avoidable machine break-downs

(F) VOLUME VARIANCE

(1) Poor production scheduling
(2) Unusual machine break-downs
(3) Storms or strikes
(4) Decrease in customer demand
 DISPOSING VARIANCES
If the variance is INSIGNIFICANT
The variance is closed or charged to Cost of
Goods Sold (COGS).
FAVORABLE VARIANCE: (-)
UNFAVORABLE VARIANCE: (+)
 DISPOSING VARIANCES
If the variance is SIGNIFICANT
The variance is closed or charged to Cost of
Goods Sold (COGS), Finished Goods and Work-
in-Process Inventory
FAVORABLE VARIANCE: (-)
UNFAVORABLE VARIANCE: (+)
 QUIZZER (DO-IT-YOURSELF DRILL)
THEORIES PROBLEMS
1. C 11. D 21. C 1. C 11. B 21. B
2. A 12. B 22. B 2. D 12. C 22. D
3. C 13. D 23. B 3. D 13. D 23. B
4. B 14. A 24. E 4. C 14. A 24. C
5. A 15. A 25. D 5. C 15. D 25. C
6. B 16. D 26. E 6. B 16. A 26. B
7. C 17. D 27. A 7. E 17. C 27. D
8. D 18. D 28. C 8. D 18. A 28. D
9. C 19. C 29. B 9. B 19. D 29. A
10. C 20. C 30. B 10. B 20. C 30. B