Standard costing

August 16, 2017

Standard Costing Overview

Standard costing is the practice of substituting an expected

cost for an actual cost in the accounting records, and then
periodically recording variances showing the difference
between the expected and actual costs. This approach
represents a simplified alternative to cost layering systems,
such as the FIFOand LIFO methods, where large amounts of
historical cost information must be maintained for items held
in stock.

Standard costing involves the creation of estimated (i.e.,

standard) costs for some or all activities within a company.
The core reason for using standard costs is that there are a
number of applications where it is too time-consuming to
collect actual costs, so standard costs are used as a close
approximation to actual costs.

Since standard costs are usually slightly different from actual

costs, the cost accountant periodically calculates variances
that break out differences caused by such factors as labor
rate changes and the cost of materials. The cost accountant
may also periodically change the standard costs to bring
them into closer alignment with actual costs.

Advantages of Standard Costing

Though most companies do not use standard costing in its

original application of calculating the cost of ending
 inventory, it is still useful for a number of other applications.
In most cases, users are probably not even aware that they
are using standard costing, only that they are using an
approximation of actual costs. Here are some potential uses:

 Budgeting. A budget is always composed of standard

costs, since it would be impossible to include in it the exact
actual cost of an item on the day the budget is finalized. Also,
since a key application of the budget is to compare it to actual
results in subsequent periods, the standards used within it
continue to appear in financial reports through the budget
period.
 Inventory costing. It is extremely easy to print a report
showing the period-end inventory balances (if you are using
a perpetual inventory system), multiply it by the standard cost
of each item, and instantly generate an ending inventory
valuation. The result does not exactly match the actual cost of
inventory, but it is close. However, it may be necessary to
update standard costs frequently, if actual costs are continually
changing. It is easiest to update costs for the highest-dollar
components of inventory on a frequent basis, and leave lower-
value items for occasional cost reviews.

 Overhead application . If it takes too long to aggregate

actual costs into cost pools for allocation to inventory, then you
may use a standard overhead application rate instead, and
adjust this rate every few months to keep it close to actual
costs.

 Price formulation. If a company deals with custom

products, then it uses standard costs to compile the projected
cost of a customer’s requirements, after which it adds on a
margin. This may be quite a complex system, where the sales
department uses a database of component costs that change
 depending upon the unit quantity that the customer wants to
order. This system may also account for changes in the
company’s production costs at different volume levels, since
this may call for the use of longer production runs that are less
expensive.

Nearly all companies have budgets and many use standard

cost calculations to derive product prices, so it is apparent
that standard costing will find some uses for the foreseeable
future. In particular, standard costing provides a benchmark
against which management can compare actual performance.

Problems with Standard Costing

Despite the advantages just noted for some applications of

standard costing, there are substantially more situations
where it is not a viable costing system. Here are some
problem areas:

 Cost-plus contracts . If you have a contract with a

customer under which the customer pays you for your costs
incurred, plus a profit (known as a cost-plus contract), then you
must use actual costs, as per the terms of the contract.
Standard costing is not allowed.
 Drives inappropriate activities. A number of the
variances reported under a standard costing system will drive
management to take incorrect actions to create favorable
variances. For example, they may buy raw materials in larger
quantities in order to improve the purchase price variance ,
even though this increases the investment in inventory.
Similarly, management may schedule longer production runs in
order to improve the labor efficiency variance , even though it is
 better to produce in smaller quantities and accept less labor
efficiency in exchange.

 Fast-paced environment. A standard costing system

assumes that costs do not change much in the near term, so
that you can rely on standards for a number of months or even
a year, before updating the costs. However, in an environment
where product lives are short or continuous improvement is
driving down costs, a standard cost may become out-of-date
within a month or two.

 Slow feedback. A complex system of variance

calculations is an integral part of a standard costing system,
which the accounting staff completes at the end of each
reporting period. If the production department is focused on
immediate feedback of problems for instant correction, the
reporting of these variances is much too late to be useful.

 Unit-level information. The variance calculations that

typically accompany a standard costing report are accumulated
in aggregate for a company’s entire production department,
and so are unable to provide information about discrepancies at
a lower level, such as the individual work cell, batch, or unit.

The preceding list shows that there are many situations

where standard costing is not useful, and may even result in
incorrect management actions. Nonetheless, as long as you
are aware of these issues, it is usually possible to profitably
adapt standard costing into some aspects of a company’s
operations.

Standard Cost Variances

 A variance is the difference between the actual cost incurred
and the standard cost against which it is measured. A
variance can also be used to measure the difference between
actual and expected sales. Thus, variance analysis can be
used to review the performance of both revenue and
expenses.

There are two basic types of variances from a standard that

can arise, which are the rate variance and the volume
variance. Here is more information about both types of
variances:

 Rate variance . A rate variance (which is also known as a

price variance) is the difference between the actual price paid
for something and the expected price, multiplied by the actual
quantity purchased. The “rate” variance designation is most
commonly applied to the labor rate variance , which involves the
actual cost of direct labor in comparison to the standard cost of
direct labor. The rate variance uses a different designation
when applied to the purchase of materials, and may be called
the purchase price variance or the material price variance.
 Volume variance . A volume variance is the difference
between the actual quantity sold or consumed and the
budgeted amount, multiplied by the standard price or cost per
unit. If the variance relates to the sale of goods, it is called
the sales volume variance . If it relates to the use ofdirect
materials, it is called the material yield variance . If the variance
relates to the use of direct labor, it is called the labor efficiency
variance. Finally, if the variance relates to the application of
overhead, it is called the overhead efficiency variance .

Thus, variances are based on either changes in cost from the

expected amount, or changes in the quantity from the
 expected amount. The most common variances that a cost
accountant elects to report on are subdivided within the rate
and volume variance categories for direct materials, direct
labor, and overhead. It is also possible to report these
variances for revenue.

It is not always considered practical or even necessary to

calculate and report on variances, unless the resulting
information can be used by management to improve the
operations or lower the costs of a business. When a variance
is considered to have a practical application, the cost
accountant should research the reason for the variance in
detail and present the results to the responsible manager,
perhaps also with a suggested course of action.

Standard Cost Creation

At the most basic level, you can create a standard cost simply
by calculating the average of the most recent actual cost for
the past few months. In many smaller companies, this is the
extent of the analysis used. However, there are some
additional factors to consider, which can significantly alter
the standard cost that you elect to use. They are:

 Equipment age. If a machine is nearing the end of its

productive life, it may produce a higher proportion of scrap than
was previously the case.
 Equipment setup speeds. If it takes a long time to setup
equipment for a production run, the cost of the setup, as spread
over the units in the production run, is expensive. If a setup
reduction plan is contemplated, this can yield significantly
lower overhead costs.
 Labor efficiency changes. If there are production process
changes, such as the installation of new, automated equipment,
then this impacts the amount of labor required to manufacture
a product.

 Labor rate changes. If you know that employees are

about to receive pay raises, either through a scheduled raise or
as mandated by a labor union contract, then incorporate it into
the new standard. This may mean setting an effective date for
the new standard that matches the date when the cost increase
is supposed to go into effect.

 Learning curve. As the production staff creates an

increasing volume of a product, it becomes more efficient at
doing so. Thus, the standard labor cost should decrease (though
at a declining rate) as production volumes increase.

 Purchasing terms. The purchasing department may be

able to significantly alter the price of a purchased component
by switching suppliers, altering contract terms, or by buying in
different quantities.

Any one of the additional factors noted here can have a major
impact on a standard cost, which is why it may be necessary
in a larger production environment to spend a significant
amount of time formulating a standard cost.
8.4 Advantages and Disadvantages of
Standard Costing
Advantages and disadvantages of using standard costs

Five of the benefits that result from a business using a

standard cost system are:

 Improved cost control.

 Moreuseful information for managerial planning and
decision making.
 More reasonable and easier inventory measurements.
 Cost savings in record-keeping.
 Possible reductions in production costs.
Improved cost control Companies can gain greater cost
control by setting standards for each type of cost incurred
and then highlighting exceptions or variances—instances
where things did not go as planned. Variances provide a
starting point for judging the effectiveness of managers in
controlling the costs for which they are held responsible.

Assume, for example, that in a production center, actual

direct materials costs of $ 52,015 exceeded standard costs
by $ 6,015. Knowing that actual direct materials costs
exceeded standard costs by $ 6,015 is more useful than
merely knowing the actual direct materials costs amounted
to $ 52,015. Now the firm can investigate the cause of the
excess of actual costs over standard costs and take action.

Further investigation should reveal whether the exception

or variance was caused by the inefficient use of materials
or resulted from higher prices due to inflation or inefficient
purchasing. In either case, the standard cost system acts as
an early warning system by highlighting a potential hazard
for management.
More useful information for managerial planning and
decision making When management develops
appropriate cost standards and succeeds in controlling
production costs, future actual costs should be close to the
standard. As a result, management can use standard costs
in preparing more accurate budgets and in estimating costs
for bidding on jobs. A standard cost system can be valuable
for top management in planning and decision making.
More reasonable and easier inventory
measurements A standard cost system provides easier
inventory valuation than an actual cost system. Under an
actual cost system, unit costs for batches of identical
products may differ widely. For example, this variation can
occur because of a machine malfunction during the
production of a given batch that increases the labor and
overhead charged to that batch. Under a standard cost
system, the company would not include such unusual costs
in inventory. Rather, it would charge these excess costs to
variance accounts after comparing actual costs to standard
costs.

Thus, in a standard cost system, a company assumes that

all units of a given product produced during a particular
time period have the same unit cost. Logically, identical
physical units produced in a given time period should be
recorded at the same cost.

Cost savings in record-keeping Although a standard

cost system may seem to require more detailed record-
keeping during the accounting period than an actual cost
system, the reverse is true. For example, a system that
accumulates only actual costs shows cost flows between
inventory accounts and eventually into cost of goods sold.
It records these varying amounts of actual unit costs that
must be calculated during the period. In a standard cost
system, a company shows the cost flows between inventory
accounts and into cost of goods sold at consistent standard
amounts during the period. It needs no special calculations
to determine actual unit costs during the period. Instead,
companies may print standard cost sheets in advance
showing standard quantities and standard unit costs for the
materials, labor, and overhead needed to produce a certain
product.
Possible reductions in production costs A standard
cost system may lead to cost savings. The use of standard
costs may cause employees to become more cost
conscious and to seek improved methods of completing
their tasks. Only when employees become active in
reducing costs can companies really become successful in
cost control.

Three of the disadvantages that result from a business

using standard costs are:

 Controversial materiality limits for variances.

 Nonreporting of certain variances.
 Low morale for some workers.
Controversial materiality limits for
variances Determining the materiality limits of the
variances may be controversial. The management of each
business has the responsibility for determining what
constitutes a material or unusual variance. Because
materiality involves individual judgment, many problems or
conflicts may arise in setting materiality limits.
Nonreporting of certain variances Workers do not always report all
exceptions or variances. If management only investigates unusual variances, workers may not
report negative exceptions to the budget or may try to minimize these exceptions to conceal
inefficiency. Workers who succeed in hiding variances diminish the effectiveness of budgeting.
 (Actual price – Standard price) x Actual quant
Materials price variance =
(Actual Price x Actual Qty purch) – (Standard
Quantity purchased)

(Actual quantity used – Standard quantity al

Materials usage variance =
(Actual qty used x Standard price) – (Standa

(Actual rate – standard rate) x Actual hours w

Labor rate variance =
(Actual rate x Actual hours worked) – (Standa

(Actual hours worked – standard hours allowe

Labor efficiency variance =
(Actual hours worked x Standard Rate) – (Stan
Rate)

(Actual variable OH rate – standard variable O

Variable OH Spending variance =
(Actual variable OH rate x Actual OH base) – (
base)

(Actual OH base – standard OH base) x Stand

Variable OH Efficiency variance =
(Actual OH base x Standard variable OH rate)
rate)

Fixed OH variance = Actual fixed overhead – Budgeted fixed overhead

Low morale for some workers The management by

exception approach focuses on the unusual variances.
Management often focuses on unfavorable variances while
ignoring favorable variances. Workers might believe that
poor performance gets attention while good performance is
ignored. As a result, the morale of these workers may
suffer.
8.5 Variance Summary
See below for a summary of the six variances from
standard discussed in this chapter.

Remember, variances are expressed at the absolute values

meaning we do not show negative or positive numbers. We
express variances in terms of FAVORABLE or UNFAVORABLE
and negative is not always bad or unfavorable and positive
is not always good or favorable.

Keep these in mind:

 When actual materials are more than standard (or

budgeted), we have an UNFAVORABLE variance.
 When actual materials are less than the standard, we
have a FAVORABLE variance.
 Same rule applies for direct labor. If actual direct labor
(either hours or dollars) is more than the standard,
we have an UNFAVORABLE variance. A FAVORABLE
variance occurs when actual direct labor is less than
the standard.

Accounting in the Headlines

How will the increasing cost of chocolate impact

Hershey’s variances?

The price of chocolate had been predicted to increase

rapidly beginning in late 2013 and continue into 2014,
according to the Wall Street Journal. The price increase
is due to multiple factors, including a shortage of cocoa
beans and an increase in demand by consumers.

Although the demand for all chocolate has been increasing,

consumer tastes have been gradually shifting towards dark
chocolate because of its purported health benefits.
Dark chocolate uses more cocoa beans per ounce than
milk chocolate.

So what does the predicted price increase mean for

companies that use chocolate and/or cocoa beans?

Questions

1. The Hershey Company produces several products that

use chocolate and/or cocoa beans. Which of the following
variances for Hershey’s chocolate products are likely to be
impacted by the projected price increase in the cost of
chocolate? Explain your answer.

 a. Direct material price variance

 b. Direct material quantity variance
 c. Direct labor rate variance
 d. Direct labor efficiency variance

2. Hershey’s Special Dark Mildly Sweet Chocolate

Bar and Hershey’s Milk Chocolate with Almonds
Bar both weigh 1.45 ounces. Which bar’s variances are
more likely to be impacted by the increase in the cost of
chocolate? Explain your reasoning.

3. Since The Hershey Company’s management knows that

the price of chocolate is likely to increase, it might revise
one or more of its standards. Which standard(s) would be
impacted? What would be the benefit of revising the
standard(s) before the end of the reporting period?
Introduction to Standard
Costing
Standard costing is an important subtopic of cost accounting.
Standard costs are usually associated with a manufacturing
company's costs of direct material, direct labor, and
manufacturing overhead.
Rather than assigning the actual costs of direct material,
direct labor, and manufacturing overhead to a product, many
manufacturers assign the expected or standard cost. This
means that a manufacturer's inventories and cost of goods
sold will begin with amounts reflecting the standard costs, not
the actual costs, of a product. Manufacturers, of course, still
have to pay the actual costs. As a result there are almost
always differences between the actual costs and the standard
costs, and those differences are known as variances.
Standard costing and the related variances is a valuable
management tool. If a variance arises, management becomes
aware that manufacturing costs have differed from the
standard (planned, expected) costs.

 If actual costs are greater than standard costs the variance is

unfavorable. An unfavorable variance tells management that if
everything else stays constant the company's actual profit will
be less than planned.
 If actual costs are less than standard costs the variance is
favorable. A favorable variance tells management that if
everything else stays constant the actual profit will likely
exceed the planned profit.
The sooner that the accounting system reports a variance, the
sooner that management can direct its attention to the
difference from the planned amounts.

If we assume that a company uses the perpetual inventory

system and that it carries all of its inventory accounts at
standard cost (including Direct Materials Inventory or Stores),
then the standard cost of a finished product is the sum of the
standard costs of the inputs:
 1. Direct material
2. Direct labor
3. Manufacturing overhead
1. Variable manufacturing overhead
2. Fixed manufacturing overhead
Usually there will be two variances computed for each input:

Since the calculation of variances can be difficult, we

developed several business forms (for PRO members) to help
you get started and to understand what the variances tell us.
Learn more about AccountingCoach PRO.
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Insights. This PDF document is designed to deepen your
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allocations, estimating cost behavior, costs for decision making, and
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Sample Standards Table

Let's assume that your Uncle Pete runs a retail outlet that
sells denim aprons in two sizes. Pete suggests that you get
into the manufacturing side of the business, so on January 1,
2017 you start up an apron production company called
DenimWorks. Using the best information at hand, the two of
you compile the following estimates to use as standards for
2017:

Standards Table for DenimWorks

The aprons are easy to produce, and no apron is ever left

unfinished at the end of any given day. This means that your
company never has work-in-process inventory.
When we make your journal entries for completed aprons
(shown below), we'll use an account calledInventory-FG which
means Finished Goods Inventory. (Some companies will use
WIP Inventory or Work-in-Process Inventory). We'll also use the
account Direct Materials Inventory. (Other account titles often
used for direct materials are Raw Materials Inventory
or Stores.)
Direct Materials Purchased:
Standard Cost and Price
Variance
Direct materials refers to just that—raw materials that are
directly traceable into a product. In your apron business the
direct material is the denim. (In a food manufacturer's
business the direct materials are the ingredients such as flour
and sugar; in an automobile assembly plant, the direct
materials are the cars' component parts).

DenimWorks purchases its denim from a local supplier with

terms of net 30 days, FOB destination. This means that title to
the denim passes from the supplier to DenimWorks when
DenimWorks receives the material. When the denim arrives,
DenimWorks will record the denim received in its Direct
Materials Inventory at the standard cost of $3 per yard (see
standards table above) and will record the liability at the
actual cost for the amount received. Any difference between
the standard cost of the material and the actual cost of the
material received is recorded as a purchase price variance.

Examples of Standard Cost of Materials and Price

Variance
Let's assume that on January 2, 2017 DenimWorks ordered
1,000 yards of denim at $2.90 per yard. On January 8, 2017
DenimWorks receives 1,000 yards of denim and an invoice for
the actual cost of $2,900. On January 8, 2017 DenimWorks
becomes the owner of the material and has a liability to its
supplier. On January 8 DenimWorks' Direct Materials Inventory
is increased by the standard cost of $3,000 (1,000 yards of
denim at the standard cost of $3 per yard), Accounts Payable is
credited for $2,900 (the actual amount owed to the supplier),
and the difference of $100 is credited to Direct Materials Price
Variance. In general journal format the entry looks like this:

The $100 credit to the price variance account communicates

immediately (when the denim arrives) that the company is
experiencing actual costs that are more favorable than the
planned, standard cost.

In February, DenimWorks orders 3,000 yards of denim at $3.05

per yard. On March 1, 2017 DenimWorks receives the 3,000
yards of denim and an invoice for $9,150 due in 30 days. On
March 1, the Direct Materials Inventory account is increased
by the standard cost of $9,000 (3,000 yards at the standard
cost of $3 per yard), Accounts Payable is credited for $9,150
(the actual cost of the denim), and the difference of $150 is
debited to Direct Materials Price Variance as an unfavorable
price variance:
After the March 1 transaction is posted, the Direct Materials
Price Variance account shows a debit balance of $50 (the $100
credit on January 2 combined with the $150 debit on March 1).
A debit balance in a variance account is always unfavorable—it
shows that the total of actual costs is higher than the total of
the expected standard costs. In other words, your company's
profit will be $50 less than planned unless you take some
action.

On June 1 your company receives 3,000 yards of denim at an

actual cost of $2.92 per yard for a total of $8,760 due in 30
days. The entry is:

Direct Materials Inventory is debited for the standard cost of

$9,000 (3,000 yards at $3 per yard), Accounts Payable is
credited for the actual amount owed, and the difference of
$240 is credited to Direct Materials Price Variance. A credit to
the variance account indicates that the actual cost is less
than the standard cost.

After this transaction is recorded, the Direct Materials Price

Variance account shows an overall credit balance of $190. A
credit balance in a variance account is always favorable. In
other words, your company's profit will be $190 greater than
planned due to the favorable cost of direct materials.

Note that the entire price variance pertaining to all of the

direct materials received was recorded immediately. In other
words, the price variance associated with the direct materials
received was not delayed until the materials were used.

We will discuss later how to handle the balances in the

variance accounts under the heading "

Direct Materials Usage

Variance
Under a standard costing system, production and inventories
are reported at the standard cost—including the standard
quantity of direct materials that should have been used to
make the products. If the manufacturer actually uses more
direct materials than the standard quantity of materials for the
products actually manufactured, the company will have an
unfavorable direct materials usage variance. If the quantity of
direct materials actually used is less than the standard
quantity for the products produced, the company will have a
favorable usage variance. The amount of a favorable and
unfavorable variance is recorded in a general ledger
account Direct Materials Usage Variance. (Alternative account
titles include Direct Materials Quantity Variance or Direct
Materials Efficiency Variance.) Let's demonstrate this variance
with the following information.
January 2017
In order to calculate the direct materials usage or quantity
variance, we start with the number of acceptable units of
products that have been manufactured—also known as
the good output. At DenimWorks this is the number of good
aprons physically produced. If DenimWorks produces 100 large
aprons and 60 small aprons during January, the production and
the finished goods inventory will begin with the cost of the
direct materials that should have been used to make those
aprons. Any difference will be a variance.
Note:

We are not determining the quantity of aprons that DenimWorks

should have made. Rather, we are determining whether the 100
large aprons and 60 small aprons that were actually manufactured
were produced efficiently. In the case of direct materials, we want to
determine whether or not the company used the proper amount of
denim to make the 160 aprons that were actually produced. (For the
purposes of calculating the direct materials usage variance, it does
not concern us whether DenimWorks had a goal to produce 100
aprons, 200, aprons, or 250 aprons.)
Standard costs are sometimes referred to as the "should be
costs." DenimWorks should be using 278 yards of denim to
make 100 large aprons and 60 small aprons as shown in the
following table.
We determine the total standard cost of the denim that should
have been used to make the 160 aprons by multiplying the
standard quantity of denim (278 yards) by the standard cost of
a yard of denim ($3 per yard):

An inventory account (such as F.G. Inventory or Work-in-

Process) is debited for $834; this is the standard cost of the
direct materials component in the aprons manufactured in
January 2017.
The Direct Materials Inventory account is reduced by the
standard cost of the denim actually removed from the direct
materials inventory. Let's assume that the actual quantity of
denim removed from the direct materials inventory and used to
make the aprons in January was 290 yards. Because Direct
Materials Inventory reports the standard cost of the actual
materials on hand, we reduce the account balance by $870
(290 yards used $3 standard cost per yard). After removing 290
yards of materials, the balance in the Direct Materials
Inventory account is $2,130 (710 yards x $3 standard cost per
yard).
The Direct Materials Usage Variance is: [the standard quantity
of material that should have been used to make the good
output minus the actual quantity of material used] X the
standard cost per yard.
In our example, DenimWorks should have used 278 yards of
material to make 100 large aprons and 60 small aprons.
Because the company actually used 290 yards of denim, we
say that DenimWorks did not operate efficiently—an extra 12
yards of denim was used (278 vs. 290 = 12). When we multiply
the 12 yards by the standard cost of $3 per yard, the result is
an unfavorable direct materials usage variance of $36.

Let's put the above information into a format commonly used

for computing variances:

Direct Materials Usage/Quantity/Efficiency Variance Analysis

The journal entry for the direct materials portion of the

January production is:
February 2017
Let's assume that in February 2017 DenimWorks produces 200
large aprons and 100 small aprons and that 520 yards of denim
are actually used. From this information we can compute the
following:

Let's put the above information into our format:

Direct Materials Usage (or Quantity) Variance Analysis

The journal entry for the direct materials portion of the

February production is:
Direct Labor: Standard Cost,
Rate Variance, Efficiency
Variance
"Direct labor" refers to the work done by those employees who
actually make the product on the production line. ("Indirect
labor" is work done by employees who work in the production
area, but do not work on the production line. Examples include
employees who set up or maintain the equipment.)

Unlike direct materials (which are obtained prior to being

used) direct labor is obtained and used at the same time. This
means that for any given good output, we can compute the
direct labor rate variance, the direct labor efficiency
variance, and the standard direct labor cost at the same time.

January 2017
Let's begin by determining the standard cost of direct labor for
the good output produced in January 2017:
Assuming that the actual direct labor in January adds up to 50
hours and the actual hourly rate of pay (including payroll
taxes) is $9 per hour, our analysis will look like this:

Direct Labor Variance Analysis for January 2017:

In January, the direct labor efficiency variance (#3 above) is

unfavorable because the company actually used 50 hours of
direct labor—this is 8 hours more than the standard quantity of
42 hours allowed for the good output. The additional 8 hours is
multiplied by the standard rate of $10 to give us an unfavorable
direct labor efficiency variance of $80. (The direct labor
efficiency variance could be called the direct
labor quantity variance or usagevariance.)
Note that DenimWorks paid $9 per hour for labor when the
standard rate is $10 per hour. This $1 difference—multiplied by
the 50 actual hours—results in a $50 favorable direct labor rate
variance. (The direct labor rate variance could be called the
direct labor price variance.)
The journal entry for the direct labor portion of the January
production is:

February 2017
In February your company manufactures 200 large aprons and
100 small aprons. The standard cost of direct labor for the
good output produced in February 2017 is computed here:
If we assume that the actual labor hours in February add up to
75 and the hourly rate of pay (including payroll taxes) is $11
per hour, the total equals $825. The analysis for February 2017
looks like this:

Direct Labor Variance Analysis for February 2017:

Notice that for the good output in February, the total actual
labor costs amounted to $825 and the total standard cost of
direct labor amounted to $800. This unfavorable difference of
$25 agrees to the sum of the two labor variances:

The journal entry for the direct labor portion of the February
production is:
Later in Part 6 we will discuss what to do with the balances in
the direct labor variance accounts under the heading "What To
Do With Variance Amounts".