MAS - 1304

STANDARD COSTING AND VARIANCE ANALYSIS

STANDARD – a measure of acceptable performance established by management as a guide in

making economic decisions. A standard is a benchmark or “norm” for measuring performance.
In managerial accounting, standards relate to the cost and quantity of inputs used in
manufacturing goods or providing services.

STANDARD COST – pre-determined unit cost which is used as a measure of performance

STANDARD vs. BUDGET

1. Both standards and budget are pre-determined costs
2. Primary difference: a standard is a unit amount, whereas a budget is a total amount
* a standard may be regarded as the budgeted cost per unit of product.
3. In accounting: except in the application of manufacturing overhead to jobs and processes,
budget data are not journalized in cost accounting systems, whereas standard costs may be
incorporated into cost accounting systems.

ADVANTAGES OF STANDARD COSTS

Standard costs:
1. facilitate management planning
2. promote greater economy and efficiency by making employees more “cost-conscious”
3. are useful in setting selling prices
4. contribute to management control by providing basis for evaluation and cost control.
5. are useful in highlighting variances in management by exception
* Mangement by Exception – 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
6. simplify costing of inventories and reduce clerical costs.

STANDARD COSTING CONTROL LOOP

1. Establishing standards
2. Measuring actual performance
3. Comparing actual performance with standard
4. Taking corrective action when needed
5. Revising standards, if necessary

SETTING STANDARDS COSTS

Standards should be set so that they encourage efficient operations.
Ideal vs. Normal Standards:
Ideal standards – based on the optimum level of performance under perfect operating
conditions
Normal standards – based on an efficient level of performance that are attainable under
expected operating conditions

STANDARD COST COMPONENTS

1. Standard Price or Rate – the amount that should be paid for one unit of input factor.
2. Standard Quantity – tha amount of input factor that should used to make a unit of product.
* Both standards relate to the input factors: materials, direct labor, and factory overhead

MAS 1304 : Page 1

Materials:
Price Standard – based on the delivered cost of materials plus an allowance for receiving and
handling
Quantity Standard – establishes the required quantity plus an allowance for waste and spoilage

Labor:
Price Standard – based on current wage rates and anticipated adjustments (e.g. C.O.L.A)
Quantity Standard – based on required production time plus an allowance for rest periods, clean-
up, machine setup, and machine downtime

Manufacturing Overhead:
A standard pre-determined overhead rate is used based on an expected standard activity index
such as standard direct labor hours or standard direct labor cost

VARIANCES
Static budget variance = actual results – static (master) budget amounts
Static budget refers to the budget that is set at the beginning of a budgeting period and that
is geared to only one level of activity – the budgeted level of activity.

Flexible budget variance = actual results – budgeted amounts for the actual level of activity
A flexible budget is geared to all levels of activity within the relevant range and is used to
plan and control spending. The flexible budget will show the cost formula for each variable
cost and total cost (possibly including fixed costs) at various levels of activity

For Materials and Labor:

Price Variance (or Rate, Budget, Spending Variances)
PV = (actual price – standard price) x actual quantity

Quantity Variance (or Usage or Efficiency Variances)

QV = (actual quantity – standard quantity) x standard price
* When production process involves combining several materials in varying proportions, the
maters quantity variance is supplemented by:

Mix variance:
Total actual quantities at standard prices
Less: Total actual input at average standard input cost (TAI x ASIC
Mix variance

Yield variance:
Total actual input at average standard input cost (TAI x ASIC)
Less: Standard cost (AO x ASOC)
Yield variance
or
Actual output
Less: expected output from actual input
Yield difference
x Average standard output cost
Yield variance

MAS 1304 – Page 2

For Factory Overhead
Variable overhead variances
a. The variable overhead spending variance is computed as follows when the variable
overhead rate is expressed in terms of direct labor-hours:

Variable overhead spending variance = (Actual overhead rate – Standard overhead

rate) x Actual input hours

b. The variable overhead efficiency variance is computed as follows when the variable
overhead rate is expressed in terms of direct labor-hours:

Variable overhead efficiency variance = (Actual hours – Standard hours allowed) x

Variable Overhead rate

Fixed Overhead Variances in a Standard Cost System.

a. Budget Variance. The budget variance is the difference between the actual fixed overhead
costs incurred during the period and the budgeted fixed overhead costs contained in the
flexible budget. This variance is very useful in that it indicates how well spending on
fixed items was controlled.

b. Volume Variance. The volume variance is the difference between the total budgeted fixed
overhead and the fixed overhead applied to production. Alternatively, it can be
expressed as the difference between the denominator level of activity and the standard
hours allowed for the output of the period, multiplied by the fixed portion of the
predetermined overhead rate.

Volume
Variance
=
Fixed portion of the
predetermined
overhead rate ( Denominator
hours
-
Standard hours
allowed for the
actual output )
The volume variance occurs because the denominator level of activity differs from the
standard hours allowed for production. Thus, an unfavorable variance means that the
company operated at an activity level below the denominator level of activity.

Conversely, a favorable variance means that the company operated at an activity level
greater than the denominator level of activity.

Under- and Overapplied overhead. The sum of the four manufacturing overhead variances-
variable overhead spending, variable overhead efficiency, fixed overhead budget, and
fixed overhead volume – equals the under- or overapplied overhead for the period.

MAS 1304 : Page 3

EXERCISES! XD
1. Istatua Company manufactures bust statues of famous historical figures. All statues are the
same size. Each unit requires the same amount of resources. The following information is from
the static budget for 2013:
Expected production and sales 6,000 units
Direct materials 72,000 pounds
Direct manufacturing labor 21,000 hours
Total fixed costs P1,200,000

Standard quantities, standard prices, and standard unit costs follow for direct materials and
direct manufacturing labor:
Standard Quantity Standard Price Standard Unit cost
Direct materials 12 pounds P10 per pound P120
Direct manufacturing labor 3.5 hours P50 per hour P175

During 2013, actual number of units produced and sold was 5,500. Actual cost of direct
materials used was P668,800, based on 70,400 pounds purchased at P9.50 per pound. Direct
manufacturing labor hours actually used were 18,500 at the rate of P51.50 per hour. As a result
actual direct manufacturing labor cost were P952,750. Actual fixed costs were P1,180,000.
There were no beginning or ending inventories.

Required:
1. Prepare a flexible budget for the given number of units of production.
2. Compute price and efficiency variances, as well as the flexible budget variance, for
direct materials and direct manufacturing labor.

2. Likmuan, Inc., is a privately hel furniture manufacturer. For august 2013, Likmuan had the
following standards for one of its product, a wicker chair:

Direct materials - 2 square yards of input at P5 per square yard

Direct manufacturing labor – 0.5 hour of input at P10 per hour

The following data were compiled regarding actual performance: actual output units (chairs)
produced, 2,000; square yards of input purchased and used, 3,700; price per square yard,
P5.10; direct manufacturing labor costs, P8,820; actual hours of input, 900; labor price per hour,
P9.80

Required:
Show computations of price and efficiency variances for direct materials and direct
manufacturing labor

MAS 1304 – Page 4

3. FOH Company provided you the following information relevant in analyzing overhead variances:
Normal capacity 135,000 units or 405,000 hours (i.e., 135,000
units x 3 hrs.)
Standard hours 390,000 hrs.
Actual hours 380,000 hrs
Standard overhead rates:
Fixed overhead rate P 3.00 per hour
Variable overhead rate 2.00 per hour
Total overhead rate P 5.00 per hour
Actual overhead costs
Variable P 800,000
Fixed 1,250,000

Required: Analyze the factory overhead variances using the:

1. 2-way analysis (ConVo)
2. 3-way analysis (SVV)
3. 4-way analysis

4. Rover Crunches, Inc. manufactures breakfast cereal, using the following proportion of
ingredients to produce 200 kgs. of output.
Quantity Price Cost
Wheat germ 25 kgs P2.05 P 50
Barley 100 1.00 100
Oats 125 0.80 100
Total 250 kgs P250

Materials records for January indicate:

Beg. Invty Purchases Purchase Price Ending Invty
Wheat germ 2,000 kgs 8,000 kgs P2.05 per kilo 1,200 kgs
Barley 5,000 35,000 1.10 5,300
Oats 4,000 45,000 0.75 7,000

The materials price variance is recognized when the materials are purchased. Actual finished
production for the month was 70,000 kilos.

Required: Materials purchase price, mix and yield variances.

MAS 1304 – Page 5