Chap 10

Standard Costs
Standards are benchmarks or norms for

measuring performance. In managerial accounting,
two types of standards are commonly used.
Quantity standards
specify how much of an
input should be used to
make a product or
provide a service.
Price standards
specify how much
should be paid for
each unit of the
input.
Examples: Firestone, Sears, McDonalds, hospitals,

construction, and manufacturing companies.
8-1
Setting Direct Materials Standards

Standard Price
per Unit
Standard Quantity
per Unit
Final, delivered
cost of materials,
net of discounts.
Summarized in
a Bill of Materials.
8-2
Setting Direct Labor Standards

Standard Rate
per Hour
Standard Hours
per Unit
Often a single
rate is used that reflects
the mix of wages earned.
Use time and

motion studies for
each labor operation.
8-3
Setting Variable Manufacturing

Overhead Standards
Price
Standard
Quantity
Standard
The rate is the

variable portion of the
predetermined overhead
rate.
The quantity is
the activity in the
allocation base for
predetermined overhead.
8-4
The Standard Cost Card

A standard cost card for one unit
of product might look like this:
Inputs
Direct materials
Direct labor
Variable mfg. overhead
Total standard unit cost
AxB
Standard
Quantity
or Hours
Standard
Price
or Rate
Standard
Cost
per Unit
3.0 lbs.
2.5 hours
2.5 hours
$ 4.00 per lb.

$
14.00 per hour
3.00 per hour
$
12.00
35.00
7.50
54.50
8-5
Using Standards in Flexible

Budgets
Standard costs per unit for direct materials, direct
labor, and variable manufacturing overhead can be
used to compute activity and spending variances.
Spending variances become more

useful by breaking them down into
quantity and price variances.
8-6
A General Model for Variance Analysis

Variance Analysis
Quantity Variance
Price Variance
Difference between
actual quantity and
standard quantity
Difference between
actual price and
standard price
8-7
Quantity and Price Standards

Quantity and price standards are
determined separately for two reasons:
The purchasing manager is responsible for raw
material purchase prices and the production manager
is responsible for the quantity of raw material used.
The buying and using activities occur at different times.

Raw material purchases may be held in inventory for a
period of time before being used in production.
8-8

Variance Analysis
Quantity Variance
Price Variance
Materials quantity variance

Labor efficiency variance
VOH efficiency variance
Materials price variance

Labor rate variance
VOH rate variance
8-9
(1)
Standard Quantity
Allowed for Actual Output,
at Standard Price
(SQ SP)
(2)
Actual Quantity
of Input,
at Standard Price
(AQ SP)
Quantity Variance
(2) (1)
(3)
Actual Quantity
of Input,
at Actual Price
(AQ AP)
Price Variance
(3) (2)
Spending Variance
(3) (1)
8-10

Actual quantity is the amount of direct materials, direct
labor, and variable manufacturing overhead actually used.
(1)
Standard Quantity
at Standard Price
(SQ SP)
(2)
Actual Quantity
of Input,
at Standard Price
(AQ SP)
Quantity Variance
(2) (1)
(3)
Actual Quantity
of Input,
at Actual Price
(AQ AP)
Price Variance
(3) (2)
Spending Variance
(3) (1)
8-11

Standard quantity is the standard quantity allowed
for the actual output of the period.
(1)
Standard Quantity
at Standard Price
(SQ SP)
(2)
Actual Quantity
of Input,
at Standard Price
(AQ SP)
Quantity Variance
(2) (1)
(3)
Actual Quantity
of Input,
at Actual Price
(AQ AP)
Price Variance
(3) (2)
Spending Variance
(3) (1)
8-12

Actual price is the amount actually
paid for the input used.
(1)
Standard Quantity
at Standard Price
(SQ SP)
(2)
Actual Quantity
of Input,
at Standard Price
(AQ SP)
Quantity Variance
(2) (1)
(3)
Actual Quantity
of Input,
at Actual Price
(AQ AP)
Price Variance
(3) (2)
Spending Variance
(3) (1)
8-13

Standard price is the amount that should
have been paid for the input used.
(1)
Standard Quantity
at Standard Price
(SQ SP)
(2)
Actual Quantity
of Input,
at Standard Price
(AQ SP)
Quantity Variance
(2) (1)
(3)
Actual Quantity
of Input,
at Actual Price
(AQ AP)
Price Variance
(3) (2)
Spending Variance
(3) (1)
8-14
Learning Objective 4
Compute the direct
materials quantity and
price variances and
explain their
significance.
8-15
Materials Variances An Example

Glacier Peak Outfitters has the following direct
materials standard for the fiberfill in its mountain
parka.
0.1 kg. of fiberfill per parka at $5.00 per kg.
Last month 210 kgs. of fiberfill were purchased and
used to make 2,000 parkas. The materials cost a
total of $1,029.
8-16
Materials Variances Summary

Standard Quantity
Standard Price
200 kgs.
$5.00 per kg.

= $1,000
Actual Quantity
Standard Price
210 kgs.
$5.00 per kg.

= $1,050
Quantity variance
$50 unfavorable
Actual Quantity
Actual Price
210 kgs.
$4.90 per kg.

= $1,029
Price variance
$21 favorable
8-17

Standard Quantity
Standard Price
Actual Quantity
Standard Price
Actual Quantity
Actual Price
200 kgs.
210 kgs.
210 kgs.
0.1 kg per parka 2,000 parkas
= 200 kgs
$5.00 per kg.
$5.00 per kg.
$4.90 per kg.
= $1,000
= $1,050
Quantity variance
$50 unfavorable
= $1,029
Price variance
$21 favorable
8-18

Standard Quantity
Standard Price
200 kgs.
$5.00 per kg.

= $1,000
Actual Quantity
Standard Price
210 kgs.
210 kgs
$1,029
$5.00
per kg.
= $4.90
per kg
= $1,050
Quantity variance
$50 unfavorable
Actual Quantity
Actual Price
210 kgs.
$4.90 per kg.

= $1,029
Price variance
$21 favorable
8-19
Materials Variances:
Using the Factored Equations
Materials quantity variance
MQV = (AQ SP) (SQ SP)
= SP(AQ SQ)
= $5.00/kg (210 kgs (0.1 kg/parka 2,000 parkas))
= $5.00/kg (210 kgs 200 kgs)
= $5.00/kg (10 kgs) = $50 U
Materials price variance

MPV = (AQ AP) (AQ SP)
= AQ(AP SP)
= 210 kgs ($4.90/kg $5.00/kg)
= 210 kgs ( $0.10/kg) = $21 F
8-20
Responsibility for Materials

Variances
Materials Quantity Variance
Production Manager
Materials Price Variance
Purchasing Manager
The standard price is used to compute the quantity variance

so that the production manager is not held responsible for
the purchasing managers performance.
8-21
Responsibility for Materials

Variances
Your poor scheduling
I am not responsible for

this unfavorable materials
quantity variance.
You purchased cheap
material, so my people
had to use more of it.
Production Manager
sometimes requires me to
rush order materials at a
higher price, causing
unfavorable price variances.
Purchasing Manager
8-22
Quick Check
Zippy
Hanson Inc. has the following direct materials

standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week, 1,700 pounds of materials were
purchased and used to make 1,000 Zippies. The
materials cost a total of $6,630.
8-23
Quick Check
Zippy
How many pounds of materials should Hanson

have used to make 1,000 Zippies?
a. 1,700 pounds.
b. 1,500 pounds.
c. 1,200 pounds.
d. 1,000 pounds.
8-24
Quick Check
Zippy
How many pounds of materials should Hanson

have used to make 1,000 Zippies?
a. 1,700 pounds.
b. 1,500 pounds.
c. 1,200 pounds.
The standard quantity is:
d. 1,000 pounds.
1,000 1.5 pounds per Zippy.
8-25
Quick Check
Zippy
Hansons materials quantity variance (MQV)

for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
8-26
Quick Check
Zippy
Hansons materials quantity variance (MQV)

for the week was:
b. $170 favorable.
d. $800 favorable.
MQV = SP(AQ - SQ)

MQV = $4.00(1,700 lbs - 1,500 lbs)
MQV = $800 unfavorable
8-27
Quick Check
Zippy
Hansons materials price variance (MPV)

for the week was:
b. $170 favorable.
d. $800 favorable.
8-28
Quick Check
Zippy
Hansons materials price variance (MPV)

for the week was:
b. $170 favorable.
d. $800 favorable. MPV = AQ(AP - SP)
MPV = 1,700 lbs. ($3.90 - 4.00)

MPV = $170 Favorable
8-29
Quick Check
Standard Quantity
Standard Price
Zippy
Actual Quantity
Standard Price
Actual Quantity
Actual Price
1,500 lbs.
$4.00 per lb.
1,700 lbs.
$4.00 per lb.
1,700 lbs.
$3.90 per lb.
= $6,000
= $ 6,800
= $6,630
Quantity variance
$800 unfavorable
Price variance
$170 favorable
8-30
Quick Check
Zippy
Recall that the standard quantity for 1,000 Zippies

is 1,000 1.5 pounds per Zippy = 1,500 pounds.
Standard Quantity
Standard Price
Actual Quantity
Standard Price
Actual Quantity
Actual Price
1,500 lbs.
$4.00 per lb.
1,700 lbs.
$4.00 per lb.
1,700 lbs.
$3.90 per lb.
= $6,000
= $ 6,800
= $6,630
Quantity variance
$800 unfavorable
Price variance
$170 favorable
8-31
Compute the direct labor
efficiency and rate
variances and explain
their significance.
8-32
Labor Variances An Example

Glacier Peak Outfitters has the following direct labor
standard for its mountain parka.
1.2 standard hours per parka at $10.00 per hour
Last month, employees actually worked 2,500 hours
at a total labor cost of $26,250 to make 2,000
parkas.
8-33
Labor Variances Summary

Standard Hours
Standard Rate
Actual Hours
Standard Rate
Actual Hours
Actual Rate
2,400 hours
$10.00 per hour
2,500 hours
$10.00 per hour
2,500 hours
$10.50 per hour
= $24,000
= $25,000
= $26,250
Efficiency variance
$1,000 unfavorable
Rate variance
$1,250 unfavorable
8-34

Standard Hours
Standard Rate
2,400 hours
$10.00 per hour

= $24,000
Actual Hours
Standard Rate
Actual Hours
Actual Rate
2,500 hours
2,500 hours
1.2 hours per parka 2,000
parkasper
= 2,400
$10.00
hour hours$10.50 per hour
= $25,000
Efficiency variance
$1,000 unfavorable
= $26,250
Rate variance
$1,250 unfavorable
8-35

Standard Hours
Standard Rate
Actual Hours
Standard Rate
Actual Hours
Actual Rate
2,400 hours
2,500 hours
hours
$26,250 2,500
$10.00 per hour = $10.50
$10.00per
perhour
hour
2,500 hours
$10.50 per hour
= $24,000
= $25,000
Efficiency variance
$1,000 unfavorable
= $26,250
Rate variance
$1,250 unfavorable
8-36
Labor Variances: Using the Factored

Equations
Labor efficiency variance
LEV = (AH SR) (SH SR)
= SR (AH SH)
= $10.00 per hour (2,500 hours 2,400 hours)
= $10.00 per hour (100 hours)
= $1,000 unfavorable
Labor rate variance

LRV = (AH AR) (AH SR)
= AH (AR SR)
= 2,500 hours ($10.50 per hour $10.00 per hour)
= 2,500 hours ($0.50 per hour)
= $1,250 unfavorable
8-37
Responsibility for Labor Variances

Production managers are
usually held accountable
for labor variances
because they can
influence the:
Mix of skill levels

assigned to work tasks.
Level of employee
motivation.
Quality of production
supervision.
Production Manager
Quality of training
provided to employees.
8-38
Responsibility for Labor Variances

I am not responsible for
the unfavorable labor
efficiency variance!
You purchased cheap
material, so it took more
time to process it.
I think it took more time

to process the
materials because the
Maintenance
Department has poorly
maintained your
equipment.
8-39
Quick Check
Zippy
Hanson Inc. has the following direct labor

standard to manufacture one Zippy:
1.5 standard hours per Zippy at
$12.00 per direct labor-hour
Last week, 1,550 direct labor-hours were
worked at a total labor cost of $18,910
to make 1,000 Zippies.
8-40
Quick Check
Zippy
Hansons labor efficiency variance (LEV)

for the week was:
b. $590 favorable.
d. $600 favorable.
8-41
Quick Check
Zippy
Hansons labor efficiency variance (LEV)

for the week was:
b. $590 favorable.
d. $600 favorable.
LEV = SR(AH - SH)
LEV = $12.00(1,550 hrs - 1,500 hrs)
LEV = $600 unfavorable
8-42
Quick Check
Zippy
Hansons labor rate variance (LRV) for the

week was:
b. $310 favorable.
d. $300 favorable.
8-43
Quick Check
Zippy
Hansons labor rate variance (LRV) for the

week was:
b. $310 favorable.
LRV = AH(AR - SR)
LRV = 1,550 hrs($12.20 - $12.00)
d. $300 favorable.LRV = $310 unfavorable
8-44
Quick Check
Standard Hours
Standard Rate
1,500 hours
$12.00 per hour

= $18,000
Zippy
Actual Hours
Standard Rate
1,550 hours
$12.00 per hour

= $18,600
Efficiency variance
$600 unfavorable
Actual Hours
Actual Rate
1,550 hours
$12.20 per hour

= $18,910
Rate variance
$310 unfavorable
8-45
Compute the variable
manufacturing overhead
efficiency and rate
variances and explain
their significance.
8-46
Variable Manufacturing Overhead

Variances An Example
variable manufacturing overhead labor standard for
its mountain parka.
1.2 standard hours per parka at $4.00 per hour
Last month, employees actually worked 2,500 hours
to make 2,000 parkas. Actual variable
manufacturing overhead for the month was
$10,500.
8-47

Variances Summary
Standard Hours
Standard Rate
2,400 hours
$4.00 per hour

= $9,600
Actual Hours
Standard Rate
2,500 hours
$4.00 per hour

= $10,000
Efficiency variance
$400 unfavorable
Actual Hours
Actual Rate
2,500 hours
$4.20 per hour

= $10,500
Rate variance
$500 unfavorable
8-48

Variances Summary
Standard Hours
Actual Hours
Actual Hours
Standard Rate
Standard Rate
Actual Rate
2,400 hours
2,500 hours
2,500 hours
1.2 hours per parka 2,000

$4.00 per hour
$4.00 per
hour hours $4.20 per hour
parkas
= 2,400
= $9,600
= $10,000
Efficiency variance
$400 unfavorable
= $10,500
Rate variance
$500 unfavorable
8-49

Variances Summary
Standard Hours
Actual Hours
Standard Rate
Standard Rate
2,400 hours
2,500 hours
$10,500 2,500
hours
$4.00 per hour
$4.00 per
per hour
hour
= $4.20
= $9,600
= $10,000
Efficiency variance
$400 unfavorable
Actual Hours
Actual Rate
2,500 hours
$4.20 per hour

= $10,500
Rate variance
$500 unfavorable
8-50

Variances: Using Factored Equations
Variable manufacturing overhead efficiency variance
VMEV = (AH SR) (SH SR)
= SR (AH SH)
= $4.00 per hour (2,500 hours 2,400 hours)
= $4.00 per hour (100 hours)
= $400 unfavorable
Variable manufacturing overhead rate variance

VMRV = (AH AR) (AH SR)
= AH (AR SR)
= 2,500 hours ($4.20 per hour $4.00 per hour)
= 2,500 hours ($0.20 per hour)
= $500 unfavorable
8-51
Quick Check
Zippy
Hanson Inc. has the following variable

manufacturing overhead standard to
manufacture one Zippy:
1.5 standard hours per Zippy at
$3.00 per direct labor-hour
Last week, 1,550 hours were worked to make
1,000 Zippies, and $5,115 was spent for
variable manufacturing overhead.
8-52
Quick Check
Zippy
Hansons efficiency variance (VMEV) for

variable manufacturing overhead for the week
was:
b. $435 favorable.
d. $150 favorable.
8-53
Quick Check
Zippy
Hansons efficiency variance (VMEV) for

variable manufacturing overhead for the week
was:
b. $435 favorable.
1,000 units 1.5 hrs per unit
d. $150 favorable.
VMEV = SR(AH - SH)
VMEV = $3.00(1,550 hrs - 1,500 hrs)
VMEV = $150 unfavorable
8-54
Quick Check
Zippy
Hansons rate variance (VMRV) for variable

manufacturing overhead for the week was:
b. $400 favorable.
d. $300 favorable.
8-55
Quick Check
Zippy
Hansons rate variance (VMRV) for variable

manufacturing overhead for the week was:
b. $400 favorable.
VMRV = AH(AR - SR)
VMRV = 1,550 hrs($3.30 - $3.00)
d. $300 favorable. VMRV = $465 unfavorable
8-56
Quick Check
Zippy
Standard Hours
Standard Rate
1,500 hours
$3.00 per hour
Actual Hours
Standard Rate
1,550 hours
$3.00 per hour
Actual Hours
Actual Rate
1,550 hours
$3.30 per hour
= $4,500
= $4,650
= $5,115
Efficiency variance
$150 unfavorable
Rate variance
$465 unfavorable
8-57
Materials VariancesAn Important

Subtlety
The quantity variance

is computed only on
the quantity used.
The price variance is
computed on the entire
quantity purchased.
8-58

Subtlety
materials standard for the fiberfill in its mountain
parka.
0.1 kg. of fiberfill per parka at $5.00 per kg.
Last month 210 kgs. of fiberfill were purchased at a
cost of $1,029. Glacier used 200 kgs. to make
2,000 parkas.
8-59

Subtlety
Standard Quantity
Standard Price
200 kgs.
$5.00 per kg.

= $1,000
Actual Quantity
Standard Price
200 kgs.
$5.00 per kg.

= $1,000
Quantity variance
$0
8-60

Subtlety
Actual Quantity
Standard Price
210 kgs.
$5.00 per kg.

= $1,050
Actual Quantity
Actual Price
210 kgs.
$4.90 per kg.

= $1,029
Price variance
$21 favorable
8-61
Variance Analysis and Management by

Exception
How do I know
which variances to
investigate?
Larger variances, in
dollar amount or as
a percentage of the
standard, are
investigated first.
8-62
Advantages of Standard Costs

Management by
exception
Promotes economy
and efficiency
Advantages
Simplified
bookkeeping
Enhances
responsibility
accounting
8-63
Potential Problems with Standard

Costs
Emphasizing standards
may exclude other
important objectives.
Standard cost
reports may
not be timely.
Invalid assumptions
about the relationship
between labor
cost and output.
Potential
Problems
Favorable
variances may
be misinterpreted.
Emphasis on
negative may
impact morale.
Continuous
improvement may
be more important
than meeting standards.
8-64
End of Chapter 08
8-65

Chap 10

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Chap 10

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Standard Costs

Standards are benchmarks or norms for

Examples: Firestone, Sears, McDonalds, hospitals,

Setting Direct Materials Standards

Setting Direct Labor Standards

Use time and

Setting Variable Manufacturing

The rate is the

The Standard Cost Card

$ 4.00 per lb.

Using Standards in Flexible

Spending variances become more

A General Model for Variance Analysis

Quantity and Price Standards

The buying and using activities occur at different times.

A General Model for Variance Analysis

Materials quantity variance

Materials price variance

A General Model for Variance Analysis

A General Model for Variance Analysis

A General Model for Variance Analysis

A General Model for Variance Analysis

A General Model for Variance Analysis

Materials Variances An Example

Materials Variances Summary

$5.00 per kg.

$5.00 per kg.

$4.90 per kg.

Materials Variances Summary

Materials Variances Summary

$5.00 per kg.

$4.90 per kg.

Materials price variance

Responsibility for Materials

Materials Price Variance

The standard price is used to compute the quantity variance

Responsibility for Materials

I am not responsible for

Hanson Inc. has the following direct materials

How many pounds of materials should Hanson

How many pounds of materials should Hanson

1,000 1.5 pounds per Zippy.

Hansons materials quantity variance (MQV)

Hansons materials quantity variance (MQV)

MQV = SP(AQ - SQ)

Hansons materials price variance (MPV)

Hansons materials price variance (MPV)

MPV = 1,700 lbs. ($3.90 - 4.00)

$4.00 per lb.

$4.00 per lb.

$3.90 per lb.

Recall that the standard quantity for 1,000 Zippies

$4.00 per lb.

$4.00 per lb.

$3.90 per lb.

Labor Variances An Example

Labor Variances Summary

$10.00 per hour

$10.00 per hour

$10.50 per hour

Labor Variances Summary

$10.00 per hour

Labor Variances Summary