Standard Costing WJGuzman

Budgets set standards that are used to control and evaluate managerial performance. To determine the
unit standard cost for a particular input, two decision must be made:
 The quantity decision: the amount of input that should be used per unit of output. This decision
produces quantity standards.
 The pricing decision: the amount that should be paid for the quantity of the input to be used. This
decision produces price standards.
The unit standard cost can be computed by multiplying these two standards:

Quantity standard x Price standard = Standard cost per unit

There are three potential sources of quantitative standards namely:

 Historical experience – provides an initial guideline for setting standards, but should be used with
caution because they can perpetuate existing inefficiencies.
 Engineering studies – identifies efficient approaches rigorous guidelines, but engineered
standards often are too rigorous.
 Input from operating personnel – since operating personnel are accountable for meeting
standards, they should have significant input in setting standards.

Standards are generally classified as either ideal or currently attainable.

 Ideal standards demand maximum efficiency and can be achieved only if everything operates
perfectly.
 Currently attainable standards can be achieved under efficient operating conditions. Allowance
is made for normal breakdowns, interruptions, and less than perfect skill.
Of the two types, currently attainable standards offer the most behavioral benefits.

There are two frequently mentioned reasons for adopting a standard cost system:
 To improve planning and control
- Comparing actual costs with budgeted costs identifies variances, the difference between actual
and planned costs for the actual level of activity.
- Overall variances can be further broken down into a price variance or a usage or efficiency
variance if unit price or quantity standards have been developed.
 To facilitate product costing
- Costs are assigned to products using quantity and price standards for all three manufacturing
costs: direct materials, direct labor, and overhead.

VARIANCES – DIFFERENCE BETWEEN ACTUAL & STANDARD

1. The difference between actually incurred costs and the “should be” incurred costs.
2. It can be either favorable or unfavorable.
3. It should be assigned to the department or division that has the ability to control the activity that
causes the variance.
4. As a general rule, all variances should be recorded as soon as possible so that corrective action
may be taken. By doing so, variance analysis is useful to management because it points to the
areas of operations most in need of management's attention.
5. Adhering to the concept of Management by Exception, material variances, whether favorable or
not are necessary to be investigated upon or inquired about.

Actual Costing Normal Costing Standard Costing

Direct materials Actual Actual Standard
Direct labor Actual Actual Standard
Overhead Actual Applied Standard

Direct Material Variance

a. Quantity purchased and used
at actual price Price
variance
Total
b. Quantity purchased and used Material
at standard price Variance
Usage
c. Standard quantity at variance
standard price

1. Price variance = ∆ Price x Actual Quantity

= (Standard unit price - Actual unit price) x Actual quantity purchased
It results from paying more or less than the standard price for materials.
2. Quantity variance = ∆ Quantity x Standard Price
= (Standard quantity - Actual quantity) x Standard Unit price
Allowed used
It results from using more or less than the standard quantity of materials on various jobs or operations.

Quantity Actual Actual Standard

Price Actual Standard Standard
Variance Price Variance Quantity/ Usage Variance

Direct Labor Variance

a. Quantity worked (time)
at actual rate Rate
Variance
Total
b. Quantity worked Labor
at standard rate Variance
Efficiency
c. Standard quantity at variance
standard rate

1. Rate variance = ∆ Rate x Actual Quantity (time)

= (Standard rate - Actual rate) x Actual quantity purchased
It results from paying higher (or lower) than standard wage rates.

2. Efficiency variance = ∆ Quantity (time) x Standard Rate

= (Standard quantity - Actual quantity) x Standard Unit price
Allowed used
It results from using more or less than the standard time on various jobs or operations.

Quantity Actual Actual Standard

Price Actual Standard Standard
Variance Rate/ Price/ Spending Efficiency/ Quantity/ Volume

Overhead Variance
The factory overhead variance is the difference between manufacturing overhead incurred and standard
overhead charged to production for a given period. The factory overhead variance may be analyzed in
many ways.

One-way Analysis: (Computation of Under- or Over-applied OH)

Actual cost (Variable & Fixed)
Under- or Over-applied overhead
Standard OH (Std. hours @ standard rate)

Two-way Analysis: (Controllable & Volume Variance)

1. Controllable (or budget) variance - The difference between the ACTUAL OVERHEAD COST and THE
AMOUNT OF COST THAT SHOULD BE INCURRED at the STANDARD volume
2. Uncontrollable - The difference between the COST THAT SHOULD BE INCURRED at the STANDARD
volume and the cost ALLOCATED to work in process.

Actual cost (Variable & Fixed)

Budget/Controllable variance
Budgeted Cost (Budgeted Fixed OH +
at Standard hrs. Std. VOH rate x Standard hrs.)
Volume/Uncontrollable variance
Standard OH (Std. hours @ standard rate) __________________
Total variance

Three-way Analysis: (Spending, Efficiency & Volume Variance)

1. Spending Variance - The difference between the ACTUAL COSTS and the OVERHEAD COSTS
THAT SHOULD HAVE BEEN INCURRED AT THE ACTUAL VOLUME of production is a spending
variance. (compose the Controllable Variance)
2. Efficiency Variance (or Capacity) - The difference between the OVERHEAD COSTS THAT SHOULD
HAVE BEEN INCURRED AT THE ACTUAL VOLUME and the COSTS THAT SHOULD HAVE BEEN
INCURRED AT THE STANDARD VOLUME. (compose the Controllable Variance)
3. Volume Variance – same as in two way variance analysis.
Actual cost (Variable & Fixed)
Spending
Budgeted Cost (Budgeted Fixed OH + Variance
at Actual hrs. Std. VOH rate x Actual hrs.) Budget/Controllable variance
Efficiency
Budgeted Cost (Budgeted Fixed OH + Variance
at Standard hrs. Std. VOH rate x Standard hrs.)
Volume/Uncontrollable variance
Standard OH (Std. hours @ standard rate) __________________
Total variance

Four-way Analysis: (Fixed Spending, Variable Spending, Efficiency & Volume Variance)
1. Fixed Spending – The difference between actual cost and budgeted overhead
2. Variable Spending – The difference between actual cost and budgeted overhead
3. Efficiency – same as in the three-way analysis
4. Volume - same as in the two and three - way analysis

Actual cost Variable + Fixed

Spending
Budgeted Cost Std. VOH rate + Budgeted Variance
at Actual hrs. x Actual hrs. Fixed OH Budget/Controllable variance
Efficiency
Budgeted Cost (Budgeted Fixed OH + Variance
at Standard hrs. Std. VOH rate x Standard hrs.)
Volume/Uncontrollable variance
Standard OH (Std. hours @ standard rate) __________________
Total variance

1. During August, 10,000 units were produced. The standard quantity of material allowed per unit was 10
pounds at a standard cost of P3 per pound. If there was an unfavorable usage variance of P18,750 for
August, the actual quantity of materials used must be _________.

2. During the month of March, Baker's Express purchased 10,000 pounds of flour at P1 per pound. At the
end of March, Baker's Express found that it had a favorable materials price variance of P500. The
standard cost per pound must be __________.

3. During October, 10,000 direct labor hours were worked at a standard cost of P10 per hour. If the direct
labor rate variance for October was P4,000 unfavorable, the actual cost per direct labor hour must be
_________.

4. Roberts Company uses a standard costing system. The following information pertains to direct
materials for the July:
Standard price per lb. P18.00
Actual purchase price per lb. P16.50
Quantity purchased 3,100 lbs.
Quantity used 2,950 lbs.
Standard quantity allowed for actual output 3,000 lbs.
Actual output 1,000 units
Roberts Company reports its material price variances at the time of purchase. What is the material
usage variance for Roberts Company?

5. Mover Company has developed the following standards for one of its products:
Direct materials: 7.5 pounds x P8 per pound
Direct labor: 2 hours x P12 per hour
The following activity occurred during March:
Materials purchased: 5,000 pounds costing P42,500
Materials used: 3,600 pounds
Units produced: 500 units
Direct labor: 1,150 hours at P11.80/hour
The company records materials price variances at the time of purchase. The variable standard cost per
unit for materials and labor is
6. Perfect Builders makes all sorts of moldings. Its standard quantity of material allowed is 1 foot of wood
per 1 foot of molding at a standard price of P2.00 per foot. During August, it purchased 500,000 feet of
wood at a cost of P1.90 per foot, which produced only 499,000 feet of molding. Calculate the materials
price variance and the materials usage variance, respectively.

7. Compute the variable efficiency variance, using the following data:

Standard labor hours per good unit produced 2 hours
Good units produced 1,000 units
Actual labor hours used 2,100 hours
Standard variable overhead per standard labor hour P 3.00 per hour
Actual variable overhead P 6,500
What is the variable overhead efficiency variance?

8. The following standards for variable manufacturing overhead have been established for a company
that makes only one product:
Standard hours per unit of output 3.5 hours
Standard variable overhead rate P15.20 per hour
The following data pertain to operations for the last month:
Actual hours 3,800 hours
Actual total variable overhead cost P 59,090
Actual output 800 units
What is the variable overhead efficiency variance for the month?

9. During June, Cisco Company produced 12,000 chainsaw blades. The standard quantity of material
allowed per unit was 1.5 pounds of steel per blade at a standard cost of P8 per pound. The actual cost
was P7 per pound. The actual pounds of steel that Cisco purchased were 19,500 pounds. All materials
purchased were used. Calculate Cisco's materials usage variance.

10. The following standards for variable manufacturing overhead have been established for a company
that makes only one product:
Standard hours per unit of output 5.6 hours
Standard variable overhead rate P12.00 per hour
The following data pertain to operations for the last month:
Actual hours 2,600 hours
Actual total variable overhead cost P 31,330.00
Actual output 400 units
What is the variable overhead spending variance for the month?

11. The Fort Company uses a standard cost system in which overhead costs are applied to products on
the basis of direct labor-hours (DLHs). The following data applied to the company's activities for the
month of March:
Actual fixed overhead cost incurred P 161,450
Denominator activity 50,000 DLHs
Number of units completed 21,000 Units
Fixed overhead budget variance P 11,450 U
Standard direct labor-hours per unit 3 DLHs
a. The fixed portion of the predetermined overhead rate for March is __________.
b. The volume variance for March is _________.

12. The following data are the actual results for Roadtrek Co. for October:
Actual output 9,000 cases
Actual variable overhead P405,000
Actual fixed overhead P122,000
Actual machine time 40,500 machine hours
Standard cost and budget information for Roadtrek Company follows:
Standard variable overhead rate P9.00 per MH
Standard quantity of machine hours 4 hours per case
Budgeted fixed overhead P1,440,000 per year
Budgeted output 10,000 cases per month

a. The variable overhead spending variance for the month of October is

b. The overhead efficiency variance is
c. The amount of fixed overhead controllable variance is
d. The amount of fixed overhead volume variance is
e. The amount of variable overhead volume variance is
13. Meldouville Company has just finished reviewing the results of its operations for the current period.
The company’s chief accountant told management that the total overhead spending variance was
unfavorable by P1,000. However, the variable overhead portion of this variance was favorable by P200.
The company’s volume variance, according to the accountant, was favorable by P300. During the
period Medouville applied P1,800 of fixed overhead to production. The adjustment at the end of the
period to allocate under-or-overapplied overhead included a debit of P200 to the Factory Overhead
Control account.

a. Meldouville’s actual fixed overhead costs for the period amounted to

b. Meldouville’s overhead efficiency variance for the period was