Ateneo de Zamboanga University

School of Management and Accountancy

Accountancy Department
School Year 2021-22

Course Code: COSMAN2 Semester: 1st

Course Title: Strategic Cost Management Session: 1
Instructor: _____________________________________ Week No.: 6-7

LEARNING PACKET NO. 5

Standard Costing and Variance Analysis

INTENDED LEARNING OUTCOME:

At the end of this learning unit, the learners shall:

1. Understand the use of standard cost in entities and its importance in cost control and
evaluation.
2. Calculate and analyze variances.

I. CONCEPT NOTES

Basic Standard Costing Concepts

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

economic decision. It serves as a “benchmark” or “norm” for measuring performance.

Types of Standards
1. Ideal Standards – also called Theoretical Standards, these are measure of optimum performance.
These standards are established based on a perfect working condition – no delays, breakdowns,
wastages, materials and manpower shortages, work stoppage, or any error of any sort.
2. Practical Standards – these are measure of tight but attainable performance. These standards are
established for a normal level of operation and efficiency, allowing for certain expected or normal
production problems.

Standard Costs – pre-determined cost of manufacturing a unit of product during a specified period of time.
These are determined by multiplying the quantity standards and cost standards.

Elements of Standard Costs:

1. Quantity Standards – indicate the quantity of materials and labor time required to produce a unit
of product or provide a service.
2. Cost Standards – specify the amount of payment that should be made for each unit of input.

Users of Standard Costs

1. Manufacturing firms
2. Service firms
3. Non-profit organizations

Purposes of Standard Costs

1. Cost control
 2. Pricing decisions
3. Motivation and performance appraisal
4. Cost awareness and cost reduction
5. Preparation of budgets
6. Costing of inventories
Cost Elements Actual Costing Normal Costing Standard Costing
Direct Materials Actual Actual Standard
Direct Labor Actual Actual Standard
Factory Overhead Actual Applied Standard
7. Preparation of cost reports
8. Management by objective

Standard Costing Control Loop

Establish
Standards

Take corrective
actions (when Measure actual
needed, including performance
standard revision)

Compare actual
Investigate the
performance
variances
with standard

Analyze the
variance

Setting Up Standard Costs

MATERIALS STANDARDS

Standard Quantity per Unit – should reflect the units of materials required to produce each unit of
product, including allowances for unavoidable wastages, spoilage, as well as other normal inefficiencies.
Standard Price per Unit – should reflect the final, delivered cost of materials, net of any discount and
inclusive of allowances for handling costs.

Materials
Std. Qty. per Unit Std. Price per Unit
Standard Cost = X
of Product of Materials
per Unit

DIRECT LABOR STANDARDS

Standard Time (Hours) per Unit – the amount of labor time (or number of hours) required to produce
each unit of product, including allowances for employee rest periods, personal needs of employees, and
even normal machine downtime.
Standard Rate per Hour – should include the wages, fringe benefits, and other labor costs.

Labor Std. Time (Hours)

Std. Rate per
Standard Cost = per Unit of X
Labor Hour
per Unit Product

VARIABLE MANUFACTURING OVERHEAD STANDARDS

The standards for variable manufacturing costs are computed in the same manner as the standards for
labor costs are computed.

Standard Hours per Unit – the amount of allocation base from a company’s predetermined overhead rate
that is required to produce one unit of finished goods. Commonly used allocation bases are direct labor
hours and machine hours.
Standard Rate per Hour – represents the amount of variable overhead the company expects to pay for
every capacity hour used.

Variable
Std. Allocation Std. Rate per
Manufacturing
= Base (Hour) per X Allocation Base
Overhead
Unit of Product (Hour)
Standard Cost

FIXED MANUFACTURING OVERHEAD STANDARDS

Fixed overhead costs are usually expressed in terms of total figures.

Standard Hours per Unit – the amount of allocation base from a company’s predetermined overhead rate
that is required to produce one unit of finished goods. Commonly used allocation bases are direct labor
hours and machine hours.
Standard Rate per Hour – represents the amount of budgeted fixed overhead allocated to each capacity
hour used.

Fixed
Budgeted Fixed Overhead Std. Allocation
Manufacturing
= X Base (Hour) per
Overhead Normal/Practical Capacity
Unit of Product
Standard Cost (Allocation Base)

BUDGET VS. STANDARD COSTS

There is essentially no difference between these two terms. Both budget and standard costs are
predetermined amounts, and are set prior to the actual recording of costs in the books of the company.
However, BUDGET is used to denote a predetermined total cost, while STANDARD is used to denote a
predetermined unit cost.

Variance Analysis

Definition and General Model for Variance Analysis

Variance – also called as error or planning gap, is the variation in the amount of the actual cost incurred by
an entity compared to the standard cost that would have been incurred at a given level of actual activity.

Variance Computation:
Actual Cost P XXX
Standard Cost XXX
Total Cost Variance P XXX
In analyzing variance, analysts may decompose it into two elements: the price element and the quantity
element.

Price Variance – the difference between the actual amount paid for an input and the standard amount that
should have been paid, multiplied by the actual input.
Quantity Variance – the difference between how much of an input was actually used and how much
should have been used and is stated in dollars term using the standard price of the input.

Price and quantity elements in the variance analysis can be used for all production costs elements. Terms
may vary depending on the element analyzed.

Production Cost Element Price Element Variance Quantity Element Variance

Direct materials Price Variance Quantity Variance
Direct labor Rate Variance Efficiency Variance
Variable factory overhead Spending/Budget Variance Efficiency Variance
Fixed factory overhead Spending/Budget Variance Capacity/Volume Variance

General model of the analysis:

Actual Cost P XXX
Actual Cost P XXX Expected Cost XXX
Standard Cost XXX Price Variance P XXX Price Variance P XXX
Total Cost Variance P XXX
Quantity Variance XXX Expected Cost P XXX
Total Cost Variance P XXX Standard Cost XXX
Quantity Variance P XXX

- A variance is FAVORABLE when the actual cost incurred is lower than the standard cost.
- A variance is UNFAVORABLE when the standard cost is lower than the actual cost incurred.

DIRECT MATERIALS VARIANCE

Total direct materials variance can be computed as follows:

Actual Materials Cost P XXX

Standard Materials Cost XXX
Materials Cost Variance P XXX

DM Variance can be analyzed through the two elements of the variance cost:

DM Price Variance

Actual Materials Cost (AP X AQ) P XXX

Expected Materials Cost (SP X AQ) XXX
DM Price Variance P XXX
or
DM Price Variance = (AP - SP) X AQ

Note that the direct materials price variance are computed using quantity of materials purchased rather
than the quantity used for the purposes of simplifying bookkeeping and timely determination of variances.
DM Quantity Variance

Expected Materials Cost (SP X AQ) P XXX

Standard Materials Cost (SP X SQ) XXX
DM Quantity Variance P XXX
or
DM Quantity Variance = (AQ - SQ) X SP

In case the production process involves combination or mixture of two or more materials in varying
proportions, the Quantity Variance can be analyzed further into two elements, the materials input (MIX)
and the product output (YIELD).

DM Quantity Mix Variance

Mix Variance – the difference between the actual combination or mixture of materials to produce certain
quantity of output and the standard mixture at a given actual total input of materials.

Total Actual Input at SP Σ(SP X AQU) P XXX

Total Actual Input at ASIC (ASIC* X TAI**) XXX
DM Quantity Mix Variance P XXX
or
DM Quantity Mix Variance = Σ(AMAI***- SMAI****) X SP
*ASIC = Average Standard Input Cost. The average of the standard cost per input of materials in a standard mixture.
Computed as: Total Standard Cost/Total Standard Input Quantity
**TAI = Total Actual Input.
***AMAI = Actual Mix based on total actual input.
****SMAI = Standard Mix based on total actual input.

DM Quantity Yield Variance

Yield Variance – the difference between the actual unit of output produced based on the actual inputs
placed into the production and the standard output that should have been produced.

Total Actual Input at ASIC (ASIC X TAI) P XXX

Total Actual Output at ASOC (ASOC* X TAO) XXX
DM Quantity Yield Variance P XXX
or
DM Quantity Yield Variance = (AO**- SO***) X ASOC
*ASOC = Average Standard Output Cost. The average of the standard cost per quantity of standard output.
Computed as: Total Standard Cost/Total Standard Output
**AO = Actual quantity of output produced.
***SO = Standard quantity of output that should have been produced based on the actual quantity of input used.
Computed as: TAI X Yield %****
****Yield % = The percentage of expected output over the standard input.
Computed as: Total Standard Output Quantity/Total Standard Input Quantity
DIRECT LABOR VARIANCE

Total direct labor variance can be computed as follows:

Actual Labor Cost P XXX
Standard Labor Cost XXX
Labor Cost Variance P XXX

DL Variance can be analyzed into two factors:

DL Rate Variance
Actual Labor Cost (AR X AH) P XXX
Expected Labor Cost (SR X AH) XXX
DL Rate Variance P XXX
or
DL Rate Variance = (AR - SR) X AH

DL Efficiency Variance
Expected Labor Cost (SR X AH) P XXX
Standard Labor Cost (SR X SH) XXX
DL Efficiency Variance P XXX
or
DL Efficiency Variance = (AH - SH) X SR

In case the production process involves combination or mixture of two or more types of labor in varying
efficiency proportions, the Efficiency Variance can be analyzed further into two elements, the labor input
(MIX) and the product output (YIELD).

DL Efficiency Mix Variance

Mix Variance – the difference between the actual combination of labor to produce certain quantity of
output and the standard mixture at a given actual total hours worked.
Total Actual Input at SP Σ(SP X AH) P XXX
Total Actual Input at ASIC (ASIC* X TAI**) XXX
DL Efficiency Mix Variance P XXX
or
DL Efficiency Mix Variance = Σ(AMAI***- SMAI****) X SP
*ASIC = Average Standard Input Cost. The average of the standard cost per input of materials in a standard mixture.
Computed as: Total Standard Cost/Total Standard Input Quantity
**TAI = Total Actual Input.
***AMAI = Actual Mix based on total actual input hours.
****SMAI = Standard Mix based on total actual input hours.

DL Efficiency Yield Variance

Yield Variance – the difference between the actual unit of output produced based on the actual input hours
placed into the production and the standard output that should have been produced.
 Total Actual Input at ASIC (ASIC X TAI) P XXX
Total Actual Output at ASOC (ASOC* X TAO) XXX
DL Efficiency Yield Variance P XXX
or
DL Efficiency Yield Variance = (AO**- SO***) X ASOC
*ASOC = Average Standard Output Cost. The average of the standard cost per quantity of standard output.
Computed as: Total Standard Cost/Total Standard Output
**AO = Actual quantity of output produced.
***SO = Standard quantity of output that should have been produced based on the actual input hours.
Computed as: TAI X Yield %****
****Yield % = The percentage of expected output over the standard input.
Computed as: Total Standard Output Quantity/Total Standard Input Hours

FACTORY OVERHEAD VARIANCE

Total direct labor variance can be computed as follows:
Actual Overhead Cost P XXX
Standard Overhead Cost XXX
Overhead Cost Variance P XXX

The analysis on factory overhead is quite unique. Instead of using the traditional two-way variance
breakdown (rate and efficiency) for the entire overhead cost, the overhead must first be broken into
variable and fixed overhead costs before the analysis on budget and efficiency/capacity variances can be
made. In addition, variances on overhead costs can be analyzed using two-way, three-way or four-way
breakdown of costs.

Two-way Variance Analysis

In two-way analysis, the costs are broken down into two overhead cost control classification: Controllable
and Capacity/Volume-related costs.
CONTROLLABLE VARIANCE
Actual Overhead Cost (AFOH) P XXX
Actual Variable Overhead Cost XXX
Actual Fixed Overhead Cost P XXX
Budget Allowed at Standard Hours (BASH)
Standard Variable Overhead Cost (SVFOHR X SH) P XXX
Budgeted Fixed Overhead Cost XXX XXX P XXX
CAPACITY/VOLUME VARIANCE
Budget Allowed at Standard Hours (BASH)
Standard Variable Overhead Cost (SVFOHR X SH) P XXX
Budgeted Fixed Overhead Cost XXX P XXX
Standard Overhead Cost (SFOH)
Standard Variable Overhead Cost (SVFOHR X SH) P XXX
Standard Fixed Overhead Cost (SFxFOHR X SH) XXX XXX XXX
P XXX

Alternative computations for Capacity/Volume Variance:

CAPACITY/VOLUME VARIANCE
Budgeted Fixed Overhead Cost (SFxFOHR X DH*) P XXX
Standard Fixed Overhead Cost (SFxFOHR X SH) XXX
P XXX
*DH= Denominator level hours. The amount of hours used in determining the standard or pre-determined factory overhead cost
per unit. Usually the Normal Capacity.
Or
Capacity/Volume Variance = (DH - SH) X SFxFOHR

Three-way Variance Analysis

In the three-way analysis, the controllable variance is simply split into two variance: the Spending/Budget
Variance and Efficiency Variance

SPENDING/BUDGET VARIANCE
Actual Overhead Cost (AFOH)
Actual Variable Overhead Cost P XXX
Actual Fixed Overhead Cost XXX P XXX
Budget Allowed at Actual Hours (BAAH)
Standard Variable Overhead Cost at AH (SVFOHR X AH) P XXX
Budgeted Fixed Overhead Cost XXX XXX P XXX

EFFICIENCY VARIANCE
Budget Allowed at Actual Hours (BAAH)
Standard Variable Overhead Cost at AH (SVFOHR X AH) P XXX
Budgeted Fixed Overhead Cost XXX P XXX
Budget Allowed at Standard Hours (BASH)
Standard Variable Overhead Cost at SH (SVFOHR X SH) P XXX
Budgeted Fixed Overhead Cost XXX XXX P XXX

CAPACITY/VOLUME VARIANCE
Budget Allowed at Standard Hours (BASH)
Standard Variable Overhead Cost (SVFOHR X SH) P XXX
Budgeted Fixed Overhead Cost XXX P XXX
Standard Overhead Cost (SFOH)
Standard Variable Overhead Cost (SVFOHR X SH) P XXX
Standard Fixed Overhead Cost (SFxFOHR X SH) XXX XXX XXX
P XXX

Alternative computations for Efficiency Variance:

EFFICIENCY VARIANCE
Standard Variable Overhead Cost at AH (SVFOHR X AH) P XXX
Standard Variable Overhead Cost at SH (SVFOHR X SH) XXX
P XXX

Or
Efficiency Variance = (AH - SH) X SVFOHR

Four-way Variance Analysis

The four-way variance analysis reflects the complete analysis of the spending/budget and efficiency or
volume/capacity elements of the variable and fixed portion of the overhead cost. Thus, from the three-way
analysis, the spending/budget variance is split into variable and fixed components.
VARIABLE SPENDING/BUDGET VARIANCE
Actual Overhead Cost (AFOH)
Actual Variable Overhead Cost - Variable P XXX
Budget Allowed at Actual Hours (BAAH)
Standard Variable Overhead Cost at AH (SVFOHR X AH) XXX P XXX

FIXED SPENDING/BUDGET VARIANCE

Actual Overhead Cost (AFOH)
Actual Variable Overhead Cost - Variable P XXX
Budget Allowed at Actual Hours (BAAH)
Budgeted Fixed Overhead Cost XXX XXX

EFFICIENCY VARIANCE
Budget Allowed at Actual Hours (BAAH)
Standard Variable Overhead Cost at AH (SVFOHR X AH) P XXX
Budgeted Fixed Overhead Cost XXX P XXX
Budget Allowed at Standard Hours (BASH)
Standard Variable Overhead Cost at SH (SVFOHR X SH) P XXX
Budgeted Fixed Overhead Cost XXX XXX P XXX

CAPACITY/VOLUME VARIANCE
Budget Allowed at Standard Hours (BASH)
Standard Variable Overhead Cost (SVFOHR X SH) P XXX
Budgeted Fixed Overhead Cost XXX P XXX
Standard Overhead Cost (SFOH)
Standard Variable Overhead Cost (SVFOHR X SH) P XXX
Standard Fixed Overhead Cost (SFxFOHR X SH) XXX XXX XXX
P XXX

Alternative computations for Variable Spending/Budget Variance:

Variable Spending/Budget Variance = (AVFOHR - SVFOHR) X AH

VARIANCES IN A DIAGRAM APPROACH

Accounting for Standard Cost Variances

 At year-end, adjusting entries are made to eliminate standard cost variances. The entries depend on
whether the variances are, in total, insignificant or significant.
a. If insignificant, unfavorable variances are closed as debits to Cost of Goods Sold; favorable
variances are credited to Cost of Goods Sold.
b. If significant, variances are prorated at year-end among ending inventories and Cost of Goods Sold
so that the balances in those accounts approximate actual costs.
i. Proration is based on the relative size of the account balances. Disposition of significant
variances is similar to the disposition of large amounts of underapplied or overapplied
overhead.
 The theoretically correct allocation of the material price variance would use actual material cost in each
account at year-end.
 All variances other than the material price variance occur as part of the conversion process, and are
prorated only to Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold.
 Note that all unfavorable variances have debit balances and favorable variances have credit balances.
Unfavorable variances represent excess production costs; favorable variances represent savings in
production costs.

Pro-forma Entries (assuming ALL variances are FAVORABLE):

Materials Purchase

Raw Material Inventory (@ AQXSP) XXX

Accounts Payable (@ AQXSP) XXX
Material Purchase Price Variance XXX

Materials Issuance

Work in Process Inventory (@ SQXSP) XXX

Raw Material Inventory (@ AQXSP) XXX
Material Quantity Variance XXX

Labor Cost Incurrence

Work in Process Inventory (@ SHXSR) XXX

Wages Payable (@ AHXAR) XXX
Labor Rate Variance (@ (AR-SR)XAH) XXX
Labor Efficiency Variance (@ (AH-SH)XSR) XXX

Incurrence of Overhead Cost

Variable Factory/Manufacturing Overhead Control (@ Actual) XXX

Fixed Factory/Manufacturing Overhead Control (@ Actual) XXX
Various Accounts XXX
Application of Overhead Cost to Production

Work in Process Inventory (@Standard) XXX

Applied Variable Factory/Manufacturing Overhead (@ SHXSR) XXX
Applied Fixed Factory/Manufacturing Overhead (@ SHXSR) XXX

Closing Applied Overhead to Control Accounts

Applied Variable Factory/Manufacturing Overhead XXX

Applied Fixed Factory/Manufacturing Overhead XXX
Variable Factory/Manufacturing Overhead Control XXX
Fixed Factory/Manufacturing Overhead Control XXX

Closing Overhead Variance to Control Accounts

Variable Factory/Manufacturing Overhead Control XXX

Fixed Factory/Manufacturing Overhead Control XXX
Variable Overhead Spending Variance (@ (AR-SR)XAH) XXX
Variable Overhead Efficiency Variance (@ (AH-SH)XSR) XXX
Fixed Overhead Spending Variance (@ Actual - Budget) XXX
Fixed Overhead Capacity/Volume Variance (@ Budget - Applied) XXX

Disposition of Variances (Insignificant)

Material Purchase Price Variance XXX

Material Quantity Variance XXX
Labor Rate Variance (@ (AR-SR)XAH) XXX
Labor Efficiency Variance (@ (AH-SH)XSR) XXX
Variable Overhead Spending Variance (@ (AR-SR)XAH) XXX
Variable Overhead Efficiency Variance (@ (AH-SH)XSR) XXX
Fixed Overhead Spending Variance (@ Actual - Budget) XXX
Fixed Overhead Capacity/Volume Variance (@ Budget - Applied) XXX
Cost of Goods Sold XXX

Disposition of Variances (Significant)

Material Purchase Price Variance XXX

Material Quantity Variance XXX
Labor Rate Variance (@ (AR-SR)XAH) XXX
Labor Efficiency Variance (@ (AH-SH)XSR) XXX
Variable Overhead Spending Variance (@ (AR-SR)XAH) XXX
Variable Overhead Efficiency Variance (@ (AH-SH)XSR) XXX
Fixed Overhead Spending Variance (@ Actual - Budget) XXX
Fixed Overhead Capacity/Volume Variance (@ Budget - Applied) XXX
Cost of Goods Sold XXX
Raw Material Inventory (for MPV only) XXX
Work in Process Inventory XXX
Finished Goods Inventory XXX
Advantages and Limitations of Standard Costing
Advantages:
1. They facilitate management planning;
2. They promote greater economy and efficiency by making employees more "cost-conscious";
3. They are useful in setting selling prices;
4. They contribute to management control by providing basis for evaluation and cost control;
5. They are useful in highlighting variances in management by exception;
 Management by Exception - the practice of giving attention only to those situations in
which large variances occur, so chat management may have more time for more important
problems of the business, not just routine supervision of subordinates.
6. They simplify recording through simplified costing of inventories and reduction in clerical costs

Limitations:
1. Standard cost variance reports are usually prepared on a monthly basis and often are released days
or even weeks after the end of the month, thus, the information in the reports may be so outdated
that it is almost useless.
2. If managers use variances only to assign blame and punish subordinates, morale may suffer.
Furthermore, subordinates may be tempted to cover up unfavorable variances or take actions that
are not in the best interests of the company to make sure the variances are favorable.
3. Labor-hour standards and efficiency variances may create problems:
a. Assumption: They assume that the production process is labor-paced; if labor works faster,
output will go up.
Reality: Many companies are technology-intensive, thus outputs are based on hours worked
on machines.
Potential Problem: Association of efficiency variances to low or high outputs may be
distorted.
b. Assumption: The computations assume that labor is a variable cost.
Reality: Direct labor can often be a fixed cost.
Potential Problem: An undue emphasis on labor efficiency variances creates pressure to
build excess inventories.
4. In some cases, a “favorable” variance can be worse than an “unfavorable” variance.
5. Too much emphasis on meeting the standards may overshadow other important objectives (e.g.
maintaining and improving quality, on-time delivery, and customer satisfaction).
6. Just meeting standards is not sufficient because companies need to continually improve to remain
competitive. For this reason, some companies focus on the trends in their standard cost variances—
aiming for continual improvement rather than just meeting the standards. In other companies,
engineered standards are replaced either by a rolling average of actual costs, which is expected to
decline, or by very challenging target costs.

SAMPLE PROBLEM WITH SOLUTION

1.) Filano Corp. has the following standards for one unit of product:
Direct material: 80 pounds X $6 $480
Direct labor: 3 hours X $16 per hour 48
Variable overhead: 1.5 hours of machine time X $50 per hour 75
Fixed overhead: 1.5 hours of machine time X $30 per hour 45

The predetermined OH rates were developed using a practical capacity of 6,000 units per year. Production
is assumed to occur evenly throughout the year. During May 2010, the company produced 525 units. Actual
data for May 2010 are as follows:
Direct material purchased: 45,000 pounds X $5.92 per pound
Direct material used: 43,020 pounds (all from May’s purchases)
 Total labor cost: $24,955 for 1,550 hours
Variable overhead incurred: $43,750 for 800 hours of machine time
Fixed overhead incurred: $22,800 for 800 hours of machine time

Required: Calculate the following:

1. Material price variance based on purchases

2. Material quantity variance

3. Labor rate variance

4. Labor efficiency variance

5. Variable overhead spending and efficiency variances

6. Fixed overhead spending and volume variances

BFOH, annually ; 6,000 X 1.5 hours X $30 = $270,000

BFOH, monthly ; $270,000 / 12 months = $22,500
 7. Overhead variances using a three-variance approach

8. Overhead variances using a two-variance approach

2.) Randazzo’s Deli is used to illustrate the computation of price/rate, mix, and yield variances.

The company recently began selling 1-pound packages of seafood mix containing crab, shrimp, and oysters.
Ingredients are mixed in 200-pound batches and, because seafood is purchased fully cleaned, there is no
waste in processing. To some extent, one ingredient can be substituted for another. In addition, it is
assumed that the company uses two direct labor categories (A and B). There is a labor rate differential
between these two categories. The actual and standard information of the company for 2010 is presented
below

Material standards for one batch (200 1-pound packages):

Crab (30%) 60 pounds at $7.20 per pound $ 432

Shrimp (45%) 90 pounds at $4.50 per pound 405
Oysters (25%) 50 pounds at $5.00 per pound 250
Total 200 pounds $1,087

Crab (30%) 60 pounds at $7.20 per pound $432

Shrimp (45%) 90 pounds at $4.5 per pound 405
Oysters (25%) 50 pounds at $5 per pound 250
Total 200 pounds $1087

Labor standards for one batch (200 1-pound packages):

 Category A (2/3) 9 hours at $10.50 per hour $94.5
Category B (1/3) 3 hours at $14.3 per hour 14.3
Total 12 hours $137.4
Actual production and cost data for December:

Production : 40 batches

Material:
Crab Purchased and used 2,285.7
pounds at $7.50 per pound

Shrimp Purchased and used 3,649.1

pounds at $4.40 per pound
Oysters Purchased and used 2,085.2
pounds at $4.95 per pound
Total 8,020 pounds

Labor:
Category A workers 450 hours at $10.50 per hour
Category B workers 50 hours at $14.40 per hour
Total 500 hours

SOLUTION:

Direct Materials Price , Mix and Yield Variances

(1) Total actual data (mix, quantity, and prices):

Crab 2,285.7 pounds X $7.50 $17,142.75

Shrimp 3,649.1 pounds X $4.40 16,056.04
Oysters 2,085.2 pounds X $4.95 10,321.74
Total $43,520.53

(2) Actual mix and quantity; standard prices:

Crab 2,285.7 pounds X $7.20 $16,457.04
Shrimp 3,649.1 pounds X $4.50 16,420.95
Oysters 2,085.2 pounds X $5.00 10,426.00
Total $43,303.99

(3) Standard mix; actual quantity; standard prices:

Crab 30% 8,020 pounds X $7.20 $17,323.20
Shrimp 45% 8,020 pounds X $4.50 16,240.50
Oysters 25% 8,020 pounds X $5.00 10,025.00
Total $43,588.70

(4) Total standard data (mix, quantity, and prices):

Crab 30% _ 8,000 pounds X $7.20 $17,280.00
Shrimp 45% _ 8,000 pounds X $4.50 16,200.00
Oysters 25% _ 8,000 pounds X $5.00 10,000.00
Total $43,480.00
Direct Labor Rate, Mix and Yield Variances

(1) Total actual data (mix, hours, and rates):

Category A 450 hours X $10.50 $4,725.00

Category B 50 hours X $14.40 720.00
Total $5,445.00

(2) Actual mix and hours; standard rates:

Category A 450 hours X $10.50 $4,725.00

Category B 50 hours X $14.40 715.00
Total $5,440.00
(3) Standard mix; actual hours; standard rates:

Category A 75% X 500 X $10.50 $3,937.50

Category B 25% X 500 X $14.40 1,800.00
Total $5,737.50
(4) Total standard data (mix, hours, and rates):

Category A 75% X 480 X $10.50 $3,780.00

Category B 25% X 480 X $14.30 1,716.00
Total $5,496.00
II. CHECKING FOR UNDERSTANDING

PROBLEM 1. Universal Company operates with a standard cost accounting system and uses cost variances
as a means of detecting costs that may require more control. A standard cost sheet for a component that is
manufactured exclusively in one plant is as follows:
Direct materials (5 units @ P8) P 40.00
Direct labor (0.5 hours @ P40) 20.00
Variable overhead (0.5 direct labor hour @ P6) 3.00
Fixed overhead (0.5 direct labor hour @ P10) 5.00
Standard unit cost P 68.00

Data from the past year as follows:

a. Purchased 1,550,000 units of materials at a cost of P12,430,000.
b. Manufactured 295,000 units of product and sold 275,000 units.
c. Budgeted P1,500,000 for fixed overhead for the year.
d. Used 1,480,000 units of materials in production.
e. Used 150,000 direct labor hours.
f. Spent P5,960,000 for direct labor.
g. Spent P910,000 for variable overhead.
h. Spent P1,525,000 for fixed overhead.

REQUIRED: Using standard costing system, determine the following variances:

a. Materials price variance
b. Materials usage (efficiency) variance
c. Labor rate variance
d. Labor efficiency variance
e. Variable overhead spending variance
f. Variable overhead efficiency variance
g. Fixed overhead volume variance

PROBLEM 2. PMY Company makes Collesterite, a new health food. For a 50-kilo batch, the standard costs
for materials and labor are as follows:
Materials TOTAL
Quantity Unit Price
Inputs
Lard 25 kilos P 0.20 per kilo P 5.00
Sugar 25 kilos 0.10 per kilo 2.50
Egg yolk 10 kilos 0.05 per kilo 0.50
60 kilos P 8.00

Labor Inputs Quantity Unit Price TOTAL

Skilled labor 0.80 hour P12.00 per hour P 9.60
Unskilled labor 0.20 hour 8.00 per hour 1.60

During June, the following materials and labor were used in producing 600 batches of Collesterite:
Lard 18,000 kilos at P0.22 per kilo P 3,960
Sugar 14,000 kilos at P0.11 per kilo 1,540
Egg yolk 10,000 kilos at P0.04 per kilo 400
Skilled labor 400 hours at P12.25 per hour 4,900
Unskilled labor 260 hours at P8.00 per hour 2,080

REQUIRED:
1. Calculate the materials price, quantity, mix, and yield variances.
2. Calculate the labor efficiency, mix and yield variances.
PROBLEM 3. The standard direct labor cost to produce one kilo of output for a company is presented
below. Related data regarding the planned and actual production activities for the current month for the
company are also given below. (DLH = Direct Labor Hours).
Direct labor standard: 0.40 DLH @ P12.00 per DLH
Planned production 15,000 kilos
Actual production 15,500 kilos
Actual direct labor costs (6,250 DLH) P72,250

REQUIRED:
1. The company’s direct labor rate variance for the current month.
2. The company’s direct labor efficiency variance for the current month.

PROBLEM 4. Simon Enterprises applies variable overhead at a rate of P1.50 per direct labor hour and fixed
overhead at a rate of P1.75 per direct labor hour. The company budgets two direct labor hours for each of
the 6,000 units that are scheduled for production. Simon incurred actual variable overhead totaling
P18,700 and actual fixed overhead totaling P21,500 last year for the production of 5,900 units. In addition,
11,800 direct labor hours were actually incurred.

REQUIRED:
1. Calculate the variable overhead efficiency variance.
2. Calculate the variable overhead spending variance.
3. Calculate the fixed overhead volume variance.
4. Calculate the fixed overhead spending variance.

PROBLEM 5. A company manufactures a single product that requires a great deal of hand labor. Overhead
cost is applied on the basis of direct labor hours. The company’s condensed flexible budget for
manufacturing overhead is given below:
Cost Formula DIRECT LABOR HOURS
Overhead Costs (per DL hour) 45,000 60,000 75,000
Variable costs P 2.00 P 90,000 P 120,000 P 150,000
Fixed costs 480,000 480,000 480,000
Total overhead costs P 570,000 P 600,000 P 630,000

The company's products requires 3 kilos of material that has a standard cost of P7 per kilo and 1.50 hours
of direct labor time that has a standard rate of P6 per hour.

The company planned to operate at a denominator activity level of 60,000 direct labor hours and to
produce 40,000 units of product during the most recent year. Actual activity and costs for the year were as
follows:
Number of units produced 42,000
Actual direct labor hours worked 65,000
Actual variable overhead cost incurred P123,500
Actual fixed overhead cost incurred 483,000

REQUIRED:
1. Compute the predetermined overhead rate and break it down into variable and fixed elements.
2. What were the standard hours allowed for the year's output?
3. Compute the variable overhead spending and efficiency variances and the fixed overhead budget
and volume variances.
 4. Suppose the company had chosen 65,000 direct labor hours as the denominator activity rather than
60,000 hours. State which, if any, of the variances computed in (3) above would have changed and
explain how the variance(s) would have changed. [No computations are necessary.]

PROBLEM 6. Emerald Company produces ovens. Emerald's plant in Casanova Island uses a standard cost
system. The standard cost system relies on direct labor hours to assign overhead costs to production. The
direct labor standard indicates that four direct labor hours should be used for every oven produced. The
normal production volume is 120,000 units of this only one model ovens. The budgeted overhead for the
coming year is given below:
Fixed overhead P 1,286,400
Variable overhead 888,000*
*At normal volume

Emerald applies overhead on the basis of direct labor hours. During the year, Emerald produced 119,000
units, worked 487,900 direct labor hours, and incurred actual fixed overhead costs of P1,300,000 and
actual variable overhead costs of P927,010.

REQUIRED:
1. Calculate the standard fixed and variable overhead rates.
2. Compute the variable overhead spending and efficiency variances.
3. Compute the fixed overhead spending and volume variances.

PROBLEM 7. A company uses standard costing system in the manufacture of its single product. The 35,000
units of raw materials purchased and used cost P105,000, and two units of raw materials are required to
produce one unit of final product. In October, the company produced 12,000 units of product. The flexible
budget for materials was P60,000, and there was an unfavorable static budget variance of P35,000.

REQUIRED:
1. The company’s standard price for one unit of material.
2. The company’s direct materials quantity variance.
3. The number of outputs planned for in the company’s static budget.

PROBLEM 8. The flexible budget formula for total overhead for Star Division of Waterous Company is
P360,000 + P8 per direct labor hour. The combined overhead rate is P20 per direct labor hour. The
following data have been recorded for the year 2012:
Actual total overhead for 2008 P 580,000
Total overhead spending variance 16,000 U
Volume variance 24,000 U

REQUIRED: Using a three-variance approach, determine the number of standard hours allowed and actual
hours of direct labor hours worked.

PROBLEM 9. Energy Products produces a gasoline additive, Gas Gain. This product increases engine
efficiency and improves gasoline mileage b y creating a more complete burn in the combustion process.
Careful controls are required during the production process to ensure that the proper mix of input
chemicals is achieved and that evaporation is controlled. If the controls are not effective, there can be loss
of output and efficiency.

The standard cost of producing a 500-liter batch are as follows:

Chemical Mix SP Total Cost
Echol 200 liters P 20.00 P 4,000
Protex 100 liters 42.50 4,250
 Benz 250 liters 15.00 3,750
CT-40 50 liters 30.00 1,500
600 liters P 13,500

The quantity of chemicals purchased and used during the current production period are shown in the
schedule below. A total of 140 batches of Gas Gain were manufactured during the current production
period. Energy Products determines its cost and chemical usage variations at the end of each production
period.
Chemical Mix
Echol 26,600 liters
Protex 12,880 liters
Benz 37,880 liters
CT-40 7,140 liters
84,420 liters

REQUIRED:
Compute the materials usage variance and then break down this variance into its mix and yield
components.

PROBLEM 10. Metro Fashions, Inc. manufactures women's blouses of one quality, which are produced in
lots to fill each special order. Its customers are department stores in various cities. Metro Fashions sews
the particular store's labels on the blouses. During November the company worked on three orders, for
which the month's job-cost records disclose the following data.
Lot Number Boxes in Lot Material Used (yards) Hours Worked
N42 2,000 48,200 5,960
N43 3,400 80,880 10,260
N44 2,400 57,650 5,780

The following additional information is available:

I. The firm purchased 190,000 yards of material during November at a cost of P212,800.
II. Direct labor during November amounted to P330,000. According to payroll records,
productions employees were paid P15 per hour.
III. There was no work in process on November 1. During November, lots N42 and N43 were
completed. All material was issued for lot N44, which was 80 percent completed as to
conversion (i.e., direct labor and overhead).
IV. The standard costs for a box of six blouses are as follows:
Direct material 24 yards at P1.10 P 26.40
Direct labor 3 hours at P14.70 44.10
Manufacturing overhead 3 hours at P12.00 36.00
Standard cost per box P 106.50

REQUIRED:
1. Prepare a schedule computing the standard cost of lots N42, N43, and N44 for November.
2. Prepare a schedule showing, for each lot produced during November:
a. Direct-material price variance. {Hint: Must be computed in total, across all three production
lots.)
b. Direct-material quantity variance.
c. Direct-labor efficiency variance.
d. Direct-labor rate variance.

III. ANALYSIS AND INTEGRATION

1. Explain how standards relate to job order and process cost accumulation.
 2. Standard cost variance reporting is useful management control tool. However, too much emphasis
on meeting standards can result in inefficiencies and lost opportunities for improvement. Explain
how this can occur.

IV. INDEPENDENT LEARNING

Submit your answer to the case below through the Schoology assignment box assigned by the instructor.
You may submit scanned or digital copy of your answer. BE HONEST!

PROBLEM 1. John Fleming, chief administrator for Valley View Hospital, is concerned about costs for tests
in the hospital's lab. Charges for lab tests are consistently higher at Valley View than at other hospitals and
have resulted in many complaints. Also, because of strict regulations on amounts reimbursed for lab tests,
payments received from insurance companies and governmental units have not been high enough to
provide an acceptable level of profit for the lab.

Mr. Fleming has asked you to evaluate costs in the hospital's lab for the past month, following information
is available:
 Basically, two types of tests are performed in the lab – blood tests and smears. During the past
month, 1,800 blood tests and 2,400 smears were performed in the lab.
 Small glass plates are used in both types of tests. During the past month, the hospital purchase
12,000 plates at a cost of P28,200. This cost is net of 6% quantity discount. Some 1,500 of
these plates were still on hand unused at the end of the month; there were no plates on hand at
the beginning of the month.
 During the past month, 1,150 hours of labor time were recorded in the lab. The cost of this
labor time was P13,800.
 Variable overhead cost last month in the lab for utilities and supplies totaled P7,820.

Valley View Hospital has never used standard costs. By searching industry literature, however, you have
determined the following nationwide averages for hospital labs:
Plates: Two plates are required per lab test. These plates cost P2.50 each and are disposed of after the test
is completed.
Labor: Each blood test should require 0.3 hours to complete, and each smear should require 0.15 hours to
complete. The average cost of this lab time is P14 per hour.
Overhead: Overhead cost is based on direct labor-hours. The average rate for variable overhead is P6
per hour.

Mr. Fleming would like a complete analysis of the cost of plates, labor, and overhead in the lab for the last
month so that he can get the root of the lab’s cost problem.

REQUIRED:
1. Compute a materials price variance for the plates purchased last month and a materials
quantity variance for the plates used last month.
2. For labor cost in the lab:
a. Compute a labor rate variance and a labor efficiency variance.
b. In most hospitals, one-half of the workers I the lab are senior technicians and one-half
are assistants. In an effort to reduce costs, Valley View Hospital employs only one-
fourth senior technicians and three-fourths assistants. Would you recommend that this
policy be continued? Explain.
3. Compute the variable overhead spending and efficiency variance.
PROBLEM 2. "Wonderful! Not only did our salespeople do a good job in meeting the sales budget this year,
but our production people did a good job in controlling costs as well," said the president of a company. "Our
P18,000 overall manufacturing cost variance is only 1.5% of the P1,200,000 standard cost of products sold
during the year. That's well within the 3% parameter set by management for acceptable variances. It: looks
like everyone will be in line for a bonus this year."

The company produces and sells a single product. A standard cost card for the product shows the following:
Direct materials, 2 feet at P8.45 P 16.30
Direct labor, 1.40 hours at P8 11.20
Variable overhead, 1.40 hours at P2.50 3.50
Fixed overhead, 1.40 hours at P6 8.40
Standard cost per unit P 40.00

The following information is available for the year just completed:

a. The company manufactured 30,000 units of product during the year.
b. A total of 64,000 feet of material was purchased during the year at a cost of P8.55 per foot. All of
this material was used to manufacture the 30,000 units. There were no beginning or ending
inventories for the year.
c. The company worked 45,000 direct labor hours during the year at a cost of P7.80 per hour.
d. Overhead is applied to products on the basis of direct labor hours. Data relating to manufacturing
overhead costs follow:
Denominator activity level (direct labor hours) 35,000
Budgeted fixed overhead costs (from the overhead
flexible budget) P210,000
Actual variable overhead costs incurred 108,000
Actual fixed overhead costs incurred 211,800

REQUIRED:
1. Compute the direct materials spending and efficiency variances for the year.
2. Compute the direct labor spending and efficiency variances for the year.
3. For the manufacturing overhead, compute:
a. the variable overhead spending and efficiency variances for the year.
b. the fixed overhead budget and volume variances for the year.
4. Total the variances you have computed, and compare the net amount with the P18,000 mentioned
by the president. Do you agree that bonuses should be given to everyone for good cost control
during the year. Explain.