A lecture on

STANDARD COSTING AND

VARIANCE ANALYSIS
Kelvin Jaluag Culajara, BSA, CPA
Instructor of the Accountancy Department/
School of Management and Accountancy
Ateneo de Zamboanga University
CONTENTS
• A conceptual approach on standard
costing (which may include basic
definitions and key factors, and
disclaimers)
• Standard costing macro-analysis (one-way
variance analysis)
• Micro-analyses (two-way, three-way, four-
way)
• Practice sets
CONCEPT: STANDARD COSTING

1. What is standard costing?

2. What is the significance of standard
costing in today’s society?
3. How do organizations set standards?
CONCEPT: SETTING STANDARDS

Standard cost per unit = Budgeted cost x Budgeted input

Standard quantity = Budgeted input x Budgeted output

per output

Budgeted cost and budgeted quantity are the

planned cost and quantity that the entity may expect
to incur or yield.

These expectations may be the result of the

organization’s previous experiences, or of empirical
evidence, etc.
CONCEPT: SETTING STANDARDS

PROBLEM 1: Ednie Corporation wants to establish standard costs for

the manufacture of its product – wooden boxes called Bengram. The
following are the standard specifications for the manufacture of
Bengrams:

Materials: 6 pcs. 2’x2’x2’ ½-inch thick plywood, at average price of P20

per plywood.
Direct labor: An average worker can fully produce 2 Bengrams for 16-
hour (or equivalent to 2 working days at 8 hours each). A worker is paid
at P7.50 hourly rate.
Factory overhead: Save this for later. 

Find for the following:

1. Standard materials quantity and labor cost per unit
2. Standard labor hours and labor cost per unit
CONCEPT: SETTING STANDARDS

Materials
Standard Quantity per Unit = 1 unit Bengram x 6 pcs. plywood
= 6 pcs. plywood per unit of Bengram

Standard Cost per Unit = 6 pcs. plywood x P20 per plywood

= P120 per unit of Bengram

Direct Labor
Standard Hours per Unit = 16 hours / 2 units of Bengram
= 8 hours per unit of Bengram

Standard Labor Cost per Unit = 8 hours per unit x P7.50 per hour
= P60 per unit of Bengram
CONCEPT: APPLICATION OF STANDARDS

Materials variance
Assume that during the month under review, Ednie Corp.
was able to produce 900 units of Bengram, using 5,625 pcs.
of plywood. These data could be obtained from the Cost of
Production Report prepared by the Cost Accounting
Department. The records revealed that the corporation
purchased 5,680 pcs. of plywood at P20.25 per piece.

The management is concerned whether it managed its

materials well in producing Bengram.
CONCEPT: APPLICATION OF STANDARDS

Materials variance

Total materials variance = Total standard cost – Actual materials cost;

= P108,000 – P113,906.25
= -P5,906.25 (Unfavorable)

Total standard cost = Standard quantity x Standard cost

= (900 units x 6 pcs.) x P20
= P108,000

Actual cost = Actual quantity x Actual cost

= 5,625 pcs. X P20.25
= P113,906.25
CONCEPT: APPLICATION OF STANDARDS

The problem with total materials variance is

that it disregards other key factors that
contribute to that total variance.
CONCEPT: APPLICATION OF STANDARDS

Materials variance

Total materials variance = Total standard cost – Actual materials cost;

= P108,000 – P113,906.25
= -P5,906.25 (Unfavorable)

Materials price variance = (Actual quantity x Actual price) –

(Actual quantity x Standard price)

Materials quantity = (Actual quantity x Standard price) –

variance (Standard quantity x Standard price)
CONCEPT: APPLICATION OF STANDARDS

Materials variance

Total materials variance = Total standard cost – Actual materials cost;

= P108,000 – P113,906.25
= -P5,906.25 (Unfavorable)

Materials price variance = (5,625 pcs x P20.25) – (5,625 pcs. x P20)

= P1,406.25 (Unfavorable)

Materials quantity = (5,625 pcs x P20) – (900 x 6pcs. X P20)

variance = P4,500 (Unfavorable)
CONCEPT: APPLICATION OF STANDARDS

Labor variance
Assume that in producing 900 units of Bengram, Ednie
Corporation actually used 7,000 direct labor hours which it
paid at an hourly rate of P7.60.
CONCEPT: APPLICATION OF STANDARDS

Labor variance

Total labor variance = Total standard cost – Actual materials cost;

= P54,000 – P53,200
= P800 (Favorable)

Total standard cost = Standard hours x Standard rate

= (900 units x 8 hours) x P7.50
= P54,000

Actual cost = Actual hours x Actual rate

= 7,000 hours X P7.60
= P53,200
CONCEPT: APPLICATION OF STANDARDS

The problem with total total labor variance

is that it disregards other key factors that
contribute to that total variance.
CONCEPT: APPLICATION OF STANDARDS

Labor variance

Total labor variance = Total standard cost – Actual materials cost;

= P54,000 – P53,200
= P800 (Favorable)

Labor rate variance = (7,000 hrs x P7.60) – (7,000 hrs x P7.50)

= P700 (Unfavorable)

Labor efficiency = (7,000hrs x P7.50) – (900units x 8hrs x

variance P7.50)
= P1,500 (Favorable)
PRACTICE PROBLEMS

Carmen Company produces and sells a product with the following material
standards:
1. Quantity – 5 liters of raw materials per unit
2. Price – P7.00 per standard

Actual data on production and material costs for the previous month were
gathered as follows:
1. Production – 3,000 units of product
2. Quantity of materials purchased – 20,000 liters
3. Quantity of materials used – 14,000 liters
4. Price paid for materials purchased – P7.10 per liter

Determine the total materials variance, and the price and quantity
variances.
PRACTICE PROBLEMS

Pacito Corporation usually pays its factory workers at a rate of P10 per
hour. At standard, these workers should produce a unit of product in 16
hours. For the month of May, production records showed that the
company manufactured 4,500 units of product in 74,000 hours. Payroll
showed total direct labor costs of P707,440.

Determine the total labor variance, and the labor rate and labor
efficiency variances.
CONCEPT: SETTING FACTORY
OVERHEAD STANDARDS

Factory overhead standards have something to do with:

• Spending
• Maximizing the fixed capacity
• Efficiency
CONCEPT: SETTING FACTORY
OVERHEAD STANDARDS

Approaches to standard costing of factory overhead:

• Fixed budget approach (or static budget approach
because it uses only one level of activity)
• Flexible budget approach (or dynamic budget approach
because various possible outcomes in activity within the
relevant range are considered)
CONCEPT: SETTING FACTORY
OVERHEAD STANDARDS
Fixed overhead approach

Let us assume that prior to actual production, Ednie Corporation

expected or planned to produce 1,000 units of Bengram. For this
activity level, budgeted factory overhead costs were determined as
follows:
 Indirect materials, P8,000
 Indirect labor, P10,000
 Light and water, P6,000
 Depreciation and factory equipment, P3,000
 Factory insurance, P1,500
 Factory rent, P3,500
CONCEPT: SETTING FACTORY
OVERHEAD STANDARDS
Fixed overhead approach

Standard overhead cost per unit = Total budgeted FOH___

Budgeted activity

= P32,000 / 1,000 units

= P32 per unit

Standard overhead cost per DL hour = P32,000 / (1,000 units x 8

direct labor hours per unit)
= P32,000 / 8,000 DL hours
= P4 per direct labor hour
CONCEPT: APPLICATION OF STANDARDS

Let us assume that after referring to the

different source documents like cost of
production report, job order cost sheets,
labor time tickets, etc., we were able to
determine that in producing 900 units of
Bengram, Ednie Corporation actually
incurred total factory overhead costs of
P34,000.
CONCEPT: SETTING FACTORY
OVERHEAD STANDARDS
Fixed overhead approach

Standard overhead cost per unit = Total budgeted FOH___

Budgeted activity

= P32,000 / 1,000 units

= P32 per unit

Standard overhead cost per DL hour = P32,000 / (1,000 units x 8

direct labor hours per unit)
= P32,000 / 8,000 DL hours
= P4 per direct labor hour
CONCEPT: APPLICATION OF STANDARDS

Factory overhead variance (fixed budget approach)

Total factory overhead = Actual FOH – Std. FOH

variance

= P34,000 – (9oo units x 8

hours x P4 per hour)
= P34,000 – P28,800
= P5,200 unfavorable
CONCEPT: APPLICATION OF STANDARDS

3-way analysis

Budget variance = Actual factory overhead – Budgeted FOH

Capacity variance = (Budgeted hours – Actual hours) x Standard

OH rate per hour

Efficiency variance = (Actual hours – Standard hours) x Standard

OH rate per hour
CONCEPT: APPLICATION OF STANDARDS

3-way analysis

Budget/spending variance = P34,000 – P32,000

= P2,000 unfavorable

Capacity variance = (8,000 hours – 7,000 hours) x P4

= P4,000 unfavorable

Efficiency variance = (7,000 hours – 7,200 hours) x P4

= P800 favorable

7,200 hours = 900 units x 8 hours

CONCEPT: SETTING FACTORY
OVERHEAD STANDARDS
Flexible budget approach

Let us assume that prior to actual production, Ednie Corporation

expected or planned to produce 1,000 units of Bengram. For this
activity level, budgeted factory overhead costs were determined as
follows:
 Indirect materials, P8,000 variable
 Indirect labor, P10,000 variable
 Light and water, P6,000 variable
 Depreciation and factory equipment, P3,000 fixed
 Factory insurance, P1,500 fixed
 Factory rent, P3,500 fixed
CONCEPT: SETTING FACTORY
OVERHEAD STANDARDS
Flexible budget approach

Total fixed costs = P8,000

Total variable costs = P24,000

Standard variable OH rate per unit = P24,000/1,000 units

= P24 per unit

Standard variable OH per hour = P24,000/(1,000 units x 8hrs)

= P3 per hour

Standard overhead cost per DL hour = P32,000 / (1,000 units x 8

direct labor hours per unit)
= P32,000 / 8,000 DL hours
= P4 per direct labor hour
CONCEPT: APPLICATION OF STANDARDS

Let us assume that after referring to the

different source documents like cost of
production report, job order cost sheets,
labor time tickets, etc., we were able to
determine that in producing 900 units of
Bengram, Ednie Corporation actually
incurred total factory overhead costs of
P34,000.
CONCEPT: APPLICATION OF STANDARDS

2-way analysis

Controllable variance = Actual factory overhead – Budgeted

allowance based on standard hours

Budgeted allowance based on standard hours

is equal to budgeted fixed OH and variable OH.

Volume variance = Budgeted factory overhead based on std.

hours less standard factory overhead
CONCEPT: APPLICATION OF STANDARDS

2-way analysis

Actual factory overhead P34,000

Less budgeted allowance based on std hours:
Budgeted fixed overhead P8,000
Standard variable OH (7,200 x P3) 21,600 29,600
Controllable variance P4,400 UF

Budgeted allowance based on std. hours P29,600

Standard FOH (900 x 8hrs x P4) 28,800
Volume variance P 800 UF
CONCEPT: APPLICATION OF STANDARDS

3-way analysis

Actual factory overhead P34,000

Less budgeted allowance based on actual hours:
Budgeted fixed overhead P8,000
Standard variable OH (7,000 x P3) 21,000 29,000
Spending variance P5,000 UF

Budgeted allowance based on actual hours P29,000

Budgeted allowance based on std. hours 29,600
Variable efficiency P 600 F
CONCEPT: APPLICATION OF STANDARDS

3-way analysis

Budgeted allowance based on std. hours P29,600

Standard FOH (900 x 8hrs x P4) 28,800
Volume variance P 800 UF