Ateneo de Zamboanga University

School of Management and Accountancy

Accountancy Department

LEARNING PACKET
COSMAN2 – Strategic Cost Management
Session 1 , First Semester, SY 2020-21

LEARNING PACKET NO. 4 DATE: August 30,2020

TOPIC: Variances Part 1- Direct material and Direct labor variances Week No.: 4
Session: 1

INTENDED LEARNING OUTCOME:

At the end of these learning units, the learners shall:

1.) Define what is standard cost and the types of standards

2.) Understand the difference of price and quantity variance for direct materials
3.) Understand the difference of labor rate and efficiency variance for direct labor
4.) Analyze the difference between mix and yield variances

I. CONCEPT NOTES

5.1.1. Basic Standard Costing Concepts

Standards and Standard Costs
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.
In management accounting, standards are set for the quantity and cost of inputs used in manufacturing
goods or providing services.
Quantity Standards – indicate the quantity of materials and labor time required to produce a unit of
product or provide a service.
Cost Standards – specify the amount of payment that should be made for each unit of input.
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.
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.
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
1. Establish standards
2. Measure actual performance
3. Compare actual performance with standard
4. Analyze the variances
5. Investigate the variances that must be investigated
6. Take corrective action when needed. This may include revision of standards.

5.1.2. 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.

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.

5.1.3. 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

IN SUMMARY : VARIANCES IN A DIAGRAM APPROACH

SAMPLE PROBLEM WITH SOLUTION

1.) Comprehensive problem

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:
a. Calculate the following:
1. Material price variance based on purchases
2. Material quantity variance
3. Labor rate variance
4. Labor efficiency variance
2.) Direct Materials and Direct Labor Mix and Yield Variances

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 $432

pound
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 $14.30 715.00
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
Upstate manufactures a product that has the following standard costs:

Direct materials: 40 yards at P2.70 P108

per yard
Direct labor: 8 hours at P18.00 per 144
hour
Total P252

The following information pertains to July:

Direct material purchased: 42,500 yards at P2.78 per yard, or P118,150

Direct material used: 36,000 yards
Direct labor: 7,500 hours at P18.30 per hour, or P137,250
Actual completed production: 1,050 units

Required:
Calculate the direct-material price and quantity variances and the direct-labor rate and efficiency
variances. Indicate whether each variance is favorable or unfavorable.

PROBLEM 2
Information on Goodeve Company’s direct labor costs are presented below:

Standard direct labor hours 30,000

Actual direct labor hours 29,000
Direct labor efficiency variance Favorable P 4,000
Direct labor rate variance Favorable P 5,800
Total payroll P110,200

1.) What was Goodeve’s standard direct labor rate?

2.) What was Goodeve’s actual direct labor rate?

PROBLEM 3
The Bohol Company uses standard costing. The following data are available for October:

Actual quantity of direct materials used 23,500 pounds

Standard price of direct materials P2 per pound
Material quantity variance P1,000 U

The standard quantity of materials allowed for October production is:

PROBLEM 4
Information on Dulce’s direct material costs for May is as follows:
Actual quantity of direct materials purchased and used 30,000 lbs.
Actual cost of direct materials P84,000
Unfavorable direct materials usage variance P 3,000
Standard quantity of direct materials allowed for May production 29,000 lbs

For the month of May, Dulce’s direct materials price variance was:

PROBLEM 5
Bernie Services has three labor classes: administrative assistants, paralegals, and attorneys. Standard
wage rates are as follows: administrative assistants, P30 per hour; paralegals, P60 per hour; and
attorneys, P125 per hour. For October, the numbers of actual direct labor hours worked and of standard
hours for probate cases were as follows:

Actual DLHs Number of Standard Hours

Allowed
Administrative assistant 900 1,008
Paralegal 2,520 2,772
Attorney 1,500 1,260

a. Calculate October’s direct labor efficiency variance and decompose the total into the following
components:
1. direct labor mix variance, and
2. direct labor yield variance.

PROBLEM 6 – Setting Direct Material Standards

The Vandana Company has a signature scarf for ladies that is very popular. Certain production and
marketing data are indicated below:
Cost per yard of cloth P40.00
Allowance for rejected scarf 5% of production
Yards of cloth needed per scarf 0.475 yard
Airfreight from supplier P1.00/yard
Motor freight to customers P0.90 /scarf
Purchase discounts from supplier 3%
Sales discount to customers 2%
The allowance for rejected scarf is not part of the 0.475 yard of cloth per scarf. Rejects have no
market value. Materials are used at the start of production.

Calculate the standard cost of cloth per scarf that Vandana Company should use in its cost sheets.

PROBLEM 7 – Setting Direct Labor Standards

Double M company is a chemical manufacturer that supplies various products to industrial users. The
company plans to introduce a new chemical solution called Bysap, for which it needs to develop a
standard product cost. The following labor information is available on the production of Bysap.
 The product, which is bottled in 10-liter containers, is primarily a mixture of Byclyn, Salex, and
Protet.
 The finished product is highly unstable, and one 10-liter batch out of six is rejected at final
inspection. Rejected batches have no commercial value and are thrown out.
 It takes a worker 35 minutes to process one 10-liter batch of Bysap. Employees work on eight-
hour a day, including one hour per day for rest breaks and cleanup.

What is the standard labor time to produce one 10-liter batch of Bysap?
V. INDEPENDENT LEARNING

PROBLEM 1
Hellier Contractors paints interiors of residences and commercial structures. The firm’s management has
established cost standards per 100 square feet of area to be painted.

Direct material (P18 per gallon of paint) P1.50

Direct labor 2.00
Variable overhead 0.60
Fixed overhead (based on 600,000 square feet per month) 1.25

Management has determined that 400 square feet can be painted by the average worker each hour.
During May, the company painted 600,000 square feet of space and incurred the following costs:

Direct material (450 gallons purchased and used) P 8,300.00

Direct labor (1,475 hours) 12,242.50
Variable overhead 3,480.00
Fixed overhead 7,720.00
a. Compute the direct material variances.
b. Compute the direct labor variances.

PROBLEM 2
Surgical Products produces latex surgical gloves. Machines perform the majority of the processing for
1,000 pairs of gloves per hour. Each pair of gloves requires 0.85 square foot of latex, which has a standard
price of P0.80 per square foot. Machine operators are considered direct labor and are paid P15 per hour.
During one week in May, Surgical Products produced 300,000 pairs of gloves and experienced a P1, 440
unfavorable material quantity variance. The company had purchased 2,500 more square feet of material
than had been used in production that week. The unfavorable material price variance for the week was
P5, 186. A P288 unfavorable total labor variance was generated based on 315 total actual labor hours to
produce the gloves.

A. Determine the following amounts:

a. Standard quantity of material for production achieved
b. Actual quantity of material used
c. Actual quantity of material purchased
d. Actual price of material purchased
e. Standard hours for actual production
f. Labor efficiency variance
g. Labor rate variance
h. Actual labor rate
B. Journalize the journal entries for the above information

PROBLEM 3- Materials Mix and Yield Variance Analysis.

Kreutzer Candle Co. manufactures candles in various shapes, sizes, colors, and scents. Depending on the
orders received, not all candles require the same amount of color, dye, or scent materials. Yields also
vary, depending upon the usage of beeswax or synthetic wax. Standard ingredients for 1,000 lbs. of
candles are:

Standard Cost
Standard Mix per Pound
Input:
Beeswax.................................................................................................... 200 lbs. P1.00
Synthetic wax......................................................................................... 840 .20
Colors......................................................................................................... 7 2.00
Scents ......................................................................................................... 3 6.00
Totals .................................................................................................. 1,050 lbs.

Standard output ........................................................................................... 1,000 lbs.

Price variances are charged off at the time of purchase. During January, the company was busy
manufacturing red candles for Valentine's Day. Actual production then was:

Input:
Beeswax............................................................................................................................... 4,100
Synthetic wax.................................................................................................................... 13,800
Colors.................................................................................................................................... 2,200
Scents .................................................................................................................................... 60
Totals ............................................................................................................................. 20,160 lbs.

Actual output............................................................................................................................ 18,500 lbs.

Required: Compute the materials mix variance and the materials yield variance.