PART D: STANDARD COSTING

Main content
1. Standard costing and
setting standard – ch 13
2. Cost variance - ch 14a
3. Sales variance and Operating Statement- ch 14b
Giảng Viên TS. VŨ QUANG KẾT 1

1. STANDARD COSTING AND SETTING STANDARD

1.1. Standard costing

Standard Costing is a costing method, that is used to compare the standard
costs and revenues with the actual results, in order to arrive at the variances
along with its causes, to inform the management about the deviations and take
corrective measures, for its improvement.
A standard cost is a
predetermined estimated
unit cost, used for
inventory valuation and
control.

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 1. STANDARD COSTING AND SETTING STANDARD
1.1. Standard costing
Standard cost card: A standard cost card shows full details of the standard
cost of each product STANDARD COST CARD - PRODUCT 1234
$ $
Direct materials Material X - 3 kg at $4 per kg 12
Material Y - 9 litres at $2 per litre 18 30
Direct labour Grade A - 6 hours at $1.50 per hour 9
Grade B - 8 hours at $2 per hour 16 25
Standard direct cost 55
Variable production O/h - 14 hours at $0.50 per hour 7
Standard variable cost of production 62
Fixed production O/h - 14 hours at $4.50 per hour 63
Standard full production cost 125
Administration and marketing overhead 15
Standard cost of sale 140
Standard profit 20
Standard sales price 160

Giảng Viên TS. VŨ QUANG KẾT 3

1. STANDARD COSTING AND SETTING STANDARD

1.1. Standard costing

The use of Standard costing
(a) To value inventories and cost production for cost accounting purposes
(b) To act as a control device by establishing standards, highlighting activities
that are not conforming to plan and thus alerting management to areas which
may be out of control and in need of corrective action
Standard costing as a control technique
- The establishment of predetermined estimates of the costs of products or
services
- The collection of actual costs
- The comparison of the actual costs with the predetermined estimates

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 1. STANDARD COSTING AND SETTING STANDARD
1.2. Seting sandard costing
Types of performance standard

Type of Descritions
standards
- Based on perfect operating conditions: no wastage, no spoilage, no idle time,
Ideal no inefficiencies, no breakdowns.
- Variances are useful for pinpointing areas where a close examination may
result in large savings in order to maximise efficiency and minimise waste.
- Have an unfavourable motivational impact because reported variances will
always be adverse.
- Employees will often feel that the goals are unattainable and not work so hard.
- Based on the hope that a standard amount of work will be carried out
Attainable efficiently, machines properly operated or materials properly used.
- Some allowance is made for wastage and inefficiencies.
- If well set, they provide a useful psychological incentive by giving employees a
realistic but challenging target of efficiency. The consent and co-operation of
employees involvedGiảngin improving
Viên TS. VŨthe standard
QUANG KẾT are required. 5

1. STANDARD COSTING AND SETTING STANDARD

1.2. Seting sandard costing
Types of performance standard
Type of Descritions
standards
- These are based on current working conditions (current wastage, current
Current inefficiencies).
- The disadvantage of current standards is that they do not attempt to improve on
current levels of efficiency.
- These are kept unaltered over a long period of time, and may be out of date.
Basic - They are used to show changes in efficiency or performance over a long period
of time.
- Basic standards are perhaps the least useful and least common type of
standard in use.

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 1. STANDARD COSTING AND SETTING STANDARD
1.2. Seting sandard costing
Direct material prices
Will be estimated by the purchasing department from their knowledge of:
- Purchase contracts already agreed
- Pricing discussions with regular suppliers
- The forecast movement of prices in the market
- The availability of bulk purchase discounts
Direct labour rates
- Set by discussion with the personnel department and by reference to the
payroll and to any agreements on pay rises with trade union representatives of
the employees.
(a) A separate hourly rate or weekly wage will be set for each different labour
(b) An average hourly rate will be applied for each type of labour

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1. STANDARD COSTING AND SETTING STANDARD

1.2. Seting sandard costing
Overhead absorption rates
- In absorption costing, the absorption rate of fixed production overheads will be
predetermined, and based in the usual manner on budgeted fixed production overhead
expenditure and budgeted production.
- Selling and distribution costs, standard costs might be absorbed as a percentage of the
standard selling price.
- Standard costs under marginal costing will not include any element of absorbed
overheads.
Standard resource requirements of labour rates
(a) The 'standard product specification’ for materials must list the quantities required
per unit of each material in the product.
(b) The 'standard operation sheet' for labour will specify the expected hours required by
each grade of labour in each department to make one unit of product.

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 2. COST VARIANCES
2.1. Variances
2.2. Direct material cost variances
2.3. Direct Labour cost variances
2.4. Variable production overhead variances
2.5. Fixed production overhead variances
2.6. The reasons for cost variances
2.7. The significance of cost variances

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2.1. Variances

A variance is the difference between a planned, budgeted or standard cost

and the actual cost incurred. The same comparisons may be made for
revenues. The process by which the total difference betweenm standard and
actual results is analysed is known as variance analysis.
Variances can be divided into three main groups.
- Variable cost variances
- Fixed production overhead variances
- Sales variances

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 2.2. Direct material cost variances

a. Direct material total variance

The direct material total variance is the difference between what the output
actually cost and what it should have cost, in terms of material. It can be
subdivided into the price variance and the usage variance.
Example 2.1: Product A has a standard direct material of 10 kilograms of
material Y at $10 per kilogram. During period 4, 1,000 units of A were
manufactured, using 11,700 kilograms of material Y which cost $98,600.
This is the difference between what 1,000 units should have cost and what
they did cost.
1,000 units should have cost (1000x $100) $100,000
but did cost $ 98,600
Direct material total variance $1,400 (F)
The variance is favourable.
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2.2. Direct material cost variances

b. Direct material price variance

- The direct material price variance is the difference between the standard
cost and the actual cost for the actual quantity of material used or purchased

For example 2.1: The direct material price variance

This is the difference between what 11,700 kgs should have cost and what
11,700 kgs did cost.
11,700 kgs of Y should have cost (x $5 per h) $11,500
but did cost $ 8,900
Direct material Y variance $2,600 (F)
The variance is favourable because the labour cost less than it should have
costs.

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 2.2. Direct material cost variances
c. Direct material usage variance
The direct material usage variance is the difference between how much
material should have been used and how much material was used, valued at
standard cost.
For example 2.1: The direct material usage variance
1,000 units should have used: 1000 units x 10 kg = 10,000 kg
but did use 11,700 kg
Usage variance in kg 1,700 kg (A)
Usage variance in $ 1700kg x$10 = $17,000 (A)

Summary
Direct material Price variance $18,400 (F)
Direct material Usage variance $17,000 (A)
Direct material Total variance $ 1,400 (F)
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2.3. Direct labour cost variances

a. Direct labour total variance
The direct labour total variance is the difference between what the output
should have cost and what it did cost, in terms of labour.. It can be subdivided
into the direct labour rate variance and the efficiency variance.
Example 2.2: The standard direct labour cost of product A is 2 hours of grade z
labour at $5 per hour = $10 per unit of product A. During period 4, 1,000 units of
product A were made, and the direct labour cost of grade z labour was $8,900
for 2,300 hours of work.
This is the difference between what 1,000 units should have cost and what they
did cost.
1,000 units should have cost (1000x $10) $10,000
but did cost $ 8,900
Direct material total variance $1,100 (F)
The variance is favourable.
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 2.3. Direct labour cost variances
b. Direct labour price variance
The direct labour price variance The direct labour rate variance is similar to
the direct material price variance. It is the difference between the standard cost
and the actual cost for the actual number of hours paid for. It is the difference
between what the labour did cost and what it should have cost.

For example 2.2: The direct labour rate variance

This is the difference between what 2,300 hours should have cost and what
2,300 hours did cost.
2,300 hours of work should have cost (x $5 per h) $11,500
but did cost $ 8,900
Direct labour rate variance $1,100 (F)
The variance is favourable because the labour cost less than it should have.

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2.3. Direct labour cost variances

c. Direct labour efficiency variance
The direct labour efficiency variance is similar to the direct material usage, it
is the difference between how many hours should have been worked and how
many hours were worked, valued at the standard rate per hour.

For example 2.2: The direct labour efficiency variance

1,000 units of X should have taken (x 2 hrs): = 2,000 hs
but did take 2,300 hs
Efficiency variance in hours 300 hs (A)
Efficiency variance in $ 300 hs x$5 = $1,500 (A)
The variance is adverse because more hours were worked than should have
been worked

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 2.4. Variable production overhead cost variances
The variable production overhead total variance can be subdivided into the
variable production overhead expenditure variance and the variable
production overhead efficiency variance (based on actual hours)
The variable production overhead expenditure variance is the difference
between the amount of variable production overhead that should have been
incurred in the actual hours actively worked, and the actual amount of variable
production overhead incurred.
The variable production overhead efficiency variance it is the difference
between how many hours should have been worked and how many hours
were worked, valued at the production overhead rate per hour.

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2.4. Variable production overhead cost variances

Expenditure

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 2.4. Variable production overhead cost variances
Example 2.3: Suppose that the variable production overhead cost of product
X is: 2 hours at $1.50 = $3 per unit
During period 6, 1,000 units of product X were made. The labour force worked
2,020 hours, of which 60 hours were recorded as idle time. The variable
overhead cost was $3,075.
(a) The variable overhead total variance
1,000 units of product X should cost (x $3) $3,000
but did cost $3,075
Variable production overhead total variance $75 (A)
(b) The variable overhead expenditure variance
1,960 hours of variable production o/h should cost (x $1.50) $2940
but did cost $3,075
Variable production overhead expenditure variance $135 (A)
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2.4. Variable production overhead cost variances

Example 2.3:
(c) The variable overhead efficiency variance
1,000 units of product X should take (x 2hrs) 2,000 hrs
but did take 1,960 hrs
40 hrs(F)
Variable production o/h efficiency variance: 40x$1.5= $60 (F)

Summary
Variable production overhead expenditure variance 135(A)
Variable production overhead efficiency variance 60(F)
Variable production overhead total variance 75(A)

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 2.5. Fixed production overhead cost variances

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2.5. Fixed production overhead cost variances

Fixed overhead variance
FIXED OVERHEAD TOTAL VARIANCE

VOLUME VARIANCE
EXPENDITURE
Volume efficiency Volume Capacity
VARIANCE variance variance

Fixed Overhead Fixed O/h Fixed O/h

= -
total variance incurred absorbed

Fixed Overhead Budgeted fixed O/h Actual fixed O/h

= -
expenditure variance expenditure expenditure
Fixed O/H Standard Standard
= Budgeted Actual
volume x absorption - x absorption
volume volume
variance rate/ unit rate/ unit
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 2.5. Fixed production overhead cost variances
Fixed overhead variance
Fixed Overhead Hours Hours Standard
volume efficiency = should - actually x absorption
variance have taken taken rate per hour

Fixed Overhead Standard

Budgeted Actual
volume Capacity = - x absorption
hours hours
variance rate per hour

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2.5. Fixed production overhead cost variances

Example 2.4- Fixed overhead Variance
Suppose that a company plans to produce 1,000 units of product E during
August 20X3. The expected time to produce a unit of E is five hours, and the
budgeted fixed overhead is $20,000. The standard fixed overhead cost per unit
of product E will therefore be as follows.
5 hours at $4 per hour = $20 per unit
Actual fixed overhead expenditure in August 20X3 turns out to be $20,450. The
labour force manages to produce 1,100 units of product E in 5,400 hours of
work.
Calculate the following variances.
(a) The fixed overhead total variance (b).The fixed o/h expenditure variance
(c)The fixed o/h volume variance (d) The fixed o/h volume efficiency variance
(e)The fixed overhead volume capacity variance

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 2.5. Fixed production overhead cost variances
(a) Calculate the fixed overhead total variance
Fixed overhead incurred $20,450
Fixed overhead absorbed (1,100 units X $20 per unit) $22,000
Fixed overhead total variance $ 1,550 (F)
(= over-absorbed overhead)
The variance is favourable because more overheads were absorbed than budgeted

(b) Calculate the fixed overhead expenditure variance

Budgeted fixed overhead expenditure $20,000
Actual fixed overhead expenditure $20,450
Fixed overhead expenditure variance $ 450 (A)
The variance is adverse because actual expenditure was greater than budgeted
expenditure
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2.5. Fixed production overhead cost variances

(c) Calculate the fixed overhead volume variance
The production volume achieved was greater than expected. The fixed
overhead volume variance measures the difference at the standard rate.
Actual production at standard rate (1,100 X $20 per unit) $22.000
Budgeted production at standard rate (1,000 X $20 per unit) $20.000
Fixed overhead volume variance $ 2.000 (F)

The variance is favourable because output was greater than expected:

(i) The labour force may have worked efficiently, and produced output at a faster rate than
expected.
(ii) The labour force may have worked longer hours than budgeted, and therefore produced
more output, so there may be a capacity variance.

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 2.5. Fixed production overhead cost variances
(d) Calculate the fixed overhead volume efficiency variance
1,100 units of product E should take (x 5 hrs) 5.500 hrs
but did take 5.400 hrs
Fixed overhead volume efficiency variance in hours 100 hrs (F)
Fixed overhead volume efficiency variance in $ (x$4) $400 (F)
(e) Calculate the fixed overhead volume capacity variance
Budgeted hours of work 5.000 hrs
Actual hours of work 5.400 hrs
Fixed overhead volume capacity variance in hours 400 hrs (F)
Fixed overhead volume capacity variance in $ (x$4) $1600 (F)

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Fixed overhead cost variances Graph

UNDER –absorbed fixed overheads (1)

Fixed O/h Line B- Standard fixed O/h

Cost ($)
Line C - Actual fixed O/h
TOTAL
variance EXPENDITURE variance
(A) D (A)
VOLUME
variance (F)
Line A- Budgeted fixed O/h

Actual No of units Number of units produced

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 Fixed overhead cost variances Graph

UNDER–absorbed fixed overheads (2)

Fixed O/h Line B- Standard fixed O/h

Cost ($)
Line C - Actual fixed O/h
TOTAL
variance EXPENDITURE variance
(A) (A)

Line A- Budgeted fixed O/h

VOLUME
variance D
(A)

Actual No of units Number of units produced

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Fixed overhead cost variances Graph

UNDER–absorbed fixed overheads (3)

Fixed O/h Line B- Standard fixed O/h

Cost ($)
Line A - Budgeted fixed O/h

VOLUME
EXPENDITURE variance (F)
variance
(A)

Line C- Actual fixed O/h

TOTAL
variance D
(A)

Actual No of units Number of units produced

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 Fixed overhead cost variances Graph

OVER –absorbed fixed overheads (1)

Fixed O/h Line B- Standard fixed O/h

Cost ($)
Line A- Budgeted fixed O/h
VOLUME
variance EXPENDITURE variance (F)
(A) D
TOTAL
variance (F)
Line C- Actual fixed O/h

Actual No of units Number of units produced

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Fixed overhead cost variances Graph

OVER –absorbed fixed overheads (2)

Line B- Standard fixed O/h
Fixed O/h D
Cost ($) VOLUME
variance (F)
Line A - Budgeted fixed O/h
EXPENDITURE
variance (F)
TOTAL
variance (F)
Line C - Actual fixed O/h

Actual No Number of units produced

of units
Giảng Viên TS. VŨ QUANG KẾT 32
 Fixed overhead cost variances Graph

OVER –absorbed fixed overheads (3)

Line B- Standard fixed O/h
Fixed O/h D
Cost ($) TOTAL
variance (F)
Line C - Actual fixed O/h
EXPENDITURE
VOLUME
variance (A)
variance (F)

Line A - Budgeted fixed O/h

Actual No Number of units produced

of units
Giảng Viên TS. VŨ QUANG KẾT 33

Fixed overhead cost variances Graph

REMMEMBER
Fixed o/h expenditure variance = Budgeted fixed o/h- actual fixed o/h
If this > 0 => favourable variance.
Fixed o/h volume variance = Point D cost - budgeted fixed overheads
If this > 0 => favourable variance.
Total fixed overhead variance = Actual fixed overheads - Point D cost
If this > 0 => Adverse variance.

Where Point D cost is the standard fixed cost for the actual number of units
produced

Giảng Viên TS. VŨ QUANG KẾT 34

 2.6. The reasons for cost variances
There are four general causes of variances.
(a) Inappropriate standard. Incorrect or out of date standards could have
been used which will not reflect current conditions.
(b) Inaccurate recording of actual costs. For example, if timesheets are
filled in incorrectly, this may lead to variances.

(c) Random events. Examples include unusual adverse weather conditions

and a flu epidemic. These may cause additional unforeseen costs.
(d) Operating inefficiency. If the variance is not caused by inappropriate
standards, inaccurate recording or random events, then it must be due to
operating efficiency. The operating efficiency may be due to controllable or
uncontrollable factors.

Giảng Viên TS. VŨ QUANG KẾT 35

2.6. The reasons for cost variances

VARIANCES FAVOURABLE ADVERSE

Material price - Unforeseen discounts received, - Price Increase, Careless purchasing
- More care taken in purchasing, Change in - Change in material standard
material standard
Material - Material used of higher quality than standard - Defective material, Excessive waste
usage - More effective use made of material - Theft, Stricter quality control
- Errors in allocating material to jobs - Errors in allocating material to jobs
Labour rate - Use of apprentices or other workers at a rate of - Wage rate increase
pay lower than standard - Use of higher grade labour
Labour - Output produced more quickly than expected - Lost time In excess of standard
efficiency because of work motivation, better quality of allowed
equipment or materials, or better methods - Output lower than standard set
- Errors in allocating time to jobs because of deliberate restriction, lack
of training or substandard material
used
- Errors in allocating time to jobs

Giảng Viên TS. VŨ QUANG KẾT 36

 2.6. The reasons for cost variances

VARIANCES FAVOURABLE ADVERSE

Overhead Savings in costs incurred Increase in cost of services used
expenditure More economical use of services Excessive use of services
Change in type of services used
Overhead Labour force working more efficiently Labour force working less efficiently
volume (favourable labour efficiency variance) (adverse labour efficiency variance)
efficiency
Overhead Labour force working overtime
Machine breakdown, strikes, labour
volume
shortages
capacity

Giảng Viên TS. VŨ QUANG KẾT 37

2.7. The significance of cost variances

Once variances have been calculated, management have to decide whether
or not to investigate their causes. It would be extremely time consuming and
expensive to investigate every variance, therefore managers have to decide
which variances are worthy of investigation.
Factors which can be taken into account when deciding whether or not a
variance should be investigated.
(a) Materiality : Tolerance limits can be set and only variances which exceed such limits
would require investigating.
(b) Controllability: Some types of variance may not be controllable even once their cause is
discovered. Uncontrollable variances call for a change in the plan, not an investigation into the
past.

Giảng Viên TS. VŨ QUANG KẾT 38

 2.7. The significance of cost variances
(c) The type of standard being used
- Ideal standard => variances is always be adversed
(d) Interdependence between variances. Quite possibly, individual variances should not be
looked at in isolation. One variance might be interrelated with another, and much of it might
have occurred only because the other, interrelated variance occurred too. We will investigate
this issue further in a moment.
- Cheaper materials for a job in order to obtain a favourable price variance.This may lead to
higher materials wastage than expected and therefore adverse usage variances occur.
- More expensive materials, which perhaps have a longer service life, the price variance will be
adverse but the usage variance might be favourable.
- Higher rates for experience and skill, using a highly skilled team should incur an adverse rate
variance at the same time as a favourable efficiency variance

(e) Costs of investigation. The costs of an investigation should be weighed

against the benefits of correcting the cause of a variance.

Giảng Viên TS. VŨ QUANG KẾT 39

3. SALES VARIANCE AND OPERATING STATEMENTS

3.1. Sales variance
3.2. Variances in a standard marginal costing system
3.3. Deriving actual data from standard cost details and
variances
3.4. Control action

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 3.1. Sales variance
Selling price variance
The selling price variance is a measure of the effect on expected profit of a
different selling price to standard selling price. It is calculated as the difference
between what the sales revenue should have been for the actual quantity sold,
and what it was.
Example 3.1
Suppose that the standard selling price of product X is $15. Actual sales in 20X3 were 2,000
units at $15.30 per unit. The selling price variance is calculated as follows.
Sales revenue from 2,000 units should have been (x $15) $30.000
but was (x $15.30) $30.600
Selling price variance $600 (F)
The variance calculated is favourable because the price was higher than expected.

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3.1. Sales variance

Sales volume profit variance
The sales volume profit variance is the difference between the actual units
sold and the budgeted (planned) quantity, valued at the standard profit per unit.
In other words, it measures the increase or decrease in standard profit as a
result of the sales volume being higher or lower than budgeted(planned).
Example 3.2
Suppose that a company budgets to sell 8,000 units of product J for $12 per unit. The standard
full cost per unit is $7. Actual sales were 7,700 units, at $12.50 per unit.
Budgeted sales volume 8.000 units
Actual sales volume 7.700 units
Sales volume variance in units 300 units
x Standard profit per unit ($12-$7) $5
Sales volume profit variance in ($) $1.500 (A)

The variance is adverse because actual sales were less than budgeted (planned).
Giảng Viên TS. VŨ QUANG KẾT 42
 3.1. Sales variance
The significance of sales variances
The possible interdependence between sales price and sales volume
variances
- A reduction in the sales price might stimulate greater sales demand,
- A price rise would give => an adverse sales price variance might be
counterbalanced by a favourable sales volume variance.
e a favourable price variance, but possibly at the cost of a fall in demand and an
adverse sales volume variance.

It is therefore important in analysing an unfavourable sales variance that the

overall consequence should be considered; that is, has there been a
counterbalancing favourable variance as a direct result of the unfavourable
one?
Giảng Viên TS. VŨ QUANG KẾT 43

3.2. Operating statements

Operating statement is a regular report for management of actual costs and

revenues, usually showing variances from budget
Operating statements show how the combination of variance reconcile
budgeted profit and actual profit

This reconciliation isusually presented as a report to senior management at

the end of each control period. The report is called an operating statement
or statement of variances.

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 Proforma for Operating statements
$ $ $
Budgeted profit X
Sales volume profit variance X
Standard profit from actual sale X
(F) (A)
Variance
Sales price
Material price
Material usage
Labor rate
Labour efficiency
Variable overhead expenditure
Variable overhead efficiency
Fixed overhead expenditure
Fixed overhead efficiency
X X X
Actual profit Giảng Viên TS. VŨ QUANG KẾT X 45

3.2. Operating statements

Example 3.3- Variances and operating statements
Sydney manufactures one product, and the entire product is sold as soon as it is
produced. There are no opening or closing inventories and work in progress is
negligible. The company operates a standard costing system and analysis of variances
is made every month. The standard cost card for the product, a boomerang, is as
follows.
STANDARD COST CARD - BOOMERANG
Direct materials 0.5 kilos at $4 per kilo $2.00
Direct wages 2 hours at $2.00 per hour $4.00
Variable overheads 2 hours at $0.30 per hour $0.60
Fixed overhead 2 hours at $3.70 per hour $7.40
Standard cost $14.00
Standard profit $6.00
Standing selling price $20.00

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 3.2.Operating statements
Example 3.3- Variances and operating statements
Budgeted (planned) output for the month of June 20X7 was 5,100 units.
Actual results for June 20X7 were as follows.
Production of 4,850 units was sold for $95,600.
Materials consumed in production amounted to 2,300 kg at a total cost of
$9,800.
Labour hours paid for amounted to 8,500 hours at a cost of $16,800.
Actual operating hours amounted to 8,000 hours.
Variable overheads amounted to $2,600.
Fixed overheads amounted to $42,300.
Required
Calculate all variances and prepare an operating statement for the month
ended 30 June 20X7.

Giảng Viên TS. VŨ QUANG KẾT 47

3.2. Operating statements

Example 3.3- Variances and operating statements
(a) Material price variance (d) Labour efficiency variance
2,300 kg of material should cost (x $4) $9,200 4,850 boomerangs should take (x 2hs) 9,700hrs
but did cost $9,800 but did take (active hours) 8,000hrs
Material price variance $600(A) Labor efficiency variance in hours 1,700hrs
Labor efficiency variance in $ (x$2) $3,400(F)

(b) Material usage variance (e) Idle time variance

4,850 boomerangs should use (x 0.5 kg) 2,450kg 500 hours (A) x$2 = $1000 (A)
but did cost 2,300kg
Material usage variance in kg 150kg(F) (f) Variable O/h expenditure variance
Material usage variance in $ (x$4) $500(F) 8,000 hours incurring variable o/hd
expenditure should cost (x $0.30) $2,400
(C) Labour rate variance But did cost $2,600
8,500 hours of labour should cost (x $2) $17,000 Variable O/h expenditure variance $ 200 (A)
but did cost $16,800
Labour rate variance $ 200(F) (g) Variable O/h effieciency variance
1,700 hrs (F) x $0.3 per hour $510 (F)

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 3.2. Operating statements
Example 3.3- Variances and operating statements
(h) Fixed O/h expenditure variance (k) Selling price variance
Budgeted fixed overhead Revenue from 4,850 boomerangs
(5,100 units X 2 hrs X $3.70) $37,740 should be (x $20) $97000 (A)
Actual fixed O/h $42,300 But was $95,500
Fixed O/h expenditure variance $ 4,560 (A) Selling price variance $1,400 (A)

(i) Fixed O/h volume efficiency variance (l) Sales volume profit variance
4,850 boomerangs should take (x 2hs) 9,700hrs Budgeted sales volume 5,100 units
but did take (active hours) 8,000hrs Actual sales volume 4,850 units
Variance in hours 1,700hrs Sales volume variance in unit 250 units (A)
Variance in $ (x$3,7- absorption rate) $6,290(F) Sales volume variance in $ $1,500 (A)

(j) Fixed O/h volume capacity variance

Budgeted hours of work (5,100 X 2 hrs) 10,200hrs
Actual hours of work 8,000hrs
Variance in hours 2,200hrs
Variance in $ (x$3,7- absorption rate) $8,140(A)
Giảng Viên TS. VŨ QUANG KẾT 49

SYDNEY - OPERATING STATEMENT JUNE 20X7

$ $ $
Budgeted profit 30,600
Sales volume profit variance 1,500(A)
Standard profit from actual sale 29,100
Variance (F) (A)
Sales price 1,400
Material price 600
Material usage 500
Labor rate 200
Labour efficiency 3,400
Labour idle time 1,000
Variable overhead expenditure 200
Variable overhead efficiency 510
Fixed overhead expenditure 4,560
Fixed overhead efficiency 6,290
Fixed overhead volume capacity 8,140
10,900 15,900 5,000 (A)
Actual profit Giảng Viên TS. VŨ QUANG KẾT 24,100 50
 3.3. Variance in a standard marginal costing
system
Differences between the variances calculated in an absorption costing
system and the variances calculated in a marginal costing system.
(a) In marginal costing, Fixed costs are not absorbed into product costs and so there are no
fixed cost variances to explain any under- or over-absorption of overheads. No fixed
overhead volume variance. There will be a fixed overhead expenditure variance which is
calculated in exactly the same way as for absorption costing systems.

(b) The sales volume variance will be valued at standard contribution margin (sales price per
unit minus variable costs of sale per unit), not standard profit margin.

Giảng Viên TS. VŨ QUANG KẾT 51

Proforma for Operating statements under Marginal costing

$ $ $
Budgeted profit X
Sales volume contribution variance X
Standard contribution from actual sale X
Variance (F) (A)
Sales price
Material price
Material usage
Labor rate
Labour efficiency
Variable overhead expenditure
Variable overhead efficiency
X X X
Actual Contribution X
Budgeted fixed costs X
Fixed cost expenditure variance X
Actual fixed overheads X
ACTUAL PROFIT Giảng Viên TS. VŨ QUANG KẾT X 52
 Operating statements under Marginal costing
Returning once again to the example 3.3 the variances in a system of
standard marginal costing would be as follows.
(a)There is no fixed overhead volume variance (and therefore no fixed overhead volume
efficiency and volume capacity variances).
(b)The standard contribution per unit of boomerang is $(20 - 6.60) = $13.40, therefore the
sales volume contribution variance of 250 units (A) is valued at (x $13.40) = $3,350 (A).
The other variances are unchanged. However, this operating statement differs
from an absorption costing operating statement in the following ways.
(1) It begins with the budgeted contribution
$30,600 + budgeted fixed production costs $37,740 = $68,340
(2) The subtotal before the analysis of cost variances is actual sales ($95,600) less the
standard variable cost of sales ($4,850 X $6.60) = $63,590.
(3) Actual contribution is highlighted in the statement.
(4) Budgeted (planned) fixed production overhead is adjusted by the fixed overhead
expenditure variance to show the actual fixed production overhead expenditure.

Giảng Viên TS. VŨ QUANG KẾT 53

SYDNEY - OPERATING STATEMENT under Marginal costing

$ $ $
Budgeted contribution 68.340
Sales volume contribution variance 3,350(A)
Standard profit from actual sale 64,990
Variance (F) (A)
Sales price 1,400
Material price 600
Material usage 500
Labor rate 200
Labour efficiency 3,400
Labour idle time 1,000
Variable overhead expenditure 200
Variable overhead efficiency 510
4,610 3,200 1,410 (F)
Actual contribution margin 66,400
Budgeted fixed production overhead 37,740
Expenditure variance 4,560 (A)
Actual fixed production overhead 42,300
54
Actual Profit Giảng Viên TS. VŨ QUANG KẾT
24,100
 3.4. Deriving actual data from cost detail and
variance
Rather than being given actual data and asked to calculate the variances, you
may be given the variances and required to calculate the actual data on which
they were based. See if you can do these two questions.
Question
XYZ uses standard costing. The following data relates to labour grade II.
Actual hours worked 10,400 hours
Standard allowance for actual production 8,320 hours
Standard rate per hour $5
Rate variance (adverse) $516
What was the actual rate of pay per hour?

Solution
Rate variance per hour worked = $416/10,400 = $0.04 (A)
Actual rate per hour = $(5.00 + 0.04) = $5.04.

Giảng Viên TS. VŨ QUANG KẾT 55

3.4. Deriving actual data from cost detail and

variance
Question
The standard material content of one unit of product A is 10 kg of material X which should cost
$10 per kilogram. In June 20X4, 5,750 units of product A were produced and there was an
adverse material usage variance of $1,500.
Required: Calculate the quantity of material X used in June 20X4.
Solution
Let the quantity of material X used = Y

5,750 units should have used (x 10 kg) 57,500 kg

but did use Y kg
Usage variance in kg (Y - 57,500) kg
X standard price per kg x $10
10(Y-57,500) = 1,500
Y-57,500 = 150
Y = 57,650 kg

Giảng Viên TS. VŨ QUANG KẾT 56

 3.5. Control Action

- A variance should only be investigated if the expected value of

benefits from investigation and any control action exceed the costs
of investigation
- If the cause of a variance is controllable, action can be taken to bring
the system back under control in future.
- If the variance is uncontrollable, but not simply due to chance, it will
be necessary to review forecasts of expected results, and perhaps to
revise the budget.

Giảng Viên TS. VŨ QUANG KẾT 57

3.5. Control Action

Possible control action
The control action which may be taken will depend on the reason why
the variance occurred. Some reasons for variances are:
- Measurement errors
- Out of date standard serrors
- Efficient or inefficient operations
- Random or chance fluctuations

Giảng Viên TS. VŨ QUANG KẾT 58