Topic 10
Standard Costing and Variance Analysis
Study Objectives
1 Definition of Standard Costing
2 Uses of Standard Costing
3 Calculation of Standard Cost
4 Types of Standard
Bahagian Matrikulasi, KPM 2
Study Objectives
5 Variance Analysis:
(i) Direct Material Variances:
- price variance and quantity/usage variance
(ii) Direct Labour Variances:
- labour price variance and labour quantity /efficiency variance
(iii) Overhead Variances:
- expenditure and efficiency variance for variable overhead
- volume and budget variance for fixed overhead
6 Implication of Variance Analysis
Bahagian Matrikulasi, KPM 3
10.1 Definition of Standard Costing
A standard costs are predetermined unit costs
which are used as measures of performance.
Standard costing values its manufactured
products with a predetermined materials cost,
a predetermined direct labour cost and a
predetermined manufacturing overhead cost.
Bahagian Matrikulasi, KPM 4
Distinguishing/difference between
Standards and Budgets
Standard cost - standard cost means the
budgeted cost of one unit of product.
Budgeted cost - budget means the total
amount of whole budgeted production.
Bahagian Matrikulasi, KPM 5
10.2 Uses of Standard Costing
1. Controlling
❑ Tool that helps management account in
controlling costs
❑ Detect changes in cost
❑ Study the causes
❑ Do a follow-up action
2. Performance evaluation
❑ Differences between actual and standard
are often used as measures of a manager’s
performance ( individual or for unit)
Bahagian Matrikulasi, KPM
10.3 Calculation of Standard Cost
STANDARD
Direct Materials Cost
per unit
STANDARD PRICE STANDARD QUANTITY
OF DIRECT MATERIALS X OF DIRECT MATERIALS
(SP) (SQ)
Cost per unit of direct Quantity per unit of direct
materials that SHOULD materials that SHOULD be
be incurred used in finished goods
remarks : SP – standard price
SQ – standard quantity
Bahagian Matrikulasi, KPM
10.3 Calculation of Standard Cost
STANDARD
Direct Labour Cost per
unit
STANDARD RATE / PRICE STANDARD HOURS OF
OF DIRECT LABOUR X DIRECT LABOUR
(SR) (SH)
Rate per hour of direct Time per unit of direct labour
labour that SHOULD be that SHOULD be required
incurred to make a product
remarks : SR – standard rate
SH – standard hours
Bahagian Matrikulasi, KPM
10.3 Calculation of Standard Cost
STANDARD
Manufacturing Overhead
Cost per unit
PREDETERMINED ESTIMATED PER UNIT
OVERHEAD RATE X ACTIVITIES
(SR) (SH)
Estimated Overhead cost e.g standard direct labour
Estimated Activity hours per unit
remarks : SR – standard rate
SH – standard hours
Bahagian Matrikulasi, KPM
Example 1 – Calculation of Standard cost
❖ Rajawali Enterprise produces a product named YAMI. The
following information relates to production for 2019:
Items Standard data
Sales and production 25,000 units
Direct materials 4 kg per unit @ RM3 per kg
Direct labour 3 hours per unit @ RM8 per hour
Variable overhead 3 hours per unit @ RM2 per hour
Fixed overhead 3 hours per unit @ RM3 per hour
Required : Compute standard cost per unit.
Bahagian Matrikulasi, KPM 10
Solution – example 1
Standard cost per unit :
RM
Direct material (4 kg x RM3) 12.00
Direct labour (3 hours x RM8) 24.00
Variable overhead (3 hours x RM2) 6.00
Fixed overhead (3 hours x RM3) 9.00
Total 51.00
Bahagian Matrikulasi, KPM 11
Setting standards
How do we set the standards?
Standard costs are developed in a variety of ways.
General practices:
1. Prior years performance
2. Expected future performance under normal
operating conditions.
3. Developed from price lists provided by
suppliers.
4. Determined time and motion studies
conducted by industrial engineers.
5. Developed from analysis of past data.
Bahagian Matrikulasi, KPM
10.4 Types of Standard
1 2
Ideal Normal
standard Standard
13
Bahagian Matrikulasi, KPM
Ideal Standard
❖ Refer to level of performance in perfect working
conditions with no provision for machine breakdown,
material wastage, idle time and error.
❖ Could be achieved through the best possible
combination of factors — the most favourable prices for
materials and labour, highest output with best
equipment and layout, and maximum efficiency in the
utilisation of production resources.
❖ Seldomly used because it is too difficult to achieve and
give adverse impact on employee’s motivation and
morale.
Bahagian Matrikulasi, KPM 14
Normal @ Basic Standard
❖ Would remain unchanged and will be used over long
time period.
❖ Useful to analyze trends of organization performance for
long period of time.
❖ However, if there is changes in production methods and
price levels, the standard is inappropriate to be applied
since it no longer represent current target cost.
❖ Basic standards are seldom used because it does not
take into account any changes in production methods.
Bahagian Matrikulasi, KPM 15
10.5 Variance Analysis
❖ Variance analysis is an analysis of the difference
between actual cost and planned, budgeted or standard
cost.
❖ Variance analysis attempts to identify and explain the
reasons for the difference between a standard amount
and an actual amount.
❖ When the planned, budgeted or standard cost is greater
than actual cost = FAVORABLE VARIANCE (F)
❖ When the planned, budgeted or standard cost is
smaller than actual cost = UNFAVORABLE VARIANCE
(UF)
Bahagian Matrikulasi, KPM 16
Variance Analysis
Types of
Variance
Direct Direct
Material Variable Fixed
Labour Overhead
Variances Variances Overhead
Variances Variances
17
Bahagian Matrikulasi, KPM
Calculation of variance
❖ Two method for variance calculation:
i) Matrix method (diagram)
ii) Equation / formula method
❖ Identify actual items and standard items:
- Actual price (AP) and standard price (SP)
- Actual quantity (AQ) and standard quantity (SQ)
- Actual rate (AR) and standard rate (SR)
- Actual hours (AH) and standard hours (SH) or
normal hours (NH) or budgeted hours (BH)
❖ Compare between actual cost with standard cost :
- actual < standard = Favorable, F
- actual > standard = Unfavorable, UF
Bahagian Matrikulasi, KPM 18
10.5.1 Direct Materials Variances
DM Price DM Quantity /
variance usage variance
✔ Actual price ≠ standard price ✔ Actual quantity used ≠ standard
✔ (AP- SP) AQ quantity in production
✔ compare AP & SP at AQ ✔ (AQ -SQ) SP
purchased ✔ Compare AQ used & SQ at SP in
production
Direct materials variance
• The difference between actual cost of DM and standard DM
cost of actual volume, [AP x AQ]- [SP x SQ]
• OR total DM price variance & DM quantity variance
Bahagian Matrikulasi, KPM
Direct Materials Variances
❖ A matrix method is used to determine and analyze a variance
(purchased quantity = used quantity)
Actual Standard / Actual Standard
AP x AQ AQ X SP SP X SQ
Price Variance, X Quantity Variance, Y
Direct materials variance = X+Y
Notes :
Actual price (AP)
Actual Quantity (AQ) = actual qty per unit x Actual units of production
Standard price (SP)
Standard Quantity (SQ) = standard qty per unit x Actual units of production
Bahagian Matrikulasi, KPM 20
Example 2: DMV – purchased q= used q
Syarikat KKHH produces H & M for the southern market.
The costs information for the production are as follows:
Direct material standard price RM 2.00 per kg
Standard quantity 5 kg per unit
Direct material actual cost RM 2.20 per kg
Actual quantity 4 kg per unit
Actual unit produced 100 units
Compute direct materials price variance, quantity variance
and direct materials variance.
Bahagian Matrikulasi, KPM 21
Solution : Example 2 - DMV
1) Use matrix method
Actual Standard / Actual Standard
AP x AQ AQ X SP SP X SQ
2.20 x ( 4x100) (4 x 100) x 2 2 x (5 x 100)
880 800 1,000
Price Variance=RM80 UF Quantity Variance=RM200 F
Direct materials variance = RM120 F
Bahagian Matrikulasi, KPM 22
Solution : Example 2 - DMV
2) Use formula / equation
Price variance Quantity variance
= (AP - SP) x AQ = (AQ - SQ) x SP
= (2.20 – 2.00) x (4x100) = [(4 x100) – (5 x 100)] x 2
= RM80 UF = RM200F
Direct materials variance
= RM120F ( 80 UF + 200F)
Bahagian Matrikulasi, KPM 23
Direct Materials Variances
❖ A matrix method is used to determine and analyze a variance
(purchased quantity ≠ used quantity)
Actual Standard / Actual Standard
AP x AQp AQp X SP SP x AQu SP X SQ
Price Variance, X Quantity Variance, Y
Direct materials variance = X+Y
Notes :
Actual price (AP)
Actual Quantity purchased (AQp)
Actual Quantity used (AQu)
Standard price (SP)
Standard Quantity (SQ) = standard qty per unit x Actual units of production
Bahagian Matrikulasi, KPM 24
Example 3: DMV – purchased q ≠ used q
Syarikat HUSFI DINI produces HD for the Northern
market. The costs information for the production are as
follows:
Actual production 4000 units
Direct materials purchased 10000 kg @ RM8.30
At the end of the month, balance of direct materials is 1,800kg.
The standard cost information as follows:
Direct materials 2 kg x RM8.00 = RM16
Determined the Direct Material Variances .
Bahagian Matrikulasi, KPM 25
Solution : Example 3 - DMV
1) Use matrix method
Actual Standard / Actual Standard
AP x AQp AQp X SP SP x AQu SP X SQ
8.30 x 10,000 10,000 x 8 8 x 8,200 8 x ( 2x 4,000)
83,000 80,000 65,600 64,000
Price Variance = RM3,000UF Quantity Variance = RM1,600UF
Direct materials variance =RM4,600UF
Bahagian Matrikulasi, KPM 26
Solution : Example 3 - DMV
2) Use formula / equation
Price variance Quantity variance
= (AP - SP) x AQp = (AQu - SQ) x SP
= (8.30 – 8.00) x (10,000) = [8,200 – ( 2 x 4,000)] x 8
= RM3,000 UF = RM1,600UF
Direct materials variance
= RM4,600 UF ( 3000 UF + 1600 UF)
Bahagian Matrikulasi, KPM 27
Direct Materials Variances
Reasons for a favorable (F) direct material price
variance may include:
❖An overall decrease in the market price level
❖Purchase of materials of lower quality than the standard
Reasons for a unfavorable (UF) direct material price
variance may include:
❖An overall hike in the market price of materials
❖Purchase of materials of higher quality than the standard
❖Increase in bargaining power of suppliers
Bahagian Matrikulasi, KPM 28
Direct Materials Variances
Reasons for a favorable (F) direct material quantity
variance may include:
❖Purchase of materials of higher quality than the standard
(this will be reflected in adverse material price variance)
❖Greater use of skilled labour
❖Training and development of workforce to improve
productivity
Reasons for a unfavorable (UF) direct material quantity
variance may include:
❖Purchase of materials of lower quality than the standard
❖Use of unskilled labour
Bahagian Matrikulasi, KPM 29
10.5.2 Direct Labour Variances
DL quantity /
DL Price / rate variance efficiency variance
⚫ Actual rate per hour ≠ ⚫ Actual hours worked ≠ standard
standard rate per hour hours at actual production
⚫ (AR-SR) AH ⚫ (AH-SH) SR
⚫ Compare AR & SR at the ⚫ Compare AH & SH utilized at
actual hour utilized during a SR
period
Direct labour variance
• The difference between actual cost of DL with standard cost of
DL , [AR x AH] - [SR x SH]
• OR total DL price variance and DL efficiency variance
Bahagian Matrikulasi, KPM
Direct Labour Variances
❖ A matrix method is used to determine and analyze a variance
Actual Standard / Actual Standard
AR x AH AH X SR SR X SH
Price Variance, X Efficiency/ Quantity Variance, Y
Direct labour variance = X+Y
Notes :
Actual rate (AR)
Actual hours (AH)
Standard rate (SR)
Standard hours (SH) = standard hour per unit x Actual units of production
Bahagian Matrikulasi, KPM 31
Example 4 : DLV
Syarikat DTPH produces H-Mas for Masjid Tanah market. The costs
information for the production are as follows:
Standard rate RM 0.50 per hour
Standard hour 2 hours per unit
Actual units produced were100 units , which:
Actual rate RM 0.60 per hour
Actual working hours 220 hours
Determine the Direct Labour Variances
Bahagian Matrikulasi, KPM 32
Solution : Example 4 - DLV
1) Use matrix method
Actual Standard / Actual Standard
AR x AH AH X SR SR X SH
0.60 x 220 220 x 0.50 0.50 x (2 x 100) 132
110 100
Price Variance=RM22 UF Efficiency/ Quantity Variance
=RM10 UF
Direct labour variance = RM32 UF
Bahagian Matrikulasi, KPM 33
Solution : Example 4 - DLV
2) Use formula / equation
Price variance Efficiency variance
= (AR - SR) x AH = (AH - SH) x SR
= (0.60 – 0.50) x 220 = [220 – ( 2 x 100)] x 0.50
= RM22 UF = RM10UF
Direct labour variance
= RM32 UF ( 22 UF + 10 UF)
Bahagian Matrikulasi, KPM 34
Direct Labour Variances
Reasons for a favorable (F) direct labour price/rate
variance may include:
❖Hiring of more un-skilled or semi-skilled labour
❖Decrease in the overall wage rates in the market due to an
increase in the supply of labour.
Reasons for a unfavorable (UF) direct labour price/rate
variance may include:
❖Increase in the national minimum wage rate
❖Hiring of more skilled labour than anticipated in the
standard
❖Inefficient hiring by the HR department
Bahagian Matrikulasi, KPM 35
Direct Labour Variances
Reasons for a favorable (F) direct labour quantity
/efficiency variance may include:
❖Hiring of more higher skilled labour (this may adversely
impact labour rate variance)
❖Training of work force in improved production techniques
and methodologies
❖ Using better quality raw materials which are easier to
handle
Reasons for a unfavorable (UF) direct labour quantity /
efficiency variance may include:
❖Hiring of lower skilled labour than the standard
❖Decrease in staff morale and motivation
Bahagian Matrikulasi, KPM 36
10.5.3 Variable Overhead Variances
❖ The variable overhead variance comprised of two variances,
which are:
a) Expenditure Variance
▪ The difference between variable production overhead
expense incurred during a period and the standard
variable overhead expenditure.
▪ Formula : (AR-SR) AH
b) Efficiency Variance
▪ Difference between standard number of manufacturing
hours and the actual hours worked during the period
▪ Formula : (AH-SH) SR
Variable overhead variance = Total both variances
above
Bahagian Matrikulasi, KPM = (AR x AH) – (SR x SH) 37
Variable Overhead Variances
❖ A matrix method is used to determine and analyze a variance
Actual Standard / Actual Standard
AR x AH AH X SR SR X SH
Expenditure Variance, X Efficiency Variance, Y
Variable overhead variance = X+Y
Notes :
Actual rate (AR)
Actual hours (AH)
Standard rate (SR) = predetermined variable overhead rate
Standard hours (SH) = standard hour per unit x Actual units of production
Bahagian Matrikulasi, KPM 38
Example 5 : VOV
Syarikat DDLJ produces H-Tech. The budgeted costs for the company
were as follows:
Production 20,000 units
Direct Labour hours 30,000 hours
Variable Overhead RM 24,000
Standard variable overhead rate per unit RM0.80 @1.5 hours
The actual produced units are 18,000 units The actual variable
overhead are RM 25,200. Actual Direct Labour Hours are 40,000 hours.
Determine the Variable Overhead Variances
Bahagian Matrikulasi, KPM 39
Solution : Example 5 - VOV
1) Use matrix method
Actual Standard / Actual Standard
AR x AH AH X SR SR X SH
25,200 40,000 x 0.80 0.80 x (1.5 x 18,000)
32,000 21,600
Expenditure Variance Efficiency Variance
=RM6,800 F =RM10,400 UF
Variable overhead variance = RM3,600 UF
Bahagian Matrikulasi, KPM 40
Solution : Example 5 - VOV
2) Use formula / equation
Efficiency variance
Expenditure variance
= (AH - SH) x SR
= (AR - SR) x AH
= [40,000 – (1.5 x 18,000)]
= 25,200 – (0.80 x 40,000)
x 0.80
= RM6,800 F
= RM10,400 UF
Variable overhead variance
= RM3,600 UF ( 6,800F + 10,400 UF)
Bahagian Matrikulasi, KPM 41
Variable Overhead Variances
Reasons for a favorable (F) variable overhead
expenditure variance may include:
❖Economies of scale (e.g. increase in order size of indirect
material leading to bulk discounts on purchase)
❖A decrease in the general price level of indirect supplies
Reasons for a unfavorable (UF) variable overhead
expenditure may include:
❖A rise in the national minimum wage rate leading to a
higher cost of indirect labour
❖A decrease in the level of activity not fully offset by a
decrease in overheads
Bahagian Matrikulasi, KPM 42
Variable Overhead Variances
Reasons for a favorable (F) variable overhead
efficiency variance may include:
❖Use of raw materials which is easier to work with
❖Employment of a higher skilled labour or improvement of
skills of existing workforce through training and
development leading to improve productivity
Reasons for a unfavorable (UF) variable overhead
efficiency variance may include:
❖Use of cheaper raw materials which is harder to work with
❖Inefficient production caused by employment of lower
skilled labour
Bahagian Matrikulasi, KPM 43
10.5.4 Fixed Overhead Variances
❖ The Fixed Overhead variance comprised of two variances, which
are:
a) Budget Variance
▪ Fixed Overhead Budget Variance, also known as fixed
overhead spending variance, is the difference between
budgeted and actual fixed production overheads during a
period.
▪ Formula : Actual FO – Budgeted FO @
▪ (AR x AH) – (BH@NH x SR)
b) Volume Variance
▪ Fixed Manufacturing Overhead Volume Variance, is the
difference between budgeted and absorbed fixed production
overheads.
▪ Formula : Budgeted FO – absorbed FO (SR x SH)
Bahagian Matrikulasi, KPM 44
Fixed Overhead Variances
❖ A matrix method is used to determine and analyze a variance
Actual Standard / Actual Standard
AR x AH BH @ NH X SR SR X SH
or use actual cost or use budgeted cost
Budget Variance, X Volume Variance, Y
Fixed overhead variance = X+Y
Notes :
Actual rate (AR); Actual hours (AH)
Budgeted hours (BH); Normal hours (NH)
Standard rate (SR) = predetermined fixed overhead rate
Standard hours (SH) = standard hour per unit x Actual units of production
Bahagian Matrikulasi, KPM 45
Example 6 - FOV
Syarikat DIL budgeted costs for 2019 are below:
Production unit 25,000 units
Direct labour hours 30,000 hours
Fixed Overhead RM 21,000
Standard hour per unit 1.5 hours
The actual produced units are 28,000 units. The actual fixed
overhead are RM 22,400. Actual direct labour hours are
35,000 hours.
Determine the Fixed Overhead Variances
Bahagian Matrikulasi, KPM 46
Solution : Example 6 - FOV
1) Use matrix method
Actual Standard / Actual Standard
AR x AH BH X SR SR X SH
22,400 21,000 (21,000/30,000) x (1.5x28,000)
0.70 x (42,000)
29,400
Budget Variance Volume Variance
=RM1,400 UF =RM8,400 F
Fixed overhead variance = RM7,000 F
Bahagian Matrikulasi, KPM 47
Solution : Example 6 - FOV
2) Use formula / equation
Volume variance
Budget variance = (BH xSR) – (SH x SR)
= (AR x AH) – (BH x SR) = 21,000 – [0.70 x (1.5 x
= 22,400 – 21,000 28,000)]
= RM1,400 UF = 21,000 – 29,400
= RM8,400 F
Fixed overhead variance
= RM7,000 F ( 1,400UF + 8,400 F)
Bahagian Matrikulasi, KPM 48
Fixed Overhead Variances
Reasons for a favorable (F) fixed overhead variance
may include:
❖Planned business expansion, which was anticipated to
cause a stepped increase in fixed overheads, not being
undertaken during the period.
❖Cost rationalization measures carried out during the period
aimed at reducing fixed overheads by eliminating
inefficiencies (e.g. through process re-engineering and
optimization of the usage of shared resources and
facilities).
Bahagian Matrikulasi, KPM 49
Fixed Overhead Variances
Reasons for a unfavorable (UF) fixed overhead
variance may include:
❖Expansion of business undertaken during the period, which
was not taken into consideration in the budget setting
process, cause a stepped increase in fixed overheads.
❖Inefficient fixed overhead management (e.g. due to empire
building pursuits of senior management).
Bahagian Matrikulasi, KPM 50
VARIANCE IMPLICATIONS
Actual Costs < Standard Costs =Favorable (F)
Actual Costs > Standard Costs =Unfavorable (UF)
Who is responsible for the variances ?
Direct Material Price variance - purchasing department
Direct Material Quantity variance - production department
Direct Labour Price/Rate Variance - HR department
Direct Labour Efficiency Variance - production department
Variable Ohd Expenditure Variance - production department
Variable Ohd Efficiency Variance - production department
Fixed Ohd Budget Variance - Manufacturing Supervisor
Fixed Ohd Volume Variance - production department
Bahagian Matrikulasi, KPM
