STANDARD COSTING AND VARIANCE ANALYSIS
Standard - a benchmark or “norm” for measuring performance. In managerial accounting,
standards relate to the cost and quantity of inputs used in manufacturing goods or providing
services.
Standard Costing – a system that determines product cost by using standards or norms for
quantities and/or prices of component elements. It also allows costs to be compared against
norms for cost control purposes.
Standard Cost - pre-determined unit cost which is used as a measure of performance.
ADVANTAGES OF STANDARD COSTING
facilitate management planning;
promote greater economy and efficiency by making employees more “cost-conscious”;
are useful in setting selling prices;
contribute to management control by providing basis for evaluation and cost control;
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 that management may have more time
for more important problems of the business, not just routine supervision of
subordinates.
simplify costing of inventories and reduce clerical costs
Ideal vs. Normal Standards
Ideal Standards – based on the optimum level of performance under perfect operating
conditions
Normal Standards – based on an efficient level of performance that are attainable under
expected operating conditions
Variance Analysis
The following are the different types of Manufacturing Variance:
I. Direct Materials Variance
a. Material Price Variance (Spending Variance) - The purchasing agent is generally
responsible for the price variance.
MPV = (actual price – standard price) x actual qty. purchase
b. Material Quantity Variance (Usage Variance / Efficiency Variance) - The production
manager is generally responsible for the quantity variance.
MQV = (actual qty. – standard qty.) x standard price
Summary
II. Direct Labor Variance
a. Labor Rate Variance (Spending Variance) - The production manager is generally
responsible for the labor rate variance.
LRV = (actual rate – standard rate) x actual hours
b. Labor Efficiency Variance (Usage Variance / Efficiency Variance) - The production
manager is generally responsible.
LEV = (actual hours – standard hours) x standard rate
Summary:
Exercise: The following July information is for ABC Company:
Standards:
Material 3.0 feet per unit @ P4.20 per foot
Labor 2.5 hours per unit @ P7.50 per hour
Actual:
Production 2,750 units produced during the month
Material 8,700 feet used; 9,000 feet purchased @ P4.50 per foot
Labor 7,000 direct labor hours @ P7.90 per hour
1. What is the material price variance (based on usage)?
2. What is the material price variance (based on quantity purchased)?
3. What is the material quantity variance?
4. What is the labor rate variance?
5. What is the labor efficiency variance?
Exercise: ABC Company has the following information available for October when 3,500 units
were produced.
Standards:
Material 3.5 pounds per unit @ P4.50 per pound
Labor 5.0 hours per unit @ P10.25 per hour
Actual:
Material purchased 12,300 pounds @ P4.25
Material used 11,750 pounds
Labor used 17,300 direct labor hours @ P10.20 per hour
1. What is the material price variance (based on usage)?
2. What is the material price variance (based on quantity purchased)?
3. What is the material quantity variance?
4. What is the total material variance?
5. What is the labor rate variance?
6. What is the labor efficiency variance?
7. What is the total labor variance?
III. Factory Overhead Variance
a. Two-way analysis
Controllable Variance – it is the responsibility of the production department managers to
the extent that they can exercise control over the costs to which the variances relate.
Actual Factory Overhead xx
Budgeted Allowed Based on Std. Hours (xx)
Controllable Variance xx
Volume Variance (Uncontrollable Variance) – it is the responsibility of the executive and
departmental management.
Budgeted Allowed Based on Std. Hours xx
Standard Factory Overhead (xx)
Volume Variance xx
b. Three-way Analysis
Actual Factory Overhead
Budgeted Allowed Based on Actual Spending Variance
Hours Budgeted Allowed Based on Std. Efficiency Variance
Hours Standard Factory Overhead Volume Variance
c. Four-way Analysis
Spending Variance
VARIABLE FIXED
Efficiency Variance
Actual AVR x AFR x AH
BAAH AH SVR x BFC Volume Variance Controllable (1 & 3)
BASH AH SVR x BFC Variable Spending Variance
Standard SH SVR x SFR x SH
Fixed Spending Variance
SH
Key points:
If the actual cost is greater than the standard cost, it will result to unfavorable variance
(debit or underapplied)
If the actual cost is lower than the standard cost, it will result to a favorable variance
(credit or overapplied)
Reporting Variances
All variances should be reported to appropriate levels of management as soon as possible.
Variance reports facilitate the principle of “management by exception” by highlighting
significant differences.
Top management normally looks for significant variances. These may be judged on the
basis of some quantitative measure, such as more than 10% of the standard or more than
P1,000.
Exercise: ABC Company presented you the following budgeted monthly cost function for its
total manufacturing overhead: (₱2,500 x Machine Hours) + ₱1,000,000. The budgeted
production volume for the month is 300,000 bottles requiring 600 machine hours. It is ABC’s
policy to use machine hours for measuring the volume variance of fixed manufacturing overhead.
The actual results for the month are as follows:
Actual Production: 310,000 bottles
Actual Machine Hours: 630 machine hours
Actual Variable MOH: ₱1,638,000
Actual Fixed MOH: ₱950,000
Calculate the following:
1. Variable MOH Rate Variance (4-way variance)
2. Variable MOH Efficiency Variance (4-way variance)
3. Fixed MOH Spending Variance (4-way variance)
4. Fixed MOH Volume Variance (4-way variance)
5. Spending Variance (3-way variance)
6. Efficiency Variance (3-way variance)
7. Volume Variance (3-way variance)
8. Controllable Variance (2-way variance)
9. Uncontrollable Variance (2-way variance)
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