1: Standard Budget Actual  Variance- the difference between

actual cost and standard cost. Should

 Standard- benchmark for measuring be described either as favorable or
performance. An idea or thing used as unfavorable
a measure, norm or model in
comparative evaluations Various Types of Variances:

Two Types of Standards Direct Materials:

1. Standard Quantity- specify how much 1. Quantity variance/usage variance
of an input should be used to make a 2. Materials spending/materials price
product or provide a service variance
2. Standard price/Standard Cost- specify 3. Total materials variance
how much should be paid for each unit
of input Direct Labor
1. Efficiency variance/time variance
Standard cost information comes from a 2. Labor spending/labor rate variance
number of sources: historical data, product 3. Total labor variance
specifications outlined by product engineers,
contracts with suppliers, labor union contracts Factory Overhead
1. Controllable variance
Users of Standard Costs 2. Volume variance
1. Manufacturing firms 3. Efficiency variance
2. Service firms 4. Variable spending variance
3. Non profit organization 5. Fixed spending variance

Advantages of Using standard costs Phases and Importance of this topic

1. Standard costs serve as a key element 1. Establish standard
in the application of management by 2. Measure actual performance
exception, management by objectives 3. Compare actual performance to
and responsibility accounting standard
2. Standard costs promote economy and 4. Analyze the variances
efficiency among employees 5. Investigate the variances that are
3. The use of standard costs simplifies material or significant in amount
bookkeeping and costing procedures 6. Take corrective actions when needed.
This may include revision of standard
 Budget- is the price allocated to a for future use
particular product based on the
standard quantity
-budgets are termed as 2: Direct Materials
“management estimates” or
“expectations” Illustration:
Assuming Company XYZ is producing dog
 Actual- exact cost incurred in figurines (product) and selling them to the
consideration to the exact quantity public market. The following data are as
used, purchased or incurred follows:

Two Types of Actual Direct Materials (Clay):

1. Actual Quantity- specify how much is Standard Quantity Allowed per figurine
the exact quantity used to be used for =3 kgs/figurine
each unit or output
2. Actual price/cost- specify the exact Total Actual Quantity
price or cost to be incurred to produce =2,000 figurines
each unit of output Actual Quantity purchased and utilized
materials (AQ)
=6,500 kgs
Standard Price per material (SP) Possible causes:
=P4.00 per kg 1. Faulty machines
Actual Price per material (AP) 2. Inferior materials quality
=P3.80 per kg 3. Untrained workers
4. Poor supervision

For 2,000 figurines Price variance is P1,300 favorable

Actual: What are the possible reasons why the

= AQ x AP company has a savings when it comes to
= 6,500kgs x P3.80 price?
= P24,700
Possible causes:
Budget: 1. Good customer-supplier relationship
=AQ x SP 2. Competitive supply management
= 6,500 kgs x P4.00 3. Opt for inferior quality (This is why
=P 26,000 favorable variance is not always good)
4. Good time management (Prevents rush
Standard: order)
= SQ x SP
= 3 kgs (per figurine) x 2,000 fig x P4.00 3: Direct Labor
= P24,000
Illustration:
Assuming Company XYZ is producing dog
Price or Spending Variance: figurines and selling them to the public
= Budget – Actual market. The following data are as follows:
= P26,000 – P24,700
= P1,300 Direct Labor:
= favorable Standard Hours Allowed per figurine
= 0.5 hours/figurine
Quantity/Usage Variance: Total Actual Quantity
= Standard- Budget = 2,000 figurines
=P24,000- P26,000 Actual Hours Used for production (AH)
= -P2,000 = 1,050 hours
=Unfavorable Standard Rate per hour (SR)
= P6.00 per hour
Materials Spending Variance: Actual Rate per hour (AR)
= Quantity Variance- Price Variance = P6.80 per hour
= -P2,000-P1,300
= P700 For 2,000 figurines
=Unfavorable Actual:
= AH x AR
= 1,050 hours x P6.80
Direct Materials: = P7,140
Actual – AQAP
Budget- AQSP Budget:
Standard- SQSP = AH x SR
= 1,050 hours x P6.00
Analysis: = P6,300
Quantity variance is P2,000 unfavorable
Standard:
What are the possible reasons why there is an = SH x SR
excessive use of material? = 0.5 hours (per figurine) x 2,000 x P6.00
= P6,000
Labor Rate Variance
= Budget- Actual 4: Factory Overhead Variance
= P6,300- P7,140
= -P840  BAAH- budget adjusted for actual
= Unfavorable hours is a combination of:
Labor Efficiency Variance: Fixed: Budgeted Fixed FOH
= Standard – Budget Variable: “Actual hours” x Variable
=P6,000- P6,300 OH rate
= -P300
= Unfavorable  BASH- budget adjusted for standard
hours is a combination of:
Labor Spending Variance Fixed: Budgeted Fixed FOH
= -P300 – P840 Variable: “Standard” Hours x Variable
= -P1,140 OH rate
= Unfavorable
Illustration:
Direct Labor Given:
Actual – AHAR 1.) Standard factory overhead cost per unit of
Budget- AHSR product:
Standard- SHSR = 4 hours at P3.00 per hour
2.) Actual production
Analysis: = 2,000 units
3.) Actual hours
Labor Efficiency variance is P300 = 7,500 hours
unfavorable. 4.) Actual Factory overhead incurred (70%
fixed)
What are the possible reasons why there is an = P 25,000
excessive hours used? 5.) Budgeted Fixed Factory Overhead
(BFFOH)
Possible causes: = P 20,000
1. Poorly trained workers 6.) Normal Production
2. Unmotivated workers = 2,500 units
3. Poor supervision
4. Faulty Equipment Actual FOH (AFOH):
= P25,000
Labor Efficiency variance is P300 unfavorable
Standard FOH (SFOH):
What are the possible reasons why there is an = Actual production x Standard FOH
excessive hours used? hours/unit x standard FOH rate/hr
= 2,000 x 4 hours x P3.00
Possible causes: = P24,000
1. Poorly trained workers
2. Unmotivated workers BAAH:
3. Poor supervision =Budgeted Fixed FOH + “Actual hrs” x
4. Faulty Equipment Variable OH rate
= P20,000 + (7,500 x P1.00/hr)
Labor rate variance is P840 unfavorable = P27,500

What are the possible reasons why the Variable OH rate:

company has excessive rate? = BFFOH/ Normal Production
Possible causes: Hours per unit of production
1. Overtime = P20,000/P2,500
2. Excessive manpower 4 hrs
3. Prioritizing unskilled employees = P2.00 (fixed OH rate)
= P3.00- P2.00  Price Variance- difference in prices x
= P1.00 actual quantity
 Mix Variance – total actual quantities
BASH at standard prices less total actual
= Budgeted Fixed FOH + “Standard hrs” x input at average standard input cost
Variable OH rate (ASIC)
= P20,000 + (8,000 hrs x P1 hr)  Yield Variance- total actual quantity
= P 28,000 input at average standard input cost
(ASIC) less Total quantity output at
Standard hrs: actual output x average std cost
= standard factory overhead cost x actual (ASOC)= (TAQ input x ASIC)-(TAQ
production output x ASOC)
= 4 hrs x 2,000
= 8,000 hrs. Illustration:

A Company combines three types of materials

to produce its product. For 100 kilo batch
5: Variance Analysis (Standard output quantity) , the standard cost
for materials are as follows:
Spending Variance:
= BAAH- AFOH
= P27,500- P25,000
= P2,500
= Favorable

Efficiency Variance:
= BASH- BAAH
= P28,000- P27,500 During August, the Company produced 200
= P500 batches or 20,000 kilos of its product.
= Favorable Materials used for this production were:

Volume Variance:
= SFOH- BASH
= P24,000 – P28,000
= -P4,000
= Unfavorable
Price Variance:
Controllable Variance: The difference in prices x actual quantity
= BASH – AFOH (computed for each type of material then
= P28,000- P25,000 summarized to get the net price variance)
= P3,000
= Favorable

Total Factory Overhead Variance:

= SFOH- AFOH
= P24,000 – P 25,000
= -P1,000 Mix Variance:
= Unfavorable Total actual quantities at standard prices less
total actual input at average standard input cost
(ASIC)
6: Material Price, Mix and Yield Variance
Analysis
ASIC=
= Total std input cost / Total std input quantity
= P516 / P120
= P4.30 per kilo

Budgeted:
=Total actual input x ASIC
= 24,600 x P4.30
= P105,780

=P106,300 (actual) – P105,780(budgeted)

= P520
=UF (actual is greater than budgeted)

Yield Variance:

Total actual quantity input at average standard

input cost (ASIC) less Total actual quantity
output at actual output x ave std cost (ASOC)
= (TAQ input x ASIC) – (TAQ output x
ASOC)

ASIC:
= Total std input cost / Total std input quantity
= P516 / P120
= P4.30 per kilo

ASOC:
= Total std output cost / Total std output
quantity
= P516 / P100
= P5.16 per kilo

=TAQ x (ASIC)
= 24,600 x P4.30
= P105,780

TAQ x (ASOC)
= 20,000 x P5.16
= P103,200

P105,780 – P103,200
= P2,580
= F (input is greater than output)