Standard Costing and

Variance Analysis
 Manufacturing, service and
not-for-profit organizations

Standard Record standard and actual costs in the

Cost
accounting records

Systems Provides an essential element of cost

control: having norms against which
actual operations can be compared

Clerical efficiency
Use of Standard Cost Systems

MOTIVATING PLANNING CONTROLLING – DECISION MAKING PERFORMANCE

VARIANCE ANALYSIS EVALUATION
 • Standard costs are budgeted costs
to
✔ Manufacture a single unit of
product or
✔ Perform a single service

• To develop standards, identify

✔ Material and labor types,
Standards quantities, and prices
✔ Overhead types and behavior
 Minimize unit cost while achieving certain
quality specifications.

Manufacturing
Objective Input Output
Resources Quality
 Direct
materials

Production
Direct labor
costs

Factory
overhead
Direct Materials used
• Types
Material • Quality
• Quantity
Standards • Price
A
B
S
 Actual Cost = actual quantity x actual price

Direct Budgeted Cost = actual quantity x standard price

Materials

Standard Cost = standard quantity x standard price

 Bryan Company employs a standard cost system in which direct materials inventory is carried at standard cost. Bryan
has established the following standards for the prime costs of one unit of product:

Direct materials QUANTITY PRICE

STANDARD 6.0 pounds P3.50/pound
ACTUAL 7.5 pounds P2.90/pound

Actual Cost = AQ X AP 7.50 pounds x P2.90 21.75

Price variance
4.5 favorable
Budgeted Cost = AQ X SP 7.50 pounds x P3.50 26.25

Usage/quantity variance
Standard Cost = SQ X SP 6.0 pounds x P3.50 21.00
5.25 unfavorable
 Labor used
• Types
Direct Labor • Production, setup, cleanup, and
rework
Standards • Quantity
• Cost
• Include wages, payroll taxes, and
fringe benefits
A
B
S
 Actual Cost = actual no. of hours x actual rate

Direct Labor Budgeted Cost = actual no. of hours x standard rate

Standard Cost = standard no. of hours x standard rate

 Bryan Company employs a standard cost system in which direct labor is carried at standard cost. Bryan has
established the following standards for the prime costs of one unit of product:

Direct labor QUANTITY RATE

STANDARD 1.3 hours P11.00/hour
ACTUAL 1.8 hours P10.50/hour

Actual Cost = AH X AR 1.8 HRS x 10.50 18.90

Rate variance
0.90 favorable
Budgeted Cost = AH X SR 1.8 HRS x 11.00 19.80

Efficiency variance
Standard Cost = SH X SR 1.3 HRS x 11.00 14.30
5.50 unfavorable
Sample problem:
The Litton Company has established standards as follows: DIRECT MATERIALS
Direct material 3 lbs. @ P4/lb. = P12 per unit Purchase Price
A = AQ X AP 3000 lbs. x 3.80 11400 variance
Direct labor 2 hrs. @ P8/hr. = P16 per unit 600 favorable
B = AQ X SP 3000 lbs. x 4.00 12000
Actual production figures for the past year are given below. ▪ S = SQ X SP 1800 lbs. x 4.00 4800 Quantity varianc
Units produced 600
7200 unfavorabl
▪ Direct material used 2,000 lbs.
▪ Direct material purchased (3,000 lbs.) P11,400 DIRECT MATERIALS
▪ Direct labor cost (1,100 hrs.) P 9,240 Usage Price varia
A = AQ X AP 2000 lbs. x 3.80 7600
The company applies variable manufacturing overhead to 400 favorable
B = AQ X SP 2000 lbs. x 4.00 8000
products on the basis of direct labor hours. Quantity variance
S = SQ X SP 1800 lbs. x 4.00 4800
3200 unfavorable

A. The materials price variance is:

DIRECT LABOR
B. The materials quantity variance is:
C. The labor rate variance is: A = AH X AR 1100 hrs. x 8.40 9240 Rate variance
440 unfavorable
D. The labor efficiency variance is: B = AH X SR 1100 hrs. x 8.00 8800
S = SH X SR 1200 hrs. x 8.00 9600 Efficiency varianc
800 favorable
EXERCISE:

The following materials standards have been established for a particular product:
Standard quantity per unit of output .. 1.7 meters
Standard price ........................ P19.80 per meter
The following data pertain to operations concerning the product for the last month:
Actual materials purchased ............ 5,800 meters
Actual cost of materials purchased .... P113,680
Actual materials used in production ... 5,100 meters
Actual output ......................... 3,200 units
What is the materials price and quantity variance for the month?

SOLUTION:
Price variance
A = AQ X AP 5800 m x 19.60 113,680
1160 favorable
B = AQ X SP 5800 m x 19.80 114,840
S = SQ X SP 5440 m. x 19.80107,712 Quantity variance
7128 unfavorable
EXERCISE:
The following labor standards have been established for a particular product:
Standard labor hours per unit of output. 1.7 hours
Standard labor rate ...................... P14.05 per hour
The following data pertain to operations concerning the product for the last
month:
Actual hours worked ...................... 3,700 hours
Actual total labor cost .................. P50,690
Actual output ............................ 2,300 units
What is the labor rate and efficiency variance for the month?

SOLUTION:
Rate variance
A = AH X AR 3700 hrs x 13.70 50,690
1295 favorable
B = AH X SR 3700 hrs x 14.05 51,985
S = SH X SPR 3910 hrs x 14.05 54,935.50 Efficiency variance
2950.50 favorable
Overhead 1. Variable overhead
Standards 2. Fixed overhead
A
B
S
 Actual Cost = actual no. of hours x actual rate

Overhead Budgeted Cost = actual no. of hours x standard rate

Standard Cost = standard no. of hours x standard rate

VARIABLE OVERHEAD
Actual Cost = AH X AR
Spending variance
Budgeted Cost = AH X SR
Efficiency variance
Standard Cost = SH X SR
Example:
CPA Company’s standard and actual costs per unit for the most recent period, during which 400 units were produced, are given
below:
Variable overhead:
Standard: 1.5 hrs. at P3.40 per hr 5.10
Actual: 1.4 hrs. at P3.10 per hr 4.34
Fixed overhead
Standard: 1.5 hrs. at P2.00 per hr 3.00
Actual: P1,288
The Company’s normal capacity for the period is 650 hours.

Solution:

Actual Cost = AH X AR 560 HRS X 3.10 1736 Spending variance

168 FAVORABLE
Budgeted Cost = AH X SR 560 HRS X 3.40 1904
Efficiency variance
Standard Cost = SH X SR 600 HRS X 3.40 2040 136 FAVORABLE
FIXED OVERHEAD
Actual Cost = Total Actual Fixed Cost
Spending variance
Budgeted Cost =Normal Capacity

Standard Cost = Total Standard Cost Volume variance

Example:
CPA Company’s standard and actual costs per unit for the most recent period, during which 400 units were produced, are given
below:
Variable overhead:
Standard: 1.5 hrs. at P3.40 per hr 5.10
Actual: 1.4 hrs. at P3.10 per hr 4.34
Fixed overhead
Standard: 1.5 hrs. at P2.00 per hr 3.00
Actual: P1,288
The Company’s normal capacity for the period is 650 hours.

Solution:

Actual Cost = 1288 Spending variance

12 FAVORABLE
Budgeted Cost = NC X SR 650 HRS X 2.00 1300
Volume variance
Standard Cost = SH X SR 600 HRS X 2.00 1200 100 UNFAVORABLE