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 – a planned unit cost of the product, component or service produced in a period.

The Need for Standards

o A standard is a measure of acceptable performance established by management as a guide in making economic
decisions.
o A standard is 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.
o A standard cost is a determined unit cost which is used as a measure of performance.
o A standard is the budgeted cost per unit of product.
o Both standards and budgets are predetermined costs, and both contribute to management planning and control.
 A standard is a unit amount.
 A budget is a total amount.

o Standard costs offer a number of advantages to an organization:

 They facilitate management planning.
 They promote greater economy by making employees more “cost-conscious”.
 They are useful in setting selling prices.
 They contribute to management control by providing a basis for evaluation of cost control.
 They are useful in highlighting variances in management by exception.
 They simplify costing of inventories and reduce clerical costs.

Standard Costing – Is a costing system that traces direct cost to output produced by multiplying the standard prices
and rates by the standard quantities of input allowed for actual outputs produced and allocates overhead costs on the basis of
the standard overhead-cost rates times the standard quantities of the allocation bases allowed for the actual outputs. Below is
the summary of cost assignment approaches:
DIRECT MATERIALS DIRECT LABOR OVERHEAD

ACTUAL COSTING SYSTEM Actual Actual Actual

NORMAL COSTING SYSTEM Actual Actual Standard
STANDARD COSTING Standard Standard Standard
SYSTEM

Setting Standard Costs

 Companies set standards at one of two levels:
o Ideal standards - represent optimum levels of performance under perfect operating conditions.
o Normal standards - represent efficient levels of performance that are attainable under expected operating
conditions.

 The direct materials price standard should be based on the delivered cost of raw materials plus an allowance for
receiving and handling.
 The direct materials quantity standard should establish the required quantity plus an allowance for unavoidable
waste and normal spoilage.
 The direct labor price standard should be based on current wage rates and anticipated adjustments.
 The direct labor quantity standard should be based on required production time plus an allowance for rest periods,
cleanup, machine setup, and machine downtime.
 For manufacturing overhead, a standard predetermined overhead rate is used. It is based on an expected standard
activity index such as standard direct labor hours or standard machine hours.
 The total standard cost per unit is the sum of the standard costs of direct materials, direct labor, and manufacturing
overhead.

Variance Analysis
The following are the different types of Manufacturing Variance:
 Direct Materials Variance
 Direct Labor Variance
 Factory Overhead Variance

Direct Materials Variance

a) Material Price Variance (MPV)

MPV = (actual price – standard price) x actual qty. purchase
 Key points:
o If the actual price is greater than the standard price, it will result to unfavorable price variance.
o If the actual price is less than the standard price, it will result to favorable price variance.

Accountability: The purchasing agent is generally responsible for the price variance because he has the
control over the price paid for the acquisition of the materials.

Journal Entry:
Raw Materials Inventory
(AQ Purchase x Std. Price) xx
MPV – unfavorable xx
MPV – favorable xx
Accounts payable
(AQ Purchase x Actual Price) xx

b) Material Quantity Variance (MQV)

MQV = (actual qty. – standard qty.) x standard price

Key points:
o If the actual quantity is greater than the standard quantity, it will result to unfavorable quantity
variance.
o If the actual quantity is less than the standard quantity, it will result to favorable quantity
variance.
Accountability: The production manager is generally responsible for the quantity variance because he has
the control over the use of the materials.

Journal Entry:
Work in Process Inventory
(Std. Qty. x std. price) xx
MQV – unfavorable xx
MQV – favorable xx
Raw Materials Inventory
(Actual qty. used x std. price) xx

Direct Labor Variances

a) Labor Rate Variance (LRV)

LRV = (actual rate – standard rate) x actual hours
Key points:
o If the actual rate is greater than the standard rate, it will result to unfavorable rate variance.
o If the actual rate is less than the standard rate, it will result to favorable rate variance.

Accountability: The production manager is generally responsible for the labor rate variance because he
has the responsibility for seeing that labor price/rate variance are kept under control.
b) Labor Efficiency Variance (LEV)
LEV = (actual hours – standard hours) x standard rate
Key points:
o If the actual hours are greater than the standard hours, it will result to unfavorable
efficiency variance.
o If the actual hours are less than the standard hours, it will result to favorable efficiency variance.
Accountability: The production manager is generally responsible for the labor efficiency variance since he has the
control over the staffs which are directly involved in the production.

Journal entry for Labor Rate and Efficiency Variance:

Work in Process Inventory xx
(Std. hours x std. price)
LRV – unfavorable xx
LEV – unfavorable xx
LRV – favorable xx
LEV – favorable xx
Wages Payable
(actual hours x actual rate) xx

Factory Overhead Variance

1) Two-way Analysis
a) 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

b) Volume 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

Key points:
o If the actual factory overhead is greater than the budgeted factory overhead, it will result to unfavorable
controllable variance.
o If the budgeted factory overhead is greater than the standard factory overhead, it will result to unfavorable
volume variance.

2) Three-way Variance

a) Spending Variance
Actual Factory Overhead xx
Budgeted Allowed Based on Actual Hours:
Fixed as budgeted xx
Variable (AH x SR) xx (xx)
Spending Variance xx

b) Efficiency Variance
Budgeted Allowed Based on Actual Hours:
Fixed as budgeted xx
Variable (AH x SR) xx xx
Budgeted Allowed Based on Std. Hours:
Fixed as budgeted xx
Variable (SH x SR) xx (xx)
Efficiency Variance xx

c) Volume Variance
Budgeted Allowed Based on Std. Hours:
Fixed as budgeted xx
Variable (SH x SR) xx xx
Standard Factory Overhead (xx)
Volume Variance xx

3) Four-way Variance

a) Variable Spending Variance

Actual Variable Factory Overhead xx

Budgeted Allowed Based on Actual
Hours:
Variable (AH x SR) xx (xx)
Variable Spending Variance xx

b) Fixed Spending Variance

Actual Fixed Factory Overhead xx

Budgeted Allowed Based on Actual Hours:
Fixed as budgeted xx (xx)
Fixed Spending Variance xx

c) Efficiency Variance

Budgeted Allowed Based on Actual Hours:

Fixed as budgeted xx
Variable (AH x SR) xx xx
Budgeted Allowed Based on Std. Hours:
Fixed as budgeted xx
Variable (SH x SR) xx (xx)
)Efficiency Variance xx
 d) Volume Variance

Budgeted Allowed Based on Std. Hours:

Fixed as budgeted xx

Variable (SH x SR) xx xx

Standard Factory Overhead (xx)
Volume Variance xx

Journal Entries:
a) Factory Overhead Control xx
Various Accounts xx
b) Work in process (std. costs) xx
Applied Factory Overhead xx

Under Two-way Method:

Applied Factory Overhead xx

Controllable Variance – unfavorable xx
Volume Variance – unfavorable xx
Controllable Variance – xx
favorable
Volume Variance – favorable xx
Factory Overhead Control xx

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.
Statement Presentation of Variances
 In income statements prepared for management under a standard cost accounting system, cost of
goods sold is stated at standard cost and the variances are disclosed separately.
 When there are no significant differences between actual costs and standard costs, companies report
their inventories at standard costs.
If there are significant differences between actual and standard costs, the financial statements must report inventories and
cost of goods sold at actual costs.

THEORIES:
1. Which of the following statements regarding standard cost system is true?
a. Favorable variances are not necessarily good variances.
b. Managers will investigate all variances from standard
c. The production supervisor is generally responsible for material price variance.
d. Standard costs cannot be used for planning purposes since costs normally change in the future.
2. A small manufacturing company recently stated its sales goal for a period was P 100,000. At this level of activity, its
budgeted expenses were P 80,000. Its actual sales were P 100,000, but its actual expenses were P 85,000. This
company operated
a. Effectively and efficiently c. Effectively but not efficiently
b. Neither effectively nor efficiently d. Efficiently but not effectively
3. Relevant information for material A follows
Quantity purchased 6,500 lbs.
Standard quantity allowed 6,000 lbs.
Actual price P 3.80
Standard price P 4.00
What is the direct material price variance for material A?
a. 1,300 favorable c. 1,200 unfavorable
b. 1,200 favorable d. 1,300 unfavorable
4. During March, Younger Company’s direct material costs for product T were as follows:
Actual unit purchase price P 6.50 per meter
Standard quantity allowed for actual production 2,100 meters
Quantity purchased and used for actual production 2,300 meters
Standard unit price P 6.25 per meters
Younger’s material quantity variance for March was:
a. 1,250 unfavorable c. 1,300 unfavorable
b. 1,250 favorable d. 1,300 favorable
 5. Samson Company uses a standard costing system in the production of its only product. The 84,000 units of raw materials
inventory were purchased for P 126,000 and 4 units of raw materials are required to produce one unit of final product.
In October, the company produced 14,400 units of product. The standard cost allowed for materials was P 72,000, and
there were was an unfavorable usage variance of P 3,000. The materials price variance for the units used in October
was
a. 15,000 unfavorable c. 3,000 unfavorable
b. 15,000 favorable d. 3,000 favorable
Use the following for numbers 6-7
Ariston Company produced 3,200 units of product. Each unit requires 2 standard hours. The standard labor rate is P15
per hour. Actual direct labor for the period was P 79,200 (6,600 hours x P12).
6. What is the direct labor rate variance?
a. 19,800 favorable c. 6,400 unfavorable
b. 16,800 favorable d. 3,000 unfavorable
7. What is the direct labor quantity variance?
a. 19,800 favorable c. 6,400 unfavorable
b. 16,800 favorable d. 3,000 unfavorable
8. Dagan Company manufactures one product with a standard direct manufacturing labor cost of four hours at P 12.00
per hour. During June, 1,000 units were produced using 4,100 hours at P 12.20 per hour. What was the unfavorable
direct labor efficiency variance?
a. 820 c. 1,200
b. 400 d. 1,220
9. The following July information is for Casey 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

Question 1: What is the material price variance (calculated at point of purchase)?

a. P2,700 U c. P2,610 F
b. P2,700 F d. P2,610 U

Question 2: What is the material quantity variance?

a. P3,105 F c. P3,105 U
b. P1,050 F d. P1,890 U

Question 3: What is the labor rate variance?

a. P3,480 U c. P2,800 U
b. P3,480 F d. P2,800 F

Question 4: What is the labor efficiency variance?

a. P1,875 U c. P1,875 U
b. P938 U d. P1,125 U

10. Kristine 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 12,300 pounds @ P4.25
purchased
Material used 11,750 pounds
Labor used 17,300 direct labor hours @ P10.20 per
hour

Question 1: What is the labor rate variance?

a. P875 F c. P865 U
b. P865 F d. P875 U

Question 2: What is the labor efficiency variance?

a. P2,050 F c. P2,040 U
b. P2,050 U d. P2,040 F
Question 3: What is the material price variance (based on quantity purchased)?
 a. P3,075 U c. P2,938 F
b. P2,938 U d. P3,075 F

Question 4: What is the material quantity variance?

a. P2,250 F c. P225 F
b. P2,250 U d. P2,475 U

Question 5: Assume that the company computes the material price variance on the basis of material issued to
production. What is the total material variance?
a. P2,850 U c. P5,188 F
b. P5,188 U d. P2,850 F

11. Ezequil Company uses a standard cost system for its production process and applies overhead based on
direct labor hours. The following information is available for August when the company made 4,500
units:

Standard:
DLH per unit 2.50
Variable overhead per DLH P 1.75
Fixed overhead per DLH P 3.10
Budgeted variable overhead P21,875
Budgeted fixed overhead P38,750
Actual:
Direct labor hours 10,000
Variable overhead P26,250
Fixed overhead P38,000

Question 1: Using the one-variance approach, what is the total overhead variance?
a. P 6,062.50 U c. P 9,687.50 U
b. P 3,625.00 U d. P 6,562.50 U

Question 2: Using the two-variance approach, what is the controllable variance?

a. P 5,812.50 U c. P 4,375.00 U
b. P 5,812.50 F d. P 4,375.00 F

Question 3: Using the two-variance approach, what is the noncontrollable variance?

a. P 3,125.00 F c. P 3,875.00 F
b. P 3,875.00 U d. P 6,062.50 U

Question 4: Using the three-variance approach, what is the spending variance?

a. P 4,375 U c. P 8,000 U
b. P 3,625 F d. P 15,750 U

Question 5: Using the three-variance approach, what is the efficiency variance?

a. P 9,937.50 F c. P 2,187.50 U
b. P 2,187.50 F d. P 2,937.50 F

Question 6: Using the three-variance approach, what is the volume variance?

a. P 3,125.00 F c. P 3,875.00 U
b. P 3,875.00 F d. P 6,062.50 U

Question 7: Using the four-variance approach, what is the variable overhead spending variance?
a. P 4,375.00 U c. P 8,750.00 U
b. P 4,375.00 F d. P 6,562.50 U

Question 8: Using the four-variance approach, what is the variable overhead efficiency variance?
a. P 2,187.50 U c. P 2,187.50 F
b. P 9,937.50 F d. P 2,937.50 F

Question 9: Using the four-variance approach, what is the fixed overhead spending variance?
a. P 7,000 U c. P 750 U
b. P 3,125 F d. P 750 F

Question 10: Using the four-variance approach, what is the volume variance?
a. P 3,125 F c. P 6,063 U
b. P 3,875 F d. P 3,875 U