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LEC 5.2 Standard Costing and Variance Analysis

Here are the steps to develop standards for factory overhead using the fixed budget approach: 1. Determine the budgeted fixed overhead cost (based on theoretical capacity): - Utilities: P15,000 - Factory rent: P34,000 - Equipment depreciation: P20,000 - Factory supervisor salary: P67,854 - Factory maintenance staff salaries: P13,488 - Total budgeted fixed overhead: P150,342 2. Determine the standard overhead rate per direct labor hour: - Total budgeted fixed overhead / Total budgeted direct labor hours at theoretical capacity = P150,342 / (10,000 units x 3 hours/unit) = P5 per direct labor

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Kelvin Culajará
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123 views32 pages

LEC 5.2 Standard Costing and Variance Analysis

Here are the steps to develop standards for factory overhead using the fixed budget approach: 1. Determine the budgeted fixed overhead cost (based on theoretical capacity): - Utilities: P15,000 - Factory rent: P34,000 - Equipment depreciation: P20,000 - Factory supervisor salary: P67,854 - Factory maintenance staff salaries: P13,488 - Total budgeted fixed overhead: P150,342 2. Determine the standard overhead rate per direct labor hour: - Total budgeted fixed overhead / Total budgeted direct labor hours at theoretical capacity = P150,342 / (10,000 units x 3 hours/unit) = P5 per direct labor

Uploaded by

Kelvin Culajará
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Standard costing and variance

analysis
Kelvin Jaluag Culajara, BSA, CPA
Assistant Instructor
School of Management and Accountancy
Use of standard costing
• Motivation- helps communicate management’s expectations to workers.
When standards are achievable and rewards for attaining them are
available, workers are likely to be motivated to strive to meet the targets
that have been set.
• Planning – financial and operational planning requires estimates about
future price and usage of inputs. Managers can use current standards to
estimate future quantity needs and costs.
• Control – actual costs and quantities can be based upon established
standards to determine whether targets are met.
• Decision-making
• Performance evaluation
The essence of standard costing and variance
analysis
• Actual costs are compared to standard costs.
• If actual costs are greater than standard costs, then it is
unfavorable to the entity because it indicates over-expenditure!
• If actual costs are less than or equal to standard costs, then it is
favorable to the entity because expenditures are within the
established budget. There are savings on the part of the entity.
Considerations in establishing standards
• Appropriateness
• Relevance
• Currency
• Attainability
• Capacity
CASE 1: Developing standards
You are a newly-established glass manufacturing firm that is about to
start its first production run. Your engineering expert says that your
theoretical capacity for production is 10,000 units, but after
considering internal and external factors (like breakdown, delivery
delays, etc.), he later estimates that 55% is the most realistic and
achievable capacity. With this capacity in mind, your cost analysts came
up with the following data:
CASE 1: Developing standards
Direct materials P 143,764
Direct labor 94,780
Factory overhead:
Utilities 15,000
Factory rent 34,000
Equipment depreciation 20,000
Factory supervisor salary 67,854
Factory maintenance staff salaries 13,488
CASE 1: Developing standards
You have determined that for the first month of operations, the firm
only operated at 34% capacity.

Each unit produced would require 2 units of direct materials, and 3


hours of direct labor. As per accounting policy, factory overhead is
initially allocated per direct labor hour.

Your bookkeepers presented to you the following actual cost data:


CASE 1: Developing standards
Direct materials P 14.50 per unit, 10,785 units used.
Direct labor 7.00 per hour, 15,000 hours used.
Factory overhead:
Utilities P 11,760
Factory rent 34,000
Equipment depreciation 20,000
Factory supervisor salary 74,715
Factory maintenance staff salaries 12,500
Determine the standard costs and standard quantities for materials,
labor, and overhead, per unit produced.
SUGGESTED ANSWER TO CASE 1:
DEVELOPING STANDARDS (materials)
Standard cost per unit = Budgeted cost x Budgeted input
Standard quantity = Budgeted input x Budgeted output per output

Budgeted cost and budgeted quantity are the planned cost and quantity
that the entity may expect to incur or yield.

These expectations may be the result of the organization’s previous


experiences, or of empirical evidence, etc.
SUGGESTED ANSWER TO CASE 1:
DEVELOPING STANDARDS (materials)
Materials
Std. units of materials per = 1 unit produced x 2 materials = 2
unit produced

Std. materials cost per = 1 unit produced x 2 materials x budgeted


unit produced materials cost per unit
SUGGESTED ANSWER TO CASE 1:
DEVELOPING STANDARDS (materials)
Materials
Budgeted materials cost = P143,764/(5,500*x2) = P13.07
per unit

*5,500 = 10,000 units theoretical capacity x 55% realistic estimate


SUGGESTED ANSWER TO CASE 1:
DEVELOPING STANDARDS (materials)
Materials
Std. units of materials per = 1 unit produced x 2 materials = 2 units
unit produced

Std. materials cost per = 1 unit produced x 2 materials x P13.07


unit produced = P26.14

Next: Find the materials variance


SUGGESTED ANSWER TO CASE 1:
DEVELOPING STANDARDS (materials)
Materials
Actual materials costs = 10,785 units used x P14.50 per unit
= P156,382.50

Standard materials = 10,000 units theoretical capacity x 34%


cost actual capacity = 3,400 units produced
= 3,400 units produced x P26.14
= P88,876

There is a materials variance of P67,506.50. The said variance is


unfavorable because the entity spent more than what the cost should be.
SUGGESTED ANSWER TO CASE 1:
DEVELOPING STANDARDS (materials)
The problem with the materials variance is that it does not enable the
decision makers to trace the cause for such variance. There can be two
factors why the entity reported an unfavorable variance:
• Maybe the entity purchased more expensive materials;
• Maybe the entity used more materials in the production than what
should be made;
• Or both.
SUGGESTED ANSWER TO CASE 1:
DEVELOPING STANDARDS (materials)
Materials price variance = (Actual materials cost) - (Actual quantity x
Standard price)
= (P14.50 x 10,785 units) – (10,785 x P13.07)
= P156,382.50 – P140,959.95
= P15,422.55 UF

The entity spent P15,422.55 more in materials with respect to its


price. The result is unfavorable.
SUGGESTED ANSWER TO CASE 1:
DEVELOPING STANDARDS (materials)
Materials quantity = (Actual qty x Std. price) – (Std. qty x
variance Std. price)
= (10,785 units x P13.07) – (3,400 units x 2 x
P13.07)
= P140,959.95 – P88,876
= P52,083.95 UF

The entity used more materials worth P52,083.95 with respect to its
quantity. The result is unfavorable.
SUGGESTED ANSWER TO CASE 1:
DEVELOPING STANDARDS (materials)
Materials price variance = P15,422.50 UF
Materials quantity variance = P52,083.95 UF

Adding the two variances above would result to the total materials
variance of P67,506.50.
SUGGESTED ANSWER TO CASE 1:
DEVELOPING STANDARDS (labor)
Standard labor cost per unit = Budgeted cost x Budgeted input
Standard hours per unit = Budgeted input x Budgeted output per output

Budgeted cost and budgeted quantity are the planned cost and quantity
that the entity may expect to incur or yield.

These expectations may be the result of the organization’s previous


experiences, or of empirical evidence, etc.
SUGGESTED ANSWER TO CASE 1:
DEVELOPING STANDARDS (LABOR)
Labor
Std. labour hours per = 1 unit produced x 3 hours = 3 DL hours
unit produced

Std. labor cost per = 1 unit produced x 3 hours x budgeted


unit produced labor cost per unit
SUGGESTED ANSWER TO CASE 1:
DEVELOPING STANDARDS (LABOR)
Labor
Budgeted labor cost = P94,780/(5,500*x3) = P5.74
per unit

*5,500 = 10,000 units theoretical capacity x 55% realistic estimate


SUGGESTED ANSWER TO CASE 1:
DEVELOPING STANDARDS (LABOR)
Labor
Std. labour hours per = 1 unit produced x 3 hours = 3 DL hours
unit produced

Std. labor cost per = 1 unit produced x 3 hours x P5.74


unit produced = P17.23 labor cost per unit produced
SUGGESTED ANSWER TO CASE 1:
DEVELOPING STANDARDS (labor)
Labor
Total labor variance = Total standard cost – Actual materials cost;
= (3,400 units x P17.23) – (15,000 hours x P7)
= P58,582 – P105,000
= P46,418 UF
SUGGESTED ANSWER TO CASE 1:
DEVELOPING STANDARDS (materials)
The problem with the labor variance is that it does not enable the
decision makers to trace the cause for such variance. There can be two
factors why the entity reported an unfavorable variance:
• Maybe the entity paid more expensive labor cost;
• Maybe the entity used more labor hours in the production than what
should be incurred;
• Or both.
SUGGESTED ANSWER TO CASE 1:
DEVELOPING STANDARDS (materials)
Labor rate variance = (Actual labor cost) - (Actual hours x
Standard labor cost)
= (P7 x 15,000) – (15,000 x P5.74)
= P105,000 – P86,100
= P18,900 UF

The entity spent P18,900 more in labor with respect to its price. The
result is unfavorable.
SUGGESTED ANSWER TO CASE 1:
DEVELOPING STANDARDS (materials)
Labor efficiency = (Actual hrs x Std. cost) – (Std. hrs x
variance Std. cost)
= (15,000 hours x P5.74) – (3,400 units x 3 x
P5.74)
= P86,100 – P58,548
= P27,552 UF

The entity used more labor worth P27,552 with respect to the
number of hours put in production. The result is unfavorable.
SUGGESTED ANSWER TO CASE 1:
DEVELOPING STANDARDS (materials)
Labor rate variance = P18,900 UF
Labor efficiency variance = P27,552 UF

Adding the two variances above would result to the total materials
variance of P46,452. Whatever discrepancy results from rounding off.
SUGGESTED ANSWER TO CASE 1:
DEVELOPING STANDARDS (factory overhead –
fixed budget approach)
Developing standards normally has two general approaches: The fixed
budget approach, and the flexible budget approach. However, they
commonly share the same computation for total factory overhead
variance, such as:

Total factory overhead = Actual FOH – Std. FOH


variance
SUGGESTED ANSWER TO CASE 1:
DEVELOPING STANDARDS (factory overhead –
fixed budget
Fixed overhead approach
approach)
Standard overhead cost per unit = Total budgeted FOH___
Budgeted activity

= P150,342 / 5,500 units


= P27.33 per unit

Standard overhead cost per DL hour = P150,342 / (5,500 units x 3 DL hours per unit)
= P150,342 / 16,500 DL hours
= P9.11 per DL hour
SUGGESTED ANSWER TO CASE 1:
DEVELOPING STANDARDS (factory overhead –
fixed budget approach)
Total FOH variance = Actual FOH – Std. FOH
= P152,975 – (3,400 units x 3 DL hrs x
P9.11)
= P152,975 – P92,922
= P60,053 UF
SUGGESTED ANSWER TO CASE 1:
DEVELOPING STANDARDS (factory overhead –
fixed budget approach)
3-way analysis

Budget variance = Actual factory overhead – Budgeted FOH

Capacity variance = (Budgeted hours – Actual hours) x


Standard OH rate per hour

Efficiency variance = (Actual hours – Standard hours) x


Standard OH rate per hour
SUGGESTED ANSWER TO CASE 1:
DEVELOPING STANDARDS (factory overhead –
fixed budget approach)
3-way analysis

Budget variance = P152,975 – P150,342 = P2,633 UF

Capacity variance = (5,500 x 3hrs – 15,000hrs) x P9.11


= P13,665 UF
Efficiency variance = (15,000hrs – 3,400 x 3hrs) x P9.11
= P43,728 UF

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