STANDARD COST AND VARIANCES

Direct Materials and Labor Variance

Learning Objectives
01 Explain how direct materials standards and direct labor standards
are set

02
Compute the direct materials price and quantity variances and explain
their significance

03 Compute the direct labor rate and efficiency variances and explain their
significance

04
05
 BRIEF RECAP
 Flexible budget variances
 Activity variances
 Revenue and spending variances
 IDEAL STANDARDS vs. PRACTICAL STANDARDS

Ideal Standards Practical Standards

can be attained only under best circumstances. They allow for are standards that are “tight but attainable”. They allow for
no machine breakdowns or other work interruptions. normal machine downtime and employee rest period.
 STANDARD COSTS
Standard
Is a benchmark for measuring performance
It relates to quantity and cost of inputs used in
manufacturing goods or providing services

Actual quantities and actual cost of inputs are compared

to these standards.
 STANDARD COSTS
Quantity Standards
- specify how much of an input should be used to make
a product or provide a services

Price Standards
- specify how much should be paid for each unit of input
 Sample Problem
“The Colonial Pewter Company”
 The Colonial Pewter Company makes only one product-
an elaborate reproduction of an 18th century pewter statue.
 The statue is made largely by hand, using traditional
metalworking tools. Consequently, the manufacturing process
is labor intensive and requires a high level of skill.
 Sample Problem
“The Colonial Pewter Company”
 Colonial Pewter has recently expanded its workforce to
take advantage of unexpected demand for the statue as gifts
 The company started with a small cadre of experienced
pewter workers but has had to hire less experience workers as
a result of the expansion.
 Sample Problem
“The Colonial Pewter Company”
 The President of the Company, J.D Wriston, has called a
meeting to discuss productions problems.
Setting Direct Materials Standards
First Task Prepare Price and Quantity Standards for the company’s only

significant raw material.

Standard Price per unit

 Reflects the final, delivered cost of materials, net
of any discounts taken
Standard price per unit *
Purchase Price, top-grade pewter ingots $3.60

Freight, by truck, from supplier’s warehouse 0.44

Receiving and handling 0.05

Less: Purchase Discount (0.09)

Standard price per pound $4.00

Setting Direct Materials Standards

*The values above is not used in the problem but rather it serves as an
illustration to the components of the Standard price per unit.
Setting Direct Materials Standards
Standard quantity per unit
- Reflects the amount of materials required for each unit of the
finished product as well as allowances for unavoidable wastage
and spoilage and rejects.
 *
Standard quantity per unit
Material requirements as specified in the Bill of Materials,
in pound 2.7

Allowance for waste and spoilage, in pounds 0.2

Allowance for rejects, in pounds 0.1
Standard quantity, in pounds 3.0

Setting Direct Materials Standards

*The values above is not used in the problem but rather it serves as an
illustration to the components of the Standard price per unit
Setting Direct Materials Standards
The standard cost of material per statue of finished
product is computed as follows:

3.0 pounds per statue x $4.00 per pound = $12.00

Setting Direct Labor Standards
Direct Labor price and quantity are usually expressed in
terms of labor rate and labor-hours

Standard rate per hour

-Includes hourly wages, employment taxes and fringe
benefits.
Standard rate per hour *
Basic wage rate per hour $10
Employment taxes at 10% of the basic rate 1
Fringe benefits at 30% of the basic rate 3
Standard rate per direct labor hour $14

Setting Direct Labor Standards

*The values above is not used in the problem but rather it serves as an
illustration to the components of the Standard Rate per Direct Labor Hours.
Setting Direct Labor Standards
Standard hours per unit

Includes time worked on the activity, allowances for breaks,

personal needs of employees, clean up, and machine breakdown.
Standard hours per unit *
Basic labor time per unit, in hours 1.9
Allowance for breaks and personal time 0.1
Allowance for clean up and machine breakdowns 0.3
Allowance for rejects 0.2
Standard direct labor hours per unit 2.5

Setting Direct Labor Standards

*The values above is not used in the problem but rather it serves as an
illustration to the components of the Standard Direct Labor Hours per unit.
Setting Direct Labor Standards
The standard direct labor cost per unit of product is:

0.5 direct- labor hours per statue x $22.00 per direct labor-
hour= $11.00 per statue.
Setting Variable Manufacturing
Overhead Standards
The Price and Quantity standard for Variable Manufacturing
01 Overhead is expressed in terms of rate and hours.

02 The rate refers to the variable portion of the Predetermined

Overhead Rate.

03 The hours relate to the activity base that is used to apply

overhead to units of product.
Setting Variable Manufacturing
Overhead Standards
Standard variable manufacturing overhead cost per unit is
computed:
0.50 direct labor-hours per statue x $6.00 per direct labor-hour
= $3.00 per statue
Inputs Standard Quantity or Standard Price or Standard Cost
Hours Rate
Direct Materials 3.0 pounds $4.00 $12.00
Direct Labor 0.50 hours 22.00 11.00
Variable Manufacturing 0.50 hours 6.00 3.00
Overhead
Total Standard Cost per $26.00
Unit

Standard Cost per unit

Using Standards in Flexible Budgets
The information provided for each Standard cost can be used to compute
Activity and Spending Variances in the Performance Report of the Company.

Original budgeted output, June 2,100 statues

Actual output, June 2000 statues
Actual direct materials cost, June $24,700
Actual direct labor cost, June 22,680
Actual variable manufacturing overhead, June 7,140
 Using Standards in Flexible Budgets
Colonial Pewter
Flexible budget Performance Report- Manufacturing Cost Only
For the Month Ended June 30

Planning Activity Flexible Spending

  Budget Variance   Budget Variance   Actual Results
Statues produced 2100   2000 2000
Direct Materials $25,200 $1,200 F $24,000 -$700 U $24,700
Direct Labor $23,100 $1,100 F $22,000 -$680 U $22,680
Variable Overhead $6,300 $300 F $6,000 -$1,140 U $7,140
 A General Model for Standard Cost
Variance Analysis
Standard cost variance analysis decomposes spending variances from
flexible budget into two elements

Standard Cost
Variance Analysis
Due to price paid for the input Due to the amount of input that
.

is used
Spending Variance
 General Model for Variance Analysis
1 2 3
Actual Quantity at Standard Quantity
Actual Quantity allowed for actual
Standard Price
at Actual Price output at Standard
AQ X AP AQ X SP Price
SQ X SP

Price Variance Quantity Variance

1-2 2-3

Spending Variance
1-3
A General Model for Standard Cost
Variance Analysis
Can be used to compute price variance and quantity variance for
each three variable cost elements- direct materials, direct labor
1st and variable manufacturing overhead

all three columns in the exhibit are based on the actual amount of
2nd output produced during the period.

the spending, price and quantity variances are computed exactly

3rd the same way regardless of whether one is dealing with direct
materials, direct labor or variable manufacturing overhead
A General Model for Standard Cost
Variance Analysis

Price Variance Quantity Variance

Material Price Variance Material Quantity Variance
Labor Rate Variance Labor Efficiency Variance
Variable Overhead Rate Variance Variable Overhead Efficiency Variance
Direct Material Variances
Materials Price Variance
It measures the difference between an input’s actual price and
its standard price, multiplied by the actual quantity purchased.

The purchasing manager has control over price paid for goods
and is therefore responsible for the material price variance.
Direct Material Variances
Material Quantity Variance
Measures the difference between the actual quantity of materials
used in the production and the standard quantity of materials
allowed for the actual output, multiplied by the standard price per
unit of materials.

The production manager is ordinarily responsible for the quantity

variance.
 Standard Cost Variance Analysis
AQ X AP
DirectAQMaterials
X SP SQ X SP
6500 lb. x $3.80/lb. 6500 lb. x $4.00/lb. 6000 lb. x $4.00/lb.
$24,700 $26,000 $24,000

Price Variance Quantity Variance

$1,300 F $2,000 U

Spending Variance = $700 U

Direct Labor Variances
Labor Rate Variance
 Measures the deviation from the standard in the average hourly
rate paid to direct labor workers. Simply stated, the difference
between the actual and standard hourly rate multiplied by the
number of hours worked during the period.
Direct Labor Variances
Labor Efficiency Variance
Measures the productivity of Direct Labor

It is the difference between the actual hours used and the
standard hours allowed for the actual output, multiplied by the
standard rate.
Direct Labor Variances
Causes of Unfavorable Variances
01Rate Variance
Labor
Workers with high rates of pay are given duties that
01 require lower skill thus resulting to a lower rates of pay.

03
Labor Efficiency Variance
01 Poorly trained and unmotivated workers and poor-
quality materials

02 Poor supervision and inaccurate standards and faulty

equipments
 Standard Cost Variance Analysis
AH X AR
Direct Labor
AH X SR SH X SR
1,050 hours x $21.60/hour 1,050 hours x $22.00/hour 1,000 hours x $22.00/hour
$22,680 $23,100 $22,000

Rate Variance Efficiency Variance

$420 F $1,100 U

Spending Variance = $680 U

Exercise- Review Problem
Direct Material: 6 ounces at $0.50/ounce $3.00

Direct Labor: 1.8 hours at $10.00/ hour 18

Variable Manufacturing Overhead: 1.8 hours at $5/ hour 9

Total Standard variable cost per unit $30

Material purchased: 18,000 ounces at $0.60/ ounce $10,800

Material used in production: 14,000 ounces -

Direct Labor: 4,000 hours at $9.75 per hour 39,000

Variable Manufacturing Overhead cost incurred 20,800

 Exercise- Review Problem
Compute the Direct Materials, Direct Labor
and provide Journal entries.
 Exercise- Review Problem
AQ X AP AQ X SP SQ X SP
18,000 x $0.60/ounce 18,000 x $0.50/ounce 12000 x $0.50/lb.
$10,800 $9,000 $6,000

Price Variance

$1,800 U

14,000 x $0.50/ounce
$7,000
Quantity Variance
$1,000 U
 Exercise- Review Problem
AH X AR AH X SR SH X SR
4,000 hours x $9.75/hour 4,000 hours x $10.00/hour 3,600 hours x $10.00/hour
$39,000 $40,000 $36,000

Rate Variance Efficiency Variance

$1,000 F $4,000 U

Spending Variance = $3,000 U

 Journal Entries- Direct Material
Variances
Raw Materials(18,000 ounces at $0.50/ounce) $9,000
Materials Price Variance(18,000 ounces at $0.10/ounce U) 1,800
Accounts Payable(18,000 ounces at $0.60) $10,800

Work in Process(12,000 ounces at $0.50/ounce) $6,000

Materials Quantity Variance(2,000 ounces U at $0.50/ounce) 1,800
Raw Materials(14,000 ounces at $0.50/ounce) $7,000
 Journal Entries- Direct Labor
Variances
Work in process(3,600 hrs at $10.00/hr) $36,000
Labor Efficiency Variance(400 hours U at $10.00 per hour) 4,000
Labor Rate Variance(4,000 hrs at $0.25/hr F) $1,000
Wages Payable(4,000 hrs at $9.75/hr) 39,000
 Problem Solving

S Company manufactures a product for which the following standards have been set:
Standard Quantity/ Hour Standard Price/Rate Standard Cost
Direct Materials 3 ft $5/ft $15
Direct Labor ? ? ?

During March, the company purchased direct materials at a cost of $55,650, all of which were
used in the production of 3,200 units of product. In addition,4,900 hours of direct labor time were
worked on the product during the month. The cost of this labor time was $36,750.
The following variances have been computed for the following month:

Direct materials quantity variance $4,500 U

Total direct labor variance 1650 F
Direct labor efficiency variance 800 U
 Required:
1. Direct Materials
a. Actual cost per foot for material for March
b. Material price variance and total variance for materials
2. Direct Labor
a. Standard direct labor rate per hour
b. Standard hours allowed for the month’s production
c. Standard hours allowed per unit of product
 Solution
1.a.Materials quantity variance = SP (AQ – SQ)
$5.00 per foot (AQ – 9,600 feet*) = $4,500 U
$5.00 per foot × AQ – $48,000 = $4,500**
$5.00 per foot × AQ = $52,500
AQ = 10,500 feet
Therefore, $55,650 ÷ 10,500 feet = $5.30 per foot
Or
$5.00(X-(3,200 x 3 ft)) = $4,500 U
b. Materials price variance = AQ (AP – SP)
10,500 feet ($5.30 per foot – $5.00 per foot) = $3,150
U
The total variance for materials is:

Material price variance $3,150 U

Materials quantity variance 4,500 U
Total Variance $7,650 U
Solution
2.a.Labor rate variance = AH (AR – SR)
4,900 hours ($7.50 per hour* – SR) = $2,450 F
$36,750 – 4,900 hours × SR = –$2,450
4,900 hours × SR = $39,200
SR = $8.00

b. Labor efficiency variance = SR (AH – SH)

$8 per hour (4,900 hours – SH) = $800 U
$39,200 – $8 per hour × SH = $800*
$8 per hour × SH = $38,400
SH = 4,800 hours
c.The standard hours allowed per unit of product are:
4,800 hours ÷ 3,200 units = 1.5 hours per unit