UU - the Keview School of Uccowrla © Me jemand pervecee - Vv MS-06: STANDARD COSTING STANDARD - a benchmark set by management in aid of performance measurement. In manufacturing companies, standards are classified as follows: ‘+ QUANTITY Standard ~ indicates the quantity of raw materials or labor time required to produce 2 Unit of product. This is normaily expressed per unit oLgutout (e.9., 3 pieces per unit). + COST Standard - indicates what the cost of the quantity standard should be. This is normally expressed per unit of input (e.g., P 2.00 per piece). STANDARD COSTS - systematically pre-determined costs established by management to be used as a basis for comparison siti actuaT est BUDGETS vs. STANDARDS on BUDGETS = STANDARDS Purpose | Badgels are statements of expected | Standards pertain to what costs should be sts. N60 | given a certain level of performance widgets emphasize cost levels” that | Standards emphasize the levels to which costs should not be exceeded. Should be reduced Coverage | Budgets are set for all departments in | Standards are set only for the production or the firm (e.g., sales, administration, | manufacturing division of the firm. manufacturing . n =" as Analysis | When actual data differ from the| The nature and cause of the significant * | budget, it may be an indication of | variance are investigated so that necessary either good or bad performance. corrective actions are taken accordingly. STANDARD COST VARIANCE ANALYSIS VARIANCE = Actual Costs (AC) ~ Standard Costs (SC) AC > SC: Unfavorable (debit balance) AC < SC: Favorable (credit balance) MATERIALS Variance ‘Actual Materials Cost € Actual Quantity (AQ) x Actual Price (AP) _= standard Materials Cost. € Standard Quantity (SQ) x Standard Price (SP) Materials Cost Variance Analysis: Quantity variance: AQxSP = Difference in quantities x standard price Price variance: AQxOP = Actual quantity x Difference in prices LABOR Variance Actual Labor Cost € Actual Hours (AH) x Actual Rate (AR) =) Standard Labor Cost € Standard Hours (SH) x Standard Rate (SR) Labor Cost Variance Analysis. Efficiency variance: = AHXSR Difference in hours x standard rate Rate variance: AHXOR = Actual hours x Difference in rate FACTORY OVERHEAD (FOH) Variance = (Actual FOH cost) - (Standard FOH cost) (Refer to page 2 for FOH Variance Analysis) ‘These variances are calculated whenever thé production process involves combining s grt Materiais variance = Actual Cost - Standard Cost Analysis: nae Price variance: AP =. Actual Quantity x (Actual Price — i Be Mix variance: AQKSP . ice - Standard Price) Less: Total. Actual Quantity at Average Standard Price MIX Variance ETAQASP} Yield variance: _ TAQASP Less: Standard Cost ‘YIELD Variance¥. STANDARD COSTING IMPORTANT NOTES: MATERIAL and LABOR VARIANCE ANALYSIS 1, Maternal PRICE variance is also known as: Matenal spending variance, material money variance, material rate variance Material QUANTITY variance Is also known as: Material usage variance, material efficiency variance 3. Material sage variance is a quantity variance while material p 4. Labor RATE variance is also known as: Labor price variance, labor spending variance, labor money variance 5. Labor EFFICIENCY variance is also known as: Labor fours variance, labor usage variance, labor time variance, 6. Labor efficiency variance excludes idle time spent in the production. If any, idle time is separately explained through the tle Time Variance, whic is regarded as unfavorable. : IDLE TIME variance = Idle Time x Standard Labor Rate FACTORY OVERHEAD (FOH) VARIANCE ANALYSIS One-way variance analysis: Computation: Legencl; FOH Variance AFOH ~ SOI AFOH: Actual FOH SFOH: Standard FOH = (SH x SR) age variance is a price variance. _ Two-way variance analysis Gon, Controllable variance AFOH ~ BASH BASH: Budget Adjusted for Standard Hours \e] Volume variance BASH ~ SFOH BASH = Budgeted FFOH + (SH x Variable FOH Rate) FFOH: Fixed Factory Overhead Three-way variance analysis: Se Spending variance AFOH ~ BAI BAAH: Budget Adjusted for Actual Hours Efficiency variance BAAH ~ BASH BAAH = Budgeted FFOH + (AH x Variable FOH Rate) Yol_ Volume variance BASH - SFOH Four-way variance analysis: Variable Spending variance AFH (V) ~ BARH (V)_ AFH (V): Actual Variable FOH Fixed Spending variance ‘JAFOH (F) = BAAH (F) AFOH (F): Actual FFOH Efficiency variance (variable) BAAH ~ BASH BAAH (V): Actual Hours x Variable FOH Rate Volume variance (fixed) BASH ~ SFOH BAAH (F): Budgeted FFOH IMPORTANT NOTES: FACTORY OVERHEAD VARIANCE ANALYSIS i. “Standard Factory Overhead (SFOH) = Standard Hous x Standard FOH Rate. Under standerd costing, ‘SFOH is likewise referred to.as the-Applied Factory Overhead. 2. If AFOH is more than SFOH, then factory overhead is said to be under-applied; hence, under-application dlean untavaréle vatanee wil averapaitction halons areca ierere 3, The term eapocttyverance lsalsb used to mean te volumervarionce 4. Budget Variance = Actual Cost ~ Budgeted Cost = Actual FOH ~ Budgeted FOH (BFOH) 1 fearon is aojusted based on standard Nours (BASH), then budges vannee cor ollable variance b _Tearorisadjusted besed on actual hours (MAG), thn budpetraronce seer ene st Melane Verena lo acucly te Prod Value Vorerocy Sere les Sacral ee eee ie variablaeopecty verance, 4. Under the Say eppvcnshy' the, POH Mciaiey Veronee is acl the: Varsbne emteey Venera: Other than ‘BAAN ~ BASH, variable overncad efficiency variance semy aie ee ae eeleney, Var Change in hours x variable FOH rate = (AH — SH) UR 7. FOH variances may classified into: + Variable FOH Variances = Variable Spending Variance + Efficiency Variance (variable) + Fixed FOH Variances = Fixed Spending Variance +- Volume Variance (fixed) 8. Alternatively, another FOH variance analysis may include the following a 4 not included in the board exam syllabus for Management Services): aces (NOTE: this version is ‘IDLE Capacity variance: BAH - (AH x SR) 2 Tota emcioney vononces a HGR 2. RAED Eten) (cheeucchan) vatence: A H.4 FR (were: 8. Manufecturina EMency Varonce incorporates the etek of beak rye ee FON Rate) ‘ Sunes varied ad aboc Etency Variance. in rre cases, te motel quantty vorrei ey 10, DH Variance + BL Varonee "FO Varonce = Production or Rese mee gs OF etek eae STANDARD COSTING PROCEDURES 1. Cost control 1. Establishing standards Costing of inventories Preparation of cost report Management by exception 2. Pricing decisions 2; Measuring : 3 Motivation and performance appraisal 3, Ceesunng actual pertrmance | 2 oR'Suarence ont cost estton Seite SOG peoominen es S: Preparation of budgets 5. Revising standards when needed 7. sSTANDARD COSTING (ie . Materials and Labor Variance Analysis EXERCISES: STANDARD. COSTING Kodak Company has established the following standards for one unit of Its main product, The Wonder Camera Tripod: Inputs Standards Direct matenals 3 metal bars per tnpod at P 2.00 per bar Direct labor vs labor hour per tripod at P 10 per hour ‘At the start of the month, the budget includes a planned production of 100 units of tripod based of formal capacity; at the end of the month, actual production was 120 units of tripod, which resulte to using 400 bars of metal, purchased at a cost of P 2.10 per bar. REQUIRED: 1. Based on the BUDGETED production of 100 units: A) How many metal bars must the company plan to use? (Budgeted quantity) "OP" 8) How much materials cost is included in the budget? (Budgeted cost)? Gc Determine the actual cost of materials used. (Actual cost yfeve Boted on the ACTUAL production of 120 uriis: A) How many metal bars should have been used? (Standard quantity) MOF 40 B) How much materials cost should have been incurred? (Standard matenals cost, a ©). How many labor hours should have been spent? (Standard hours) QC he 1D) How much labor cost should have been incurred? (Standard labor cost}PGco. 4. Determine the following A) Materials budget vanance([are fiw) For ¥ 4-8) Materials standard cost variance. Feta’) Pu Se ee tart centred Tose tee Cel £ Burin the month a total payroll of @ STOTaEs what laborers, working 45 labor hours, to produze the 120 units of Tripod. Determine the following Ay Total labor variance, 8) Labor efficiency variance. ‘C) Labor rate vanance. Solution guide to Kem no. 4, requirement na. 5 DIRECT LABOR Variance = AC - SC = - Labor Efficiency Variance (LEV) = (AH — SH) SR Labor Rate Variance (LRV) = AH (AR - SR) AH x AR: x ua Cx SR x : uev { sH x sR: x Materials Price Usage Variance vs. Material Purchase Price Variance * The standard cost of direct material used by Graf Company for its lone product is P 3 per unit. Duting the month, 500 pieces of materials were purchased at a total cost of P 1,400 while only 400 pieces of materials were used; the standard quantity allowed for actual production is 380 pieces, REQUIRED: 1. Total materials variance 2. Materials quantity variance 3. Materials price usage variance 4. Materials purchase price variance... Solution guide.to item.n0,.2 : ; is ACTUAL DATA STANDARD DATA © AQ used 4eops, SQ S. © AP= fee Meats . SP= fs DIRECT MATERIAL Variance = AC~SC = 1/20 ~ lO = mF : Materials Quantity Variance (MQV) = (AQ = a7 t Materials Price usage Variance ie) a ee 35 San es 3 en ¥ pee A) = Baas i MV © 20x SP (lg xspy)(axse)1 Factory Overhead Budget Navtal Company shows the following data regarding its factory overhead: + Standard per unit of product: 4 labor hours @ P 3.00* per hour + Normal Capacity: 2,500 units * Budgeted (Denominator) Hours: __I0,¢¢O__hours | ~~ Fixed Overhead (FFOH) | P 20,000 able Overhead Rate (VR) 10/600, HO REQUIRED: Compute for the missing amounts. 4. Factory Overhead Variance Analysis, Two-Variance Method The normal capacity of Borg Company is Fixed Overhead Rate FR) | a Vi Zz “Standard Overhead Rate (SR) |_P 3.00* Flexible budget formula: FOH = _26cc0 » 4x (000 Tabor hours per month. v: BH bom or CoH ‘At normal capacity, the standard factory overhead rate is P 13 per labor hour based on P 96,000 of budgeted fixed ses nl month and a variable cost rate of PS per labor hour. During January, the company operated at2,50) labor hours, with actual factory overhead cost of P 166,000. The number of standard labor hours allowed for the production actually attained is 11,000. REQUIRED: (1) Overall FOH variance Rafa Company provides the following production data: (2) FOH controllable variance (3) FOH volume variance. Factory Overhead Variance Analysis (Two, Three, Four-Way Variance Method) Total standard overhead cost per unit of product: 4 hours at P 3.00 per hour = P 12.00 per unit Budgeted fixed factory overhead Normal production Actual production Actual hours Actual factory overhead incurred (75% fixed) REQUIRED: Determine the following: 1, Budgeted factory overhead 6. 2. Standard factory overhead. 2. 3. Budgeted FOH based on actual hours 8. 4, Budgeted FOH based on standard hours 9. 5. Controllable variance 10. P 20,000 2,500 units 2,000 units 7,500 hours 26,000 Volume vanance Spending variance Variable efficiency variance Variable spending variance Fixed spending variance 6. Factory Overhead Variance Analysis (Budget, Variable, Fixed Variances) Assume the same data in item number 5: *~ One-way Two-way view AFOH: P 26,000 “Con” = sree F s SFOH: P.24,000 “Vol” = fe@oW = “LE (vy FOH Varianc P2,000U Vol P 2,000 U ADDITIONAL REQUIREMENTS: 11. Budget (flexible) variance (2-way) 14. 12, Budget (flexible) variance (3-way) 15. 13. Variable controllable variance 16. __ hours @ P 12.00 8) Direct Labor: C) Variable overhea Production Materials purchases, 32,000 pounds Materials used at standard prices, 31,200 pounds Direct labor (actual) Material purchase pn Material use variance Direct labor rate variance Direct labor efficiency variance Variable overhead spending variance Variable overhead efficiency variance Actual variable overhead cost '8 per direct labor hour Fixed volume variance Variable FOH variance Fixed FOH variance 7. Materials, Lubor and, Overhead Variances (Compute for the missing amounts) * Standard variable costs per unit: ‘A) Materials: 4 pounds @P____ | 5-00 8,000 units P 62,000 P 47,200 P 2,000 adverse > : 2,000 favorable P 1,500 favorable PpSTANDARD COSTING Answers to item no. 7: + Materiais: 4 pounds @ P:LS7S Pz50 + Direct Labor: 45 hour & P 12.00 P6.00 2 Vanable overhead: P 8 per direct labor hour 24,00 2 Materials used at standard prices, 31,200 pounds B5B,500 + Direct labor (actual) 4,199 hours 47,200 2 Material usage variance P1500 F + Direct labor efficiency variance P1200 0 + Varable overhead efficiency variance Pg00U + Actual variable overhead cost 231,300 2 Materials Price, Mix and Yield Variances Bonanta Merger produces the popular Makating face powder, standards for one kilo of the Makating face powder: Bonarita has in its budget the following Ingredients Standard. Quantity (input) (Grams) Standard Unit Cost Standard Cost Paminta (20%) P 3.00 P 600 Gawgaw (70%) P4.00 P 2,800 Atsuete (10%) 5.00 500 TOTAL 3,900 ‘The company reported the following production and cost data for the 2013 operations: Ingredients Actual Quantity (input) (Grams) Actual Unit Price Actual Total Cost Paminta 45,000 4.00 P 180,000 Gawgaw 125,000 P 3.00 375,000 Atsuete 30,000 6.00 480,000 __ TOTAL "200,000 P 735,000 ‘The company produced 190 kilos of Makating face powder in 2013. REQUIRED: : 1. Total matenals cost variance 2. Materials price variance 3. Matenals mix variance 4. Materials yield variance WRAP-UP EXERCISES (TRUE OR FALSE; MULTIPLE-CHOICE} janufacturing and non-manufacturing costs. F 1. Standard costing applies to bot! Fx Fhe standard cont system ts compatible with job order costing, but not with process costing. +3. A variance with a debit balance indicates unfavorable performance, Fa. Untavereble variances should be reviewed, but significant favorable variances need not be reviewed. © 5. Material amount of variances should be closed to the re 06 ina va. Cost of goods sold only x best en . Cost of goods sold and finished goods inventory oMakesl (egg c._ Cost of goods sold, finished goods inventory and work in process Fed G. Cost of goods sold, finished goods inventory, work in process and direct materials 6. Standards can pinpoint responsibility and, if properiy used, can help motivate employees. Which department should usually be held responsible for an unfavorable materials price variance? ‘a. Production ¢. Engineering i b. Materials handling eo Helevile purchasing - @ 8. Under a standard cost system, the mafeuals effi A oronee are the responsibility of ‘a. Production and industrial engineering. c. Purchasing and sales b. Purchasing and industrial engineering d. Sales and industrial engineering G 9. Which set of terms descnbes the same type of variance? IE ae ee rate niet, vse torarcn aoe iearce, rate variance, eccrey variance ao eee ee eye Rice AUBUAY ConA a sa entantncraneneyefeency vara Sani vanane ab AE Tee ae fe oper mana ee peers aa a ee cds or atc tere ROUGH GE POTS per Pa es ne. Dang production of 1,300 finished units of product. a 1,100 pounds in the ‘b A) “What fs the’ materials quantity variance for December? ae ae tevorante ep 432 favorable b. P:144 unfavorable 4. P-432 unfavorable 8) imate the mei ance varance fr December? ae a5 rovers i CP 135 fvorable & bibsumovereble Ly Gert? Appy $F 135 unoversbe Te pwolmee DuceSTANDARD COSTING } 11. when performing input-output analysis in standard costing, standard hours allowed is @ means of measuring 2. Actual output at actual hours b. Actual output at standard hours ¢. Standard output at actual hours d. Standard output at standard hours 12. A debit balance in the labor efficiency variance indicates that 2. Actual hours exceed standard hours b. Standard hours exceed actual hours ©. Actual hours exceed normal hours 4. Normal hours exceed actual hours 13. If a project required 50 hours to complete at a cost of P 10.00 per hour but should have taken only 45 hours at a cost of P 12.00 per hour, what is the proper entry to record the costs? a. Work-In-Process 540 s Labor Usage Variance 60 a= ae) ¢ 940 LAY toF (tr) Labor Rate Variance roo (YS led tee(2) ev: ( Accrued Payroll 500 ‘ P LEY + GoU (Dr, b. wages begtee “sa RE ¥en) 7 MEY © Got (09 Labor Usage Variance 60 Accrued Payroll 500 ‘ Work-In-Process 460 acre Labor Rate Variance 100 Xeon Labor Usage Variance 60 . i f Accrued Payroll 500 Work-In-Process 500 Accrued Payroll 500 14, The direct tabor costs for the month of July 2014 were as follows: Actual direct labor hours 20,000 Standard direct labor hours 21,000 Direct labor rate variance, unfavorable _—P 3,000 Total payroll P 126,000 What was the direct labor efficiency variance? a. P 6,000 favorable ? & Peltsotavorane 7 AMS ©. P 6,150 unfavorable d. 6,300 unfavorable 15. Under the two-variance method for analyzing factory overhead, budget or controllable. variance is computed by subtracting from actual factory overhead costs incurred the : a. Budget allowance based on actual hours b. Budget allowance based on normal hours ¢. Budget allowance based on standard hours d. Budget allowance based on budgeted hours 16. The manufacturing overhead variances were determined as follows: Variable overhead spending variance 3,500 F Variable overhead efficiency variance. P 4.000 U Fixed overhead spending variance P 5,000 F Fixed overhead volume variance P 6,500 U ‘ What is the overhead controllable variance? 2. P500U b. P1,500U © P4500 F 4. P5,500U 17. Assuming the same data in item 16, what is the total over a. P-2,000 under-applied b. P 2,000 over-applied ¢.P 3,500 under-applied 4. Cannot be determined from given information 18, How do you call the sum of materials variance, a. variance b. Yield variance cc. Volume variance d. Production cost variance head variance? Tabor variance, and overhead variance?