Fi ani ‘You met the admission standards for the college or university ‘The car you drive had meet certain governmental emission standards, The i ant have to meet certain health and nuscitional standards in these cases is very simple: STANDARD COST = Concepts aN Standard cost is a carefully (scientifically) pre-determined costs established by t ‘ent as basis of comparison witht ‘They are budgeted unit costs established to Thotivate optimum productivty and efficiency. They are excellent example of control loop, The eontrol Loop consists of: 1, Establishing standards - ; 2, Measuring actual performance - 3, Comparing actual performance with standards _ 4. Taking corrective actions when needed - 5, Revising standards STANDARD COSTS = Applicability. ‘Although much of discussion will focus on manufacturing operations, you should also recognize that standard costs are also applicable to many other types of businesses, For example, fa fast food restaurant such as MeDonalds’ knows not only the price it should pay for pickles, beef, buns, and other ingredients, but also how much time it should take an employee to flip hamburgers, Iftoo much is paid for pickles, or too much time is taken to prepare Big Macs, the ns are noticed and corrective action is taken. Moreover, standard costs may be ie rofit enterprises such as universities, (charitable organizations ) and ‘ governmental Gace) DISTINGUISHING BETWEEN STANDARDS AND BUDGETS In concept, standards and budgets ire essential . tod both cootibits sleniicatly to wisagement plage se sce Te predetermined Sox, however, in the way terms are expressed. A serait There is ference « Amount) Thus, it is customary to state that the cost of dis Seay pees i 10,00. “However, if 5,000 units of the product are produc ae for a a labor cos. In this coment |a siandard)c theleioe DI hr, conceal wi hb con dgeted cost per 43‘There are important accounting difterences: manufacturing overhead to jobs and processes, budgeted data are not journalises in cost accounting systems. In contrast, standard costs may be incorporated into cos! necounting systems. [tis also possible for a company to repo its inventories at standard cos in its finan siatement, but it is not possible to report inventories at budgeted cost. a ADVANTAGES OF STANDARD COSTS: *” zk Facilitate management planning) 2 Promote greater economy by making employees more “cost conscious”. 3 Useful in settingGelling prices ‘A. Contribute to management Control by providing basis for evaluation of cost control. & Useful.in highlighting: in management by exception. 6. Simplify.costing of inventories end reduce clerical costs. 7. Rerformance evaluation) SETTING OF STANDARDS - Illustration. To establish the standard cost of producing a product, it is necessary to establish standards for each manufacturing, coat clement dire miieials diret labor, and manufactusi © overhead. The standard for SE tom s consideration of theGlandardGaaw i) Che paid and the( standard quanti To illustrate, we will assume that Xonic Inc st ‘cost performance in filling an order for 1,000 gallons of { wishes to use Weed-O, a liquid weed killer. ba ‘The direct materials pri Gieumed This standard should (Cfaw materials”> This is frequently include’an amount Item Purchase price, net of discount Freight Receiving and handling ard d anc quantity per unit for Xonic Inc. is as follow: : Item Quantity (pound) Required materials ay, Allowance for waste 04 Allowance for spoilage O1 Standard direct materials quantity per unit 49 The standard direst materials Coot pet uit is the standard des mails ice-times the i i ity, For Xonic is daniard amietal oot pot plea ot Weal standard direct-materials quantity, OisP12.00 ‘ is P12.00 (P3.00x 4.0 pounds), Sadak ger ym -¥ SDMThe divers ncn) is standard is]bs current wagi jving adjustments (COLA)incladed iqi@h & fh >In addition, the price standard judes\employer payroll taxes and fringe PEMeHits) such ‘4s paid holidays and vacation. For conic Inc. ike dicot itor piss oe follows: om f Item Price per hour Hourly wage rate P7.50 COLA 0.25 Payroll taxes 0.75 Fringe benefits 50 Standard direct labor rate per hour B10.09 ‘The direct labor quantity standard is the time be required tocinake one uni? This standard is especial cecal afd 2 Opposed to capital-intensive) RS sae re ee ; intensi made in this standard for rest peri cl setup, and machine downtime. For Xonic Inc., the diet Tabor Quant and ee | Item ‘Quantity Giours) Actual production time 15 Rest periods and cleanup 02 Setup and downtime 03 Standard direct labor hours per unit 29 ‘The standard direct labor cost per unit isthe standard direct labor rate times the ‘Standard lirect labor hours. For Xonic Inc., the standard direct labor cost per gallon of Weed-O is P20.00 P 10.00 x 2.0 hours), For manufacturing overhead, a standard predetermined ‘overhead rate((P.O.R))W8 used in {ting standard. This overhead rate is(determined by dividing budgeted ovis ted standard activity indety For example, the index may be standard labor hows oe ndard machine hours. “Xonic [nc., uses standard direct labor total standard direct labor hours are 26,400 (200 x(2)) At this level of activity, overhead costs are expected to be P132.200 of which 1200 is vatiable and P52,800 are fixed, The standard predetermined ovechead rates, ef0r@, are computed as shown below: Budgeted Standard Overhead Direct —Cost ¢ Variable 26,400 Fixed 52,800 _ 26,400 TOTAL 132,000 26,400 The standard (hanu fact le direct labor quantity stan “Gallon of Weed-O is cerhead rate per _unit)is the (predete; For Xonic Inc., the standard 45: Direct Materials pounds eee 500 i 2 pounds 10.00 20.00 Manufacturing Overhead 2 hours 5.00 10.00 P42.00 -AcrTy OF PRODUCTION | ‘As a guidepost for setting up of cost standards, management determines at what capacity ' cx volume of production the plant will operate in a given petiod: This capacity must be clu a terms of units or man or machine bouts> The selection of the level of production for in J in terms of : Copressee jad is indispensable es volume always inuences cost in general. CATEGORIES OF PRODUCTION CAPACITIES: = JORETICAL OR MAXIMUM Refers to total capaci} wherein the plant and the nel operate at full speed without any interpution —Thi gees a EAL? capacity because itis lawless: As it iMimpossibloto atiain this capacity it is Farused for constructing standard cost. “THREE (3) 1 CTICAL, Theoretical! or maximum’ capacity less allowances for" unavoi 2 ee ferption such 8S nel rn mation rea ops rep ues dl ib imtermion of materials, deficiency of ved, labor disputes, absences, Z seress, 16) This capacity is| possible of atta is(seldom) used for the - (Sang up of cost standard because irassumes that what can possibty-be produced can alsope soe 2 NORMAL CAPACITY. Practical capacity less'the deficiency of customer's orders ‘This level of production undertakes to manufacture @ volume saffici average sales demand over a considerably long period of time. Itis thir erie hee is widely used as the basis: for the computation of pean a approximate demand over a period that includes seasonal, “Cyclical and trend ee ] ion Deviation in a given year willbe offset in subsequent year, 46EEE Generally, cost standards are classified as follows: a) Currently attainable standards — a type of standard cost which is revised annually or oftener depending upon the changes of either to paces or the ical make up of the raducion or altematve ofthe plant. This standard therefore, insble performance so that any deviation will denote inefficiencies ae have a reasonable probability of responding to management B le standard also motivates employees. F b) Fixed of measurement standards - a type of standard cost that is_more-or less. permanent in the sense that is not adjusted except for abnormal changes in price. VARIANCES When actual:costs and standard costs differ, the difference is aariance) A variance can cither be favorable or unfavorable. ‘ Qt, < SC FAVORABLE VARIANCE- it ocours hen actuaf costs are less than the standards cost Be UNFAVORABUE VARIANCE - it ong wn actual costs exceeded standards costs, Standard costs.are. usually established for the three (3) elements Of product costs namely: GsueahLato and Factory Overhead?) At the end of the period, a comparison is made between neal incurred and the cst that should have been incurred (standard cost) MATERIALS COST VARIANCE = si G. 2 CTP ‘The standard material cost is composed ‘of standard material quantity multiplied by the standard. material unit price. This will then be cot with actual material costs, which is m ‘of actual material quantity purchased/used multiplied by actual unit price IMlustation: A prodiicFemuires 6000unitsiof Materials A, The standard [unit price of A. is P3.00. ihe end of the month, actual materials used are 6,120 units were bought st P2:80 1a Oe narnna (erence) between the actual material cost and standard costis shown ¢ Quantity Price TOTAL : Standard Material Cost 6,000, P3.00 P 18,000 _ ‘Actual Material Cost 6,120 2.80 17,136) Material Cost VariancB FVOTRBIG) cs. --re cece rtecicen cece BB » ‘ © Je: most companies, the acquisition of materials or merchandise entails different control a the bility. for the price variance usually ress with the ing Office and the responsibility for usageltficiency Manager. Material Quantity (Usage) Variance — is the difference between actual quantity of ae in products and the standard quantity of materials allowed multiplied by the 47 ' ——————— cnnw | i fice Vari 80 - P3.00) x 6,120 (6,120 = 6,000) x P3.00 The pri ; the company was able to hen it pays the ‘compared to the budgeted amount BD The ussess due to using nits of materials than is Freauited The oh must ‘The cost flows of actual and standard costs would appear in T-account form as follows: Accounts Payable Store - Materials. Work in Process ; as @ a |:sars@, 1001] Qn 6,900 x P3,00, eS ace ea ae Soy PI7,136 P18,360 18,360 18,000Journal Entries: 1. Stores/Materials Materials Price Variance P1224 Accounts Payable 17,136 # 2. Work in Process P18,000 Materials Usage Variance 360 Stores/Materials P18,360 # 1. Price increase or discount ene eee 2, Failure to take advantage of cash 2. discount : 3, Mishandling of materials 3. Ruchaseofhigher orlower quay hate gain ef ey WN ow Illustration: Assume that to _various_materials intoG00 Ibs. of finished product XR will require 10 labor hours at At the of the s. of product XR were completed using 2 ‘at a total labor cost of 250. The variance between actual labor cost and standard labor cost is shown below: | No.of hours eyes TOTAL Standard labor cost 2,400° P50,400 se Actual labor cost 2,500 a 50 51,250" In most establishments, the negotiation and establishment of wage scale for laborers is = ape bel is responsible forthe selection, hiring and ; the accountability for labor rate variance rest with the Personnel . the eran, Peducion Dep s held responsible for the labor efficiency variance since they are the one who assigns and supervise laborers working inside the plant.= is the difference between the actual rate paid and the standard rate per |by the actual labor hours used, labor hour multiplied Legend. Se The cost flows of actual and standard costs for labor would appear in T-account as follows:Precedi ance il i f analysis. An jing discussion on variance illustrated the conventional method of s attempt is Sereda lesson to illustrate a method, which appears more logical and Tealistic. MATERIALS Bei UNITS —-PRICEPERUNIT TOTAL tandard 6,000 P3.00 P 18,000 neve 6.120 2.80 17,136 Material Cost Variance P__864 favorable the amount of change if price alone fluctuates. If other Fagg eee ie a meade ; Difference in Price x Standard Quantity = Price Variance 0.20 x 6,000 = 1,200 favorable , MAgrials Quantity (Usage Variance is the amount of change, if quantity alone has Varied. If other factors do not vary, the quantity variance would be Difference in Quantity x Standard Price Quantity (Usage) Variance 120 x P 3.00 P360 unfavorable nothe amount of change caused by the joint quantity and price. The formula is — 01 simultaneous ve Difference in Quantity x Difference in Unit Price = Joint Variance 120 x P0.20 = P24 favorable SUMMARY Price Variance . . P 1,200 favors Quantity (Usage) Variance ... 3.60 unfaw Joint Variance oo... » 24 favor: P_864 favo: Illustration: ‘No. of Hours Rate/Hour TOTA Actual Labor Cost 2,500 P 20,50 P51,259) Standard Labor Cost 2,400 21.00. (50,40 ) Labor Cost Variance (unfavorable) ......... nich Pgs aie: the amount of change if only the wage rate per hour v other factors remain the same, the rate variance is - Difference in rate perhour x Standard hours = Rate Variance | PO.SO = 2,400 = P1,200 favorz 1 the amount of change if only the number »f,hours fluctuates. Ifthe other factors remain unchanged, the time variance is — ¢ Difference inhours x Standard rate = Efficiency Variance 100 x P21 = P2,100 unfavorable » masesamieayaues amount of change caused by the combined effect o: changes ) inthe number and the wage rate per hour. The formula is — Difference in hours x Difference in rate Joint Variance . 100 “ x P0s0” P50 favorable SUMMARY os =e a Labor Rate Variance P 1,200 favorable J Labor Efficiency Variance 2,100 unfavorable « Labor Joint Variance 50 favorable Labor Cost Variance P_850 unfavorable a specifications are generally tests Comparing the costs of various grades of materials wi mo 52satisfactory mixture, Changes are often made when it seems less costly grades of materials or substitute materials Thee we! In general, ‘mix refers to relative Proportion or 0 n of various ingrediémts direct materials or of the component of a finished product. A m Ice is eee mixing. basic: materials. in differ standard y cation In the manufacture of wool for instance, the standard proportion of the grades of wool for each yarn mumber are reflected in the standard blend’cost. Any difference the actual wool used and the standard blend will result in what is known as blend or mix:variance.. fers to the tit ‘quantity of finished output produced from a predetermined or standard of i amount of inputs, such as direct materials. ance is the result of ‘obtaining a yield different from the one expected on the basis of input. cost saving resulting from ly ce versa. In many cases, the new'mix is ‘yield of the final product. Such a situation origin of the variances. ee see sn ¢ affected by an unfavorable yi advantage created by one maybe cancelled out by the other. To facilitate the computation of mix and yield variances, it would be helpfial to understand the term Standard Input Cost (SIC) and Standard Output Cost (SQC). ‘Standard Input Cast is the weighted average cost of the standard cost of material by the standard quantity. On itandard Qutput Cost is the weighted average cost of the expected output of ee te ‘On standard material input. This is determined by dividing thee standard 5 Cost of material input by the expected output of finished product. a d Corporation mamufactures a Cebuano delicacy called “Pintos”. For a 1100 Ibs. }£Pintos” per batch, the following ingredients are required: Standard Input Standard Standard Standard Quantity i01 Price 55 Ibs. 50% »< P9.00 P 495 33 Ibs. 30% . 12.00 396 © Standard Input Cost (SIC) —— P1,419/110 bs. = P 12.90/b. 2 Standard One Cost (SOC) — P 1,419/100 Ibs. =P 1419/1.In January, Venell Food Ci hpnof Pine ude long pees completed processing one (I) batch which yield 105 _ fil ys Actual : ; Total ‘Materials ‘Quantity Used Actual Price Actual Ci se ‘Corn Grits 60 Ibs. P = Pp 310 30 Ibs. : pode Milk 30 Ibs. 28 20 oa oe ' 2 150. ired: Material ial a cate whether Require petal ay mix, and yield ae Indicate wh ‘the variance is favorable raid The price variance for each material is determined by Actual Standard Difference Price Price = In Price Fine Corn Grits P 8.50 P 9.00 P.0.50 fay. Sugar 14.00 12.00 2.00 unf. Powdered Milk 25,00 24,00 1.00 unf, ae Considering the standard proportion of 0%, 30% _ and meee its, sugar and-powdered milk, , the materials should have _ been mixed using,60 Ibs. fine grits, 36.lbs) of sugar 24 Ibs. f powdered milk. However, — the actual data showed a different combination of materials. The.mix variance of “Pintos ” materials can be computed as follows: ‘Actual Input Actual Input at at Standard Mix Materials ‘Actual Mix Standard Mix Difference x _Price = Difference Fine Com Grits 60 Ibs. comx120) - - 3 Sugar 30 Ibs. cowxi 36 6 fay. P12 P72 fav. Powdered Milk _30 Ibs._qowxim) 24 6unf 24 120 1bs. 120. and is obtained by considering the influence ofMaterials AstmlQuamice = Stanard Fre = TOTAL ‘ Fine Com Grits 60 Ibs. P9 P Sugar 30 Ibs. 12 360 Powdered Milk 30 Ibs. 24 720, 120 Ibs. ‘Total actual quantity at individual standard price P 1,620 Less: Total actual quantity at Standard input cost (120 x P 12.90) (1,548) ~ Mix Variance P22 unf. jance,. The expected output from the standard inp ° ), which means that a 1 a our illustration, our actu "yield var we malty te il per The a compo il be as @ * SL eS eel oO P 1,548.00 eS Less: Actual output finished product at Standard > Output Cost (SOC) 105 Ibs. x P 14.19 489.95 Yield Variance P__58.05 unfavorable « ! Summary: Price Variance . P 60.00 unfavorable ‘< ~ Mix Variance 72.00 urfavorable he - Yield Variance + 58,05 unfavorable Material Cost Variance ‘P190.05 unfavorable Proof: Actual Cost ee P 1,680.00 ~ Standard Cost (105 Ibs. xP 14.19) (148995) “y Materials Cost Variance B__190.05 unfavorable on _DIRECTILABOR RATE MIX AND YIELD VARIANCE ‘ As we have just observed, the fiandard cost-ofproducts-are. frequently. developed by foiyancrace am a given establishments, workers diferin wage rate duce aki, ‘ 55 einsIllustration: (1) Labor rate perhour: 1 skilled worker @ P.2 P20 2 unskilled workers @ PM aa Total cost of standard combination of labor R42 ‘Average rate per hour, P42/3 =(B14]/ (2) Standard labor price per pound of output at10 Ibs. per hour P 14/10 = PL40 G) Standard labor cost of 92,070 Ibs. of output 1.40 x 92,070, ‘PA x 9,207 hours = P128,898 Oe ps one ours of P Sao @P 14.1555 First, consider the usual direct labor variance. Direct Actual Input for Actual ‘Actual Input x Labor_ Price i Skilled 3,400 P21=P71,400 3,400 x P20=P68,000 wi Unskilled 5,600.x PI0= $6,000 5,600x P11 = _61,600 } 9,000 127,400 P129,600 © -9,207S~P 128,898 4 5 janet Efficiency Variance P 702 Unfavorable f re (Labor Cost Variance P 1,498 Favorable , } ce 5 4 The varianced maybe subdivided mix Variances in the 1 same way we ahdivided material quantity (usage) variances, ‘The differences in inputs are: &§ x Difference ae ot 3,400 -331 Unslalled 5,608 +538 2.000 +201 ae ) LABOR MIX VARIANCE = Difference in (units of input x (Budgeted individual rate per hour ~ Budgeted average price per hour of input) es Cty ‘ Pe sh ue ‘or Skilled -331x(P20-P 14) = P 1,986 unfavorable For Unskilled: +538x(P 11-P 14) = _1,614 unfavorable P.3,600 unfavorable pr ieee il ZFor Skilled -331xP14 = For Unskilled; = 4938xPl4s.= +2Q7xP 14 = ‘The financial effect of substitute on labor’efficiency is measured by the yield and mix e i not all price: variance are ‘excluded from these calculations. labor yield variance would be en Of Saas ‘overhead is the most complicated of the three ent ap This is so because, factory head is fick maybe Pry able ply feo mit ‘overhead. are two kinds of composahoferlotofeostitems It is for this reasons that factory ctory overhead budget namely: (a) and (b) flexible or variable or one, which, after having been prepared, is , 4. A certain capacity of production is set and with t esis made. For insane, let us assume that Ann Sue Corporat 4,000. Total Bi Overhead 12.900, Per Unit (P 12,000/4,000) ap Vin? Per Direct Labor Hour (P12;000/8,000) PSO ~* Overhead Rate) STi i with a total overhead cost sme at the end of the/3,800 units were produced using 7,500 hours : on ‘of 12,400. Using the- Three-Way Fixed Budget variance analysis, determine the following FIXEDIREDGET VARIANCE ANALYSIS a) Spending Variance ©) Efficiency Variance b) Capacity Variance Actual Factory Overhead P 12,400 © | Budgeted Factory Overhead (12,000) P 400 unf. - — Standard Hours) x Predetermined Overhead Rate 7,500 - 7,600 x P150 150 fav. (Budgeted Hours — Actual Hours) x Predetermined Overhead Rate 8,000_- 7,500 x P1450 750 unt. Factory Overhead Net Variance ... BLL.000 unf. 4 *Standard Hour = Actual units produced multiplied by Standard Hour per unit (3,800 x 2 hrs. = 7,600) (PROOF) r ‘ overheat | Actual Factory Overhead P.12,400 | Less: Applied Factory Overhea \7, 11,400) Under Applied Factory Overh E1000 is the difference between actual cost incurred-and-the- for anned production Since the company incurred more than an the budgeted cost the resulting variance is described as unfavorable. iu 1¢ company was able to produce during a given ae duced, the compan to sped’? direer ibe ae {ee ny expects direct hours. Feo ee ing 7.500_ direct labor hours. The = units is 7,600 direct a direct labor hours). In other w a labor 3,800 units x 2 hours ata total cost of PISO (100 x P'1.50) wved 100 {es whether oF not the comy | or budgeted capacity. The bud pany was able ble toizae planned ] Proce {000 units of shed ogo 8.00 direct labo ied product or hours, expected toMost of the items, if not all in capacity variances analysis are composed of fixed costs e all know, fixed cost. it fluctuates in inverse i nsw perunit ‘Proportion to changes in volume or level of activity. ae nae the fixed cast per unit decre: ted : = 'ases and vice versa, ie Gaeta 4abor hours with predetermined overhead rate of P1.50° per direct iabor hour. The actual capacity attained is 7,500. direct labor hoi : ect urs and predetermined overhead rate at this level will be P1.60/DLH (P12,000/ 7,500 J, Miteo increase fixed cost per unit by PO.10 per direct labor hour. Thus, the capacity variance is P7S0 unfavorable (7,500 DLH x PO. 10). The underutilized capacity i¢ SoMhours multiplied by P.0.R of i cesuit Sete 4.50, wll result in P750 unfavorable Sapaciy vaganes, | rt Fc isk aw Peay (Dies “ A flexible overhead budget ia geaip a fixed-or static budgets under diferent levels of production. In preparing this type of budget, a normal capacity of production is determined at the onset of the period and is considered 100%. At this capacity, it is safe to it on a per unitbasis. Also it is this capacity that is used as the the predetermined overhead rate (eo) to be charged to production of a given period. In preparing a budget for each level of production, the normal capacity is used as the focal point as shown in the illustration below: Flexible Overhead Budget Units produced 1,600 2400 3200 \4,000\ 4,200 4,800 Direct labor hours 3,200 4,800 6,400 \8,000 | 8400 9,600 % Capacity 40% 60% = BOX | TOOK 105% 124 Factory Overhead Fixed Cost 9,600 9,600 P9,600 9,600 9,600 P9,600 Variable Cost 960 1440 1920 | 2,400) 2520 2,880 Total Budget P10,560 P1L,040 PlL520 Pd2.220 Cost per DLH P3230 82.30 BL.80 (paso | ps4 30 i fixed overhead makes it In a flexible overhead budget, the segregation of variable and possible to determine the budget for any level of operation. Variable overhead vanes in direct while fixed overhead remain constant in tatal amount under any level Proportion to the volume : of operation not exceeding the approved normal capacity. The budget of 4,000 units which hours is shown below: “awires 6,000 direct bor noe enble Overhead Budget Variable Overhead Fixed Overhead TotalBased on the above budget, the standard overhead rate or predetermined overhead rate {pOR) per hour is Variable overhead rate P2,400/8,000 = p0307 Fixed Overhead rate P9,600/8,000 = 120 Total overhead rate perlabor hour = BLs0 If the operation is at\90%) capacity, then the standard (allowed) hours for the actual production will be 7,200 direct labor hours (8,000 x 90%). Budget at 90% capacity will be- Variable overhead 7,200 hrs. x PO.30 Fixed overhead Total Illustration: Using the budget —, assume that the company produces.3,800-units of finished product using 7,500 direct labor hours with an actual overhead of P12,400, Then- Standard hour is 3,800 (8,000 hrs./4,000 units) Standard overhead ee xP1S0 Hy The factory overhead variance is P12,400’less P11,400 = P!,000, unfavorable. This variance may be analyzed as follows: oe ai ars 7 UF ‘Actual Factory Overhead shP12,400 4 * Less: Budgeted Factory Overhead se Fixed Cost | $ Variable Cost (7,500 hrs.xP0.30) 2.250 (11,850) » P50. unfavorable ~ Budgeted based on actual hours—_ 11,850 8 Less; Budgeted based on Gane hours Fixed Cost 4 = seem 29,600: A Pee Ney Variable Cost (7,600 hrs. x P0.30) 42,280 (11,880) 30 favorable Budgeted based on standard hours p) 11,880 . ; bes Applied Factory Overhead ; | ‘Standard hours x Standard Overhead Rate) ma 76 = A 480 unfavorable 7,600 x PI.SO- —~ (11.400) eae care 60Actual Factory Budgeted Factory Overhead Fixed Cost on actual hours P9,600 Variable Cost (7,500 x Po 30) 2,250 (11.850) P $50 unfavorable P 12,400 (Actual Hours ~ Standard Hours) x Unit Variabl (7,500 = 7,600) x PO030 3 30 favorable le eased Boas Standard Hours) x Unit Fixed Cost ( = 7,600) x = P120 —480 unfavorable 21.000 unfavorable Actual Factory Overhead Less: Budgeted Factory Overhead based on standard hr. Fixed Cost P9,600 Variable Cost (7,600 hrs. x P 0.30) 2,280 (11,880) $20 Unf. P 12,400 (Budgeted Hours — Standard Hours) x Unit Fixed Cost (8,000 = 7,600) x P1120 480 Unf. Factory Overhead Variance .....2..0.00.2+esss0sescsreeeensene B1.000 Unf. Joumal Entries: The recording of factory overhead variance is normally done at the end of accounting Period, when the actual factory overhead is closed to applied factory overhead account. Applied Factory Overhead (7,600 x P 1.50) P 11,400 Spending Variance ey ee Factory Overhead P 12,400 Efficiency Variance 30 . From the above entry, we can observe that when the variance is unfavorable, iis debited, til favorable is recorded as . Standards in a a cam a ties ours, sents 61it I }o0ds oF to provicie services, Providing a unit of service Say what the rt ofthe time or the materials should be facturing a unit of product or in m cast of Generally, > of many people in an organization, including the accountant, the industri ‘engineer, and various levels of management. Standards are normally y highly efficient efforts. Such standards are generally fe to haves impact on employees, nn standards are compared ‘against actual performance, the difference is referred to as ‘4 ae ‘Variances are computed and reported to management on a regular basis for both the rice and the quantity elements of materials, labor, and Overhead. Specific formulas are 4 measure of the difference between the actual on fla the See multiplied by the number of hours worked wring the period. du actual waren PRICE VARIANCE Hicsihes chal Repat neiesti hy teE an overlapping of the price ‘and quantity variances caused by deviations in both price and quantity from the Standards that have bee set. jprACTICAL CAPACITY capacity that rk interruptions Na ard that can be atta, through reasonable, aries ficient, fforts by the average worker at a task. + ov cal @ detailed listing of standard amounts of materials, FA DARDIGHSTEGAHD £0 into a unit of product, art Nella mmltiplied by the that has been set. | @fANDARD COST PER UNIT the cost card; it is computed by price or rate. the time that taken to complete DAR 5 ALL time that should have been the standard hours per unit. by multiplying the number of units produced by the the price that should be paid for a single unit of materials, 7 for quality, quantity purchased, freight-in, receiving, and other such costs, net of any discount: allowed. ce between theNCE the difference between standard price and jHantities and actual —— gSTIONS oS” |. What sypes.of organizations make use of standard costs? ‘What isa Se penn ‘What is a price standard? What is the beginning point in setting a standard? Where responsibility for standard setting fail? a ° ‘tous Bent 4, Why must a standard for the future be more than simply a proj 5, Distinguish between ideal and practical standards, on Pt? 6. Ifemployees are unable to meet a standard, what expect have on their productivity? he ere a 7, What is the difference between a standard and a budget? 8, What is meant by the term variance? 9. 1 What is meant by the term management by exception? 10. Why are variances generally segregated in terms of a price variance and quantity variance? 11. Who is generally responsible for the materials price variance? The materials quantity Variance? The labor efficiency variance? 12. The materials price variance can be computed at what two different points in time? Which point is better? Why? 13, An examination of the cost records of the Chittenden Furniture Company indicates that the materials price variance is favorable but that the materials quantity variance is unfavorable by a substantial amount. What might this indicate? 14, What dangers lie in using standards as punitive tools? 15. “Our workers are all under labor contracts; therefore, our labor rate variance is bound to be zero”. Discuss. EXERCISES FA.) Huron Company produces a commercial cleaning compound known as Zoom. The direct materials and the direct labor standards.of one unit of Zoom are given below. Xe Res Be Stal Standard Standard i Price /Rate ee va Direct material P2.50/ pound 235/e~' P1001 yi i 12.00/ pound pe kiae Direct labor mod ing activity was recorded: During the most recent month, the following activity, we Cie Me a Twenty thousand of materials were purchased at @ D> +t i used to produ b. All of the materials purchased were use c. A total of 750 hours of direct labor time wef mer ing: (indi ance -is favorable of 3 Required: Compute the following: (indicate whether the_varianes is { unfavorable) : a \ i al and labor costs. » _A Two-way Variance Method for material “a Three-way Variance Method for materil and labor costs. 64 i¢-2 The Lewis Company established the following standards: 3 ts Direct materials: 3 Ibs. @ P2 each/Ibs, Direct Labor: 4 fy direct aber hour-@Payne 5 @ P6/hr., Variable overhead: ‘Actual production figures: Units produced 100, Direct materials used (400 lbs.) P840 ois e bor cost (350 hrs) P2,450, variable overhead Required: Materials price variance, Labor efficiency variance, Overhead spending variance and Overhead efficiency variance. The Blue Corporation produces a si following standard costs per unit @ P9,50/hr. gle product, New Blue, and has developed the : Direct material 5 Ibs. @ P40/Ib., Direct labor 2.8 hrs 10,000 Ibs. of materials purchased at a cost of P450,000. There was no beginning inventory of raw materials but an ending inventory balance of 1,500 Ibs. During the peiiod the employees worked 4,000 hours at a rate of P10 per hour. 1,500 units were actually produced. (Indicate whether variance is favorable or unfavorable) At i Required: Direct labor rate variance and Direct labor efficiency variance, The Apex Company uses standard direct labor hours to apply overhead to production. Budgeted and Actual data are shown below for 2012: Budgeted Actual Production in units 2,500 3,000 Direct labor hours 5,000 6,200 Variable overhead 14,000 15,500 “ Fixed overhead cost P6000 6,300 & Required: Denominator activity for 2012, Standard hours worked, Overhead budget se variance and Overhead volume variance. Hernandez keeps track of the time relating to orders and production of goods. The following times for each order were recorded: Inspection time -0.5 days, Move time -0.6 = days and Process time — 4 days. ’ 5 Waiting time: from receipt of order to start of production ~5 days and start of « Production to completion -7 days. Compute the following: Throughput time, Velocity of production, Time spent on non- added activities and Delivery cycle time. is io 65.E6. E-7, E9, ‘The following data to labor cost Pa standard system were taken from the books of Camotes Payroll P 1,596 Actual labor hours used 1,520 hours Standard labor hours allowed 1,480 hours: Standard rate per hour P14s Required: Determine the labor cost variance under the following methods A. Two-Way Variance Analysis B, Three-Way Variance Analysis ‘The Standard price for Material XO is P 3.65 per liter. During November, 2,000 liters ‘were purchased at P 3.60 per liter. The quantity of Material XO issued to products during, the month was 1,775 liters and the quantity allowed for November production was 1,825 liters. Required: Compute the material price variance assuming that: 1. Itis recorded at the time of purchase 2. It is recorded at the time it is issued to production Data on Goodman Company's direct labor cost is given below: ‘Standard direct — labor hours 30,000 ‘Actual direct — labor hours 29,000 Labor Usage (Efficiency) Variance P 4,000 favorable Labor Rate Variance P 5,800 favorable Total Payroll ..2056.0.80s4+.ionssreeseee ode: P 110,000 Uedisregar Required: Compute the following. 1. Actual direct labor rate 2. Standard direct labor rate Genola Fashions began production of a new product on June’ 1, 2000. The company uses ‘a standard cost system and has established the following standards for one unit of the new product. Standard Standard Standard 2 : on Direct material 2.5 yards P 14 per yard. ? P35. Direct labor 1.6 hours 8 per bour 2) | During June, the following activites were recorded in relation tothe new product ar purchase of 10,000 yards of material at a cost of P 13.80 per yard. 8,000 yards of materials were used to produce 3,000 units of the new product. ©. $000 hours of direct labor were incurred ata total cost of P 43,000. i Fe terials; . : : ao Ayes the materials purchase price and quantity variance. b. Journal entries to record the purchase of materials in production. 662. For direct labor: ‘&. Compute the direct labor rate and efficiency variance b. Journal entries to record the incurrence of direct labor cost for the month. E-10. Sharp Company manufactures a product for which of the following standards have been ‘set. Standard ‘Standard ‘Standard Direct material 3 feet P'S per foot PIS Direct labor 7 hours ? per hour ? During March, the company purchased direct material at a cost of P 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 the labor time was P 36,750. The following variances have been computed for the month: Material quantity variances, unfavorable P 4,500 Total labor cost variance, favorable a 1,650 Labor efficiency variance, unfavorable .. 800 Required: Compute the following: Actual cost per foot for materials purchased Material price variance Material cost variance Standard direct labor rate per hour Standard hours allowed for the month’s production . Standard hours allowed per unit of product Ss PROBLEMS avaen= P-1. FILL THE BLANKS. Consider the following data for a given month Budget Formula Per Unit Various Levels of Yalume Sales P20 PPE PP oad PP 129,00) Variable costs: Direct material Mr 48,000 Meo 8 | 112,000 Fuels 1 1 4j005 Pases 7 4,003 Depreciation rm 12,000 1/00 Executive salaries 7 ce — 7 tw,95, 50,000 Required: Fill up the unknowns.2. For direct labor: a. Compute the direct labor rate and efficiency variance e b. Journal entries to record the incurrence of direct labor cost for the month Cc any manufact i 510 sep SmPANY Manufactures a product for which of the. following standards have been Standard Standard 2 ‘Quantity / Hours Price/ Rate ae Direct material 3 feet P'S per foot = Direct labor hours 2 per hour ? ‘ pute Meck econ Purchased direct material at a cost of P 55,650, all of which were used in the production of 3,200 units of product. In aii hours direct labor time were worked on the u eno Product during the month. Thi f the labor time was P 36,750. The following variances have been computed for the month Material quantity variances, unfavorable . P 4,500 Total labor cost variance, favorable .. 1,650 Labor efficiency variance, unfavorable 800 Required: Compute the following: Actual cost per foot for materials purchased Material price variance Material cost variance Standard direct labor rate per hour Standard hours aliowed for the month’s production . Standard hours allowed per unit of product ava 6. Materials Mix Variance 4 7 Materials Yield Variance ‘The ; ¢ ‘ 4. Company uses a standard Gost system. 2 oe Mixa a oe Scone msl | Tim! Standard ~ _Standard Price Per Pound a Anput Quantity“. P0.70 4 wel iffy 20bs 0.40 2) ' HSE als 0.20 —s_ ® é L% 25 Ibs. ; - St 2 a yep opie os The sandard 0s] mix of av matali npetd to piu) of product. the period it was determined slgpoo0 of finished products end of the period it was dete weep sing the 075 MPH ‘ 640? 466730,000 Ibs. @ P 0.80 Pt ee Mate 04 50,000 1bs.@ 0.35 ¢ 44 220,000 bs. @ 0.25 ce 68 a0, 00 Mba bas 256,800 |wired: Compute the followin, ee 1. Standard Input Cost Standard Output Cost Material Price Variances” Material Mix Variances’ Material Yield Variances bor Rate, Mix, and Yield Variances. Supervisi Be) bee rae Nes od Pervision in a foundry shop has the following a. Labor Price Per Hour: 2 Journeymen @ P 22 P44 3 Helpers @ P 12 36 Total cost of standard labor combination 80 |e 7G b. Standard labor price per unit of output at 8 units per hour, P 16/8 ¢. Standard labor cost of 20,000 units of output, 20,000 x P 2 P.40,000 d. Actual inputs, 2,900 labor hours consisting of: 900 hours of jourmeymen@P 23 P 20,700 2,000 hours of Helpers@P 11 _22,000 P.42,700 Required: Compute the Labor Rate, Mix and Yield Variances. 5, Labor Rate, Mix, and Yield Variances. Laguna Manufacturing Company has process cost accounting system. An analysis that compares the o cata pen atl « plan and flexible budget is prepared ely ir eee ecmitedand ] flexible budget are established each year at sum 4 held constant for the entire year. ‘ Standard ) Direct-Labor | pau Hoi alowed Labor 500 Stalled en S00 Semi Skilled 15 500, oes 1000, under the terms , n January 1, 2000, under The wage rate for each labor class ne an Tie condard wage ates were tot ofa new union contract negotiated in Decem Fevised to reflect the new contract. 69‘The actual direct-labor hours (D) f aqced for the month of April were ea tnd the actual direct-tabor rates Per hour pila! me irect-Labor _ Actual Labor Direct Skilled Mae Pec ain is Semi Skilled 22.50 oa Unskilled eas 650 375 sired: Compute the Labor Rate, Mix, and Yield Variance ‘The Lonn Manufacturing Co. produces two 6 : t-© redients for a variety of products, The song nog cal Products to be used as base ea budget for the two (2) product was (000 X=4 = Production output — ea in gallons 600. 0 20 Direct Material P 1,500 P 1,875 P3375 Direct Labor 900. Suv 1.800 Total prime manufacturing costs P2400 B2rs= PSs The following planning assumption were used for the budget: Direct material yield of 96 percent Direct labor rate per hour P 6 The actual direct proportion cost for 2000 was (000 omitted) Xo 28 Total Production output 220.0 658.0 in gallons i : 1,368.0 P2,138.5 P3,506.5 ld en 936.0 1,992.0. _2,028.0 Direct Labor 8 a Total prime manufacturing costs. The actual production yield was 95 percent for X — 4 and 94 percent for Z~ 8 The direct-labor cost per hour both product was P 6.50 red. juct X—4: e aos ate al price variance ft The direct material efficiency variance ; -8 2. Caleulate for product 2-8: ek The direct-labor rate variance F See #. The direct-labor efficiency variance ield Vari ies, Inc, Mats i sx and Yield Variances. Riceso Crunchies, 222. Mix following proportion of ingredients: factures breakfast cereals, using t 710STANDARD Quantity ‘ yheat Germ Pe Pie eg if 25 lbs P200/Ib beans ooh bs 1.00/14? oa nO2 125 Ibs. 0.80 /tby tee 250 Ibs, / 50 F «sof (bs bs for Oct i oc terials records for October indicate: peo The ___ INVENTORY - Gee? PURCHASES x Ending Quantity Price vey Weest Cor 2,000 Ibs. 1,200 Ibs. Rice 5,000 Ibs, 8. 8,000 lbs. P2.05/b ; 5,300 Ibs. 35,000 Ibs.» 1.101 4 Soybeans 4,000 Ibs, 7,000 Ibs. 45,000 Ibs. 0.75/b “ a a i. The ‘The material price variance is recognized when the materials aa The conversion of 250 pound of mix materials into\200 Ibs Of finished product Fejuires 35 direct, labor hours at P 24 per hour. The actual direct labor for the month was 8,000 hours and ‘ost of P194,400. : Factory ovechead is applied to production on the basis of direct labor hour at arate of P2. ec hour (P3 fixed, P 6 variable). Normal capacity: overhead is P 90,000 with 10,000 direct labor hours. Actual overhead for October was P 84,000>, Actual finished production for the month 25 70,000 pound. —_ Required: Compute the following: / AY Material purchase price, mix, yield variance, 2) Labor rate and efficiency variance oe 3) Factory overhead, spending, efficiency, controllable and capacity variance. sa ?-8 )Factory Overhead Variance ~ Fixed Budget Approach ed. total f March, Department I DALZUR Company incurn Gehan oe oe 000 in Seine 2,500 units of product, for which 24,000 hours were used. Ne For such month, the department's budgeted factory overhead ce was P 600,000 based on normal activity level of 30,000 hours of 3,000 units of product. le ee i i Overhead consist of Spending, Required: ‘Fixed Budget Variance Analysis of Factory = f Efficiency and Caparity Variance 2 Putt —2-Naetory Overhead Variance ~ Flexible Budget Approach =— ce Zusit pes Secret 7 has the following standard and budgeted figures for the product it manufactures:EEE No. of hours requi quired per uni Standard variable rate nit 2% hours Budgeted fixed overhead PA per hour Normal capacity oe i ,000 hours Standard fixed overhead rate P2 per hor ur During April, the departme: nt produced 5,000 uni i 43,000 hours. Actual factory overhead incurred ane aceon eo Required: Compute the Spending, Efficiency, Controllable and Idle Capa under the Flexible Budget Approach tae p10 Peters Company uses a flexible budget system and ing fore caren oet yystem and prepared the following information Capacity 80% 80% 90% 100% Direct labor hours 4,000 27,000 30,000 Variable factory overhead P48,000 PS4,000 0,000 Fixed factory overhead P108,000 108,000 108,000 Peters operated at 80% of Capacity during the year but applied ‘overhead based on the 90% capacity. Actual factory overhead incurred was 164,00. Required: Compute the Spending, Efficiency, and idle Capacity variances: P11 “Go-for-Good” provides you with the following data: ‘Actual fixed factory overhead costs 32,000 ‘Actual variable factory overhead costs 8,000 ‘Actual direct labor hours incurred ss ue Standard direct labor hours 10, ~ Normal capacity (based on direct labor hours) 1600 Flexible factory overhead budget: 'p30,000 + P1.00 per direct labor hour Required: Compute the following: (filamor) 1 Variable overhead spending variance: 2. Fixed overhead spending variance: 3. Fixed overhead volume variance | 4 Fixed avertvead idle capacity V2 nce. 5, Variable overhead efficiency variance. 6, Fixed overhead effectiveness variance. n ee