COST ACCOUNTING Standard Costing & Variance Analysis, Standard ~ is a measure of acceptable performance established by management as a guide in making economic decisions, Standard Cost ~ Is a scientifically predetermined cost of manufacturing a unit or a specific quantity of product during a particular period of time. It Is a measure of acceptable performance, established by management as a Quide to certain economic decisions. Its in short, a reflection of what @ management thinks a cost ought to be. Standards are most frequently established for: 4. Rav materials used In making a product or one of its components. 2. Direct labor needed to perform a manufacturing operation. 3. Manufacturing overhead applied to a unit of output. Purposes of Standard Costs 1. Cost control 5. Preparation of budgets 2. Pricing decisions Costing of inventories 3. Motivation and performance appraisal 7. Preparation of cost reports 4. Cost awareness and cost reduction 8. Management by objective ‘Management by Objective and Management by Exception In essence, management by objectives (MBO) means that managers establish specific goals or objectives for all business activities. Eventually, actual results of operations are compared with these objectives. If actual results fall within the established objectives, litte management action is taken. When performance is significantly different from the desired level, appropriate action is done by management, ‘This concept is very much related to the so-called management by exception, which states that managers will maximize thelr efficiency if they concentrate only on those operational factors showing material deviations from the plan.‘The standard Cost Accounting System ‘The standard cost accounting system consists of three basic objectives, they are: f.'Seandard setting 2) Accumulation of actual costs 3. Variance analysis Determination ef standard cost is based on physical standards ~ basic and current. A basic standard is a yardstick against which both expected and actual performances are compared, Its similar to an Index number 2gainst which al subsequent results are measured. “The current standards are of tnree types: 3. Theoretical standard - z's standard set for an desl or maximum leval of operation and efficiency. Such standard constitute goals to be aimed for rather than performance that can be currently achieved 2, Expected Aetual Standard ~ is 2 standard set for 3 normal level of operation and ficiency. Its Feasonably close estimate of actual results. 3, Normal Standard - is a standard set for normal level of operation and efficiency, instead to represent challenging yet atainable results. Diferent Types of Capacity Levels: ‘capacity - refers tothe fixed amount of the company's human and nonhuman resources for which management hhae committed reff and with which ie expects to conduct the Dusiness and maintain the firm as a going concer. Different levele of capacity are deserbed ne theoretical, practical and normal ‘Theoretical capacity ~ refe's t the plant's or department's capabilty to procuce at full ti, without interruptions. “Though itis highly impossible to attain, its a well calculated to serve as a bass for establishing other capacty levels Practical capacity ~ is theoretical capacity ess internal factors such as ordinary and expected interruptions due to deays, breakdowns, inefciencies, non-working days, and changes In production processes. city ~ is the most commonly used type of capacty level. In calculating normal capaaty, not only Internal but alsc external factors, particularly Ure market or he demand for the product, re considered. The ‘normal capacity level Is used in calculating the predetermined or standard factory overhead rate.Standard Cost Yariance Analysis neverv « Puranate Qty nur - Usye dy Varlance = Actual Costs (AC) - Standard Costs (sc) Infavorable/ Adverse (debit balance) favorable / Desirable (credit balance) Materials Variances Actual Materials Cost + Actual Quantity Used x Actual Price = Standard Materials Cost > Standard Quantity x Standard Price Materials Cost variance Analysis: Quantity Variance: Difference in Quantities Used x Standard Price Price Variance; Difference in Prices x Actual Quantity (Purchased/Used) med Boy deg eo te Fx CQ oD AIMEE STROMIllustration; Material Variances Moonlight Company has established the followin§ Actual Hours x Actual Labor Rate Re 4:17 ~standars tabor Cost ~ Standard Hours x Standard taper Rate, | Labor Cost Variance x“ Bye 7aY Al SE / LEV pny yd Ev | Efficiency Variance: Difference in Hours x Standard Rate Rate Variance: Difference in Rates x Actual Hours TLV coe A? Analysis: Illustration: Labor Variances Funny Corporation has a standard labor cost Lore unit of output. During the past mon 500) were manufactured, The total labor eee foP this Saou geID ye actual labo re 80,640. Actual labor hours were¢f1,300. Required: 1. The total debits to work in process account for direct labor. would be: fF (2 SOD 2. The total labor variance is: Gor 3. The labor rate variance is: noe 4. The labor efficiency variance is: 2K ya eo yao ee? quer 8, zacou_ 1130 W ]9, bor oor? < )F60Illustration: Material and Labor Variances ‘You have been given the following information for the Lei Company: “Actual labor hours used ‘Standard materials price ‘Actual labor rate per hour ‘Standard quantity of materials, ‘Standard labor hours Actual materials price ‘Standard labor rate per hour ‘Actual quantity of materials purchased ‘Actual quantity of materials used Required: What Is the matertal price variancer F971 VA What is the materials efficiency variance?¢ (, 2 ¢ What Is the labor rate variance? @3).¢ § What Is the labor efficency variance? @yy, < 315 hours P 2.50 per unit 3.00 450 units 300 hours P 2.52 per unit, 3.10 445 units 425 unitsIllustration: Material and Labor Variances (Reconstruction) Fon y Se & Ce P 7,000 - U You have been given the following list of Bar Company’ : se Direct materials price variance h Direct materials eFcleney var re IS C2 xn Eo00 utd Sad Gus 0.55 xtsas Direct labor price verence 4 3ieo Le 4 ot 41000 - U [Soo You have also been given the following ‘ SA e270 « SPACUD ‘Actual units produced 0 Budgeted units of production | £14" MOO _ Standard labor hours 279% 0 Actual direct labor costs YO yoYyod ‘Actual price paid for direct materials Direct labor efficiency variance C 1. The aghualnumber of units of direct material sep ‘a. 100,000 units b. 109,470 u d. 114,000 units (The actual amount of direct materials urchsted 8. 100,060 units . 178,571 unl 4. 264,000 units JD 3 The actual labor hours worked is: 2. 4,808 hours b. 4,992 hours . 5,000 hours 4. The acdbaagerte per nur De eens eR oo c.ris7Important Notes: Material and Labor Variance Analysis 4 The materials price variance Is also known as materials spending variance, materials money variance, materials rate variance. 4 The materials quantity variance is also known as materials usage variance, materials efficiency variance. Materials price usage variance Is a price variance. [(AP-SP) x AQu] The labor rate variance is also known as labor price variance, labor spending variance, labor money variance. 2 The labor efficiency variance Is also knovin as labor hours variance, labor usage variance, labor time variance. = The labor efficiency variance excludes idle time spent in the production. If any, idle time is separately explained through the Idle Time Variance, which is generally regarded as unfavorable, Idle Time Variance = Idle Time x Standard Labor Rate.Factory Overhead Variances ‘ Factory Overhead Variance Analyses: Two-way variance analysis: Controllable Variance Volume Variance Variable FOH Three-way variance analysis: ‘Spending Variance Hours Variable Efficiency Variance Volume Variance Four-way variance analysis: Variable Spending Variance Fixed Spending Variance Variable Efficiency Variance Volume Variance Actual FOH Cost > Actual Hours x Actual FOH Rate ‘Standard FOH Cost > Standard Hours x Standard Rate FOH Cost Variance ‘Computation AFOH - BASH BASH ~ SFOH AFOH - BAAH (AH-SH) x SVR BASH - SFOH ‘AFOH (V) ~ (SVR x AH) AFOH (F) ~ BFOH (F) (Axt-5H) x Sve BASH - SFOH Legend BASH: Budget Allowed for Standard Hours BASH = Budgeted Fixed FOH + Standard BAH: Budget Allowed for Actual SVR: Standard Variable FOH Rate AFOH: Actual Variable FOH BFOH: Budgeted Fixed FOHxIllustration: Factory Overhead Budget Barracuda Company shows the following data regarding its factory overhead: + Standard per unit of product: 4 labor hours @ P3,00* per hour + Normal capacity: 2,500 units + Budgeted (Denominator) Hours: { AOD — hours Fixed FOH 220,000 Fixed FOH Rate P Variable FOH 4 €foan Variable FOH Rate Total Budgeted FOH Standard FOH Rate Flexible budget formula: FOH = _\/ 42p0m% f1 Cx \ Required: Fill-in the blanks. lustration: Factory Overhead Variance Analysis, Two-Variance Method The normal cay Piranha Company is 12,000 labor hours per month. At normal capacity, the standard factory overhead rate If P13 per labor hour based on 696,000 of budgeted fixed cost per month and a variable cost rate of PS hour, Boring January, the company operated at 12,500 labor hours, with actual factory overhead cost 166,000) The number of standard labor hours allowed for the production actually attained Is 11,000. Required: Determine (1) ead variance )2) ¢Gerhead controllable CK le. H ’ 1B W Mow pan 2, ou v1a tion: head vari: i ), Thi 1 is Ilustraton: Factory Overhead Varlance Analysis (Two, Three, Four-may variance Afalvsis) > 5 Catfish Company provides the following production data: Uc [0008 ‘Total standard overhead cost per unit of product: 4 hours at P3.00 per hour = P12.00 per unit [A 6 — Budgeted Fined FOH P 20,000 ‘Actual production Y ¥ > Actual FOH (95% fhved) P 26/000 ‘actual hours 7/500 hours 6.2 Normal production 2,500 units 4 = Jace Hic Required: Determine the folloyiing: F 1. Budgeted FOH PeBop Variable Spending Variance “| ae r 2, Standard FOH p20. Fixed Spending Variance 3 BAAN aac + Badge etBle) warlsnce (2-uay) Pepe F 4. BASH p7¢oo Budget (Flexible) Variance (3-way) 5. Controlfete Varian ere fF Variable Controllable Variance Jog; ft TD F 6. Volume Variance Fixed Volume Variance 7. Spending Variance ie ¥ 24 15. Variable FOH Variance x: rt 8 Variable ficiency Vgiance, x) 2% VOUS. Frac FoH variance Ko 26? 8° CSR ae Su 4 Gawv) 24000 4 veo | VAREeE oper BA Eee © vp S40 AFOU cowreen fare | wy‘Important Notes: Factory Overhead Variance Analysis. 'SFOH = SH x Standard FOH Rate. Under standard costing, SFOH is likewise referred to as the Applied FOH. If AFOH > SFOH, then FOH Is sald to be under-applied; hence, under-application Indicates an unfavorable variance, while over-application indicates a favorable variance. ‘The term capacity variance Is also used to mean the volume variance. Budget Variance = Actual Cost ~ Budgeted Cost = Actual FOH ~ Budgeted FOH (BFOH) * Tf BFOH Is adjusted based on SH (BASH), then budget variance is controllable variance. * If BFOH is adjusted based on AH (BAAH), then budget variance is spending variance. \oume varanca &acunty te Fixed Volume Variance tere Is no Such thing a variable woke or variable capacity variance, Under the 3-way approach, the FOH Efficiency Variance Is actualy the Variable Efficiency Variance. Other than "BAAH-BASH”, variable overhead efficiency variance may also be computed based on: (AH-SH) x VR ~ FOH variances may be classified into: * Variable FOH Variances = VSV + VEV » Fixed FOH Variances = FSV + FW. Alternatively, another FOH variance analysis may include the following variances (NOTE: this version is ‘ot Included in the board exam syllabus for Management Services): * IDLE Capacity Variance: BAAH ~ (AH x SOR) * TOTAL Efficiency Variance: ,(AH-SH) x SOR * FIXED Efficiency Variance (Effectiveness) Variance: (AH-SH) x FR ~ Manufacturing Efficiency Variance incorporates the effect of both FOH Efficiency Variance and Labor Efficiency Variance. in rare cases, the materials quantity variance may also be included, DM Variance + DL Variance + FOH Variance = Production or Manufacturing Cost Variance. Variances in the Ledger Accounts Variances usually do net appear on the FS of a company. They are used for managertal control and are recorded In the ledger accounts.