DIVINE WORD COLLEGE OF BANGUED

Bangued, Abra

GRADUATE SCHOOL

TOPIC 4 STANDARD COSTS AND ANALYSIS OF VARIANCES

Intended Learning Outcomes (ILO)

At the end of the module (topic) students are expected to:

a. State the nature and rationale of standard costs
b. Discuss the users of standard cost
c. Explain the benefits and limitations of standard costs
d. Describe how standards are set
e. Explain the process of setting standard costs for direct material, direct labor and overhead
f. Identify the possible causes of variances and responsibility for them
g. Compute and analyze the variances between actual and standard costs

Discussion

Please refer to the report of Group 2 on Standard Costs and Analysis of Variances.

Addendum

As an additional reference, read on pages 428 to 443 of the Managerial Accounting book by
Garrison et al. Take note of the computations incorporated therein.

Also, the term SPENDING VARIANCE as discussed in the book by Garrison et al is simply termed
TOTAL VARIANCE insofar as the Philippine references I have encountered. Likewise, the VARIABLE
OVERHEAD RATE VARIANCE per the book by Garrison et al is termed in Philippine references as the
VARIABLE OVERHEAD SPENDING VARIANCE.

Activity:

Instructions: Read the following case and encode those required in MS Word and/or Excel, save your file
as PDF with document name, BA206_Activity04_<surname, first name> (e.g. BA206_Activity04_Borja,
Keroh Vincent) and send the file to my e-mail address: kerohvincentborja@gmail.com (or directly to my
messenger) on or before May 8, 2021 at 11:00 AM.

Fiesta Company’s Alabang Plant produces precast metal molds for industrial use. Francis Tan, who was
recently appointed general manager of the Alabang Plant, has just been handed the plant’s income
statement for October. The statement is shown in the next page:

Managerial Accounting
This module is a property and is exclusively used by the DWCB Graduate School. Any duplication and reproduction, storing in any retrieval system,
distribution, posting or uploading online as well as transmitting in any form or means (photocopying and electronic sharing) of any part, without prior written
permission from the owner is strictly prohibited.
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 DIVINE WORD COLLEGE OF BANGUED
Bangued, Abra

GRADUATE SCHOOL

Budgeted Actual
Sales (5,000 metal molds) ₱ 250,000 ₱ 250,000
Less: Variable Expenses
Variable Cost of Goods Sold* 80,000 96,390
Variable Selling Expenses 20,000 20,000
Total Variable Expenses 100,000 116,390
Contribution Margin 150,000 133,610
Less: Fixed Expenses
Manufacturing Overhead 60,000 60,000
Selling and Administrative 75,000 75,000
Total Fixed Expenses 135,000 135,000
Net Operating Income (Loss) ₱ 15,000 ₱ (1,390)

*Contains direct materials, direct labor, and variable manufacturing overhead.

Mr. Tan shocked to see the loss for the month, particularly since sales were exactly as budgeted. He
stated, “I sure hope the plant has a standard cost system in operation. If it doesn’t, I won’t have the
slightest Idea of where to start looking for the problem.”

The plant does use a standard cost system, with the following standard variable cost per metal mold:

Standard Standard Price Standard

Quantity or Hours or Rate Cost
Direct Materials 4.0 pounds ₱2.50 per pound ₱ 10.00
Direct Labor 0.6 hour ₱9.00 per hour 5.40
Variable Manufacturing Overhead 0.3 hour* ₱2.00 per hour 0.60
Total Standard Variable Cost ₱ 16.00

*Based on machine-hours.

Mr. Tan determined that during October the plant produced 5,000 metal molds and incurred the following
costs:

a. Purchased 25,000 pounds of materials at a cost of ₱2.95 per pound. There were no raw materials in
inventory at the beginning of the month.
b. Used 19,800 pounds of materials. (Finished goods and work in process inventories are insignificant
and can be ignored.)
c. Worked 3,600 direct labor-hours at a cost of ₱8.70 per hour.
d. Incurred a total variable manufacturing overhead cost of ₱4,320 for the month. A total of 1,800
machine-hours was recorded.

Managerial Accounting
This module is a property and is exclusively used by the DWCB Graduate School. Any duplication and reproduction, storing in any retrieval system,
distribution, posting or uploading online as well as transmitting in any form or means (photocopying and electronic sharing) of any part, without prior written
permission from the owner is strictly prohibited.
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 DIVINE WORD COLLEGE OF BANGUED
Bangued, Abra

GRADUATE SCHOOL

It is the company’s policy to close all variances to cost of goods on a monthly basis.

Required:

1. Compute the following variances for October:

a. Direct Materials Price and Quantity Variances
b. Direct Labor Rate and Efficiency Variances
c. Variable Manufacturing Overhead Spending and Efficiency Variances
2. Summarize the variances that you computed by showing the net overall favorable or unfavorable
variance for October. What impact did this figure have on the company’s income statement?
3. Pick out the two most significant variances that you computed. Explain the possible causes of this
variances.

Managerial Accounting
This module is a property and is exclusively used by the DWCB Graduate School. Any duplication and reproduction, storing in any retrieval system,
distribution, posting or uploading online as well as transmitting in any form or means (photocopying and electronic sharing) of any part, without prior written
permission from the owner is strictly prohibited.
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