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Module 005 Standard Costing
Module 005 Standard Costing
1
Standard Costing
Definition of Standard
Standard is a benchmark set by management in aid of performance measurement. In
manufacturing companies, standards are classified into two (2) categories:
1. Quantity standard – indicates the quantity of raw materials or labor time required
to produce a unit of product. This is normally expressed per unit of output (e.g., 3
pieces per unit).
2. Cost standard – indicates what the cost of the quantity standard should be. This is
normally expressed per unit of input (e.g., P2.00 per piece).
Course Module
Standard Cost Variance Analysis
VARIANCE = Actual Costs (AC) – Standard Costs (SC)
FACTORY OVERHEAD (FOH) Variance = (Actual FOH cost) – (Standard FOH cost)
(Refer to page 3 for complete FOH Variance Analysis)
Price variance: AQ x ∆P
Mix Variance: (AQ x SP) - TAQASP
Yield Variance: TAQASP – Standard Cost
Legend
AQ – Actual quantity
∆P – Difference in prices
SP – Standard Price
TAQASP – Total actual quantity at average standard price
NOTE: Mix and yield variances may also apply to direct labor, specifically in situations
where various labor skills are required to produce units of products.
Volume variance BASH - SFOH BASH = Budgeted FFOH + (SH x Variable FOH Rate)
Course Module
Three-way variance analysis
Spending variance AFOH – BAAH BAAH: Budget Adjusted for Actual Hours
Efficiency variance BAAH – BASH BAAH = Budgeted FFOH + (AH x Variable FOH Rate)
Fixed spending variance AFOH (F) – BAAH (F) AFOH (F): Actual FFOH
Efficiency variance (variable) BAAH – BASH BAAH (V): Actual Hours x Variable FOH Rate
Illustrative Example:
A company produces a single product that has the following standard costs:
Materials 5 pieces at P4 per piece P 20
Labor 3 hours at P10 per hour 30
Variable overhead 3 hours at P15 per hour 45
Fixed overhead 3 hours at P5 per hour 15
Total manufacturing cost variance P110
The total budgeted fixed overhead is P15,000. This is for the budgeted production (the
normal capacity level) of 1,000 units requiring the budgeted time of 3,000 hours.
During the period, the company produced 1,100 units and incurred the following costs:
P21,28
Materials 5,600 pieces at P3.80 per piece 0
Labor 3 ,250 hours at P11 per hour 35,750
Variable overhead 3 hours at P14.50 per hour 47,125
Fixed overhead 3 hours at P5 per hour 16,000
P120,15
Total 5
Course Module
For purposes of analysis, it is best if the total favorable variance of P845 is broken down
into the cost elements (materials, labor, variable overhead, and fixed overhead).
MATERIALS
COMPUTATION:
Quantity Price Total
Actual 5,600 P3.80 P21,280
Less: Standard
AP x SQ/u (1,100 x 5) 5,500 4 22,000
Variance 100U P0.20F P720F
DQ DP
where:
AP = actual production
SQ/u = standard quantity per unit
DQ = difference in quantities
DP = difference in prices
U = unfavorable
F = favorable
ANALYSIS:
Spending or Price Variance:
AQ x AP (5,600 x P3.80) P21,280
- AQ x SP (5,600 x P4.00) 22,400
Spending or price variance P1,120F
where:
AQ = actual quantity
AP = actual price
Managerial Accounting
7
Standard Costing
SQ = standard quantity
SP = standard price
Alternative solution:
Spending/Price variance: AQ x ∆P = 5,600 x 0.20 F = P1,120F
Efficiency/Quantity variance: ∆Q x SP = 100 U x P4 = P400U
where:
AQ = Actual quantity
∆P = difference in prices
∆Q = difference in quantities
SP = standard price
Spending/Price variance P1,120 F
Efficiency/Quantity variance 400 U
Total materials cost variance P 720 F
DIRECT LABOR
COMPUTATION:
Hours Rate Total
Actual 3,250 P11.00 P35,750
Less: Standard
AP x SH/u (1,100 x 3) 3,300 10.00 33,000
Variance 50F P1.00U P2,750U
DH DR
where:
AP = actual production
SH/u = standard hours per unit
DH = difference in hours
DR = difference in rate
U = unfavorable
F = favorable
ANALYSIS:
Course Module
Spending or Rate Variance:
AH x AR (3,250 x P11.00) P35,750
- AH x SR (3,250 x P10.00) 32,500
Spending or rate variance P3,250 U
Where:
AH = actual hours
AR = actual rate
SR = standard rate
SH = standard hours
Alternative solution:
Spending or Rate variance: AH x ∆R = 3,250 x P1.00U = P3,250 U
Efficiency or Time variance: ∆H x SR = 50F x P10 = P500 F
Where:
AH = actual hours
∆R = difference in rates
∆H = difference in hours
SR = standard rate
ANALYSIS:
Spending or Rate Variance:
AH x AR (3,250 x P14.50) P47,125
- AH x SR (3,250 x P15.00) 48,750
Spending or rate variance P1,625F
Where:
AH = actual hours
AR = actual rate
SR = standard rate
SH = standard hours
Alternative solution:
Spending or Rate variance: AH x ∆R = 3,250 x P0.50F = P1,625 F
Efficiency or Time variance: ∆H x SR = 50F x P15 = P750 F
Where:
AH = actual hours
∆R = difference in rates
∆H = difference in hours
SR = standard rate
Course Module
Fixed overhead variance P 500F
Where:
SH = standard hours
SFxR = standard fixed rate
ANALYSIS:
Fixed Spending or Budget Variance
Actual fixed overhead P16,000
Less: Budgeted fixed overhead 15,000 P1,000 U
Three-Way Analysis:
Spending variance:
P1,625
Variable spending F
Fixed spending 1,000U P625F
Efficiency variance (variable) 750F
Volume or capacity 1,500F
Total overhead variance P2,875F
Two-Way Analysis:
Managerial Accounting
11
Standard Costing
Spending variance:
P1,625
Variable spending F
Fixed spending 1,000U
Variable efficiency 750F P1,375F
Volume or capacity 1,500F
Total overhead variance P2,875F
During August, the company produced 200 batches or 20,000 kilos of its product. Materials
used from this production were: