Exercise 1 ( Setting Standards; Preparing a Standard Cost card )

Medi Laboratories, Inc., a pharmaceutical company, makes an anticoagulant drug.

The main ingredient in the drug is a raw material called Beta ML12. Information concerning the purchase
and use of Beta ML12 follows:

Purchase of Beta ML12: The raw material Beta ML12 is purchased in 2- kilogram containers at a cost of
P3,000 per kilogram. A discount of 2% is offered by the supplier for payment within 10 days and Medi
Laboratories takes all discounts. Laboratories must pay, amount to P1,000 for an average shipment of ten 2-
kilogram containers.

Use of Beta ML12: The bill of materials calls for 6 grams of Beta ML12 per capsule of the anticoagulant
drug. (A kilogram equals 1,000 grams.) About 4% of all Beta ML12 purchased is rejected as unsuitable
before being used to make the anticoagulant drug. In addition, after the addition of Beta ML12, about 1 out
of every 26 capsules is rejected at final inspection, due to defects of one sort or another in the capsule.

Requirement I. Compute the standard purchase price for one gram of Beta ML12.

Cost per 2 kilogram container ( 3,000 per kilogram x 2-kilogram) P6,000.00

Less: 2% cash discount (P6,000 x 2 % ) 120.00
Net cost P5,880.00
Add: Shipping Cost ( P1,000 ÷ 10 containers) 100.00

Total cost P5,980.00

Divided by: Number of grams per container
(2 kilograms × 1000 grams per kilogram) 2,000.00
Standard Purchase Price for One Gram of Beta ML12 P 2.99

Requirement 2 : Compute the standard quantity of Beta ML12 (in grams) per capsule that passes final
inspection.
(Carry computations to two decimal places.)

Beta ML12 required per capsule as per bill of materials 6.00 grams
Add : allowance for material rejected as unsuitable before being used
[(6 grams ÷ 0.96 ) – 6 grams] 0.25grams
Total 6.25 grams
Add : Allowance for rejected capsules at the final inspection
[(6.25 grams ÷ 26 capsules- 1 capsules) ] 0.25 grams
Standard Quantity of Beta ML12 6.50 grams
Requirement 3 : Using the data from (1) and (2) above, prepare a standard cost card showing the
standard cost of Beta ML12 per capsule of the anticoagulant drug.

Item Standard Quantity Standard Price Standard Cost

Beta ML12 Per Capsule Per Gram Per Capsule
6.50 grams P2.99 P19.435

*(6.50 grams x P 2.99=P 19.435 ¿

Exercise 2 ( Material Variances)

Jasper Household Products, Inc., manufactures a number of consumer items for general household use.
One of these products, a chopping board, requires an expensive hardwood.
During a recent month, the company manufactured 4,000 chopping boards using 11,000 board feet of
hardwood.
The hardwood cost the company P18,700. The company's standards for one chopping board are 2.5 board
feet of hardwood, at a cost of P1.80 per board foot.

Requirement 1 : According to the standards, what cost for wood should have been
incurred to make 4,000 chopping blocks?
How much greater or less is this than the cost that was incurred?

Number of chopping blocks 4,000

Multiplied to: Std. number of board feet per chopping block 2.5
Standard board feet allowed 10,000
Multiplied to: Standard cost per board foot P 1.80
Total standard cost P 18,000

Actual cost incurred P 18,700

Less: Standard cost above 18,000
Total variance—unfavorable P 700
Requirement 2 : Break down the difference computed in (1) above into a materials price variance
and a materials quantity variance.

1.) Actual 2.) Inputs at Standard Price 3.) Flexible Production Budget
(AQ x AP) ( AQ x SP) (SQ x SP)
11,000 x P1.80 10,000 x P1.80
P 18,700 = P19,800 = P18,000

Price Variance, Quantity Variance,

P 1,100 F P 1,800 U
Total Variance, P 700 U

AQ= Actual Quantity SQ= Standard Quantity Allowed for Actual Output
AP= Actual Price SP= Standard Price

AQ= 11,000 SQ= ( 4,000 x 2.50 )= 10,000

AP= (18,700 ÷ 11,000 ¿=P1.70 SP= P 1.80
Alternative Solution:
Materials Price Variance

Actual price ( P18,700 ÷ 11,000 board feet ¿ P 1.70 per board foot
Less: Standard price P 1.80 per board foot
Favorable (P 0.10 )
Multiply by: Actual Quantity Purchase * 11,000 board feet
Favorable ( P 1,100 )

*Or Actual Quantity used if quantity purchased is not known

Materials Quantity Variance

Actual Quantity 11,000 board feet

Less: Standard Quantity 10,000 board feet
Unfavorable 1,000 board feet
Multiplied by: Standard Price P 1.80 per board foot
Unfavorable P 1, 800
Exercise 3 (Labor and Variable Overhead Variances)

Halliwell Audio, Inc., manufactures military-specification com pact discs.

The company uses standards to control its costs.
The labor standards that have been set for one disc are as follows:

Standard Hours Standard Rate per Hour Standard Cost

24 minutes P6.00 P2.40

During July, 8,500 hours of direct labor time were recorded to make 20,000 discs.
The direct labor cost totaled P49,300 for the month.

Requirement 1 : What direct labor cost should have been incurred to make the 20,000 discs?
By how much does this differ from the cost that was incurred?

If standard cost is given…

Number of units (discs) manufactured 20,000
Multiplied by: Standard cost P 2.40
Standard direct labor cost P 48,000

Or
If the standard cost is not given…
Number of units (discs) manufactured 20,000
Multiplied by : Standard labor time per disc
(24 mins. / 60 mins. Per hour) 0.4
Total standard labor hours allowed 8,000
Multiplied by : Standard rate per hour P 6.00
Standard direct labor cost P 48,000

Actual direct labor cost P 49,300

Less: Standard direct labor cost 48,000
Total Variance - Unfavorable P 1,300
Requirement 2 : Break down the difference in cost from (1) above into a labor rate variance and a labor
efficiency variance.

Actual Inputs at Standard Price Flexible Production Budget

Actual Hours x Actual Labor Rate Actual Hour x Standard Labor Rate Standard hours allowed for actual
output
x Standard labor rate
P 49,300 8,500 hours x P6 per hour * 8,000 hours x P6 per hour
*
= P51,000 = P48,000

Rate Variance = P 1,700 F Efficiency Variance = P 3,000 U

Total Variance = P 1,300 U

Alternative Solution:

Labor Rate Variance

Actual labor rate * P 5.80 * 49,300/8,500= P 5.80

Less: Standard rate P 6.00
Favorable ( P 0.20)
Multiplied by: Actual hours 8,500
Favorable (P 1,700)

Labor Efficiency Variance

Actual hours 8,500

Less: Standard hours * 8,000 * 20,000 x 0.4 hr. per unit = 8,000 hours
Unfavorable 500
Multiplied by: Standard labor rate P 6.00
Unfavorable P 3,000

Labor Rate Variance ( P1,700)

Less: Labor Efficiency Variance 3,000
Net Variance P 1,300 Unfavorable
Requirement 3: The budgeted variable manufacturing overhead rate is P4 per direct labor-hour.
During July, the company incurred P39,100 in variable manufacturing overhead cost.
Compute the variable overhead spending and efficiency variances for the month.

Actual Variable Overhead Inputs at Standard Price Applied Variable Overhead

Actual Hour x Standard Variable Overhead Rate Standard hours x Std. VOR
P 39,100 8,500 hours × P4 per hour 8,000 hours* × P4 per hour
= P34,000 = P32,000

P 5,100 U P 2,000 U
Spending Variance Efficiency Variance

Total Variance = P7,100 U

Alternative Solution:

Variable Overhead Spending Variance

Actual Variable OH P39,100

Less: Actual Hours x Std. VOR
( 8,500 x P4.00) 34,000
Unfavorable P 5,100 U

Variable Overhead Efficiency Variance

Actual hours 8, 500 hours

Less: Standard hours 8,000 hours
Unfavorable (Favorable) 500 hours
Multiply by: Std. VOR P 4.00
Unfavorable P2,000 U

Variable Overhead Spending Variance P 5,100

Variable Overhead Efficiency Variance 2,000
Total Variance P 7,100 U