PRIA-ARC

CPA Review School, Inc.

“One Dream, One Team, be a CPA, Choose PRIA-ARC

3rd Floor Elizabeth Center Building, Barangay Putatan, Muntinlupa City

PRIA – (02) 8838-3099/0945-360-8753/0939-747-1831
ARC – (02) 8376-0405/0961-718-5293/0936-407-4780
MANAGEMENT SERVICES

Standard Costing
Variance Analysis

MAY 2024 MS-04

 MS-04 Standard Costing and Variance Analysis
Contents
L E C T U R E N O T E S ............................................................................................................. 1
Standard costing .............................................................................................................................. 1
Uses of Standard Costing ................................................................................................................ 1
Advantages of Standard Costing: .................................................................................................... 2
Disadvantages of Standard Costing: ............................................................................................... 2
Types of Standards .......................................................................................................................... 3
Standard Setting .............................................................................................................................. 2
General Variance Model ................................................................................................................. 2
Variance Analysis ............................................................................................................................. 2
Four-Way Analysis ........................................................................................................................... 4
Three-Way Analysis ......................................................................................................................... 4
Two-Way Analysis ............................................................................................................................ 4
LECPA Syllabus ................................................................................................................................. 5
M U L T I P L E C H O I C E Q U E S T I O N S ..................................................................................... 4
Materials Variance ........................................................................................................................... 4
Labor Variances ............................................................................................................................... 4
Mix and Yield Variances .................................................................................................................. 5
Factory Overhead Variance ............................................................................................................. 6

May 2024
 Management Services
L E C T U R E N O T E S
Standard costing
is a management accounting technique used
to establish predetermined costs for
materials, labor, and overhead for the
production of goods or services. It involves
setting standard costs based on historical
data, industry benchmarks, and
predetermined performance standards.
These standard costs serve as benchmarks
against which actual costs are compared,
enabling managers to analyze and control
costs effectively.
The standard costing process typically
involves the following steps:
1. Setting standard costs: Standard costs
are determined by considering factors
such as direct materials, direct labor,
and manufacturing overhead. Direct
materials costs include the cost of raw
materials required for production, while
direct labor costs encompass the wages
or salaries paid to the workforce
involved in the production process.
Manufacturing overhead costs include
expenses like factory rent, utilities, and
depreciation of production equipment.
2. Determining the quantity and price
standards: Quantity standards specify
the amount of materials and labor hours
required to produce a unit of output.
Price standards, on the other hand,
establish the expected cost per unit of
material or labor. These standards are
typically based on historical data,
industry norms, and management's
judgment.
3. Computing standard costs: Once the
quantity and price standards are
determined, standard costs are
calculated by multiplying the standard
quantities by the standard prices for
each cost component (materials, labor,
and overhead).
4. Recording actual costs: During the
production process, actual costs are
incurred for materials, labor, and
overhead. These costs are recorded
separately from the standard costs in
order to compare them later.
5. Analyzing variances: Variances are the
differences between actual costs and
standard costs. Variances can be
favorable (actual costs are lower than
standard costs) or unfavorable (actual
costs exceed standard costs). Managers
analyze these variances to identify the
causes and take appropriate corrective
actions.
6. Reporting and decision making: The
information gathered from the standard
costing system is used to generate
reports for management, allowing them
to assess the performance of different
departments, make informed decisions,
and take actions to improve cost
efficiency and profitability.
Uses of Standard Costing
Standard costing is a management
accounting technique that involves setting
predetermined cost standards for various
activities and comparing actual costs to
these standards. It provides a systematic
Page 1
 MS-04 Standard Costing and Variance Analysis
approach to measure and control costs
within an organization. Here are some
common uses of standard costing:
1. Cost Control:
2. Performance Evaluation:
3. Budgeting and Forecasting:
4. Pricing Decisions:
5. Inventory Valuation:
6. Continuous Improvement:
7. Benchmarking:
8. Decision Making:
Advantages of Standard Costing:
1. Cost Control: Standard costing provides
a benchmark for measuring and
controlling costs. By comparing actual
costs to standard costs, managers can
identify cost variances and take
corrective actions to control costs more
effectively.
2. Performance Evaluation: Standard
costing allows for the evaluation of
performance at various levels, such as
departments, products, or individuals. It
provides a basis for comparing actual
performance to expected performance,
facilitating performance appraisal and
identifying areas for improvement.
3. Financial Planning and Budgeting:
Standard costing provides a framework
for financial planning and budgeting
processes. It helps in setting realistic
targets, estimating costs, and aligning
budgeted costs with standard costs. This
enables organizations to develop
comprehensive budgets and allocate
resources efficiently.
4. Decision Making: Standard costing
provides cost information that supports
decision-making processes. By analyzing
May 2024
cost variances and comparing
alternative options, managers can make
informed decisions regarding pricing,
product mix, make-or-buy decisions,
and process improvements.
5. Inventory Valuation: Standard costing
provides a consistent method for
valuing inventory. By applying standard
costs to units of inventory, organizations
can determine the cost of goods sold
and the value of ending inventory,
facilitating accurate financial reporting.
Disadvantages of Standard Costing:
1. Inaccuracy and Unrealistic Standards:
Setting accurate and realistic standards
can be challenging. If the standards are
not based on current and relevant data,
they may be inaccurate and result in
unrealistic expectations. This can lead to
misleading cost variances and
ineffective cost control.
2. Rigidity: Standard costing assumes a
static and unchanging operating
environment. However, in dynamic
business environments, actual costs
may fluctuate significantly due to
factors beyond an organization's
control, such as market conditions,
inflation, or changes in technology. This
can make standard costing less effective
in such situations.
3. Time and Effort: Implementing and
maintaining a standard costing system
requires significant time, effort, and
resources. It involves setting standards,
collecting data, monitoring variances,
and conducting regular reviews.
Organizations with limited resources
may find it challenging to allocate
Page 2
 Management Services

sufficient resources to implement and 5. Behavioral Issues: Standard costing can

manage the system effectively.
4. Focus on Cost Reduction Only: Standard
costing primarily focuses on cost
reduction and may overlook other
important factors such as quality,
customer satisfaction, and innovation.
Overemphasis on cost reduction alone
may lead to compromising product or
service quality, customer loyalty, or
long-term business sustainability.
create performance pressure and
encourage employees to meet or beat
the standards at any cost. This may lead
to undesirable behaviors such as cutting
corners, neglecting quality, or
manipulating data to achieve favorable
variances. It is important to address
these behavioral issues and promote a
balanced approach to performance
evaluation and improvement.

Types of Standards
Basic Standards  A basic standard represents a stable level of performance or
efficiency over an extended period.
 It is often used in industries where the production process is
relatively stable and predictable.
 Basic standards provide a reliable baseline for performance
evaluation and cost control.
Ideal/ Perfect/  An ideal standard represents the optimal level of performance or
Theoretical efficiency that can be achieved under perfect conditions.
Standard  It assumes no wastage, no downtime, and the highest level of
productivity.
 Ideal standards are often used as long-term goals to inspire and
motivate employees.
 However, they may not be achievable in practice and serve as a
reference point rather than a realistic target.
Attainable/  Attainable standards are set based on achievable levels of
Normal Standard performance, taking into account normal operational conditions
and realistic expectations.
 They reflect the level of performance that can be reasonably
expected under typical circumstances.
 Attainable standards provide a practical benchmark for assessing
performance and controlling costs.
Current Standard  A current standard is based on current and up-to-date data.
 It takes into account the current conditions, technology, and
market factors that may affect costs and performance.
 Current standards provide a more accurate representation of the
current state of affairs and help in making timely decisions.

Page 3
 MS-04 Standard Costing and Variance Analysis

Expected Standard  Expected standards are forecasts or projections of performance

based on anticipated conditions and factors.
 They are often used in situations where there are uncertainties or
where performance is influenced by external factors such as market
demand, economic conditions, or regulatory changes.
 Expected standards help in estimating costs and planning for the
future.

Standard Setting A. Material price variance: This variance

Setting up a standard involves several steps reflects the difference between the
and considerations. Here's a general guide to actual price paid for materials and the
setting up a standard: standard price per unit of material. It is
calculated by multiplying the difference
1. Identify the Cost Elements: in price by the actual quantity of
2. Gather Historical Data: materials used. The formula for material
3. Determine the Standard Cost price variance is:
Components:
4. Set the Quantity Standards: 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑃𝑟𝑖𝑐𝑒 𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒
5. Determine the Price Standards: = (𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑟𝑖𝑐𝑒
6. Calculate the Standard Costs: − 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑃𝑟𝑖𝑐𝑒) 𝑥 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑑 𝑄𝑡𝑦
7. Review and Adjust:
8. Document and Communicate: A favorable material price variance occurs
9. Monitor and Update: when the actual price paid is lower than the
standard price, indicating cost savings.
General Variance Model Conversely, an unfavorable variance arises
when the actual price exceeds the standard
𝐴𝑐𝑡𝑢𝑎𝑙 𝑎𝑚𝑜𝑢𝑛𝑡 − 𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑎𝑚𝑜𝑢𝑛𝑡 price, indicating cost overruns.
= (𝑢𝑛𝑓𝑎𝑣) 𝑓𝑎𝑣𝑜𝑟𝑎𝑏𝑙𝑒 𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒
B. Material usage variance: This variance
Variance Analysis measures the difference between the
Direct material variance refers to the actual quantity of materials used and
difference between the standard cost of the standard quantity of materials
direct materials specified for the production specified for the production of a given
of goods or services and the actual cost of output. It is computed by multiplying
the materials used. It is a measure of the the difference in quantity by the
efficiency and cost effectiveness of the standard price per unit of material. The
material usage in the production process. formula for material usage variance is:

Direct material variance is typically divided

into two components:

May 2024 Page 2

 MS-04 Standard Costing and Variance Analysis
𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑈𝑠𝑎𝑔𝑒 𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒
= (𝐴𝑐𝑡𝑢𝑎𝑙 𝑄𝑡𝑦
− 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑄𝑡𝑦) 𝑥 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑃𝑟𝑖𝑐𝑒
A favorable material usage variance
indicates that less material was used than
expected to produce the output, resulting in
cost savings. Conversely, an unfavorable
variance implies that more material was
utilized than anticipated, leading to
increased costs.
Mix and yield variances are two types of
variances that are often calculated in the
context of manufacturing or production
processes. These variances help analyze the
differences between the expected or
standard output and the actual output
achieved.
A. Mix variance: Mix variance measures the
impact of using a different proportion or
mix of inputs than the standard mix
specified for a particular output. It
compares the actual quantity of each
input used with the standard quantity of
each input that should have been used
based on the predetermined mix.
The formula for mix variance is:
𝑀𝑖𝑥 𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒
= (𝐴𝑐𝑡𝑢𝑎𝑙 𝑀𝑖𝑥
− 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑀𝑖𝑥) 𝑥 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐼𝑛𝑝𝑢𝑡
A positive (favorable) mix variance indicates
that the actual mix used is more cost-
effective than the standard mix, resulting in
cost savings. Conversely, a negative
(unfavorable) mix variance suggests that the
May 2024
actual mix used is less cost-effective than
the standard mix, leading to increased costs.
B. Yield variance: Yield variance measures
the impact of differences in the actual
output quantity achieved compared to
the standard output quantity expected
from a given input level. It examines the
efficiency of converting inputs into
outputs and captures the variations in
the production process.
The formula for yield variance is:
𝑌𝑖𝑒𝑙𝑑 𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒
= (𝐴𝑐𝑡𝑢𝑎𝑙 𝑂𝑢𝑡𝑝𝑢𝑡
− 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑂𝑢𝑡𝑝𝑢𝑡) 𝑥 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑈𝑛𝑖𝑡
A positive (favorable) yield variance indicates
that the actual output achieved is higher
than the standard output, resulting in
increased efficiency and cost savings.
Conversely, a negative (unfavorable) yield
variance suggests that the actual output
achieved is lower than the standard output,
indicating inefficiencies and potential waste.
Direct labor variance refers to the difference
between the standard cost of direct labor
specified for the production of goods or
services and the actual cost of labor
incurred. It helps assess the efficiency and
cost effectiveness of labor utilization in the
production process.
Direct labor variance is typically divided into
two components:
A. Labor rate variance: This variance
reflects the difference between the
actual wage rate paid to workers and
Page 2
 Management Services

the standard wage rate per unit of
labor. It is calculated by multiplying the
difference in wage rate by the actual
hours of labor worked. The formula for
labor rate variance is:
𝐿𝑎𝑏𝑜𝑟 𝑅𝑎𝑡𝑒 𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒
= (𝐴𝑐𝑡𝑢𝑎𝑙 𝑅𝑎𝑡𝑒
− 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑅𝑎𝑡𝑒) 𝑥 𝐴𝑐𝑡𝑢𝑎𝑙 𝐻𝑜𝑢𝑟𝑠
A favorable labor rate variance occurs when
the actual wage rate paid is lower than the
standard rate, resulting in cost savings.
Conversely, an unfavorable variance arises
when the actual rate exceeds the standard
rate, indicating increased labor costs.
B. Labor efficiency variance: This variance
measures the difference between the
actual hours of labor used and the
standard hours of labor specified for the
production of a given output. It is
computed by multiplying the difference
in hours by the standard rate per unit of
labor. The formula for labor efficiency
variance is:
𝐿𝑎𝑏𝑜𝑟 𝐸𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦 𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒
= (𝐴𝑐𝑡𝑢𝑎𝑙 𝐻𝑜𝑢𝑟𝑠
− 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐻𝑜𝑢𝑟𝑠) 𝑥 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑅𝑎𝑡𝑒
A favorable labor efficiency variance indicates
that fewer labor hours were used than
expected to produce the output, resulting in
cost savings. Conversely, an unfavorable
variance implies that more labor hours were
utilized than anticipated, leading to increased
labor costs.
Factory overhead variance refers to the
difference between the actual factory
overhead costs incurred and the standard or
budgeted factory overhead costs for a
specific period. It helps assess the efficiency
and cost effectiveness of utilizing factory
overhead resources in the production
process.

Variable Overhead Fixed Overhead

Actual FOH
Budgeted Allowance based
on Actual hours
Budgeted Allowance based
on Standard hours allowed
Standard FOH
Actual Variable Overhead Actual Fixed Overhead
Actual hrs. x Actual Var. OH Actual hrs. x Actual Fxd. OH
rate rate
Actual Variable OH based on Budgeted Fixed Overhead
Standard rate
Actual hrs. x Standard Var.
OH rate
Standard Variable OH Budgeted Fixed Overhead
Standard hrs. x Standard Var.
OH rate
Standard Variable OH Standard Fixed OH
Standard hrs. x Standard Var. Standard hrs. x Standard Fxd.
OH rate OH rate

Page 3
 MS-04 Standard Costing and Variance Analysis

Four-Way Analysis
Variable Overhead
Actual Variable OH
Actual Variable OH based on
Standard Rate
Fixed Overheads
Actual Fixed OH
Budgeted Fixed Overhead
Less
Actual Variable OH based on
Standard Rate
Standard Variable OH
Less
Budgeted Fixed Overhead
Standard Fixed Overhead
Variance
Variable Spending Variance
Variable Efficiency Variance
Variance
Fixed Spending Variance
Volume (Capacity) Variance

Three-Way Analysis
Actual FOH
Budgeted Allowance based
on Actual hours
Budgeted Allowance based
on Standard hours allowed
Less
Budgeted Allowance based
on Actual hours
Budgeted Allowance based
on Standard hours allowed
Standard FOH
Variance
Total Spending Variance
Efficiency Variance
Volume (Capacity) Variance

Two-Way Analysis
Actual FOH
Budgeted Allowance based
on Standard hours allowed
Less Variance
Budgeted Allowance based Controllable Variance
on Standard hours allowed
Standard FOH Uncontrollable/Volume/Capacity
Variance

Variance Causes Responsibility

Material Price Variance
Materials Quantity Variance
Labor rate variance
 Fluctuations in prices Purchasing
 Proximity of the vendors Department
 Cash discounts not taken
 Substandard quality
 Contract terms
 Losses in production Production
 Defective and substandard Department
materials
 Lack of equipment
 Variation in yields
 Inexperienced worker HR Department
 Change in labor rate Production
Department

May 2024 Page 4

 Management Services

 Using high rate employee to do a

lower rate job
Labor efficiency variance  Training of employees Production
 Substandard materials Department
 Supervision
 Experience of employees
 Machine breakdowns
Controllable Variances  Increase in energy cost HR Department
 Waste and loss in supplies Production
 Lack of operators Department
 Incorrect indirect materials or
indirect labor
Volume/ Capacity/  Poor planning Production
Uncontrollable Variance  Unanticipated repairs Department
 Act of God
 Changes in demand
 Excess capacity

LECPA Syllabus
Effective October 2022
1.0 Management Accounting
1.2 Management accounting concepts and techniques for planning & control
1.2.3 Standard costing and variance analysis
1.2.3.1 Journal entries
1.2.3.2 Direct material variance (quantity, price usage, purchase price, mix
and yield)
1.2.3.3 Direct labor variance (efficiency, rate, mix and yield)
1.2.3.4 Factory overhead variance – two-way method (controllable and
volume); three-way method (spending, variable efficiency, and
volume); four-way method (variable spending, fixed spending,
variable efficiency, and volume)

******end of lecture notes******

Page 5
 MS-04 Standard Costing and Variance Analysis
MULTIPLE CHOICE QUESTIONS

Materials Variance
The next items are based on the following:
Perkins Company, which has a standard cost system, had 500 units of raw material X in its
inventory on June 1, purchased in May for P1.20 per unit and carried at a standard cost of P1.00.
The following information pertains to raw material X for the month of June.

Actual number of units purchased 1,400

Actual number of units used 1,500
Standard number of units allowed for actual production 1,300
Standard cost per unit P1.00
Actual cost per unit P1.10

1. The materials purchase price variance for raw material X for June was
A. P140 F C. P140 U
B. P150 U D. P150 F

2. The materials usage variance for raw material X for June was
A. P200 F C. P200 U
B. P220 U D. P220 F

3. The total materials variance for raw material X for June was
A. P360 U C. P360 F
B. P220 U D. P220 F

Labor Variances
The next items are based on the following:
Information on Westcott Company’s direct labor costs is as follows:

Standard direct labor hours 10,000

Standard direct labor rate P3.75
Actual direct labor rate P3.50
Direct labor usage (efficiency) variance - unfavorable P4,200

4. What were the actual hours worked, rounded the nearest hour?
A. 10,714 C. 11,200
B. 11,120 D. 11,914

May 2024 Page 4

 Management Services
5. What were the labor rate variance?
C. 1,420 F C. 1,420 U
D. 2,780 F D. 2,780 U

Mix and Yield Variances

The next items are based on the following:
Pablo's three-topping 18-inch frozen pizzas are produced by Quintella Food Industries in Los Angeles.
The company uses a standard cost system. The three toppings (in addition to cheese) for each pizza
are onions, olives, and mushrooms. To some extent, discretion may be used to determine the actual
mix of these toppings. The company has two classes of labor, and discretion may be used to
determine the mix of the labor inputs. The standard cost card for a pizza follows:

 Onions: 3 ounces at P0.10 per ounce (P1.60 per pound)

 Olives: 3 ounces at P0.35 per ounce (P5.60 per pound)
 Mushrooms: 3 ounces at P0.50 per ounce (P8.00 per pound)
 Labor category 1: 5 minutes at P12 per hour
 Labor category 2: 6 minutes at P8 per hour

During May 2024, Quintella produced 12,000 pizzas and used the following inputs: (hint: 16oz per
pound and 60 minutes in an hour)

Onions 2,000 pounds

Olives 3,000 pounds
Mushrooms 2,000 pounds
Labor Category 1 1,300 hours
Labor Category 2 1,000 hours

6. What is the material mix variance?

a. 533 U c. 533 F
b. 1,267 U d. 1,267 F

7. What is the material yield variance?

a. 533 U c. 533 F
b. 1,267 U d. 1,267 F

8. What is the labor mix variance?

a. 533 U c. 533 F
b. 1,267 U d. 1,267 F

Page 5
 MS-04 Standard Costing and Variance Analysis
Factory Overhead Variance
Edney Company employs a standard absorption system for product costing. The standard cost of
its product is as follows:

Raw materials P14.50

Direct labor (2 DLH X P8) 16.00
Manufacturing overhead (2 DLH X P11) 22.00
Total standard cost P52.50

The manufacturing overhead rate is based upon a normal activity level of 600,000 direct labor
hours. Edney planned to produce 25,000 units each units each month during the year. The
budgeted annual manufacturing overhead is

Variable P3,600,000
Fixed 3,000,000
P6,600,000

During November, Edney produced 26,000 units. Edney used 53,500 direct labor hours in
November at a cost of P433,350. Actual manufacturing overhead for the month was P260,000
fixed and P315,000 variable. The total manufacturing overhead applied during November was
P572,000.

9. Using 4-way analysis, the variable manufacturing overhead spending variance for November
is
A. P9,000 unfavorable C. P9,000 favorable
B. P6,000 unfavorable D. P6,000 favorable

10. Using 4-way analysis, the fixed manufacturing overhead spending variance for November is
A. P10,000 unfavorable C. P10,000 favorable
B. P6,000 unfavorable D. P6,000 favorable

May 2024 Page 6

 Management Services
11. Using 3-way analysis, the variable manufacturing overhead efficiency variance for November
is
A. P9,000 unfavorable C. P9,000 favorable
B. P6,000 unfavorable D. P6,000 favorable

12. Using 2-way analysis, the uncontrollable overhead variance for November is
A. P10,000 unfavorable C. P10,000 favorable
B. P6,000 unfavorable D. P6,000 favorable

13. The total overhead variance for November is

A. P10,000 unfavorable C. P10,000 favorable
B. P3,000 unfavorable D. P3,000 favorable

Page 7
 MS-04 Standard Costing and Variance Analysis
Theoretical Questions
1. How is labor rate variance computed?
A. The difference between standard and actual rate multiplied by actual hours,
B. The difference between standard and actual rate multiplied by standard hours;
C. The difference between standard and actual hours multiplied by actual rate;
D. The difference between standard and actual hours multiplied by the difference between
standard and actual rate.

2. A company uses a two-way analysis for overhead variances-- budget (controllable) and
volume (capacity). The volume variance is based on the:
A. total overhead application rate;
B. volume of total expenses at various activity levels;
C. variable overhead application rate;
D. fixed overhead application rate.

3. Listed below are four names for different kinds of standard associated with a standard cost
system. Which of these describes the labor costs that should be incurred under the
forthcoming efficient operating conditions?
A. Ideal; C. Maximum-efficiency;
B. Basic; D. Currently attainable.

4. A debit balance in the labor efficiency variance indicates that:

A. standard hours exceed actual hours;
B. actual hours exceed standard hours;
C. standard rate and standard hours exceed actual rate and actual hours;
D. actual rate and actual hours exceed standard rate and standard hours.

5. When performing input-output variance analysis in standard costing, *standard hours

allowed" is a means of measuring:
A. standard output at standard hours;
B. actual output at standard hours;
C. standard output at actual hours;
D. actual output at actual hours.

6. If the total material variances (actual cost of materials used compared with the standard costs
of the standard amount of materials required) for a given is favorable, why must this variance
be further evaluated as to price and usage
A. There is no need to further evaluate the total materials if it is favorable.
B. GAAP require that all variances by analyzed in three stages.
C. All variances must appear in the annual report to equity (owner's) for proper disclosure.
D. To allow management to evaluate the efficiency of the purchasing and production
functions.

May 2024 Page 8

 Management Services
7. When computing variances from standard costs, the difference between actual and standard
price multiplied by actual quantity yields a:
A. combined price quantity variance:
B. price variance,
C. volume variance;
D. mix variance

8. When using full absorption costing, what cost attendant to an element of production
(materials, labor or overhead) are used in order to compute variances from standard
amounts?
A. Total costs: C. Fixed costs:
B. Variable; D. Controllable costs.

9. Which of the following is the most probable reason a company would experience an
unfavorable labor rate variance and a favorable efficiency variance?
A. The mixed worker assigned to the particular job was heavily weighted towards the use
of higher paid experienced individuals.
B. The mix or workers assigned to the particular job was heavily weighted towards the use
of new relatively low paid unskilled workers.
C. Because of the production schedule workers from other production areas were assigned
to assist this particular process.
D. Defective materials caused more labor to produce a standard unit.

10. What type of direct material variances for price and usage will arise if the actual number of
pounds of materials used exceeds standard pounds allowed but actual cost was less than
standard costs? <Usage><Price>
A. Unfavorable; and Favorable
B. Favorable; and Favorable
C. Favorable; and Unfavorable
D. Unfavorable; and Unfavorable

11. If a company follows the practice of isolating variances at the earliest point in time, what
would be the appropriate time to isolate and recognize a direct material price variance?
A. When material is issued;
B. When material is purchased;
C. When material is used in production;
D. When purchase order is originated.

Page 9
 MS-04 Standard Costing and Variance Analysis
12. How should a usage variance that is significant in amount be treated at the end of an
accounting period?
A. Reported as a differed charge or credit;
B. Allocated among work in process inventory, finished goods inventory, and cost of goods
sold;
C. Charged or credited to cost of goods manufactured:
D. Allocated among cost of goods manufactured, finished goods inventory, and cost of
goods sold.

13. What is the normal year-end treatment of immaterial variances recognize in a cost accounting
utilizing standards
A. Reclassified to deferred charges until all related production is sold;
B. Allocated among cost of goods manufactured and ending work in process inventory;
C. Closed to cost of goods sold in the period in which they arose:
D. Capitalized as a cost of ending finished goods inventory.

14. Which of the following is true concerning standard cost?

A. Standard costs are estimates of cost attainable only under the most ideal conditions, but
rarely practicable;
B. Standard costs are difficult to use with a process costing system.
C. if properly used, standards can help motivate employees;
D. Unfavorable variances, material in amount, should be investigated, but large favorable
variances need not be investigated.

15. What standard cost variance represents the difference between actual factory overhead
incurred and budgeted factory overhead based on actual hours worked
A. Volume C. Efficiency variance
B. Spending variance D. Quantity variance.

16. What does a credit balance in a direct-labor efficiency variance account indicate?
A. the average wage rate paid to direct labor employees was less than the standard rate
B. the actual hours allowed for the units produced were greater than actual direct-labor
hours used
C. actual total direct-labor cost incurred were less than standard direct-labor cost allowed
for the unit produced
D. the number of units produced was less than the number of units budgeted for the period.

May 2024 Page 10

 Management Services
17. Which of the following is one of the purposes of standard costs
A. to simplify costing procedures and expedite cost reports
B. to replace budgets and budgeting
C. to use them as a basis for product costing for external-reporting purposes
D. to eliminate having an account for under applied or overapplied factory overhead at the
end of the period.

18. Given below are the following notations and their respective meanings:
AH Actual Hours
SHA Standard hours allowed for actual production
AR Actual Rate
SR Standard Rate
Which of the following formula represent the calculation of the labor-efficiency variance?
A. SR(AH-SHA) C. AH (AR - SR)
B. AR (AH - SHA) D. SHA (AR-SR)

19. When standard costs are used in a process costing system, how, if at all, are equivalent units
involved or used in the cost report at standard?
A. equivalent units are not used
B. equivalent units are computed using a "special" approach
C. the actual equivalent units are multiplied by the standard cost per unit
D. the standard equivalent units are multiplied by the actual cost per unit.

20. Excess direct labor wages resulting from overtime premium will be disclosed in which type of
variance?
A. yield C. labor efficiency
B. quantity D. labor rate.

21. Which of the following is a purpose of standard costing?

A. determine "breakeven" production level
B. control costs
C. eliminate the need of subjective decisions by management
D. allocate costs with more accuracy.

Page 11
 MS-04 Standard Costing and Variance Analysis
22. In analyzing factory overhead variance, the volume variance is the difference between the
A. amount shown in the flexible budget and the amount shown in the master budget
B. master budget application rate and the flexible budget application rate multiplied by
actual hours worked
C. budget allowance based on standard hours allowed for actual production for the period
and the amount applied during the period
D. actual amount spent for overhead items during the period and the amount applied
during the period.

23. Which of the following cost allocation methods would be used to determine the lowest price
that could be quoted for a special order that would utilize idle capacity within a production
area?
A. job order C. variable
B. process D. standard.

24. If the actual hours worked exceed the standard hours allowed, what type of variance will
occur?
A. favorable labor usage (efficiency) variance
B. favorable labor rate variance
C. unfavorable labor usage (efficiency) variance
D. unfavorable labor rate variance.

25. An unfavorable price variance occurs because of

A. price increases on raw materials
B. price decreases on raw materials
C. less than anticipated levels of waste in the manufacturing process
D. more than anticipated levels of waste in the manufacturing process.
26. An unfavorable labor efficiency variance connotes that
A. the actual labor rate was higher than the standard labor rate
B. the total labor variance must also be unfavorable
C. actual labor hours worked exceeded standard labor hours for the production level
achieved
D. overtime labor was used during the period.

May 2024 Page 12

 Management Services
27. Which of the following unfavorable variances be directly affected by the relative position of
a production process on a learning curve?
A. materials mix C. labor rate
B. materials price D. labor efficiency.

28. The difference the actual labor rate multiplied by the actual labor hours worked and the
standard labor rate multiplied by the standard labor hours is the
A. total labor variance C. labor usage variance
B. labor rate variance D. labor efficiency variance.

29. The standard unit cost is used in the calculation of which of the following variances?
<Materials price variance><Materials usage variance>
A. No; and No C. Yes; and No
B. No; and Yes D. Yes; and Yes

30. Under the two-variance method for analyzing factory overhead, the volume variance is the
difference between the
A. budget allowance based on standard hours allowed and the budget allowance based on
actual hours worked
B. budget allowance based on standard hours allowed and the factory overhead applied to
production
C. actual factory overhead and the budget allowance based on standard hours allowed
D. actual factory overhead applied to production.

**end of handouts***

Page 13