11-1

Standard Cost
Variance Analysis
 11-2

Cost
Cost control
control isis important
important
for
for companies
companies following
following aa
cost
cost leadership
leadership strategy
strategy
where
where total
total demand
demand forfor the
the
product
product isis not
not growing.
growing.

A
A standard
standard cost
cost isis the
the
per-unit
per-unit cost
cost aa
company
company should
should incur
incur
to
to make
make aa unit
unit ofof
product.
product.
 11-3

Standard
Standard Costs
Costs
a measure of acceptable performance
established by management as a guide in
making economic decisions.

A standard or “benchmark” cost has

two components: a standard price, or
rate, and a standard quantity.
 11-4

Standard
Standard Costs
Costs
Quantity Standards – indicate
quantity of raw materials or labor time
required to produce a unit of product or
services.

Cost Standards – indicate what the

cost of the quantity standards should be.
 11-5

Uses
Uses of
of Standard
Standard Costs
Costs
Manufacturing firms
Service firms
Non-profit organizations

A Standard Cost System may be

used in both job order and process
costing systems.
 11-6

Standard
Standard Costing
Costing Procedures
Procedures
Establish standards
Measure actual performance
Compare actual performance with
standard
Analyze the variances
Investigate the variances that must
be investigated
Take corrective action when needed
 11-7

Types
Types of
of Standard?
Standard?
 IDEAL STANDARD - also called “Theoretical or
Maximum-Efficiency Standards”. It can be attained
only under perfect conditions. No allowance for
machine breakdown, work interruption, wastages,
etc.
 PRACTICAL STANDARDS - also called “Currently
Attainable Standards”. They allow normal machine
downtime, employee rest-periods, wastages and work
interruptions.
 11-8

Setting
Setting Standards
Standards

Engineering methods
Managerial estimates
Benchmarking and best
practices
 11-9

Setting
Setting Standards
Standards

Engineering Methods
Some companies develop standard
quantities for materials and labor by
carefully examining production methods
and determining how much of an input
factor is necessary to obtain a finished unit.
 11-10

Setting
Setting Standard
Standard

Managerial Estimates
Some companies rely on the judgment of
managers closest to the task to determine
quantities of input needed to produce a
unit of product. Managers who
participate in setting standards are more
likely to commit to meeting them.
 11-11

Setting
Setting Standards
Standards

Benchmarking

Benchmarking is a relatively recent

development that companies use to determine
whether their operations and costs compare
favorably to those of world-class companies.
 11-12

Advantages
Advantages of
of Using
Using
Standard
Standard Costs
Costs
Standard costs serve as a key element in the
application of management by exception
(MBE), management by objective (MBO) and
responsibility accounting (RA)
Standard costs promote economy and
efficiency among employees
The use of standard costs simplifies
bookkeeping and costing procedures.
 11-13

Variances
Variances and
and Performance
Performance
Evaluation
Evaluation
• Variance is the difference between actual
and standard costs. It should be described
either as favorable (actual is less than
standard) or unfavorable (actual is more
than standard)
• Variances signal nonstandard performance
only if they are based on up-to-date
standards that reflect current production
methods and current prices of input factors.
 11-14

Responsibility
Responsibility for
for Variances
Variances
Variances Possible Causes Responsible Person
Materials spending • Quality of materials  Purchasing
or price variance • Quantity purchased manager
• Delivery time
Materials efficiency • Quality of materials  Production
or quantity variance • Defective machines manager
• Unskilled workers
• Poor supervision
Labor spending • Workers’ skill  Supervisors
or rate variance • Overtime premiums  Person
responsible for
setting labor rates
Labor efficiency • Worker’s skill  Production
or time variance • Change in worker’s manager
efficiency
• Imposition of control
measures in the production
 11-15

Disposition
Disposition of
of Variances
Variances
• Closed to Cost of Goods Sold when
the variance is not very significant in
amount
• Used as adjustment (prorated) to
Cost of Goods Sold and appropriated
Inventory Account (material, WIP or
FG) when the variance is significant in
amount
Capacity Levels
Capacity refers to the fixed
amount of the company’s
human and non-human
resources for which
management has committed
itself and with which it
expects to conduct the
business and maintain the
firm as a going concern.
3 Different Capacity Levels
 11-18

Codes:
Codes:
Code Description Code Description
A Actual R Rate
S Standard Prod Production
C Cost Pur Purchase
V Variance M Materials
Q Quantity L Labor
T Time FOH Factory Overhead
P Price Var Variable
Fx Fixed OH Overhead
F Favorable UF Unfavorable
D Difference
 11-19

Standard
Standard Costs
Costs
Cost Factor Std. Quantity Std. Price Std. Cost
Materials 10.00 P0.80 P8.00
Direct labor 0.50 16.00 8.00
Variable overhead 0.50 6.00 3.00
Fixed overhead 0.50 2.00 1.00
Total standard cost P20.00
Actual results:
Production 1,000 units
Materials purchased, 11,000 at P0.78. P8,580
Materials used 10,200 gallons
Direct labor, 480 hours at P16.20 P7,776
Variable overhead incurred P3,100
Fixed overhead incurred P1,100
 11-20

Materials
Materials Purchase
Purchase Variance
Variance
Actual Material Purchase AQ x AP
Cost
Less: Standard Material AQ x SP
Purchase Cost
Materials Purchase Cost
Variance

Example:
AMPC 11,000 x P .78 P 8,580
Less: SMPC 11,000 x P .80 P 8,800
MPCV P 220 F
 11-21

Total
Total Materials
Materials Variance
Variance
Actual Materials Cost AQ x AP
Less: Standard Materials Cost SQ x SP
Materials Cost Variance

Example:
AMC 10,200 x P.78 P 7,956
Less: SMC 10,000 x P.80 P 8,000
MCV P 44 F
 11-22

Total
Total Materials
Materials Variances
Variances
ANALYSIS:
Spending or Price Variance (PV) DP x AQ
Less: Efficiency or Quantity Variance DQ x SP
(QV)
Material Cost Variance
Example:
PV .02 F x 10,200
Add: QV 200 UF x P .80
MCV P 44 F
 11-23

Total
Total Labor
Labor Variance
Variance
Actual Labor Cost AH x AR
Less: Standard Labor Cost SH x SR
Labor Cost Variance

Example:
ALC 480 hrs. x P 16.20 P 7,776
Less: SLC 500 hrs. x P 16.00 P 8,000
LCV P 224 F
 11-24

Total
Total Labor
Labor Variances
Variances
ANALYSIS:
Spending or Rate Variance (RV) DR x AH
Less: Efficiency or Time Variance (TV) DH x SR
Labor Cost Variance
Example:
RV .20 UF x 480 hrs
Add: TV 20 F x P 16.00
LCV P 224 F
 11-25

Variable
Variable Factory
Factory Overhead
Overhead Variance
Variance
Variable Factory Overhead Variance
Actual Variable FOH AH x AVarFOHR
Less: Standard Variable FOH SH x SVarFOHR
Variable FOH Variance

Fixed Factory Overhead Variance

Actual Fixed FOH AH x AFxFOHR
Less: Standard Fixed FOH SH x SFxFOHR
Fixed FOH Variance

FOHCV
 11-26

Total
Total Factory
Factory Overhead
Overhead Variance
Variance
Variable Factory Overhead Variance
Actual Variable FOH P 3,100
Less: Standard Variable FOH 500 hrs x 6
Variable FOH Variance P 100 UF

Fixed Factory Overhead Variance

Actual Fixed FOH P 1,100
Less: Standard Fixed FOH 500 hrs x 2
Fixed FOH Variance P 100 UF

FOHCV P 200 UF
 11-27

Factory
Factory Overhead
Overhead Variances
Variances
2-Way Analysis
Controllable Variance Volume Variance
AFOH xx BASH xx
Less: Less:
BASH* xx SFOH** xx
Controllable Variance Volume Variance

*BASH **SFOH
FxOH as budgeted SH x SOHR
Add: SH x SVOHR
 11-28

Factory
Factory Overhead
Overhead Variances
Variances
2-Way Analysis
Controllable Variance Volume Variance
AFOH P 4,200 BASH P 4,000
Less: Less: P 4,000
BASH* P 1,000 SHSR**(500 x 8)
P 3,000 P 4,000
CV P 200 UF VV -
FOHV (P 200 UF + 0) = 200 UF
*BASH **SHSR
FxOH as budgeted SH x SOHR
Add: SH x SVOHR
 11-29

Factory
Factory Overhead
Overhead Variances
Variances
3-Way Analysis
Spending or Budget Capacity Variance Efficiency Variance
Variance
AFOH xx BAAH xx BASH xx
Less: Less: Less:
BAAH* xx BASH** xx SHSR*** xx

Spending Variance Capacity Variance Efficiency Variance

*BAAH *BASH **SHSR

FxOH as budgeted FxOH as budgeted SH x SOHR
Add: AH x SVOHR Add: SH x SVOHR
 11-30

Factory
Factory Overhead
Overhead Variances
Variances
3-Way Analysis
Spending or Budget Capacity Variance Efficiency Variance
Variance
AFOH 4,200 BAAH BASH 4,000
Less: 3,880 Less:
BAAH* 1,000 Less: SHSR*** 4,000
2,880 3,880 BASH** 4,000

SV 320 CV 120 F
UF
FOHV (320 UF + 120 F) = 200 UF

*BAAH *BASH **SHSR

FxOH as budgeted FxOH as budgeted SH x SOHR
 11-31

Entries
Entries for
for Variances
Variances
Favorable (Credit) Cost Variance
Unfavorable (Debit) Cost Variance

TO CLOSE:
Favorable Variance is Debited to COS (if normal
variance) or to Expense (if abnormal variance)

Unfavorable Variance is Credited to COS (if

normal variance) or to Expense (if abnormal
variance)
 Exercise:
A Company produces a single product that has the following standard costs:
Materials 5 pcs. @ P 4 per piece P 20
Labor 3 hrs. @ P 10 per hr P 30
VOH 3 hrs. @ P 15 per hr P 45
FxOH 3 hrs. @ P 5 per hr P 15
Total manufacturing standard cost P 110
The total budgeted fixed overhead at normal capacity of 1,000 units is P
15,000. The total budgeted hours is 3,000 hours.
During the period, the company produced 1,100 units and incurred the ff.
costs:
Materials 5,600 pcs. @ P 3.80 per piece P 21,280
Labor 3,250 hrs. @ P 11 per hr P 35,750
VOH 3,250 hrs. @ P 14.50 per hr P 47,125
FxOH P 16,000
Total actual cost P 120,155
 Exercise:
Computation and analysis of the variances:
Actual manufacturing costs P 120,155
Less: Standard manufacturing costs P 121,000
(1,100 units x 110)
Total Manufacturing Cost Variance (TMCV) P 845 F

Required:
Breakdown the TMCV by analyzing the cost elements:
1.Material Cost Variance (MCV)
2.Labor Cost Variance (LCV)
3.Variable FOH Cost Variance (VFOHCV)
4.Fixed FOH Cost Variance (FxFOHCV)
5.Use the 3-way analysis in analyzing FOH Variance
 11-34

Total
Total Materials
Materials Variance
Variance
Actual Materials Cost AQ x AP
Less: Standard Materials Cost SQ x SP
Materials Cost Variance

Solution:
AMC 5,600 x P 3.80 P 21,280
Less: SMC 5,500 x P 4.00 P 22,000
MCV P 720 F
 11-35

Total
Total Materials
Materials Variances
Variances
ANALYSIS:
Spending or Price Variance (PV) DP x AQ
Less: Efficiency or Quantity Variance DQ x SP
(QV)
Material Cost Variance
Solution:
PV .20 F x 5,600
Add: QV 100 UF x P 4
MCV P 720 F
 11-36

Total
Total Labor
Labor Variance
Variance
Actual Labor Cost AH x AR
Less: Standard Labor Cost SH x SR
Labor Cost Variance

Solution:
ALC 3,250 hrs. x P 11 P 35,750
Less: SLC 3,300 hrs. x P 10 P 33,000
LCV P 2,750
UF
 11-37

Total
Total Labor
Labor Variances
Variances
ANALYSIS:
Spending or Rate Variance (RV) DR x AH
Less: Efficiency or Time Variance (TV) DH x SR
Labor Cost Variance
Solution:
RV 1 UF x 3,250 hrs
Add: TV 50 hrs F x 10
LCV P 2,750 UF
 11-38

Variable
Variable Factory
Factory Overhead
Overhead Variance
Variance
Variable Factory Overhead Variance
Actual Variable FOH AH x AVarFOHR
Less: Standard Variable FOH SH x SVarFOHR
Variable FOH Variance

Fixed Factory Overhead Variance

Actual Fixed FOH AH x AFxFOHR
Less: Standard Fixed FOH SH x SFxFOHR
Fixed FOH Variance

FOHCV
 11-39

Total
Total Factory
Factory Overhead
Overhead Variance
Variance
Variable Factory Overhead Variance
Actual Variable FOH P 47,125
Less: Standard Variable FOH 3,300 hrs x 15
Variable FOH Variance P 2,375 F

Fixed Factory Overhead Variance

Actual Fixed FOH P16,000
Less: Standard Fixed FOH 3,300 hrs x 5
Fixed FOH Variance P 500 F

FOHCV P 2,875 F
 11-40

Factory
Factory Overhead
Overhead Variances
Variances
2-Way Analysis
Controllable Variance Volume Variance
AFOH P 63,125 BASH P 64,500
Less: Less: P 66,000
BASH* P 15,000 SHSR**(3,300 x 20)
P 49,500
P64,500
CV P 1,375 F VV 1,500 F
FOHV (P 1,375F + 1,500F) = 2,875F

*BASH **SHSR
FxOH as budgeted SH x SOHR
 11-41

Factory
Factory Overhead
Overhead Variances
Variances
3-Way Analysis
Spending or Budget Capacity Variance Efficiency Variance
Variance
AFOH 63,125 BAAH BASH 64,500
Less: 63,750 Less:
BAAH* 15,000 Less: SHSR*** 66,000
48,750 63,750 BASH** 64,500 (3,300 x 20)
15,000
(3,300 hrs x 15)
SV 625 F CV 750 F EV 1,500 F
FOHV (625 F + 750 F + 1,500 F) = 2,875 F
*BAAH
FxOH as budgeted **BASH **SHSR
Add: AH x SVOHR FxOH as budgeted SH x SOHR
Add: SH x SVOHR
 11-42

Summary:
Summary:
 11-43

Materials
Materials Price,
Price, Mix
Mix and
and Yield
Yield Variance
Variance Analysis
Analysis
When the production process involves combining or mixing
several materials in varying proportions , the 3-way analysis
(Price, Mix and Yield Variance Analysis) is used.
Price Variance = ∑DP x AQI (computed per material)
Mix Variance = ∑AQI x SP (computed per material)
Less: Total AQI x ASIC
Yield Variance = Total AQI x ASIC
Less: Total AQO x ASOC
ASIC = Total Standard Input Cost / Total Standard Input Quantity
Yield % = Standard Output Cost / Standard Input Quantity
ASOC = Total Standard Input Cost / Total Standard Output Quantity
 11-44

Illustrative
Illustrative Problem:
Problem:
A company combines three types of materials to produce its product.
For a 100-kilo batch, the standard cost for materials are as follows:
Material Standard Quantity Standard Price Total
A 60 kilos P5 P 300
B 36 kilos P4 P 144
C 24 kilos P3 P 72
Total 120 kilos P 516

During August, the company produced 200 batches or 20,000 kilos of its product.
Materials used for this production were.
Material Quantity Price Total
A 12,600 kilos P 4.80 P 60,480
B 7,300 kilos P 4.10 P 29,930
C 4,700 kilos P 3.40 P 15,980
Total 24,600 kilos P 106,390
 11-45

Suggested
Suggested Solution:
Solution:
ASIC = P 516 = P 4.3 per kilo
P 120 kgs.

YIELD % = 100 kgs. = 83.33 %

120 kgs.

ASOC = P 516 = P 5.16 per kilo

100

Total Material Variance:

Actual Materials Cost P 106,390
Less: Standard Materials Cost P 103,200 (Actual Output x ASOC)
Materials Variance P 3,190 UF
 11-46

Suggested
Suggested Solution:
Solution:
Price Variance
Material Actual Price Std. Price DP AQI Price Variance
A P 4.80 P 5.00 P .20 F 12,600 kgs. P 2,520 F
B P 4.10 P 4.00 P .10 UF 7,300 kgs. P 730 UF
C P 3.40 P 3.00 P .40 UF 4,700 kgs. P 1,880 UF
Total Price Variance P 90 UF
Mix Variance
Material Actual Qty. Input Standard Price Total
A 12,600 P 5.00 P 63,000
B 7,300 P 4.00 P 29,200
C 4,700 P 3.00 P 14,100
Total Actual Input @ SP P 106,300
Total Actual Input @ ASIC ( 24,600 kgs. x P 4.30 ) P 105,780
Mix Variance P 520 UF
 11-47

Suggested
Suggested Solution:
Solution:
Yield Variance
Total Actual Input @ ASIC ( 24,600 kgs. x P 4.30 ) P 105,780
Total Actual Output @ ASOC ( 20,000 kgs. x P 5.16 ) P 103,200
Yield Variance P 2,580 UF

y:
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 Exercise:
Annie Company makes and sells pastries. The standard materials input to
produce an output of 80 units of the product follows:
Material Std. Quantity Standard Prices Std. Input Cost /unit
Tic 40 units P 2 per unit P 80
Tac 25 units P 3 per unit P 75
Toc 35 units P 5 per unit P 175
TOTAL 100 units P 330
During the month of June, the company produced 420 units of the product with
the following actual materials input quantities and prices:

Material Actual Quantity Actual Prices Actual Cost /unit

Tic 180 units P 2.50 per unit P 450.00
Tac 135 units P 2.90 per unit P 391.50
Toc 185 units P 4.80 per unit P 888.00
TOTAL 500 units P 1,729.50
 Exercise:
Given the information from the preceding slide,
compute for the following:

r : 3.30
1.ASIC we
ns 80%
2.Yield Rate A 4.125
3.ASOC
39.50 UF
4.Price Variance
40 UF
5.Mix Variance
6.Yield Variance 82.50 F

7.Total Material Cost Variance 3F

 Exercise: Suggested Answer
ASIC = P 330 = 3.3 per unit
100 units

YIELD = 80 units = 80%

100 units

ASOC = P 330 = 4.125 per unit

80 units

Total Material Variance:

Actual Materials Cost P 1,729.50

Less: Standard Materials Cost P 1,732.50 (420 units x ASOC)
Materials Variance P 3.00 F
 11-51

Suggested
Suggested Answer:
Answer:
Price Variance
Material Actual Price Std. Price DP AQI Price Variance
A P 2.50 P 2.00 P .50 UF 180 units P 90 UF
B P 2.90 P 3.00 P .10 F 135 units P 13.5 F
C P 4.80 P 5.00 P .20 F 185 units P 37 F
Total Price Variance P 39.5 UF
Mix Variance
Material Actual Qty. Input Standard Price Total
A 180 units P 2.00 P 360
B 135 units P 3.00 P 405
C 185 units P 5.00 P 925
Total Actual Input @ SP P 1,690
Total Actual Input @ ASIC ( 500 units x P 3.30 ) P 1,650
Mix Variance P 40 UF
 11-52

Suggested
Suggested Solution:
Solution:
Yield Variance
Total Actual Input @ ASIC ( 500 units x P 3.30 ) P 1,650.00
Total Actual Output @ ASOC ( 420 units x P 4.125 ) P 1,732.50
Yield Variance P 82.50 F

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 Exercise: Materials
Carmen Company produces and sells a product with the
following material standards:
Quantity – 5 liters of raw materials per unit
Price – P 7.00 per liter
Previous actual data on production and material were
gathered as follows:
Production - 3,000 units of product
Quantity of materials purchased – 20,000 liters
Quantity of materials used – 14,000 liters
Price paid for materials purchased – P 7.10 per liter
Required:
a. Determine the total materials cost variance
b. Compute the price and quantity variances
c. Determine the purchase price variance
 Exercise: Labor
Pacito Corporation usually pays its factory workers
at a rate of P 10 per hour. At standard, these
workers should produce a unit of product in 16
hours.
For the month of May, production records showed
that the company manufactured 4,500 units of
product in 74,000 hours. Payroll showed total direct
labor costs of P 707,440
Required:
a. Determine the total labor cost variance
b. Compute the time and rate variances
 Exercise: Overhead
For the month of March, Department 1 of Chiqui
Company incurred total overhead costs of P
525,000 in producing 2,500 units of product, for
which 24,000 hours were used.
For such month, the department’s budgeted
factory overhead cost was P 600,000 based on
the normal activity level of 30,000 hours or 3,000
units of product.
Required:
a. Determine the total factory overhead cost
variance using the three-way variance method
 11-56

The
The End
End