Standard Costing and

Variance Analysis
Standards are expected levels of
performance
Theoretical ( or Ideal, Maximum Efficiency, or Perfection Standard )
- set at the highest possible capacity where there are no allowances
for waste, spoilage, inefficiencies, machine breakdowns, other
downtimes, and other interruptions in the production line
Ideal = 100% standards

Practical ( or Currently Attainable Standards )

- attain the most reasonable production level, with allowances for
waste, spoilage, inefficiencies, machine breakdowns, other downtimes,
and other normal production disturbances
Practical = 100% standards – Normal Allowances
Budgeted ( or Expected Output Capacity )
- estimated level of performance that the company plans to achieve
in the next 12 months

Standard Capacity
- estimated capacity that should have been used in actual capacity
( Actual Production in Units x Standard Rate per Unit Produced )

Normal Capacity ( or Normal Standard )

- average production level over a long period of time
- basis in determining the fixed overhead rate
ABC Corporation acquired a machine with a 200,000 units level of
capacity five years ago. Using this machine, the standard labor time is
2 hours per unit. Engineering estimates based on attainable
performance is 170,000 units. Management has planned to produce
only 160,000 units in the coming year using the same machine. Total
production in the last five years is 828,000 with annual production
recorded as follows:

First year, 180,000 units

Second year, 140,000 units
Third year, 170,000 units
Fourth year, 182,000 units
Fifth year, 156,000 units
Theoretical ( or Ideal, Maximum Efficiency, or Perfection Standard )

200,000 units; 400,000 hours (200,000 units x 2 hours )

Practical ( or Currently Attainable Standards )

170,000 units; 340,000 hours (170,000 units x 2 hours )

Budgeted ( or Expected Output Capacity )

160,000 units; 320,000 hours (160,000 units x 2 hours )

Normal Capacity ( or Normal Standard )

165,600 units ( 828,000 / 5 years ); 340,000 hours (170,000 units x 2

hours )
Standard Capacity

360,000 hours (180,000 units x 2 hours )

ABC Corporation
Cutting Department
Standard Costs Sheet

Direct Materials
AA – 44 3 lbs @P2.00 P6.00
BB – 77 6 pcs @P6.20 P37.20
CC – 12 4 units @P3.40 P13.60 P56.80
Direct Labor 4 hrs @P7.00 P28.00
Variable Overhead 4 hrs @P3.00 P12.00
Fixed Overhead 4 hrs @P5.00 P20.00
Total Standard Unit Cost P116.80
Standard Costs
1. Standard Materials per Unit ( ex. 3lbs., 6pcs., 4units ) and Standard
Number of Hours to make a unit of output are to be determined by
the production manager
2. Unit Material Cost shall be primarily determined by the purchasing
manager
3. Standard Labor Rate shall be estimated on the advise of the human
resource manager and production manager
4. Standard Variable Overhead Rate is determined based on past
experience
5. Fixed Overhead Rate is based on normal capacity
Standard Rate or Price should be based on a Net Basis

Standard Hours and Quantity should be set at Gross Basis

after including allowances for spoilage, breakdowns, and
similar events
ABC Corporation produces product Durito weighing 3.2
lbs., net of the 20% processing loss. It buys materials
from a supplier at an invoice price of P40 per lb. with a
normal trade discount of 2/10, n/30. Freight for the
delivery of materials costs P5 per lb. . What is the a.
standard materials quantity, b. standard price per
pound, and c. standard materials cost per unit.
a. standard materials quantity

standard materials input = standard materials output / ( 100% - loss rate )

standard materials input = 3.2 lbs. / ( 100% - 80% )
standard materials input = 3.2 lbs. / 80%
standard materials input = 4 lbs.
b. standard price per pound

purchase price ( P40.00 x 98% ) P39.20

freight – in P5.00
standard price per pound P44.20
c. standard materials cost per unit

standard materials cost per unit = standard materials input x standard price per
pound
standard materials cost per unit = 4 lbs. x P44.20
standard materials cost per unit = P176.80
 The following direct labor information pertains to the manufacture of product
Glu:
Time required to make one unit 2 direct labor hours
Number of direct workers 50
Number of productive hours per week, per worker 40
Weekly wages per worker $500
Workers’ benefits treated as direct labor costs 20% of wages

What is the standard direct labor cost per unit of product Glu?
Weekly wages per worker $500
Add: workers benefits treated as
direct labor cost (20% x $500) $100
Total $600
Divided by productive hours ÷40 hours
Direct labor rate per hour $15 per hour
Multiplied by number of hours required per unit x 2 hours per unit
Standard direct labor cost per unit $30
Variance – difference between actual and standard costs
- should be investigated, analyzed, studied, and
avoided in the future

Debit Variance Credit Variance

Positive Negative
Unfavorable ( UF ) Favorable ( F )
Direct Materials Costs Variance Analyses

Materials Price Variance = ( Actual Price – Standard Price ) Actual Quantity

Materials Quantity Variance = ( Actual Quantity – Standard Quantity ) Standard
Price

Standard Quantity = Actual Production x Standard Materials per Unit

When the problem is silent, the materials price variance should be based on
materials purchases
 The following July information is for Marley Company:

Standards:  
Material 3.0 feet per unit @ $4.20 per foot
Labor 2.5 hours per unit @ $7.50 per hour
   
Actual:  
Production 2,750 units produced during the month
Material 8,700 feet used; 9,000 feet purchased @ $4.50
per foot
Labor 7,000 direct labor hours @ $7.90 per hour
What is the material price variance (calculated at point of purchase)?

Material Price Variance = (AP - SP) * AQ

= ($4.50 - $4.20) * 9,000 feet purchased
= $2,700 UF
What is the material quantity variance?

Material Quantity Variance = (AQ - SQ) * SP

= (8,700 - (2,750 * 3)) * $4.20
= $1,890 UF
 
Direct Labor Costs Variance Analyses

Labor Rate Variance = ( Actual Rate – Standard Rate ) Actual Hours

Labor Efficiency Variance = ( Actual Hours – Standard Hours ) Standard Rate

Standard Hours = Actual Production x Standard Hours per Unit

What is the labor rate variance?

Labor Rate Variance = (AP - SP) * AQ

= ($7.90 - $7.50) * 7,000 hrs used
= $2,800 UF
What is the labor efficiency variance?

Labor Efficiency Variance = (AQ - SQ) * SP

= (7,000 hrs - (2.5 hrs/unit * 2,750 units)) * $7.50
= $938 UF (rounded)
Standard unit price P90.00

Actual units purchased 40,000

Standard units allowed for actual 36,250

production
Materials price variance- P6,000
favorable
What was the actual purchase price per unit?

Materials Price Variance = ( Actual Price – Standard Price ) Actual Quantity

( P,6000 ) = ( Actual Price ( x ) – P90 ) 40,000
- P6,000 = 40,000x – P3,600,000
P3,600,000 – P6,000 = 40,000x
P3,594,000 = 40,000x
40,000x 40,000x
P89.85 = x
Materials Price, Mix, and Yield Variances
- almost all products need different materials to complete

Standard Output Cost ( SOC )

- average standard materials cost per output ( completed units )

Standard Input Cost ( SIC )

- average standard materials cost per input ( materials input )
The standard materials costs in producing 400 units of product “X” are as follows:
MaterialsQty. in lbs. Price per lb. Total Costs
A 400 P10.00 P4,000
B 500 P5.00 P2,500
C 100 P8.00 P800
1,000 P7,300
Actual production data in March 2021 are as follows:
Production, 16,000 units
Materials used:
MaterialsQty. in lbs. Price per lb. Total Costs
A 18,000 P10.20 P183,600
B 19,000 P4.90 P93,100
C 5,000 P8.05 P40,250
42,000 P316,950
Standard Output Cost ( SOC ) = Total Standard Materials Costs / Standard
Production
Standard Output Cost ( SOC ) = P7,300 / 400 units
Standard Output Cost ( SOC ) = P18.25 per unit

Standard Input Cost ( SIC ) = Total Standard Materials Costs / Standard Materials
Input
Standard Input Cost ( SIC ) = P7,300 / 1,000 lbs.
Standard Input Cost ( SIC ) = P7.30 per lb.
Material Price Variance

Actual direct material costs P316,950

Less: Actual materials input @standard price
A ( 18,000 x P10.00 ) P180,000
B ( 19,000 x P5.00 ) P95,000
C ( 5,000 x P8.00 ) P40,000 P315,000
P1,950 UF
Material Mix Variance

Actual materials input @standard price P315,000

Less: Actual materials input @standard input cost
( 42,000 lbs. x P7.30 per lb. ) P306,600
P8,400 UF
Yield Variance

Actual materials input @standard input cost P306,600

Less: Actual output @standard output cost
( 16,000 units x P18.25 per unit P292,000
P14,600 UF

Total Materials Costs Variance P24,950 UF

ACTIVITIES - 5 ITEMS

Pane Company's direct labor costs for April are as follows:

Standard direct labor hours 42,000
Actual direct labor hours 41,200
Total direct labor payroll $247,200
Direct labor efficiency variance – favorable $3,840
1.What is Pane's direct labor rate variance?
The standard materials costs and input for a 50 liter batch of product “X” are as follows:
Fruits Qty. in liters Price per lb. Total Costs
A 20 P10.00 P200.00
B 10 P21.25 P212.50
C 25 P7.50 P187.5
D 5 P15.00 P75.00
60 P675.00
Actual production data in March 2021 are as follows:
Production, 14 batches
MaterialsQty. in liters purchased Price per lb. Qty. in liters used
A 300 P9.50 290
B 150 P22.00 130
C 350 P7.20 350
D 80 P15.40 75
1,450
2. Materials a. Price, b. Mix, and c. Yield Variances
• Hankies Unlimited has a signature scarf for ladies that is very popular. Certain
production and marketing data are indicated below:
• Cost per yard of cloth P36.00
• Allowance for rejected scarf 5% of production
• Yards of cloth needed per scarf 0.475 yard
• Airfreight from supplier P0.60/yard
• Motor freight to customers P0.90 /scarf
• Purchase discounts from supplier 3%
• Sales discount to customers 2%
• The allowance for rejected scarf is not part of the 0.475 yard of cloth per scarf.
Rejects have no market value. Materials are used at the start of production.
3. Calculate the standard cost of cloth per scarf that Hankies Unlimited should
use in its cost sheets.