STANDARD COSTING AND

VARIANCE ANALYSIS
 STANDARDS

• Anything used as a basis of evaluation

• It may be financial or non-financial, qualitatively or
quantitatively expressed
• Are established to institute order, discipline, expectations, and
normalcy
CONSIDERATIONS IN
ESTABLISHING STANDARDS

• APPROPRIATENESS – applicability or suitability of a given

standard in a given environment

• ATTAINABILITY – achievability under the best possible

operating conditions
WHY IS STANDARD NEEDED?

• MOTIVATION – TO SET OBJECTIVES, REWARD SYSTEM,

RECOGNITION, AND MODELS FOR PERFORMANCE EVALUATION.
• PLANNING – PREDICTING THE FUTURE BASED ON NORMAL
CONDITIONS
• MONITORING OR CONTROLLING
• EVALUATION – END-OF-LINE EVALUATION OF RESULTS IN
RELATION TO STANDARDS
 TYPES OF STANDARDS
• IDEAL(THEORETICAL) STANDARDS – are the standards which can be
attained under the most favorable conditions.
• PRACTICAL(CURRENTLY ATTAINABLE) STANDARDS – attain the most
reasonable production level with allowances for waste, spoilage, inefficiencies,
machine breakdowns and downtimes, and other normal production disturbances.
• BASIC STANDARDS – are standards established considering those factors that
are basic in nature and remain unchanged over a long period of time.
• EXPECTED STANDARDS – predetermined level of capacity based on ACTUAL
performance.
• NORMAL STANDARD – the average production level over a long period of time.
STANDARDS VS. BUDGET

Are standards the same as

budgets?
STANDARDS VS. BUDGET

A STANDARD is the expected

Are standards the same as cost for one unit.
budgets?
A BUDGET is the expected cost
for all units.
 STANDARD
COSTS
Based on carefully
predetermined amounts.

Standard Used for planning labor, material

Costs are and overhead requirements.

The expected level

of performance.

Benchmarks for
measuring performance.
PRODUCTION STANDARD COST SHEET
 PRODUCTION COSTS VARIANCES
• VARIANCE is the difference between actual an standard costs.
 PRODUCTION COSTS VARIANCES
• VARIANCE is the difference between actual an standard costs.
• FAVORABLE VARIANCES(F) arise when actual costs are less than
budgeted costs or actual sales/profit exceed budgeted. It is also called
OVERABSORBED or OVERAPPLIED variance.
 PRODUCTION COSTS VARIANCES
• VARIANCE is the difference between actual an standard costs.
• FAVORABLE VARIANCES(F) arise when actual costs are less than
budgeted costs or actual sales/profit exceed budgeted. It is also called
OVERABSORBED or OVERAPPLIED variance.
• UNFAVORABLE VARIANCES(UF) arise when actual costs exceed
budgeted or actual sales/profit are less than budgeted. It is also called
UNDERABSORBED or UNDERAPPLIED variance.

Profit Revenue Costs

Actual > Expected F F UF
Actual < Expected UF UF F
 TYPES OF VARIANCE
Direct Materials Costs Variances
– the difference between actual materials and standard materials
– are classified as price variance and quantity variance
– this can be calculated by using the following formula:
 TYPES OF VARIANCE
Direct Materials Costs Variances
– the difference between actual materials and standard materials
– are classified as price variance and quantity variance
– this can be calculated by using the following formula:

Material Cost Variance = (AQ x AP) - (SQ x SP)

Where
AQ  = Actual quantity
AP  = Actual price per unit of materials
SQ  = Standard quantity for the actual output
(Actual Production x Std. Materials per unit)
SP = Standard price per unit of material
 2-WAY VARIANCE ANALYSIS

• Material Price Variance = (AP – SP) x AQ = ∆P x AQ

• Material Quantity Variance = (AQ-SQ) x SP = ∆Q x SP

• Net Direct Materials Costs Variance = MPV - MQV

 SAMPLE PROBLEM
The standard unit of cost TOP Company is given below:

Direct materials : 4 lbs. @ P4.00 P 16.00

Direct labor : 3 hrs. @ P8.00 24.00
Variable overhead : 3 hrs. @ P2.00 P 6.00
Fixed Overhead : 3 hrs. @ P3.00 9.00 15.00
Total Standard Unit Cost P 55.00

The company has a normal capacity of 135,000 units and a budgeted capacity of 132,000 units. Actual data taken
from the production records for the month of November 2019 are:

Actual production 130,000 units

Materials purchases (580,000 lbs. @ P3.90) P 2,262,000
Materials used 525,000 lbs.
Payroll incurred (380,000 lbs. @ P8.15) P 3,097,000
Factory overhead: Variable P 800,000
Fixed P 1,250,000
 2-WAY VARIANCE ANALYSIS

Quantity Unit Price Amount

Actual 525,000 lbs. P3.90 P 2,047,500
- Standard 520,000 4.00 2,080,000
Variances – UF (F) 5,000 UF P(0.10) F P (32,500) F

MPV = (P3.90 – P4.00) x 525,000 lbs. = P(0.10) F x 525,000 lbs. = P(52,500)

F
MQV = (525,000 – 520, 000) x P4.00 = 5,000 UF x P4.00 = 20,000
UF
Net Direct Material Costs Variance P(32,500) F
 3-WAY VARIANCE ANALYSIS

• Material Price Variance = (AP – SP) x AQ = ∆P x AQ

• Material Quantity Variance = (AQ-SQ) x SP = ∆Q x SP
• Joint Materials Variance = (AP-SP) x (AQ-SQ) = ∆P x ∆Q

• Net Direct Materials Costs Variance = MPV – MQV – JMV

 3-WAY VARIANCE ANALYSIS
Quantity Unit Price Amount
Actual 525,000 lbs. P3.90 P 2,047,500
- Standard 520,000 4.00 2,080,000
Variances – UF (F) 5,000 UF P(0.10) F P (32,500) F

MPV = (P3.90 – P4.00) x 525,000 lbs. = P(0.10) F x 520,000 lbs. = P(52,000)

F
MQV = (525,000 – 520, 000) x P4.00 = 5,000 UF x P4.00 = 20,000
UF
JMV = (P3.90 – P4.00) x (525,000 – 520, 000) = ( 500) F
Net Direct Material Costs Variance P(32,500) F
 TYPES OF VARIANCE
Direct Labor Costs Variances
Direct Labor Cost Variance = (AH x AR) – (SH-SR)

Where
AH  = Actual Hours
AR = Actual Rate
SH = Standard Hours (Actual Production x Standard Hours per unit)
SR = Standard Rate
 2-WAY VARIANCE ANALYSIS
• Labor Rate Variance = (AR – SR) x AH = ∆R x AH
• Labor Efficiency Variance = (AH – SH) x SR = ∆H x SR

• Net Direct Labor Costs Variance = LRV – LEV

 3-WAY VARIANCE ANALYSIS
• Labor Rate Variance = (AR – SR) x AH = ∆R x AH
• Labor Efficiency Variance = (AH – SH) x SR = ∆H x SR
• Joint Labor Variance = (AR – SR) x (AH-SH) = ∆R x ∆H

• Net Direct Labor Costs Variance = LRV – LEV - JLV

 TYPES OF VARIANCE
Factory Overhead Variance

Factory Overhead Variance = AFOH - SFOH

Where
AFOH = Actual Factory Overhead
SFOH = Standard Factory Overhead
 2-WAY VARIANCE ANALYSIS (Con Vo)
• Controllable Variance = (AFOH – BASH)
• Volume Variance = BASH – (SH x SR)

Total Overhead Variance = CV - VV

 3-WAY VARIANCE ANALYSIS (SVV)
• Spending (Budget) Variance = AFOH – BAAH
• Variable Efficiency Variance = BAAH - BASH
• Volume Variance = BASH – (SH x SR)

Net Overhead Variance = SV - VEV - VV

 3-WAY VARIANCE ANALYSIS (BuCe)
• Spending (Budget) Variance = AFOH – BAAH
• Capacity Variance = BAAH – (AH x SR)
• Efficiency Variance = (AH – SR) – (SH x SR)

Net Overhead Variance = SV - CV- EV

 4-WAY VARIANCE ANALYSIS
• Fixed Spending Variance = AFOH – BFOH
• Variable Spending Variance = AVOH – (AH x SVOR)
• Variable Efficiency Variance = BAAH - BASH
• Volume Variance = BASH

Net Overhead Variance = FSV – VSV – VEV - VV

 5-WAY VARIANCE ANALYSIS
• Fixed Spending Variance = AFOH – BFOH
• Variable Spending Variance = AVOH – (AH x SVOR)
• Variable Efficiency Variance = BAAH - BASH
• Capacity Variance = BAAH – (AH – SR)
• Fixed Efficiency Variance = ∆H x FOHR/h

Net Overhead Variance = FSV – VSV – VEV – CV - FEV

 1. MATERIAL 2. LABOR 3. OVERHEAD 4. OTHER
VARIANCE VARIANCE VARIANCE VARIANCE

Material Cost Labour Cost Overhead Cost Calendar

variance Variance Variance Variance

Types of
Variances Material Price Labour Rate Variable Sales Value
Variance Variance overheads Var. variance

Labour
Material Usage Variable o/h Sales price
Efficiency
Variance efficiency var. variance
Variance

Labour Mix
Material Mix Variance Variable o/h Sales volume
Variance expenditure var. variance
Idle Time
Variance
Material Yield Fixed overhead
Profit Variance
Variance variance
Normal capacity 135,000 units or 405,000 hours
Standard hours 390,000 hrs.
Actual hours 380,000 hrs.
Standard overhead rates:
Fixed overhead rate P 3.00 per hour
Variable overhead rate 2.00 per hour
Total overhead rate P 5.00 per hour
Actual overhead costs:
Variable P 800,000
Fixed P 1,250,000