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PSBA-Manila
ACCOUNTING 10
Second Semester SY 2013-2014
Prof. C. Gonzaga
TOPIC: STANDARD COSTING SYSTEM/VARIANCE ANALYSIS
________________________________________________________________________________________________________________
Terminologies
Bill of materials a document that contains information about the product materials components and their specifications (including quality and
quantities needed)
Budget variance the difference between total actual overhead and budgeted overhead based on standard hours allowed for the production
achieved during the period; computed as part of two-variance overhead analysis; also referred to as the controllable variance
Controllable variance the budget variance of the two-variance approach to analyzing overhead variances
Expected standard a standard set at a level that reflects what is actually expected to occur in the future period; it anticipates future waste
and inefficiencies and allows for them; is of limited value for control and performance evaluation purposes
Fixed overhead spending variance the difference between the total actual fixed overhead and budgeted fixed overhead; it is computed as
part of the four-variance overhead analysis
Flexible budget a presentation of multiple budgets that costs according to their behavior at different levels of activity
Ideal standard a standard that provides for no inefficiencies of any type; impossible to attain on a continuous basis
Labor efficiency variance the number of hours actually worked minus the standard hours allowed for the production achieved multiplied by
the standard rate to establish a value for efficiency (favorable) or inefficiency (unfavorable) of the workforce
Labor mix variance (actual mix actual hours standard rate) minus (standard mix actual hours standard rate); it presents the financial
effect associated with changing the proportionate amount of higher or lower paid workers in production
Labor rate variance the actual rate (or actual weighted average rate) paid to labor for the period minus the standard rate multiplied by all
hours actually worked during the period; it is actual labor cost minus (actual hours standard rate)
Labor yield variance (standard mix actual hours standard rate) minus (standard mix standard hours standard rate); it shows the
monetary impact of using more or fewer total hours than the standard allowed
Material price variance total actual cost of material purchased minus (actual quantity of material standard price); it is the amount of money
spent below (favorable) or in excess (unfavorable) of the standard price for the quantity of materials purchased; it can be calculated based on
the actual quantity of material purchased or the actual quantity used
Material quantity variance (actual quantity standard price) minus (standard quantity allowed standard price); the standard cost saved
(favorable) or expended (unfavorable) due to the difference between the actual quantity of material used and the standard quantity of
material allowed for the goods produced during the period
Material mix variance (actual mix actual quantity standard price) minus (standard mix actual quantity standard price); it computes
the monetary effect of substituting a nonstandard mix of material
Material yield variance (standard mix actual quantity standard price) minus (standard mix standard quantity standard price); it
computes the difference between the actual total quantity of input and the standard total quantity allowed based on output and uses standard
mix and standard prices to determine variance
Mix any possible combination of material or labor inputs
Noncontrollable variance the fixed overhead volume variance; it is computed as part of the two-variance approach to overhead analysis
Normal capacity the long-run (510 years) average production or service volume of a firm; it takes into consideration cyclical and seasonal
fluctuations
Operations flow document a document listing all operations necessary to produce one unit of product (or perform a specific service) and
the corresponding time allowed for each operation

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Overhead efficiency variance the difference between total budgeted overhead at actual hours and total budgeted overhead at standard
hours allowed for the production achieved; it is computed as part of the three-variance analysis; it is the same as variable overhead efficiency
variance
Overhead spending variance the difference between total actual overhead and total budgeted overhead at actual hours; it is computed as
part of the three-variance analysis; it is equal to the sum of the variable and fixed overhead spending variances
Practical capacity the physical production or service volume that a firm could achieve during normal working hours with consideration given
to ongoing, expected operating interruptions
Practical standard a standard that can be reached or slightly exceeded with reasonable effort by workers; it allows for normal, unavoidable
time problems or delays and for worker breaks; it is often believed to be most effective in inducing the best performance from workers, since
such a standard represents an attainable challenge
Standard cost a budgeted or estimated cost to manufacture a single unit of product or perform a single service
Standard cost card a document that summarizes the direct material, direct labor, and overhead standard quantities and prices needed to
complete one unit of product
Standard quantity allowed the quantity of input (in hours or some other cost driver measurement) required at standard for the output
actually achieved for the period
Theoretical capacity the estimated maximum production or service volume that a firm could achieve during a period
Total overhead variance the difference between total actual overhead and total applied overhead; it is the amount of underapplied or
overapplied overhead
Total variance the difference between total actual cost incurred and total standard cost for the output produced during the period
Variable overhead efficiency variance the difference between budgeted variable overhead based on actual input activity and variable
overhead applied to production
Variable overhead spending variance the difference between total actual variable overhead and the budgeted amount of variable overhead
based on actual input activity
Variance analysis the process of categorizing the nature (favorable or unfavorable) of the differences between standard and actual costs
and determining the reasons for those differences
Volume variance a fixed overhead variance that represents the difference between budgeted fixed overhead and fixed overhead applied to
production of the period; is also referred to as the noncontrollable variance
Yield the quantity of output that results from a specified input
Lecture Outline
Development of a Standard Cost System
1.

A standard is a benchmark or norm used for planning and control purposes; it is a model or budget against which actual
results are compared and evaluated.

2.

A standard cost system is a product costing system that determines product cost by using standards or norms for
quantities and/or prices of component elements; it allows actual costs to be compared against norms for cost control
purposes.
A standard cost is a budgeted or estimated cost to manufacture a single unit of product or perform a single service.

Variance Computations
1.

2.

A variance is any difference between an actual cost and a standard or budgeted cost.
a.

Such a difference is favorable if actual cost is less than standard cost.

b.

A variance is unfavorable if actual cost is greater than standard cost.

A total variance is the difference between total actual cost incurred and total standard cost for the output produced
during the period.

3.

4.

a.

A total variance can be computed for each production cost element.

b.

Total variances indicate differences between actual and expected production costs, but they do not provide
useful information for determining why such differences occurred.

Total variances for materials and labor are subdivided into price and usage variances in order to help managers in their
control objectives.
a.

A price variance reflects the difference between what was actually paid for inputs and what should have been
paid for inputs during the period.

b.

A usage variance shows the difference between the quantity of actual inputs and the quantity of standard inputs
allowed for the actual output of the period. Usage variances focus on the efficiency of resultsthe relationship
of inputs to outputs.

The standard quantity allowed is the quantity of input (in hours or some other cost driver measurement) required at
standard for the output actually achieved for the period.

Material and Labor Variance Computations

1.

The total material usage variance can be subdivided into the material price variance and the material quantity variance.
AP AQP

SP AQP

Material
Purchase Price Variance

Material
Quantity Variance
Total Material Variance

2.

a.

The material price variance (MPV) is the total actual cost of materials purchased minus (actual quantity of
materials standard price); it is the amount of money spent below (favorable) or in excess (unfavorable) of the
standard price for the quantity of materials purchased; it can be calculated based on the actual quantity of
materials purchased or the actual quantity used.

b.

The material purchase price variance is the materials price variance when calculated based on the quantity of
materials purchased during the period rather than the quantity of materials used, and is used in what is referred
to as the point of purchase material variance model.

c.

The material price usage variance is the material price variance when calculated based on the quantity of
materials used during the period.

d.

The material quantity variance (MQV) is the standard cost saved (favorable) or expended (unfavorable) due
to the difference between the actual quantity of materials used and the standard quantity of materials allowed
for the goods produced during the period; (actual quantity standard price) minus (standard quantity allowed
standard price).

The total labor variance can be subdivided into the labor rate variance and the labor efficiency variance.
AP AQ

SP AQ

Labor
Rate Variance

SP SQ
Labor
Efficiency Variance

Total Labor Variance

a.

The labor rate variance (LRV) is the actual rate (or actual weighted average rate) paid to labor for the period
minus the standard rate multiplied by all hours actually worked during the period; actual labor cost minus
(actual hours standard rate).

b.

The labor efficiency variance (LEV) is the number of hours actually worked minus the standard hours allowed
for the production achieved multiplied by the standard rate to establish a value for efficiency (favorable) or
inefficiency (unfavorable) of the workforce.

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Overhead Variances
1.

Capacity refers to any measure of activity.

a.

Theoretical capacity is the estimated maximum potential activity for a specified time.

b.

Practical capacity is the activity level that could be achieved during normal working hours given unused
capacity and ongoing, regular operating interruptions, such as holidays, downtime, and start-up time.

c.

Normal capacity is a firms long-run average activity (over 5 to 10 years) which gives effect to historical and
estimated future production levels and to cyclical and seasonal fluctuations.

d.

Expected capacity is a short-run concept representing the anticipated level of the firm for the upcoming annual
period.

2.

The use of separate variable and fixed overhead rates and accounts allows the calculation of separate variances for each
type of overhead, providing managers with maximum detail and optimal flexibility for control and performance evaluation
purposes. The use of separate rates permits a four-variance approach to be taken in analyzing overhead.

3.

The total variable overhead variance is the difference between actual variable overhead costs incurred for the period and
standard variable overhead cost applied to the periods actual production or service output.

Actual VOHBudgeted VOH

AP AQ

Applied VOH
SP AQ

(Price Subvariance)
VOH
Spending Variance

SP SQ
(Usage Subvariance)
VOH
Efficiency Variance

Total Variable Overhead Variance

(Underapplied or Overapplied Variable Overhead)

4.

a.

The variable overhead spending variance is the difference between total actual variable overhead and the
budgeted amount of variable overhead based on actual hours; it is computed as part of the four-variance
analysis.

b.

The variable overhead efficiency variance is the difference between budgeted variable overhead based on
actual hours and variable overhead applied based on standard hours allowed for the production achieved; it is
computed as part of the four-variance analysis.

The total fixed overhead variance is the difference between actual fixed overhead costs incurred and standard fixed
overhead cost applied to the periods actual production.
Actual FOH

Budgeted FOH
(budgeted)

FOH
Spending Variance

Applied FOH
SP SQ
Volume Variance

Total Fixed Overhead Variance

(Underapplied or Overapplied Fixed Overhead)
a.

The fixed overhead spending variance is the difference between the total actual fixed overhead and
budgeted fixed overhead.

b.

The fixed overhead volume variance is the difference between budgeted and applied fixed overhead and is
equal to the overhead volume variance. The volume variance is also called the noncontrollable variance.

c.

To calculate fixed overhead variances, a company must have a flexible budget. A flexible budget is a planning
document that presents expected overhead costs at different levels of activity.

d.

In a flexible budget, all costs are treated as either variable or fixed; thus, mixed costs must be separated into
their variable and fixed elements.

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5.

A four-variance approach is unworkable if the accounting system does not distinguish between variable and fixed costs.

6.

The total overhead variance is the difference between total actual overhead and total applied overhead, and is the only
variance computed under the one-variance approach.
Total Applied Overhead
(Combined OH Rate Standard
Input Allowed for Actual
Production)
(SP SQ)

Total Actual Overhead

(Variable OH + Fixed OH)
Total Overhead Variance
7.

A middle column representing budgeted overhead based on standard quantity is inserted between total actual overhead and
total applied overhead under the two-variance approach.
Budgeted OH
Based on
Standard
Quantity
for Overhead
Output
Achieved

Total Actual OH
(Variable OH
+ Fixed OH)
Budget Variance
(Controllable
Variance)

Total Applied OH
SP SQ
Volume Variance
(Noncontrollable
Variance)

Total Overhead Variance

8.

a.

The budget variance is the difference between total actual overhead and budgeted overhead based on
standard hours allowed for the production achieved; it is computed as part of the two-variance analysis; it is
also referred to as the controllable variance.

b.

The volume variance can be computed under the four-variance, three-variance, or two-variance analysis.

A column representing budgeted overhead based on actual hours is inserted immediately to the right of total actual
overhead under the three-variance approach.
Budgeted
Overhead
Based on
Standard
Quantity
Allowed for
Output
Achieved

Budgeted
Overhead
Based on
Actual Hours

Total Actual
Overhead
(VOH + FOH)
Overhead
Spending
Variance

Overhead
Efficiency
Variance

Total Applied
Overhead
(SP SQ)
Overhead
Volume
Variance

Total Overhead Variance

a.

The overhead spending variance is the difference between total actual overhead and total budgeted
overhead at actual input activity; thus, a flexible budget is required. It is computed as part of the three-variance
analysis; it is equal to the sum of the variable and fixed overhead spending variances.

b.

The overhead efficiency variance is the difference between total budgeted overhead at actual input activity
and total budgeted overhead at standard input allowed (output activity); it is computed as part of the threevariance analysis; it is the same as variable overhead efficiency variance.

Mix and Yield Variances

1.
A mix is any possible combination of materials or labor inputs.

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2.
3.

4.

A yield is the quantity of output that results from a specified input.

Material price, mix, and yield variances can be calculated.
a.

The material mix variance measures the monetary effect of substituting a nonstandard mix of materials;
(actual mix actual quantity standard price) minus (standard mix actual quantity standard price).

b.

The material yield variance is the difference between the actual total quantity of input and the standard total
quantity allowed based on output and uses standard mix and standard prices to determine variance; (standard
mix actual quantity standard price) minus (standard mix standard quantity standard price).

Labor rate, mix, and yield variances can be calculated.

a.

The labor mix variance presents the financial effect associated with changing the proportionate amount of
higher or lower paid workers in production; (actual mix actual hours standard rate) minus (standard mix
actual hours standard rate).

b.

The labor yield variance shows the monetary impact of using more or fewer total hours than the standard
allowed; (standard mix actual hours standard rate) minus (standard mix standard hours standard rate).

CLASS REVIEW PROBLEMS

Problem 1
ABC Company has the following information available for the current year:
Standard:
Material
Labor

3.5 feet per unit @ P2.60 per foot

5 direct labor hours @ P8.50 per unit

Actual:
Material
Labor

95,625 feet used (100,000 feet purchased @ P2.50 per foot)

122,400 direct labor hours incurred per unit @ P8.35 per hour
25,500 units were produced

REQUIRED: (1) Compute the material purchase price and quantity variances.
(2) Compute the labor rate and efficiency variances.
(3) Journal entries to record purchase of materials, issuance of materials to production, payroll, and charging of labor cost to
Production.
Problem 2
OP Co. applies overhead based on direct labor hours and has the following available for November:
Standard:
Direct labor hours per unit
5
Variable overhead per DLH
P.75
Fixed overhead per DLH
(based on 8,900 DLHs)
P1.90
Actual:
Units produced
Direct labor hours
Variable overhead
Fixed overhead

1,800
8,900
P6,400
P17,500

REQUIRED: (1) Compute all the appropriate variances using the two-variance approach.
(2) Compute all the appropriate variances using the three-variance approach.
(3) Compute all the appropriate variances using the four-variance approach.
Problem 3
A firm producing one product has a budgeted overhead of P100,000, of which P20,000 is variable. The budgeted direct labor is 10,000
hours.
Required: Fill in the blanks.
a.
Volume
Production
Flexible Budget
Applied
Variance
120%
100%
80%
60%
b.

____________
____________
____________
____________

____________
____________
____________
____________

____________
____________
____________
____________

What is the budget variance at the 80 percent level if the actual overhead incurred is P87,000?

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Problem 4
Berry Co. manufactures a product effective in controlling beetles. The company uses a standard cost system and a flexible budget.
Standard cost of a gallon is as follows:
Direct material:
2 quarts of A
4 quarts of B
Total direct material

P14
16
P30

Direct labor:
2 hours
Manufacturing overhead
Total

16
12
P58

The flexible budget system provides for P50,000 of fixed overhead at normal capacity of 10,000 direct labor hours. Variable
overhead is projected at P1 per direct labor hour.
Actual results for the period indicated the following:
Production:
Direct material:
A
B
Direct labor:
Overhead:

5,000 gallons
12,000 quarts purchased at a cost of P7.20/quart; 10,500 quarts used
20,000 quarts purchased at a cost of P3.90/quart; 19,800 quarts used
9,800 hours worked at a cost of P79,380
Fixed
P48,100
Variable
21,000
Total overhead
P69,100

Required:
1.
What is the application rate per direct labor hour, the total overhead cost equation, the standard quantity for each
material, and the standard hours?
2.
Compute the following variances:
a.
Total material price variance
b.
Total material quantity variance
c.
Labor rate variance
d.
Labor efficiency variance
e.
MOH volume variance
f.
MOH efficiency variance
g.
MOH spending variance, both fixed and variable
PROBLEM 5
The following July information is for Kingston Company:
Standards:
Material 3.0 feet per unit @ P4.20 per foot
Labor
2.5 hours per unit @ P7.50 per hour
Actual:
Production
2,750 units produced during the month
Material 8,700 feet used; 9,000 feet purchased @ P4.50 per foot
Labor
7,000 direct labor hours @ P7.90 per hour
1.
2.
3.
4.

What is the material price variance (calculated at point of purchase)?

What is the material quantity variance?
What is the labor rate variance?
What is the labor efficiency variance?

PROBLEM 6
Timothy Company has the following information available for October when 3,500 units were produced (round answers to the nearest peso).
Standards:
Material 3.5 pounds per unit @ P4.50 per pound
Labor
5.0 hours per unit @ P10.25 per hour
Actual:
Material purchased
12,300 pounds @ P4.25
Material used
11,750 pounds
17,300 direct labor hours @ P10.20 per hour

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1.
2.
3.
4.
5.

What is the labor rate variance?

What is the labor efficiency variance?
What is the material price variance (based on quantity purchased)?
What is the material quantity variance?
Assume that the company computes the material price variance on the basis of material issued to production. What is the total
material variance?

PROBLEM 7
Redd Co. uses a standard cost system for its production process and applies overhead based on direct labor hours. The following
information is available for August when Redd made 4,500 units:

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

Standard:
DLH per unit
Variable overhead per DLH
Fixed overhead per DLH
Budgeted variable overhead
Budgeted fixed overhead

2.50
P1.75
P3.10
P21,875
P38,750

Actual:
Direct labor hours
Variable overhead
Fixed overhead

10,000
P26,250
P38,000

Using the one-variance approach, what is the total overhead variance?

Using the two-variance approach, what is the controllable variance?
Using the two-variance approach, what is the noncontrollable variance?
Using the three-variance approach, what is the spending variance?
Using the three-variance approach, what is the efficiency variance?
Using the three-variance approach, what is the volume variance?
Using the four-variance approach, what is the variable overhead spending variance?
Using the four-variance approach, what is the variable overhead efficiency variance?
Using the four-variance approach, what is the fixed overhead spending variance?
Using the four-variance approach, what is the volume variance?

Problem 8
The following information is available for Raxco for the current year:
Standard:
Material X: 3.0 pounds per unit @ P4.20 per pound
Material Y: 4.5 pounds per unit @ P3.30 per pound
Class S labor: 3 hours per unit @ P10.50 per hour
Class US labor: 7 hours per unit @ P8.00 per hour
Actual:
Material X: 3.6 pounds per unit @ P4.00 per pound (purchased and used)
Material Y: 4.4 pounds per unit @ P3.25 per pound (purchased and used)
Class S labor: 3.8 hours per unit @ P10.60 per hour
Class US labor: 5.7 hours per unit @ P7.80 per hour
Raxco produced a total of 45,750 units.
REQUIRED: (1) Compute the material price, mix, and yield variances (round to the nearest peso).
(2) Compute the labor rate, mix, and yield variances (round to the nearest peso).
Problem 9
Saksena Corp. produces a product using the following standard proportions and costs of material:
Cost Per
Pounds
Pound
Material A
50
P5.00
Material B
40
6.00
Material C
60
3.00
150
4.4667
Standard shrinkage (33 1/3%)
50
Net weight and cost
100
6.70
A recent production run yielding 100 output pounds required an input of:
Amount

Cost Per
Pound

Amount
P250.00
240.00
180.00
P670.00
______
P670.00

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Material A
Material B
Material C

40
50
65

Required: Material price, mix, and yield variances.

END

P5.15
6.00
2.80

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