Group 1 :

Muhammad Atief (1710531016)

Intan Hafizhatul Hasanah (1710531036)
Ramadhani Chandra (1710531046)
Irma Novia (1710532004)
Widya Rahmi (1710532014)

Standard Costing:
A Managerial Control Tool
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Standard Unit
The budgeted variable input cost per unit of output is a unit
standard. Unit standards are the basis or foundation on which a
flexible budget is built.

The unit standard cost for a particular input relies on quantity

standards and price standards.
 quantity standards : the amount of input that should be used
per unit of output
 price standards : the amount that should be paid for the
quantity of the input to be used

The unit standard cost can be computed by multiplying

these two standards:
= Quantity standard X Price standard

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How Standards Are Developed

• Historical experience, engineering studies,

and input from operating personnel are three
potential sources of quantitative standards.
• Price standards are the joint responsibility of
operations, purchasing, personnel, and
accounting.

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Types of Standards

• Ideal standards
demand maximum efficiency and can be achieved only if
everything operates perfectly. No machine breakdowns, slack, or
lack of skill (even momentary) are allowed.
• Currently attainable standards
can be achieved under efficient operating conditions. Allowance is
made for normal breakdowns, interruptions, less than perfect skill,
and so on. These standards are demanding but achievable.

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Why Standard Cost Systems Are Adopted

• For planning & control

• To improve performance measurement
• To give manager more information by decomposing
total variances into price & usage variances
• For product costing
• To use unit cost system that is readily available in
pricing

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Cost assignment
Standard costs are readily available for product costing in a standard cost
system.

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Standard Product Costs
Standard costs can also be used in service organizations. The
IRS, for example, could set standard processing times for
different categories of returns. If the standard processing time
is three minutes for a 1040EZ and the standard price of labor
is $9 perhour, then the standard cost of processing a 1040EZ is
= [$9 (3/60)]
= $0.45

In manufacturing firms, the standard cost per unit is the sum

of the standard costs for direct materials, direct labor, and
overhead. The standard cost sheet provides the details
underlying the standard unit cost.

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Ex : Bluechtos Cost Sheet

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Variance Analysis

A flexible budget can be used to identify the costs that should have been incurred
for the actual level of activity. This figure is obtained by multiplying the amount of
input allowed for the actual output by the standard unit price. Letting SP be the
standard unit price of an input and SQ the standard quantity of inputs allowed for
the actual output, the planned or budgeted input cost is SP X SQ. The actual input
cost is AP X AQ, where AP is the actual price per unit of the input, and AQ is the
actual quantity of input used.

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Price and Efficiency Variances

The total budget variance is the difference between actual input

costs and planned costs.
Formula: Total variance = (AP x AQ) - (SP x SQ)
• Price variance the difference between the actual and standard
unit price of an input multiplied by the number of inputs used =
(AP - SP) AQ
• Usage variance the difference between the actual and standard
quantity of inputs multiplied by the standard unit price of the
input = (AQ - SQ) SP
Total variance = Price variance + Usage variance
= (AP - SP) AQ + (AQ - SQ) SP
= {(AP x AQ) - (SP x AQ) + (SP x AQ) - (SP x
AQ) - (SP x SQ)}
= (AP x AQ) - (SP x AQ) + (SP x AQ) - (SP x
SQ)
= (AP x AQ) - (SP x SQ)

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The Decision to Investigate

How do managers determine whether variances are significant? How is the

acceptable range established? The acceptable range is the standard plus or minus
an allowable deviation. The top and bottom measures of the allowable range are
called the control limits.
The upper control limit is the standard plus the allowable deviation, and the lower
control limit is the standard minus the allowable deviation.

For example,
The assumed standard is $100,000, and the allowable deviation is plus or minus
$10,000. The upper limit is $110,000, and the lower limit is $90,000. Investigation
occurs whenever an observation falls outside of these limits (as would be the case
for the sixth observation). Trends can also be important.

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Your Date Here Your Footer Here
 The total variance measures the difference between
the actual costs of materials and labor and their budgeted
costs for the actual level of activity.

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Materials Price Variance: Formula Approach

The materials price variance can be calculated separately. The materials price variance (MPV)
measures the difference between what should have been paid for materials and what was actually
paid. The formula for computing this variance is:

MPV = (AP x AQ) - (SP x AQ) Or MPV = (AP – SP ) AQ

Notice:
AP = Actual price per unit
SP = Standart price per unit
AQ = The actual quantity of material used

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 The Bluechitos line purchased and
used 780,000 ounces of blue corn for
the first week of March. The purchase
price was $0.0069 per ounce. Thus, AP
is $0.0069, AQ is 780,000 ounces, and MPV = (AP -SP) AQ
SP (from Exhibit 9-2) is $0.0060. Using
this information, the materials price = ( $0.0069- $0.0060 )780,000
variance,is computed as follows: = $0.0009 X 780,000
= $702 U
Percent of SP X AQ $702/$4,680 = 15%

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 The responsibility for controlling the materials price variance usually belongs to the “Purchasing Agent”.
Admittedly, the price of materials is largely beyond his or her control. However, the price variance can be
influenced by such factors :

1. Quality
2. Quantity
3. Discounts
4. Distance of the source from the plant, and etc.

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Using the price variance to evaluate the performance of purchasing has some “limitations”. Emphasis
on meeting or beating the standard can produce some undesirable outcomes.

The total variance measures the difference between

the actual costs of materials and labor and their budgeted
costs for the actual level of activity.

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The first step in variance analysis is deciding whether the variance is significant or
not. If it is judged insignificant, no further steps are needed.

For the Bluechitos example, the investigation revealed that a higher-

quality corn was purchased because of a shortage of the usual grade in
the market. Once the reason is known, corrective action can be taken if
necessary—and if possible. In this case, no corrective action is needed. The
firm has no control over the supply shortage; it will simply have to wait
until market conditions improve.

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Computing the price variance at the point of purchase is preferable. The materials price variance
canbe computed at one of two points:

“It is better to have information on variances earlier rather than later

and The more timely the information, the more likely that
proper managerial action can be taken.”

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DIRECT LABOR VARIANCE
>>> Columnar Approach

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>>>Labor Rate Variance: Formula Approach

The difference between what was

paid to direct labores and what
should have been paid

LRV = (AR – SR) AH

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Computation of the Labor Rate Variance
Direct labor activity for the Bluechitos inspectors will be used to
illustrate the computation of the labor rate variance. We know that
360 hours were used for inspection during the first week in March. The
actual hourly wage paid for inspection was $7.35. From Exhibit 9-2, the
standard wage rate is $7.00. Thus, AH is 360, AR is $7.35, and SR is
$7.00. The labor rate variance is computed as follows:
LRV = (AR - SR) AH
=($7.35 - $7.00)3 60
= $0.35 X 360
=$126 U
Percent of SR X AH = $126/$2,520 = 5%

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Responsibility for the Labor Rate Variance

responsibility for the labor rate variance is

generally assigned to the individuals who
decide how labor will be used.

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 Analysis of the Labor Rate Variance
Although a 5 percent variance is not likely to be
judged significant, for illustrative purposes,
assume that an investigation is conducted. The
cause of the variance is found to be the use of
more highly paid and skilled machine operators
as inspectors, which occurred because two
inspectors quit without formal notice. The
corrective action is to hire and train two new
inspectors.

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Labor Efficiency Variance: Formula Approach

The labor efficiency variance (LEV) measures the difference between the
labor hours that were actually used and the labor hours that should
have been used:

LEV = (AH - SH) SR

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Computation of the Labor Efficiency Variance

The Bluechitos line used 360 direct labor hours for inspection while
producing 48,500 bags of corn chips. From Exhibit 9-2, the rate of 0.007
hour per bag of chips at a cost of $7 per hour should have been used. The
standard hours allowed for inspection are 339.5 (0.007 X 48,500). Thus, AH
is 360, SH is 339.5, and SR is $7. The labor efficiency variance is computed as
follows:
LEV = (AH - SH) SR
= (360 - 339.5 ) $7
= 20.5 X $7
= $143.50 U

Percent of SH X SR = $143.50/$2,376.50 = 6%

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Responsibility for the Labor Efficiency Variance

Generally speaking, production managers

are responsible for the productive use of
direct labor. However, as is true of all
variances, once the cause is discovered,
responsibility may be assigned elsewhere

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Analysis of the Labor Efficiency Variance
Assume that the $143.50 unfavorable variance was judged
significant, and its cause was investigated. The investigation
revealed that more shutdowns of the process occurred because
the duties of the machine operators were split between machine
operations and inspection. (Recall That this reassignment was
necessary because two inspectors quit unexpectedly.) This resulted
in more idle time for inspection. Also, the machine operators were
unable to meet the standard output per hour for inspection
because of their lack of experience with the sorting process. The
corrective action needed to solve the problem is the same as that
recommended for the unfavorable rate variance—hire and train
two new inspectors

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Sum of LRV and LEV
we know that the total labor variance is
$269.50 unfavorable. This total variance is the
sum of the unfavorable labor rate variance and
the unfavorable labor efficiency variance
($126.00 + $143.50)

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 Variance Analysis:
Overhead Costs
The standard overhead cost is the sum of the estimates of variable and
fixed overhead costs in the next accounting period.

The total overhead variance, the difference between applied and

actual overhead, is also broken down into component variances

Variable
Fixed Overhead
Overhead
• spending • spending
variance variance
• efficiency • volume
variance variance
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Variable Overhead Variances
The total variable overhead cost variance
is the difference between actual variable overhead costs and the standard variable
overhead costs that are applied to good units produced using the standard variable
rate.

The standard variable overhead rate

For example, using standard machine hours as the base,
the formula is as follows:

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To illustrate variable overhead variances, we will examine one week of activity for
Blue-Corn Foods (for the first week in March). The following data were gathered for
this time period:
Total Variable
Variable overhead rate (standard) $3.85 per DLH Overhead Varian

Actual variable overhead costs $1,600

Actual hours worked (machining & inspection) 400
Bags of chips produced

Hours allowed for production

48,500

378.3 0.0078 x 48.500

-
Applied variable overhead $1,456 3,85 x 378,3

Total Variable Overhead Variance

For our example,the total variable overhead variance is computed as follows:
Total variance = $1,600 - $1,456
= $144 U ( Unfavorable )
 Variable Overhead Spending Variance

The variable overhead spending variance (also called the variable overhead rate
variance) is computed by multiplying the actual hours worked by
the difference between actual variable overhead rate (AVOR ) and the standard variable
overhead rate (SVOR )

The actual variable overhead rate is simply actual variable overhead divided by actual
hours. For our example, this rate is $4 per hour ($1,600/400 hours).
The formula for computing the variable overhead spending variance is:

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 Comparison to the Price Variances of Materials and Labor

there are some conceptual differences:

• Variable overhead is not a homogeneous input—it is made up of a large number of individual items, such as
indirect materials, indirect labor, electricity, maintenance, and so on.
• The standard variable overhead rate represents the weighted cost per direct labor hour that should be incurred
for all variable overhead items.
• A variable overhead spending variance can arise because prices for individual variable overhead items have
increased or decreased. If the only source of the variable overhead spending variance was price changes, then it
would be completely analogous to the price variances of materials and labor. Unfortunately, the spending
variance is also affected by how efficiently overhead is used.

Efficient use of variable overhead items contributes to a favorable spending variance. Hence, the variable overhead
spending variance is the result of both price and efficiency.

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 Responsibility for the Variable Overhead Spending Variance

Many variable overhead items are affected by several responsibility centers. For
example,utilities are a joint cost.To the extent that consumption of variable
overhead can be traced to a responsibility center, responsibility can be assigned.
Consumption of indirect materials is an example of a traceable variable overhead
cost.
Accordingly, responsibility for the variable overhead spending variance is
generally assigned to production departments.

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 Analysis of the Variable Overhead Spending Variance

The $60 unfavorable variance simply reveals that, in the aggregate, Blue-Corn Foods spent more
on variable overhead than expected. Even if the variance were insignificant, it reveals nothing
about how well costs of individual variable overhead items were controlled.

Control of variable overhead requires line-by-line analysis for each individual item.
Exhibit 9-9 presents a performance report that supplies the line-by-line information
essential for proper control of variable overhead.
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Your Date Here Your Footer Here
Responsibility for the Variable Overhead Efficiency
Variance

The variable overhead efficiency variance is directly related to the

direct labor efficiency or usage variance. If variable overhead is truly
proportional to direct labor consumption, then, like the labor usage
variance, the variable overhead efficiency variance is caused by
efficient or inefficient use of direct labor.

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Analysis of the Variable Overhead
Efficiency Variance
The reasons for the unfavorable variable overhead efficiency variance are the same as those
offered for the unfavorable labor usage variance. More hours were used than the standard called
for because of excessive idle time for inspectors and because the machine operators used as
substitute inspectors were inexperienced in sorting. More information concerning the effect of
labor usage on variable overhead is available in a lineby- line analysis of individual variable
overhead items.

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 Fixed Overhead Variances
The total fixed overhead cost variance is the difference between actual fixed overhead
costs and the standard fixed overhead costs that are applied to good units produced
using the standard fixed overhead rate.

The standard fixed overhead rate is computed by dividing the total

budgeted fixed overhead costs by an expression of capacity, usually
normal capacity in terms of standard hours or units.

For example, using normal capacity in terms of standard machine hours

as the denominator, the formula is as follows:

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Fixed Overhead Variances. We will again use the Blue-Corn Foods example to
illustrate the computation of the fixed overhead variances

Budgeted or Planned Items

Budgeted fixed overhead $749,970

Practical activity 23,400 DLH

Standard fixed overhead rate $32.05

Actual Results

Actual production 2,750,000 bags of chips

Actual fixed overhead cost $749,000

Standard hours allowed for actual production 21,450

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 Total Fixed Overhead Variance

The total fixed overhead variance is the difference between actual fixed overhead and applied fixed
overhead, when applied fixed overhead is obtained by multiplying the standard fixed overhead rate
times the standard hours allowed for the actual output. Thus, the applied fixed overhead is:

Formula Applied Fixed Overhead Formula Total Fixed Overhead Variance

Applied Fixed Overhead Total Fixed Overhead Variance

= SFOR x Standard hours = Actual – Applied Overhead
= $32.05 x 21,450 = $749,000 - $687,473
= $ 687,473 = $ 61,527 Underapplied

43
Fixed Overhead Spending Variance

The fixed overhead spending variance is defined as the difference between the actual
fixed overhead and the budgeted fixed overhead. The spending variance is favorable
because less was spent on fixed overhead items than was budgeted.

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Responsibility for the Fixed Overhead
Spending Variance

Responsibility for the Fixed Overhead Spending Variance Fixed overhead is made
up of a number of individual items such as salaries, depreciation,taxes, and
insurance. Many fixed overhead items—long-run investments, for instance—are
not subject to change in the short run; consequently, fixed overhead costs are
often beyond the immediate control of management.

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Analysis of the Fixed Overhead Spending
Variance
Analysis of the Fixed Overhead Spending Variance Because fixed overhead is made up of many
individual items, a line-by-line comparison of budgeted costs with actual costs provides more
information concerning the causes of the spending variance.

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 Fixed Overhead Volume Variance
Fixed Overhead Volume Variance The fixed overhead volume variance is the difference
between budgeted fixed overhead and applied fixed overhead. For example, at the
beginning of the year, Blue-Corn Foods has the capacity to produce 3,000,000 bags of chips,
using 23,400 direct labor hours. The actual output is 2,750,000 bags. Thus, the actual output
is less than expected, and only 21,450 hours are allowed for the actual output. Less capacity
was used than acquired, and the cost of this unused capacity is calculated by multiplying the
rate by the difference in the expected and actual capacities (measured in hours):

Volume Variance
= Budgeted – Applied fixed overhead
= $479,970 - $687,473
= $62,497 U

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Responsibility for the Fixed Overhead
Volume Variance

Responsibility for the Fixed Overhead Volume Variance Assuming that volume variance
measures capacity utilization implies that the general responsibility for this variance should
be assigned to the production department. At times, however, investigation into the
reasons for a significant volume variance may reveal the cause to be factors beyond the
control of production. In this instance, specific responsibility may be assigned elsewhere.
For example, if purchasing acquires a material of lower quality than usual, significant
rework time may result, causing lower production and an unfavorable volume variance. In
this case, responsibility for the variance rests with purchasing, not production.

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FIXED OVERHEAD VARIANCES
Decompose total fixed
overhead variance
into spending &
volume variances.

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