STANDARD COSTING

STANDARD – a benchmark set by management in aid of performance measurement. In

manufacturing companies, standards are classified into two (2) categories:
 QUANTITY Standard – indicates the quantity of raw materials or labor time required to
produce a unit of product. This is normally expressed per unit of output (e.g., 3 pieces
per unit).
 COST Standard – indicates what the cost of the quantity standard should be. This is
normally expressed per unit of input (e.g., P2.00 per piece).

STANDARD COSTS – systematically pre-determined costs established by management to be

used as a basis for comparison with actual cost.

BUDGETS vs. STANDARDS

BUDGETS STANDARDS
Purpose Budgets are statements of expected Standards pertain to what costs should
costs. be given certain level of purpose.
Emphasis Budgets emphasize cost levels that Standards emphasize the levels to which
should not be exceeded. costs should be reduced.
Coverage Budgets are set for all departments – Standards are set only for the production
sales, administration & manufacturing. or manufacturing division of the firm.
Analysis When actual data differ from the budget, Material amounts of variance are
it may be an indication of either good or reviewed and investigated so that
bad performance. necessary corrective actions are
implemented.

STANDARD COST VARIANCE ANALYSIS

VARIANCE = Actual Costs (AC) – Standard Costs (SC)

AC > SC: Unfavorable (debit balance)

AC < SC: Favorable (credit balance)

MATERIALS Variance
Actual Materials Cost ← Actual Quantity (AQ) x Actual Price (AP)
- Standard Materials Cost ← Standard Quantity (SQ) x Standard Price
(SP)
Materials Cost Variance
Analysis:
Quantity variance: Δ Q x SP = Difference in quantities x Standard price
Price Variance: AQ x Δ P = Actual quantity x Difference in prices

LABOR Variance
Actual Labor Cost ← Actual Hours (AH) x Actual Rate (AR)
- Standard Labor Cost ← Standard Hours (SH) x Standard Rate (SR)
Labor Cost Variance
Analysis:
Efficiency variance: Δ H x SR = Difference in hours x Standard rate
Rate variance: AH x Δ R = Actual hours x Difference in rates

FACTORY OVERHEAD (FOH) Variance = (Actual FOH Cost) – (Standard FOH Cost)

MATERIALS PRICE, MIX and YIELD Variances

Mix and yield variances are normally calculated whenever the production process involves
combining several materials to produce a unit of product.

Materials variance = Actual Materials Cost – Standard Materials Cost

Analysis:
Price Variance: AQ x Δ P
Mix Variance: (AQ x SP) – TAQASP
Yield Variance: TAQASP – Standard
Cost
 Legend
AQ – Actual quantity ΔP – Difference in prices SP – Standard price
TAQASP – Total Actual Quantity at Average Standard Price

Note: Mix and yield variances may also apply to direct labor, specifically in situations where
several different labor skills are required to produce units of products.

IMPORTANT NOTES on MATERIAL and LABOR VARIANCE ANALYSIS

1. Material PRICE variance is also known as:
Material spending variance material money variance, material rate variance
2. Material QUANTITY variance is also known as:
Material usage variance, material efficiency variance
3. Materials usage variance is a quantity variance while material price usage variance is a
price variance.
4. Labor RATE variance is also known as:
Labor price variance, labor spending variance, labor money variance
5. Labor EFFICIECNCY variance is also known as:
Labor hours variance, labor usage variance, labor time variance
6. Labor efficiency variance excludes idle time spent in the production. If any, idle time is
separately explained through the Idle Time Variance, which is regarded as unfavorable.
IDLE TIME Variance = Idle Time x Standard Labor Rate

FACTORY OVERHEAD (FOH) VARIANCE ANALYSIS

One-way variance analysis: Computation Legend
FOH Variance AFOH – SFOH AFOH: Actual FOH
SFOH: Standard FOH = (SH x SR)

Two-way variance analysis:

Controllable Variance AFOH – BASH BASH: Budgeted Adjusted Standard
Hours
Volume Variance BASH – SFOH BASH = Budgeted FFOH + (SH x Variable
FOH Rate)
FFOH: Fixed Factory Overhead

Three-way variance analysis:

Spending Variance AFOH – BAAH BAAH: Budgeted Adjusted for Actual
Hours
Efficiency Variance BAAH – BASH BAAH = Budgeted FFOH + (AH x Variable
FOH Rate)
Volume Variance BASH – SFOH

Four-way variance analysis:

Variable Spending Variance AFOH (V) – BAAH (V) AFOH (V): Actual Variable FOH
Fixed Spending Variance AFOH (F) – BAAH (F) AFOH (F): Actual FFOH
Efficiency Variance (Variable) BAAH – BASH BAAH (V): Actual Hours x Variable FOH
Rate
Volume Variance (Fixed) BASH – SFOH BAAH (F): Budgeted FFOH

IMPORTANT NOTES on FACTORY OVERHEAD VARIANCE ANALYSIS

1. Standard Factory Overhead (SFOH) = Standard Hours x Standard FOH Rate. Under
standard costing, SFOH is likewise referred to as the Applied Factory Overhead.
2. If AFOH is more than SFOH (applied), then factory overhead is said to be under-applied;
hence, under-application indicates an unfavorable variance, while over-application indicates
a favorable variance.
3. The term capacity variance is also used to mean the volume variance.
4. Budget Variance = Actual Cost – Budgeted Cost = Actual FOH – Budgeted FOH (BFOH)
 If BFOH is adjusted based on standard hours (BASH), then budget variance =
controllable variance
 If BFOH s adjusted based on actual hours (BAAH), then budget variance = spending
variance
5. Volume variance is actually the fixed volume variance; there is no such thing as variance
volume or variable capacity variance.
 6. Under the 3-way approach, the FOH Efficiency Variance is actually the Variable Efficiency
Variance. Other than ‘BAAH – BASH,’ variable overhead efficiency variance may also be
computed based on:
Change in hours x Variable FOH Rate = (AH – SH) VR
7. FOH variances may be classified into:
 Variable FOH Variances = Variable Spending Variance + (Variable) Efficiency Variance
 Fixed FOH Variances = Fixed Spending Variance + (Fixed) Volume Variance
8. Alternatively, another FOH variance analysis may include the following variances
 IDLE Capacity Variance: BAAH – (AH x SR)
 TOTAL Efficiency Variance: Δ H x SR
 FIXED Efficiency (Effectiveness) Variance: Δ H x FR (where: FR is the fixed FOH rate)
9. The Manufacturing Efficiency Variance incorporates the effect of both FOH Efficiency
Variance and Labor Efficiency Variance. In some cases, the material quantity variance may
also be included.
10. DM Variance + DL Variance + FOH Variance = Production or Manufacturing Cost
Variance.

USES OF STANDARD COSTS STANDARD COSTING PROCEDURES

1. Cost control 1. Establish standards
2. Pricing decisions 2. Measure actual performance
3. Costing of inventories 3. Compare actual performance with standards
4. Motivation and performance appraisal 4. Take corrective action when needed
5. Cost awareness and cost reduction 5. Revise standards when needed
6. Preparation of budgets
7. Preparation of cost report
8. Management by exception

EXERCISES

1. Materials and Labor Variance Analysis

Photo Company has established the following standards for a single unit of its main product, Selfie
Camera Tripod (Stainless Edition):
Inputs Standards
Direct materials 3 metal bars at P2 per bar
Direct labor ½ labor hour at P10 per hour
 At the start of the month, the budget includes a planned production of 100 units of tripod
based on normal capacity.
 At the end of the month, actual production was 120 units of tripod, which resulted to using
400 bars of metal, purchased at a cost of P2.10 per bar.

REQUIRED:
1. Based on the BUDGETED production of 100 units:
A) How many bars must the company plan to use? (Budgeted quantity)
B) How much materials cost is included in the budget? (Budgeted cost)
2. Determine the actual cost of materials used. (Actual cost)
3. Based on the ACTUAL production of 120 units:
A) How many bars should have been used? (Standard quantity)
B) How much materials cost should have been incurred? (Standard materials
cost)
C) How many labor hours should have been spent? (Standard hours)
D) How much labor cost should have been incurred? (Standard labor cost)
4. Determine the following:
A) Materials budget variance
B) Materials standard cost variance
C) Materials quantity and price variance
5. In the following month, Photo purchased 500 bars at a total cost of P850 while only
400 bars out of these were used; the standard quantity allowed for the actual
production was 380 bars. Determine the following:
A) Total materials variance
B) Materials quantity variance
C) Materials price usage variance
 D) Materials purchase price variance
6. During the month, a total payroll of P540 was paid to laborers, working 45 labor
hours, to produce the 120 units of Tripod. Determine the following:
A) Total labor variance
B) Labor efficiency variance
C) Labor rate variance

2. Factory Overhead Budget

Nadal Company shows the following data regarding its factory overhead:
Flexible Budget Formula: FOH = 20,000 + 1x
Where: X – number of labor hours
 Standard: 1 unit of product requires 4 labor hours
 Normal Capacity: 2,500 units
 Budgeted Hours: A) ________ hours
Fixed Overhead (FFOH) B) __________ Fixed Overhead Rate (FR) E) __________
Variable Overhead (VFOH) C) __________ Variable Overhead Rate (VR) F) __________
Total Budgeted Overhead D) Standard Overhead Rate G) __________
__________
REQUIRED:
1. Compute for the missing amounts.
2. What is the budgeted FOH if adjusted based on 7,500 actual hours?
3. What is the budgeted FOH if adjusted based on 8,000 standard hours?

3. Factory Overhead Variance Analysis: Two-Variance Method

The normal capacity of Nadal company is 23,000 labor hours per month. At normal capacity, the
standard factory overhead rate is P13 per labor hour based on P96,000 of budgeted fixed cost per
month and a variable cost rate of P5 per labor hour. During January, the company operated at
12,500 labor hours, with actual factory overhead cost of P165,000. The number of standard labor
hours allowed for the production actually attained is 11,000.

REQUIRED:
1. Overall FOH variance
2. FOH controllable variance
3. FOH volume variance

4. Factory Overhead Variance Analysis (Two, Three, Four-Way Variance Method)

Rafa Company provides the following production data:
Standard factory overhead cost per unit of product: 4 hours at P3.00 per hour.
A) Budgeted fixed factory overhead P20,000
B) Normal production 2,500 units
C) Actual production 2,000 units
D) Actual hours 7,500 hours
E) Actual factory overhead incurred (75% fixed) P26,000

REQUIRED: Determine the following:

1. Budgeted factory overhead
2. Standard factory overhead
3. Budgeted FOH based on actual hours
4. Budgeted FOH based on standard hours
5. Controllable variance
6. Volume variance
7. Spending variance
8. Efficiency variance
9. Variable spending variance
10. Fixed spending variance

5. Factory Overhead Variance Analysis (Budget, Variable, Fixed Variances)

Assume the same data in item number 4.
ADDITIONAL REQUIREMENTS (continued from item number 4):
11. Budget (flexible) variance (2-way)
12. Budget (flexible) variance (3-way)
13. Variable controllable variance
 14. Fixed volume variance
15. Variable FOH variance
16. Fixed FOH variance

6. Materials, Labor and Overhead Variances (Compute for the missing amounts)
 Standard variable costs per unit:
A) Materials: 4 pounds @ P ___ P ___
B) Direct Labor: ___ hours @ P12.00 P 6.00
C) Variable overhead: P8 per direct labor hour P ___
 Production 8,000 units
 Materials purchases, 32,000 pounds P 62,000
 Materials used at standard prices, 31,200 hours P __________
 Direct labor (actual) _____ hours P 47,200
 Materials purchase price variance P 2,000 adverse
 Materials use variance P __________
 Direct labor rate variance P 2,000 favorable
 Direct labor efficiency variance P __________
 Variable overhead spending variance P 1,500 credit
 Variable overhead efficiency variance P __________
 Actual variable overhead cost P __________

7. Materials Price, Mix and Yield Variances

Gorgorita Merger produces the popular “3n1” face powder. Gorgorita has in its budget the following
standards for one kilo of the “3n1” face powder:
Ingredients (Input) Standard Quantity Standard Unit Cost Standard Cost
(Grams)
Paminta 200 grams (20%) P3 P600
Gawgaw 700 grams (70%) P4 P2,800
Atsuete 100 grams (10%) P5 P500
TOTAL 1,000 grams (100%) P3,900
The company reported the following production and cost data for the 2020 operations:
Ingredients (Input) Standard Quantity Standard Unit Cost Standard Cost
(Grams)
Paminta 45,000 P4 P180,000
Gawgaw 125,000 P3 P375,000
Atsuete 30,000 P6 P180,000
TOTAL 200,000 P735,000
The company produced 190 kilos of “3n1” face powder in 2020.

REQUIRED:
1. Total materials cost variance
2. Materials price variance
3. Materials mix variance
4. Materials yield variance