UM TAGUM COLLEGE Page 1 of 7

Department of Accounting Education

Competency Appraisal Course – 2nd Semester – S.Y. 2023-2024
MS - Standard Costing and Variance analysis

STANDARD COSTING AND VARIANCE ANALYSIS

STANDARDS
• Standard costs are predetermined or targeted costs set by management for various purposes like product
costing, pricing, budgeting, cost control, motivation, and performance measurement.
• Standards are similar to budgeted amounts stated on a per unit basis, but standards differ from budgets in
that they actually appear in general ledger accounts, while budgeted amounts do not.
• Because of the impact of the fixed costs in most businesses, a standard costing system is usually not
effective unless the company uses a flexible budgeting system.
• Standards are developed for each factor of production (materials, labor and overhead) based on
accounting, engineering or statistical quality control studies and usually fit into one of the two (2) broad
categories:
o IDEAL/THEORETICAL Standards – presume perfect efficiency and 100% capacity and hence not
useful for control purposes as they are not practically attainable.
o CURRENTLY ATTAINABLE/PRACTICAL Standards – based on higher-than-average levels of
efficiency, but are clearly achievable and hence typically used for employee motivation, product
costing and budgeting.
• Standards based on historical information are not used as this practice may perpetuate past inefficiencies.
• Standards may be used by service and nonprofit organizations as well as manufacturing organizations.
• Standards can be used in both process costing and job-order costing systems. In manufacturing companies,
standards are broadly classified into two (2) categories:
o QUANTITY Standard – usually 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).
o COST Standard – usually indicates what the peso amount of the quantity standard should be. This
is normally expressed per unit of input (e.g., P 5.00 per piece).
STANDARD COST VARIANCE
• Standard costs are systematically pre-determined costs established by management to be used as a basis
for comparison with actual cost.
• Variance analysis explains the difference between standard costs and actual costs.
VARIANCE = Actual Costs (AC) – Standard Costs (SC) AC < SC: Favorable (credit balance)
AC > SC: Unfavorable (debit balance)
• When standard costs are used for inventory valuation, variances are:
➢ If immaterial/insignificant: written-off to cost of goods sold
➢ If material/significant: allocated to ending work-in-process, finished goods, and cost of goods sold
• Under management by exception, managers focus attention on results that materially deviate from
expectations. Results that are close to expectations (e.g., immaterial variances) do not require
investigation.
• Standard costing procedures: (1) establish standards, (2) measure actual performance, (3) compare
standards with actual performance, (4) take corrective actions, if needed (5) revise standards, if needed
VARIANCE ANALYSIS: MATERIAL AND LABOR COSTS
• DIRECT MATERIAL (DM) Variance = Actual Costs – Standard Costs = (AQ x AP) – (SQ x SP)
Materials Quantity Variance (MQV) = (AQ – SQ) SP
Materials Price Variance (MPV) = AQ (AP – SP) AQ – Actual Quantity
Alternative AQ x AP MPV AP – Actual Price
SQ – Standard Quantity
Solution☞ AQ x SP DM Variance
SP – Standard Price
SQ x SP MQV
 UM TAGUM COLLEGE Page 2 of 7
Department of Accounting Education
Competency Appraisal Course – 2nd Semester – S.Y. 2023-2024
MS - Standard Costing and Variance analysis

• DIRECT LABOR (DL) Variance = Actual Costs – Standard Costs = (AH x AR) – (SH x SR)
Labor Efficiency Variance (LEV) = (AH – SH) SR
Labor Rate Variance (LRV) = AH (AR – SR) AH – Actual Hours
Alternative AH x AR LRV AR – Actual Rate
SH – Standard Hours
Solution☞ AH x SR DL Variance
SR – Standard Rate
SH x SR LEV

• MATERIALS MIX and YIELD variances are normally calculated when production requires combining
several types of materials to produce a unit of product. In which case, over-all DM variance is analyzed
as follows:
DIRECT MATERIAL (DM) Variance = Actual Costs – Standard Costs = (AQ x AP) – (SQ x SP)
Materials Price Variance (MPV) = AQ (AP – SP) TAQSP
Materials Mix Variance (MMV) = (AQ x SP) – TAQASP Total Actual Quantity at
Materials Yield Variance (MYV) = TAQASP – Standard Costs Average Standard Price
• Mix and yield variances may also apply to direct labor, specifically in situations where various labor skills
are required to produce units of products.
• IMPORTANT NOTES on MATERIAL and LABOR VARIANCE ANALYSIS:
1. Materials PRICE variance (MPV) is also known as:
Materials spending variance, materials rate variance, materials money variance
2. Materials QUANTITY variance (MQV) is also known as:
Materials usage variance, materials efficiency variance
3. Materials usage variance is a quantity variance while materials price usage variance is a price
variance.
4. Labor RATE variance (LRV) is also known as: Labor price variance, labor spending variance, labor
money variance.
5. Labor EFFICIENCY variance (LEV) is also known as: Labor hours variance, labor usage variance, labor
quantity 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

VARIANCE ANALYSIS: FACTORY OVERHEAD (FOH) COSTS

1-way variance analysis:
FOH Variance = AFOH -SFOH AFOH: Actual FOH
SFOH: Standard FOH = SH x SR
2-way variance analysis:
Controllable variance = AFOH – BASH BASH: Budget Adjusted for Standard Hours
Volume variance (fixed) = BASH – SFOH BASH = Budgeted FFOH + (SH x Variable FOH Rate)
FFOH: Fixed Factory Overhead
3-way variance analysis
Spending variance = AFOH – BAAH BAAH: Budget Adjusted for Actual Hours
Efficiency variance (variable) = BAAH – BASH BAAH = Budgeted FFOH + (AH x Variable FOH Rate)
Volume variance (fixed) = BASH – SFOH
4-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 Fixed FOH
Efficiency variance (variable) = BAAH – BASH BAAH (V): Actual Hours x Variable FOH Rate
Volume variance (fixed) = BASH – SFOH BAAH (F): Budgeted FFOH
 UM TAGUM COLLEGE Page 3 of 7
Department of Accounting Education
Competency Appraisal Course – 2nd Semester – S.Y. 2023-2024
MS - Standard Costing and Variance analysis

IMPORTANT NOTES on FACTORY OVERHEAD VARIANCE ANALYSIS

1. Standard Factory Overhead (SFOH) = Standard Hours (SH) x Standard FOH Rate (SR).
2. Under standard costing, SFOH is likewise referred to as the Applied Factory Overhead:
➢ AFOH > SFOH (applied FOH): FOH is under-applied, indicating an unfavorable variance
➢ SFOH (applied FOH) > AFOH: FOH is over-applied, indicating a favorable variance.
3. Budget Variance = Actual Cost – Budgeted Cost = Actual FOH (AFOH) – Budgeted FOH (BASH or BAAH)
➢ Under 2-way analysis where BASH is deducted from AFOH, budget variance = controllable variance
➢ Under 3-Way analysis where BAAH is deducted from AFOH, budget variance = spending variance
4. The term capacity variance is also used to mean the volume variance.
5. Volume variance is actually the fixed volume variance; there is no such thing as a variable volume or
variable capacity variance.
6. FOH Efficiency Variance is actually the Variable FOH 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 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 (NOTE: these variances
are not included in the CPA board exam syllabus for both subjects MAS and AFAR):
➢ IDLE capacity variance: BAAH – (AH x SR)
➢ TOTAL efficiency variance: ∆H x SR
➢ FIXED efficiency (effectiveness) variance: ΔH 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.

PROBLEM 1
Flori Scents, Inc. produces the popular “3N1” Cologne that has gone viral in social media. The merger has established
the following standards for one kilo of “3N1” Cologne:

Ingredients Standard Quantity Standard Unit Cost Standard Cost

Patis 500 grams (50%) P 3.00 P 1,500
Toyo 400 grams (40%) P 4.00 P 1,600
Suka 100 grams (10%) P 5.00 P 500
Total 1,000 grams (100%) P 3,600

The company reported the following production and cost data for the July 2023 operations:
Ingredients Actual Quantity Actual Unit Price Actual Cost
Patis 60,000 P 2.00 P 120,000
Toyo 30,000 P 5.00 P 150,000
Suka 10,000 P 4.00 P 40,000
Total 100,000 P 310,000

Flori Scents company produced 90 kilos of “3n1” cologne in July 2023.

Required:
1. Total materials cost variance
2. Materials price variance
3. Material efficiency variance
4. Material mix variance
 UM TAGUM COLLEGE Page 4 of 7
Department of Accounting Education
Competency Appraisal Course – 2nd Semester – S.Y. 2023-2024
MS - Standard Costing and Variance analysis

5. Material yield variance

PROBLEM 2
The following standard costs were developed for one of the products of CK YG.

Materials: 3 lbs. x P4 per foot P12

Direct labor: 2 hours x P15 per hour P30
Variable OH: 2 hours x P5 per hour P10
Fixed OH: 2 hours x P8 per hour P16
Total standard cost per unit P64

The following information is available regarding the company’s operations for the period:

Units produced 48,000

Materials purchased 150,000 lbs. @ P4.10 per lb.
Materials used 143,500 lbs.
Direct labor 97,000 hours costing P1,450,000
Manufacturing OH incurred:
• Variable P480,000
• Fixed P810,000

Budgeted fixed manufacturing overhead for the period is P800,000, and the standard fixed overhead rate is based on
expected capacity of 100,000 direct labor hours.
Required:
1. Materials price variance
2. Materials usage variance
3. Direct labor rate variance
4. Direct labor efficiency variance
5. Total overhead variance and analysis using
a. Two-way overhead variance analysis
b. Three-way overhead variance analysis
c. Four-way overhead variance analysis

DRILLS
1. Which of the following is a purpose of standard costing?
a. To replace budgets and budgeting.
b. To simplify costing procedures and expedite cost reports.
c. To eliminate under/over applied factory overhead at the end of period.
d. To use them as a basis for product costing for external reporting purposes.
2. A primary purpose of using a standard cost system is
a. To minimize the cost per unit of production
b. To provide a distinct measure of cost control
c. To make things easier for managers in the production facility
d. To minimize recording of certain recurring business transactions
3. A company using very tight standards in standard cost system should expect that
a. No incentive bonus will be paid
b. Most variances will be unfavorable
c. Employees will be strongly motivated to attain the standards
d. Costs will be controlled better that if lower standards were used
 UM TAGUM COLLEGE Page 5 of 7
Department of Accounting Education
Competency Appraisal Course – 2nd Semester – S.Y. 2023-2024
MS - Standard Costing and Variance analysis

For the next four (4) items, use the following information:
HEV ABI produces and sells leather handbags. In the current year, the company budgeted for the production and sale
of 1,000 handbags; however, 900 handbags were actually produced and sold Each bag has standard requiring two (2)
yards of material at a cost of P4.00 per yard and one (1) hour of assembly time at accost of P9.50 per hour. Actual cost
for the production of 900 bags were P7,215 for materials (1,850 yards purchased and used at P3.90 per yard) and
P10,125 for labor (1,125 hours at P9.00 per hour).

4. HEV ABI’s direct materials price variance is:

a. P 195 unfavorable c. P 185 favorable
b. P 15 unfavorable d. P 180 favorable

6. HEV ABI’s direct materials usage variance is:

a. P 585 unfavorable c. P 195 favorable
b. P 600 unfavorable d. P 200 unfavorable

7. HEV ABI’s direct labor rate variance is:

a. P 562.50 favorable c. P 450.00 favorable
b. P 562.50 unfavorable d. P 450.00 unfavorable

8. HEV ABI’s direct labor efficiency variance is:

a. P562.50 favorable c. P1,187.50 unfavorable
b. P2,137.50 unfavorable d. P2,025.00 favorable

For the next two (2) questions, use the following information:
SLIZ uses two different types of labor to manufacture its product. The type of labor, Mixing and Finishing, have
the following standards:

Labor Type Standard Mix Std Hourly Rate Standard Cost

Mixing 500 hours P10.00 P 5,000
Finishing 250 hours P 5.00 P 1,250

Yield: 4,000 units

Labor Type Actual Mix

Mixing 4,500 hours
Finishing 3,000 hours

Yield: 36,000 units

9. What is the labor mix variance?

a. P2,500 favorable c. P2,500 unfavorable
b. P5,000 favorable d. P5,000 favorable

10. How much labor yield variances should be reported?

a. P6,250 unfavorable c. P5,250 favorable
b. P6,250 favorable d. P5,250 unfavorable

11. Blake Company has a standard price of P5.50 per pound for materials. July’s results showed an
unfavorable material price variance of P44 and a favorable quantity variance of P209. If 1,066 pounds
were used in production, what was the standard quantity allowed for materials?
 UM TAGUM COLLEGE Page 6 of 7
Department of Accounting Education
Competency Appraisal Course – 2nd Semester – S.Y. 2023-2024
MS - Standard Costing and Variance analysis

a. 1,104 c. 1,066
b. 1,074 d. 1,100

12. Information on KIYO’s direct material costs is as follows:

Standard unit price P3.60

Actual quantity purchase 1,600
Standard quantity allowed for actual production 1,450
Materials purchase price variance – favorable P240

What was the actual purchase price per unit, rounded to the nearest centavos?
a. P3.06 c. P3.11
b. P3.45 d. P3.75

Use the following information for the next two (2) questions:
SOULTHRLL’s direct labor costs, which are presented below:

Standard direct labor hours 30,000

Actual direct labor hours 29,000
Direct labor efficiency variance (favorable) P 4,000
Direct labor rate variance (favorable) P 5,800
Total payroll P110,200

13. What was SOULTHRLL’s standard direct labor rate?

a. P3.54 c. P 3.80
b. P4.00 d. P 5.80

14. What was SOULTHRLL’s actual direct labor rate?

a. P3.60 c. P3.80
b. P4.00 d. P5.80

15. The variable-overhead spending variance is P1,080, unfavorable. Variable overhead budgeted at 40,000 machine
hours is P50,000. Actual machine hours were 36,000. What was the actual variable-overhead rate per machine
hour?
a. P1.28 c. P1.39
b. P1.25 d. P1.22

16. MAC MAFIA has a standard fixed cost of P6 per unit. At an actual production of 8,000 units a favorable volume
variance of P12,000 resulted. What were total budgeted fixed costs?
a. P36,000 favorable c. P15,000 unfavorable
b. P22,500 unfavorable d. P15,000 unfavorable

17. O SIDE MAFIA had a 25,000 unfavorable volume variance, a P18,000 unfavorable variable overhead spending
variance, and P2,000 total under applied overhead. The fixed overhead budget variance is
a. P41,000 favorable c. P45,000 favorable
b. P41,000 unfavorable d. P45,000 unfavorable

18. MATTHAIOS had actual overhead of P14,000 for the year. The company applied overhead of P13,400. If the
overhead budgeted for the standard hours allowed is P15,600, the overhead controllable variance is
a. P 600 favorable c. P1,600 favorable
 UM TAGUM COLLEGE Page 7 of 7
Department of Accounting Education
Competency Appraisal Course – 2nd Semester – S.Y. 2023-2024
MS - Standard Costing and Variance analysis

b. P2,200 unfavorable d. P1,600 unfavorable

19. The overhead variances for RHODESSA were:

Variable overhead spending variance P 3,600 favorable

Variable overhead efficiency variance P 6,000 unfavorable
Fixed overhead spending variance P10,000 favorable
Fixed overhead volume variance P24,000 favorable

What was the overhead controllable variance?

a. P31,600 favorable c. P24,000 favorable
b. P13,600 favorable d. P 7,600 favorable

20. Fixed manufacturing overhead was budgeted at P500,000 and 25,000 direct labor hours were budgeted. If the
fixed overhead volume variance was P12,000 favorable and fixed overhead spending variance was P16,000
unfavorable, fixed manufacturing overhead applied must be
a. P516,000 c. P512,000
b. P488,000 d. P496,000

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