Lesson 1

Chapter 8

STANDA R D COS T I NG
AND VA R I A NCE
ANA LY S I S

SANDARA ASPE
STAN DARD VARI ANC E
COSTI N G REPORTI N G
• A cost m anagem ent • A var i ance report
t echnique used t o com pares
cont r ol cost s in bu dgeted costs
oper at ions, especially
an d r evenues to
in pr ocess or specif ic
actual results.
or der - t ype syst ems.
STAN DA RD COSTING-DEFINED
What is a Standard?
• A standard is a set benchmark or
criteria est ablished by
management t o guide decision-
making.
• It’s a pre-det ermined quantity
used to compare act ual
performance and cost s.
STAN DA RD COSTING-DEFINED
Wh a t is S ta n d a rd Co stin g ?
• S t a n d a rd co stin g is a n a cco u n tin g
me th o d wh e re p re d e te rmin e d co sts
(like ma te ria ls, la b o r, a n d
o ve rh e a d ) a re u se d in ste a d o f
a ctu a l co sts.
• It h e lp s e va lu a te h o w we ll a ctu a l
co sts ma tch e xp e cte d co sts.
 TYPE S OF STANDARD S
I D E AL PRACTICAL
VIS I ON
STAN DARDS STANDAR D S
• Set to be attainable,
• Require perfect conditions
allowing for normal
(e.g., no machine
interruptions (e.g.,
breakdowns, 100%
machine downtime,
efficiency).
rest).
• Hardly achievable, which
• Focuses on realistic,
might discourage workers.
efficient performance.
 STAG E S OF A STANDARD
C OST SYSTEM
1.Set Guidelines for each operations 2. Compare Actual vs. Expected Results
• Define what costs should be for • Check how actual performance
each process or activity. matches the planned standards.

3. Analyze and Report Variances 4. Investigate and Take Action

• Identify and report differences • Look into major deviations and
between actual and standard take appropriate corrective action.
costs.
 ARE S TANDARDS AN D
B U D G E TS THE S AM E ?
STANDARD COSTS BU DGET
• ARE SE T • BR OADER
BE NCHMARKS
FOR FINANCIAL PL ANS
PE RFORMANCE .

NOTE: THEY ARE REL ATED, BU T STANDAR DS ARE

USED FOR MEASURING SPECIFIC COSTS, WHILE
BUDGETS COVER ALL EXPENSES AND R EVENUES.
 U S E S OF STANDARD
COSTI NG
Cost Control and
Reduction Selling Price
• Helps manage and Determination
• Helps set appropriate
reduce costs effectively.
selling prices based on
cost.
Efficiency
Measurement Inventory Valuation
• Measures how efficiently • Standard costs are used
resources are used. to determine inventory
value.

Costing Applications
• Helps apply efficient
Budget Preparation
costing for products or
• Aids in setting up financial
services.
budgets.
 ME T HODS TO SET
STANDARDS
VIS I ON
1.Past Historical 2. Engineering Studies
Costs • Detailed studies of
• Use previous data operations to
to estimate labor determine material,
and material labor, and
usage. equipment usage.
BU DG
• Shows
E T VS STANDAR D
• Sets costs
expected targets for
costs and efficiency.
limits • Mostly used
spending. in
• Covers the manufacturin
whole g.
companySI MI L AR I TI ES
• Both help control costs by setting
guidelines.
• Both require regular cost reports.
• Both compare actual costs with
expected costs.
 01 Actual Costing
• Uses real prices and actual costs
of materials, labor, and overhead.
• What you actually spend.

TYPE S OF 02 Normal Costing

• Uses real costs for materials and
COS TI N G labor but estimates overhead.

03 Standard Costing
• Uses fixed cost estimates for materials,
labor, and overhead based on past data.
Costing Comparison
CHECK YOUR UNDERSTANDING
Using the given information on the CHECK FIGURE:
previous page in Practice on This, (d) 2.7M minutes 45,000
solve for the following: hours
d. The Standard direct labor time (f) P60,000 (fixed) + 0.60
allowed to finish 180,000 units of (44,000 hours) = P86,400
product
e. The budgeted manufacturing
overhead adjusted to standard hours
in producing actual number of units
f. The budgeted manufacturing
overhead adjusted to actual hours
worked
 Lesson 2

DI RE CT M AT E R I A L
VA R I A NCE S

Kenny Jean
 K E Y C O NC E PT S

1.Variance Analysis VIS I ON

2. Material Variance
• Compares actual • Measures the
vs. standard costs. difference
• Helps identify between actual
inefficiencies and material costs
cost-saving
and standard
opportunities.
material costs.
 T W O C O M PO NE NT S OF
M AT E R I AL VAR I ANCE
1.Material Price Variance (MPV): Difference in
unit price paid vs. standard price.
Formula:
Material Price Variance (MPV) = (Standard Price – Actual Price) × Actual Quantity

2. Material Usage Variance (MUV): Difference in

actual quantity used vs. standard quantity allowed
Formula:
Material Usage Variance (MUV) = (Standard Quantity – Actual Quantity) × Standard Price
WHERE:
SP= STANDARD PRICE
AP= ACTUAL PRICE
AQ= ACTUAL QUANTITY
SQ= STANDARD
QUANTITY
 PRAC T I C E O N T H I S
During March, Aguila Company buys and utilizes
6,600 lbs. of materials which costs P26,730 to make
3,000 tiles. Tile Company’s standard material cost
per tile is P8 (2 lbs. of material x P4.00)

Solve for the following:

1.Material price variance
2.Material usage variance
 CH E C K YO U R U NDE R S TANDING
• Badger Woods, Inc. manufactures a line of consumer
products for general household use. During the recent
month, the company manufactured 4,000 wooden chairs
using the company P187,000 when purchased. According to
the standard cost card, each wooden chair requires 2.5
board feet of hardwood, at a cost of P18 per board feet.
CHECK FIGURE:
a) standard materials used 11,000 feet of hardwood. The
hardwood cost 10,000
b) 11,000 unfavorable
 Lesson 3

DI RE CT L A BOR
VA R I A NCE S

Rob Fernandez
 W H AT I S D I RE C T L ABO R VARI ANC E ?
• Difference between standard labor cost and actual labor
cost.
• Helps identify if labor costs are being managed efficiently.

Two main components:

• Labor Rate Variance (LRV) – Difference in wage rates.
• Labor Efficiency Variance (LEV) – Difference in hours
worked.
 1.Labor Rate Variance (LRV)
• Formula:
Labor Rate Variance = (Standard
Rate−Actual Rate)×Actual Hours
2. Labor Efficiency Variance
(LEV)
• Formula:
Labor Efficiency Variance=(Standard
 PRAC T I C E O N T H I S
Stingray Company spends 1,850 direct labor hours in
May to produce 1,000 units of its finished product at
a rate of P96 per hour. The standard labor rate of
Stingray per unit is P180 (2 hours x P90).

Solve for the following:

1.Labor rate variance
2.Labor efficiency variance
 CH E C K YO U R U NDE R S TANDING
Panda Inc. manufactures customized tumblers for several significant
department stores. A total of 1,150 direct labor hours were used by the
company to prepare 6,000 tumblers during the most recent week. The
company paid its direct labor employees an hourly wage of P100 on average.
The standard cost card estimates that each tumbler will need 0.2 direct labor
hours at the cost of P95 per hour.
CYU # 3.
• Solve for the labor rate variance.
• Solve for the labor efficiency variance
CHECK FIGURE:
a) 5,750 unfavorable
b) 1,200 standard hours allowed
 Lesson 4

OV E R H E A D
VA R I A NCE S

Rob Fernandez
W HAT I S OVE RH E AD VAR I ANC E S?
• Overhead variance is the difference
between actual overhead costs
incurred and the standard overhead
costs assigned to production.
• Helps identify cost inefficiencies and
areas for improvement.
T Y P ES O F OVE R H E AD VARI ANC E
ANALY SI S
• 1-Way Overhead Variance
Analysis
-Combines all overhead
variances into one figure. Simple
but lacks detailed insights.
 E XAM P LE O F 1 -WAY OVE R H E AD
VARI ANC E S ANALY SI S

• A bakery estimates its overhead costs using a

predetermined rate of ₱50 per hour. They expected
to work 1,000 hours, so:
Applied Overhead = 1,000 × ₱50 = ₱50,000
• But at the end of the month, the actual overhead
costs were ₱48,000.
 E XAM P LE O F 1 -WAY OVE R H E AD
VARI ANC E S ANALY SI S
• Variance Calculation:
Variance = Applied OH - Actual OH
Variance = ₱50,000 - ₱48,000 = ₱2,000 Over-applied
• Since the applied overhead (₱50,000) is more than the actual
cost (₱48,000), the company over-applied ₱2,000. This means
they allocated more overhead than they actually spent.
• If the actual cost was ₱52,000, then:
Variance = ₱50,000 - ₱52,000 = -₱2,000 (Under-applied OH)
• This means they underestimated their costs and spent ₱2,000
more than expected.
 T Y P ES O F OVE R H E AD VARI ANC E
ANALY SI S
• 2-Way Overhead Variance Analysis
• Splits variance into:
-Controllable variance (costs that can be
managed)
-Volume variance (costs affected by
production levels)
 T Y P ES O F OVE R H E AD VARI ANC E
ANALY SI S
1.Controllable Variance
• This shows how well managers controlled
overhead costs.
• if actual costs are higher, there is an
unfavorable, but, if lower, there is a favorable
variance.
Formula: CV= Actual Overhead Cost -
Budgeted Overhead Cost
SP L I T S VARI ANC E O F 2 -WAY OVE R H E AD

2. Volume Variance
• This happens when production is higher or lower than
expected.
• If the production is higher, fixed costs are spread and
creating favorable variance;
• But, if lower, fixed cost are spread and creating
unfavorable variance.
Formula: VV= Budgeted Overhead Cost -
Standard Overhead Cost
VARIANCE TE MP L ATE :
 T Y P ES O F OVE R H E AD VARI ANC E
ANALY SI S
• 3-Way Overhead Variance Analysis
• Further divides variance into:
-Spending variance (difference in actual vs.
budgeted costs)
-Efficiency variance (effectiveness of resource use)
-Volume variance (impact of production level
changes)
 D I VI SI O N O F VAR I ANC E O F 3 -WAY
OVE R H E AD
1. Spending Variance This shows if we spent more or less on
overhead costs than expected. It’s the difference between actual
overhead costs and the expected overhead costs for the actual
production level. If actual costs are higher, it’s an unfavorable
variance (overspending). If actual costs are lower, it’s a favorable
variance (cost savings).

Formula: SV= Actual Overhead Cost -

Expected Overhead Cost for Actual Hours.
 D I VI SI O N O F VAR I ANC E O F 3 -WAY
OVE R H E AD
2. Efficiency Variance (or Capacity Variance) This checks if we used
resources efficiently. It’s the difference between the expected
overhead cost for the standard production level and the expected
overhead cost for the actual production level. If workers take longer
than expected, it’s an unfavorable variance (wasted time/resources).
If they work faster and use fewer hours, it’s a favorable variance
(better efficiency).
Formula: EV= Expected Overhead Cost for
Standard Hours - Expected Overhead Cost for
 D I VI SI O N O F VAR I ANC E O F 3 -WAY
OVE R H E AD
3. Volume Variance This is the same as in Two-Way Overhead
Variance Analysis. It compares the expected production level
with the actual production level. If production is higher than
planned, overhead costs are spread over more units, creating a
favorable variance. If production is lower, overhead costs are
not fully utilized, causing an unfavorable variance.

Formula: VV= Expected Overhead Cost -

Standard Overhead Applied
VARI ANC E T E M P L AT E :
 T Y P ES O F OVE R H E AD VARI ANC E
ANALY SI S

• 4-Way Overhead Variance Analysis

• Most detailed approach, splitting into:
-Variable spending variance
-Variable efficiency variance
-Fixed spending variance
-Fixed volume variance
TY P E S O F 4-WAY OVE RH E AD VAR I ANC E
ANALY SI S
1. Fixed Spending Variance This shows the
difference between actual fixed overhead
costs and budgeted fixed overhead costs.
Fixed costs don’t change with production, so
this variance happens if fixed expenses (like
rent or salaries) go over or under budget.
TY P E S O F 4-WAY OVE RH E AD VAR I ANC E
ANALY SI S
2. Variable Spending Variance This
compares actual variable overhead costs
(like utilities or supplies) to the budgeted
variable costs for actual production. If
variable costs are higher than expected, it’s
an unfavorable variance. If lower, it’s a
favorable variance.
TY P E S O F 4-WAY OVE RH E AD VAR I ANC E
ANALY SI S
3. Efficiency Variance (Same as in Three-
Way Analysis) This checks if resources were
used efficiently. If more hours were used than
planned, it’s an unfavorable variance. If fewer
hours were used, it’s a favorable variance.
TY P E S O F 4-WAY OVE RH E AD VAR I ANC E
ANALY SI S
4. Volume Variance (Same as in Two- and Three-
Way Analysis) This compares planned production
with actual production. If we produce more than
expected, it spreads fixed costs over more units,
creating a favorable variance. If we produce less
than expected, fixed costs are spread over fewer
units, causing an unfavorable variance.
 P RAC T I C E O N T H I S
Practice #4:
Order completion services are provided by Octopus Inc. e-commerce
companies, The company keeps warehouses where its customers'items are
stored. In the most recent month, 5,800 direct labor-hours were used to
transport 140,000 items to customers. Variable overhead for the company
amounted to P15,950. Per the company's standards, it takes 0.04 direct labor-
hours to complete an order for one item. For the year, Octopus forecasts
60,000 direct labor hours and P168,000 of variable overhead costs.

Solve for the following:

1.Spending variance
2.Overhead efficiency variance
 C HECK YO U R U ND E R STAND I NG
Analyze the following overhead costs:
Actual overhead cost data for the period:
Fixed, P18,500
Variable, P16,000
Units produced: 9,000 units
Direct labor hours worked: 28,000 hours
Standard cost data per unit include:
a. Direct labor: 3 hours @ P5.00 per hour
b. Direct Material: 4 pounds @ P4.15 per pound
c. Overhead: 3 hours per unit
The flexible budget formula for factory overhead y=P18,000 + P0.50 per direct
labor hour. A normal volume of 30,000 direct labor hours is projected for the
period.
 C HECK YO U R U ND E R STAND I NG
CYU #4. Analyze the factory overhead costs using one-way, two-way, three-way,
and four-way methods.
Solve for the following:
1. Using one-way method: over/under applied overhead for the period
2. Using two-way method:
(a) budget variance/ controllable variance and
(b) volume variance
3.Using three-way method: (a) fixed • spending variance and (b) efficiency
variance
4. Using three-way method: (a) total spending variance and (b) volume variance

CHECK FIGURE: 2. (a) controllable variance= P34,500 U; 3. (b) efficiency

variance= P500 U ; 4. (b) volume variance = P1,800 U
 Lesson
5M ATE R I A L A ND
L A BOR M I X
VA R I A NCE S
Kenny Jean
 1.Mix Variance D I SC U SSI O N
• Measures financial impact due to deviation from the standard proportion
of material/labor usage.
• The difference between actual and standard material/labor used at
standard prices.

2. Material Mix Variance Formula

• Δ Quantity (Planned vs. Actual Mix) × Standard Price
• Price Variance is calculated separately for each material if applicable.

3. Materials Yield Variance Formula

• Δ Quantity × Standard Price (Planned Mix)
EX AM P LE 8 . 2 .5
E X AM P LE
EX AM P LE
SU M M ARY Variance Result

Price
Variance P 2,060 Unfavor
(Price

Mix
Variance P 913.33 Favo
(Correct Mat

Yield
Variance P 333.33 Unfavo
(Excessive

Total
Variance P 1,480 Unfavo
(Net Expe
 P RAC T I C E T H I S
• To determine the requirements, use the following
information about direct materials:
• Standard costs 600,000 units of materials @ P2.00
each
• Actual Costs 700,000 units @ P1.90

Practice #5:
Solve for the following variances:
a. Materials Price
b. Materials usage
C HECK YO U R U ND E R STAND I NG
T H A NK YOU !