Standard Costing

and
Variance Analysis
PREPARED BY:
MAE ZENICA B. VIRTUS
BSA 3-B
Standard
- benchmark, basis, measure, pre-determined cost
Standard Cost System
Standard Material, Standard Labor, and Standard Overhead
is a system that identifies both standard and actual costs in
the accounting records.
use standards to identify expected costs and quantities
needed to manufacture a single unit of product or perform a
single service.
Standard Cost
Scientifically pre-determined cost of manufacturing, should be
cost or the best estimate of the management of what the cost
should be.
 Goal
>The goal is to manage and control costs where the
actual can be compared to the standard or norms.

Who will develop standards?

Industrial Engineering
Data Processing
Management
Cost Accounting
Human resources
Purchasing.
After determining the desired output quality and input
resources, price and quantity standards can be
developed.

Minimizing the unit cost of a product is the primary

objective in manufacturing while achieving certain
quality.
Almost all products can be manufactured from variety
of alternative inputs that would generate similar quality
outputs.
 Setting Material, Labor, and
Overhead Standards

First Step:
Identify and list the direct materials needed to
manufacture the product to be found in product specification
documents.
If document not available, through:
-observing the production area
-questioning production personnel
- inspecting material requisitions
- reviewing the product-related cost accounts
 Four things to consider in materials input
in standard development:
• type
• quality
• quantity
• price per unit
Quality Decisions
- as material grade rises, so does price
When converting quantities into cost, companies should
make allowances for normal waste components.
Bill of materials
- includes the specifications like quality and quantity
of materials
Purchasing agents helps:
•understanding the quantity and timing of company purchasing;
• knowing what alternative suppliers are available;
• recognizing the economic climate under which purchases are being
made;
• performing “due diligence” as to the input costs incurred and profit
margins desired by
suppliers; and
• when appropriate, seeking single source suppliers or partnership
alliances with suppliers.
 When all quantity and price information is available,
component quantities are multiplied by unit prices to obtain
each component’s total cost.
These totals are summed to determine the total standard
material cost of one unit of product.
 Each production operation performed by workers -
bending, reaching, lifting, moving material, and packing or by
machinery- drilling, cooking, and assembling, should be
identified. Activities such as cleanup, setup, and rework are
considered in specifying operations and movements.
In the development of effective labor standards, information
can be obtained from the following:
-Industrial engineering methods
-in-house time-and-motion studies
-historical data.
In-house studies may result disadvantage n
employees engaging in “slowdown” tactics when
they are being monitored. Longer time being set
as standard will then result to labor efficiency
variance being favorable.
Methods-time measurement (MTM)
is an industrial engineering process that analyzes work tasks to
determine the time a trained worker requires to perform a given
operation at a rate that can be sustained for an 8-hour workday.
Operations flow document
list necessary tasks to make one unit product. For batches, time
is specified for a batch, individual not accurate
Labor rate standards should reflect:
employee wages and related employer costs for
fringe benefits, FICA (Social Security), and
unemployment taxes.
When time and rate information are available, job
task times are multiplied by wage rates to generate the
total cost of each operation.
These totals are summed to provide the total
standard labor cost of one unit of product.
 reflects the company’s predetermined manufacturing
overhead rate(s).
Standard Cost card
is prepared that summarizes the standard quantities and
costs needed to produce a unit DM, DL and OH
Although both actual and standard costs are recorded in a
standard cost system, only standard costs are shown in the Raw
(Direct) Material, Work in Process, and Finished Goods Inventory
accounts.
The standard cost of each cost element (direct material,
direct labor, variable overhead, and fixed overhead) is said to be
“applied” or “allocated” to the goods produced.
 Standards enable management to make periodic comparisons
of actual results with planned results.
Differences that arise between actual results and planned
results are called VARIANCES
Technique used to measure performance, correct
inefficiencies, and deal with the accountability function.
General Variance Analysis Model
Price (or Rate) Variance = (AP-SP)(AQ)
Quantity (or Efficiency) Variance= (AQ -SQ)(SP)
Unfavorable is not necessarily equated with bad nor is favorable
equated with good. Determination of “bad” or “good” must be made
after identifying the cause of the variance and the implications of
that variance for other cost elements.
Material Price Variance (MPV) indicates whether the amount paid for material was
less or more than standard price.
MPV= (Actual Price - Standard Price) * Actual Quantity
Material Quantity Variance (MQV) indicates whether the actual quantity used was
less or more than the standard quantity allowed for the actual output.
MQV = Standard Price x (Actual Quantity - Standard Quantity)
Total Material Variance (TMV) is the summation of the individual variances or can
also be calculated by subtracting the total standard cost for component
TMV = MPV + MQV
The labor rate variance (LRV) is the difference between the actual wages paid to
labor for the period and the standard cost of actual hours worked.
LRV= (Actual Price-Standard Price) Actual x Quantity
The labor efficiency variance (LEV) indicates whether the amount of time worked
was less or more than the standard quantity allowed for the actual output. This
difference is multiplied by the standard rate per hour of labor time.
LEV = Standard Price x (Actual Quantity- Standard Quantity)
The total labor variance for the Painting Department can be calculated as by
either
1. subtracting the total standard labor cost from the total actual labor cost or
2. summing individual labor variances
 Total variable overhead changes in direct relationship with
changes in activity and fixed overhead per unit changes inversely
with changes in activity, a specific capacity level must be selected
to compute budgeted overhead costs and to develop a
predetermined overhead (OH) rate.
 Variable overhead spending variance
difference between actual VOH and budgeted VOH based on
actual hours.
-are caused by both component price and volume differences.
- associated with price differences can occur because, over time,
changes in VOH prices have not been included in the standard rate
Variable overhead efficiency variance
the difference between budgeted VOH for actual hours . This
variance quantifies the effect of using more or less of the activity or
resource that is the base for VOH application.
When actual input exceeds standard input allowed, production
operations are considered to be inefficient. Excess input also
indicates that an increased VOH budget is needed to support the
additional activity base being used.
 The total fixed overhead (FOH) variance is divided into price and
volume components by inserting budgeted FOH in the middle
column of the general variance analysis model as follows:

Fixed overhead spending variance- the difference between actual and

budgeted FOH. This amount normally represents the differences
between budgeted and actual costs for the numerous FOH components,
although it can also reflect resource mismanagement.
Individual FOH components would be shown in the company’s
flexible overhead budget, and individual spending variances should be
calculated for each component
 Fixed overhead volume variance is the difference
between budgeted and applied FOH.
This variance is caused solely by producing at a level
that differs from the level that was used to compute the
predetermined FOH rate.
Although capacity utilization is controllable to some
degree, the volume variance is the variance over which
production managers have the least influence and control,
especially in the short run.
Noncontrollable variance- is also called a volume
variance
One-Variance Approach
Total OH variance=TAOH- (Combined OH rate x SQ)

Two-Variance Approach
Budget variance = TAOH-[(VOH rate x SQ) + BFOH]
Volume variance =[(VOH rate x SQ)+ BFOH] -[(VOH rate x SQ)
+ (FOH rate x SQ)]
(This is equal to the volume variance of the four-variance
approach.)
Two-Variance Approach

Middle column is the expected total overhead cost for

the period’s actual output. This amount represents total
budgeted VOH at the standard quantity measure allowed
plus the budgeted FOH, which is constant at all activity
levels in the relevant range.
 Two-Variance Approach
Budget variance equals to total actual overhead less
budgeted overhead for the period’s actual output.
-also referred to as the controllable variance because
managers are able to apply impact on this amount during the
short run
Volume Variance
the difference between total applied overhead and
budgeted overhead for the period’s actual output
Three- way Variance
Four- way Variance
 Why Standard Cost System are used
Standard cost systems
- provide clerical efficiency.
- assist management in its planning, controlling, decision making,
and performance evaluation functions.
- motivate employees when the standards are
➢ set at a level to encourage high-quality production and promote
cost control.
➢ seen as expected performance goals.
➢ updated periodically so that they refl ect actual
economic conditions.
 Changes in Standard Standard Costing Using a
Costing Setting and Usage Conversion Element
• In automated companies, the • If a conversion category is used
standard cost system may rather than the traditional labor
- use only two elements of and overhead categories,
production cost: direct material - overhead will commonly be
and conversion. separated into its variable and
fixed categories.
- use ideal standards rather than
- overhead may be applied using
expected or practical standards.
activity-based costing.
- use predetermined fixed
- the focus will be on
overhead rates based on ➢ spending variances for variable
theoretical capacity rather than and fi xed
expected, normal, or practical overhead.
capacity. ➢ effi ciency variances for
- compute material price machinery and produc
variances based on usage rather tion equipment rather than labor.
than purchases. ➢ volume variance for production.
 MULTIPLE MATERIALS
Material price variance
shows the dollar effect of paying prices that diff er from the
raw material standard.
Material mix variance
measures the effect of substituting a nonstandard mix of
material during the production process.
Material yield variance
measures the difference between the actual total
quantity of input and the standard total quantity allowed
based on output; this difference reflects standard mix and
standard prices.
Summing the material mix and yield variances provides a material
quantity variance
MULTIPLE MATERIALS
 MULTIPLE MATERIALS
Labor rate variance
is a measure of the cost of paying workers at other than
standard rates.
Labor mix variance
is the financial effect associated with changing the relative
hours of higher- or lower-paid workers in production.
Labor yield variance
reflects the monetary impact of using a higher- or lower-
number of hours than the standard allowed.
The sum of the labor mix and yield variances equals the
labor efficiency variance.
MULTIPLE LABOR CATEGORIES
 CHAPTER 7:
STANDARD COSTING AND
VARIANCE ANALYSIS