Standard Costing

1. Definition of Terms
 Actual or Historical Costing – actual cost of direct materials, labor and factory overhead.
 Normal Costing – actual cost of direct materials, labor and APPLIED factory overhead
based on predetermined rate for the actual units of input.
 Standard Costing – predetermined cost of material, labor, and overhead for a prescribed
set of working conditions.
 Used for planning, control, pricing, costing, motivation, and performance.
 It involves three activities: establishment of standard costs, accumulation of
actual cost and computation and analysis of variance.

2. Establishment of Standard Costs

 Done at the beginning of the accounting period, after the approval of the firm wide
financial budgets by senior management.
 Summary:

Product Price/rate standard Usage/Efficiency Standard Standard Costs

Costs

DM Standard material price x Standard materials usage = DM standards

DL Standard labor rate x Standard labor usage/efficiency = DL standard
Var. FOH Standard var. OH rate x Standard var. OH application base = Budgeted var. OH cost
Fixed FOH Standard fixed OH rate x Standard fixed OH application = Budgeted fixed OH
base cost

3. Actual Cost vs. Standard Cost

 Inventories and cost of goods sold are reflected at standard amounts instead of actual
costs.
 Difference between actual costs and standard cost are called variances, which needs to
be investigated and studied.
 Variances are either favorable or not favorable.
 Favorable = actual cost < standard cost; actual profit may exceed planned profit;
 Unfavorable = actual cost > standard cost; actual may not exceed planned profit;

4. Advantages and disadvantages

Advantages Disadvantages

 Efficiency measurement  Complex and time consuming

 Management by exception  Frequent review of standard cost
 Cost control  For internal purposes only
  Decision making  Incorrect standards may result to incorrect
 Eliminating inefficiencies measurement
 Reason or cause of variance sometimes are
overlooked or not investigated due to
cumbersome process involved.

5. Limitations
 Cannot be applied to non – standard products;
 Process is complex and requires technical skills and experience with the organization;
 Standard cost are not fixed; it needs to update periodically;
 Variances are caused by different many factors and it is impractical to assign
responsibilities to specific individuals to ascertain the precise causes of the variances.

 Variances are either controllable and non – controllable; standard costing is relevant to
controllable variances.

6. Types of Variances

Materials Price Variance

Materials Materials Quantity

Variance
Labor Rate Variance
Total Labor
Variance
Labor Efficiency Variance
FOH
Controllable Variance

Volume Variance

Materials Variance

1. Materials Price Variance (MPV) = [(Standard Price (SP) – Actual Price (AP)] x Actual
Quantity Purchased (AQP)

2. Materials Quantity Variance (MQV) = [Standard Quantity (SQ) – Actual Quantity (AQ)]
x Standard Price (SP)

Labor Variance
 1. Labor Rate Variance (LRV) = [(Standard Rate (SR) – Actual Rate (AR)] x Actual Hours
(AH)

2. Labor Efficiency Variance (LEV) = [Standard hours (SH) – Actual hours (AH)] x
Standard Rate (SR)

Factory Overhead Variance

1. Controllable Variance (CV) = Actual Factory Overhead (AFOH) – Budgeted OH for

Standard Hours

2. Volume Variance (VV) = Budgeted OH for Standard Hours – Standard OH)

7. Income Statement Presentation

 Variances are closed to cost of goods sold, if variances are insignificant;

 Variances are allocated to cost of goods sold, work in process inventory, and finished
goods inventory, if variances are significant;

Application:

1. CJ Company, a manufacturer of tables, provided the following information:

Actual production (2,000 units):
Direct materials purchased – 10,000 woods at P 125 P 1,250,000
Direct materials used – 8,400 woods at P 125 each 1,050,000
Direct labor – 19,000 hours at P 62 per hour 1,178,000
Variable factory overhead 798,000
Fixed factory overhead 76,000
Standard variable cost per unit:
DM – 4 pieces of wood at P 120 each P 480
DL – 10 hours at P 60 per hour 600
Variable factory overhead – 10 hours at P 40 per hour 400
Fixed Factory overhead at normal capacity,
annual budget for 1,500 tables or 15,000 hours P 60,000

Required: (a) calculate materials, labor and overhead variance (b) Journal entries to record the
variance

Materials variance:
Price Variance = (AP – SP) x AQP
= (125 – 120) x 10,000 woods
= 5 x 10,000
= 50,000 – UF
 Price variance = (AP – SP) x AQU
= 125 – 120 x 8,400
= 42,000 UF

Quantity Variance = (SQ – AQ) x SP

= (2,000 x 4) – 8,400 x 120
= 48,000 UF

Total variance 98,000 (90,000) UF, to check:

SQ x SP = AQP x AP
8,000 x 120 = 8,400 x 125
960,000 = 1,050,000
90,000 Total UF

Labor rate variance = (SR – AR) x actual hours

= (60 – 62) x 19,000 hrs
= 2 x 19,000
= 38,000 UF

Labor efficiency = (SH – AH) x SR

= (2,000 x 10hrs) – 19,000 hrs x 60
= (20,000 hrs – 19,000 hrs) x 60
= 60,000 F

Total variance = 38,000 UF – 60,000 F = 22,000 F

AH x AR = SH x SR
19,000 hrs x 62 = 20,000 hrs x 60
1,178,000 = 1,200,000
Total = 22,000 F

Factory overhead variances

1. Controllable Variance (CV) = Actual Factory Overhead (AFOH) – Budgeted OH for

Standard Hours

= 874,000 – (2,000 x 10 hrs x 40) + 60,000

= 874,000 – 860,000
= 14,000 UF

2. Volume Variance (VV) = Budgeted OH for Standard Hours – Standard OH)

= 860,000 – (20,000 hrs. x 40) + (20,000 hrs. x 4)
= 860,000 – 880,000
= 20,000F
 Total variance = 14,000UF – 20,000F = 6,000 F

Journal Entries:

1. RMI (10,000 x 120) 1,200,000

Materials price variance 50,000
AP 1,250,000

2. Work in process (8,000 x 120) 960,000

Materials quantity variance 48,000
RMI (8,400 x 120) 1,008,000

3. Payroll 1,178,000
Accrued payroll 1,178,000

4. Work in process (20,000 x 60) 1,200,000

Labor rate variance 38,000
Labor efficiency 60,000
Payroll 1,178,000

5. Factory overhead control 874,000

Cash/accrual 874,000

6. Work in process – variable FOH 800,000

Applied FOH (20,000 hrs x 40) 800,000

Work in process – fixed FFOH (20,000 x 4) 80,000

Applied FOH 80,000

Applied FOH 880,000

Controllable variance 14,000
Volume variance 20,000
FOH control 874,000

2. Assume that all variances are closed to cost of goods sold and considering the following
information:
Sales 4,600,000
Cost of Goods sold at standard 2,760,000
Selling expenses 620,000
Administrative expenses 200,000
Income tax 285,000

Requirements:
a. Closing entries to close the variances to COGS
b. Prepare an income statement.
Solution:

Cost of sales 70,000

Labor efficiency variance 60,000
Volume variance 20,000
Materials price variance 50,000
Materials quantity variance 48,000
Labor rate variance 38,000
Controllable variance 14,000

Sales 4,600,000
Cost of sales (standard) 2,760,000
Adjustments 70,000 2,830,000
Gross Profit 1,770,000
OPEX (820,000)
Net income 950,000
Tax (285,000)
Net income after tax 665,000

Standard Costing

1. Upstate Manufactures a product that has the following standard costs:

Direct materials: 40 yards at P 2.70 per yard P 108
Direct labor: 8 hours at P 18.00 per hour 144
Total P 252

The following information pertains to July:

Direct materials purchased: 42,500 yards at P 2.78 per yard, or P 118,150.00;
Direct material used: 36,000 yards
Direct labor: 7,500 hours at P 18.30 per hour, or P 137,250
Actual completed production: 1,050 units

Required: Calculate the direct-material price and quantity variances and the direct-labor rate and
efficiency variances. Indicate whether each variance is favorable or unfavorable.

Materials Variance

1. Price variance (AP – SP) x AQP or used.

= (2.78 – 2.70) x 36,000 yards
= 2,880 UF

2. Quantity variance (AQU – SQU) x SP

= 36,000 yards – (40 yards x 1,050) x 2.70
= (36,000 – 42,000) x 2.70
= 16,200 F
Total variance = 2,880 UF – 16,200F
= 13,320 F

Actual vs. Standard csot

36,000 yards x 2.78 vs. 42,000 x 2.70
100,080 vs. 113,400
13,320 F

Labor Variance
1. Labor rate variance = (AR – SR) x actual hours
= (18.30 – 18.00) x 7,500 hours
= 2,250 UF

2. Labor efficiency variance = (AH – SH) x SR

= 7,500 – (1,050 x 8 hrs) x 18
= (7,500 – 8,400) x 18
= 16,200 F

Total variance = 2,250UF – 16,200F

= 13,950 F

Actual cost vs. Standard cost

7,500 x 18.30 = 8,400 x 18
137,250 = 151,200
13,950 F

2. Hermosa Enterprises recently experienced a fire, forcing the company to use incomplete
information to analyze operations. Consider the following data and assume that all materials
purchased during the period were used in production.
Direct materials:
Standard price per pound: P 9
Actual price per pound: P 8
Price variance: P 20,000 F
Total of direct material variances, P 2,000 F
Direct labor:
Actual hours worked: 40,000
Actual rate per hour: P 15
Efficiency variance: P 28,000 F
Total of direct-labor variances: P 12,000 UF
Hermosa completed 12,000 units

Required: Determine the following: (1) actual materials used, (2) materials quantity variances,
(3) labor rate variance, (4) standard labor rate per hour, and (5) standard labor time per finished
unit.
Solution:
(1) Actual material cost:
Price variance = (AP – SP) x AQU
20,000 F = (8 – 9) x AQU
20,000 F = 1 x AQU
20,000F = AQU
AQU = 20,000 pounds

(2) Total variances = price variance + materials quantity variance

2,000 F = 20,000F +
2,000 F = 20,000F - 18,000UF

(3) labor rate variance = Total variance – Efficiency variance

= 12,000UF – 28,000 F
= 16,000 F

(4) labor rate variance = (SR – AR) AH

16,000F = (X – 15) 40,000
16,000F = 40,000x – 600,000
600,000 + 16,000 = 40,000x
616,000 = 40,000x
X = 15.4

(5) Labor efficiency variance = (SH – AH) x SR

28,000 F = (X – 40,000) x 15.4
28,000F = 15.4x – 616,000
28,000 + 616,000 = 15.4X
15.4 x = 644,000
X = 644,000/15.4
X = 41,818 hours

3. Nancy Simon is the long-time catering director of Naples-on-the Beach, a hotel noted
throughout the industry for quality, profitability, and cost control. The hotel recently catered a
steak dinner for a 2,000-person convention. Strict standards were in place for the dinner: 0.75
pounds of beef per plate at P 9 per pound. A review of the accounting records shortly after the
convention showed that 1,680 pounds of beef were purchased and consumed, costing the hotel P
13,440.

Required:
a. Calculate the cost of beef budgeted for the dinner and the total beef variance (i.e. the
difference between budgeted and actual cost). Should this variance be of concern to the
hotel? Why?
Solution:
Total beef variance = 13,440 - (.75 pounds x 9 per pound x 2,000)
= 13,440 – 13,500
= 60 F
 b. Assess the job that Simon did in “managing” the beef purchase by performing a variance
analysis. Comment on your findings.
Price variance = (AP – SP) x AQU
= (8 – 9) x 1,680
= 1,680F

Quantity variance = (AQU – SQU) x SP

= (1,680 – 1,500) x 9
= 1,620 UF

Total = 1,680F – 1620UF

= 60F

c. Assume that the hotel received a number of complaints shortly after the dinner
concluded. Explain a possible reason behind the conventioneers’ unhappiness.

Factory Overhead Variance Variable spending

 Two way
 Three way Spending variance
 Four way Controllable
variance Fixed spending
Factory Overhead
Variable efficiency
Variance

Volume variance

Two Way

Budget allowed on
Actual FOH Standard FOH
standard hours
(BASH)

Controllable variance Volume variance

Three way

Budget allowed on
Actual FOH BASH SFOH
actual hours (BAAH)

Spending variance Efficiency variance Volume variance

Four way
Actual Applied VOH Actual Fixed Budgeted Applied
Budgeted VOH
Variable OH overhead FOH FOH

VOH spending VOH efficiency FOH spending FOH volume

var

1. CJ Company, a manufacturer of tables, provided the following information:

Actual production (2,000 units):
Direct materials purchased – 10,000 woods at P 125 P 1,250,000
Direct materials used – 8,400 woods at P 125 each 1,050,000
Direct labor – 19,000 hours at P 62 per hour 1,178,000
Variable factory overhead 798,000
Fixed factory overhead 76,000
Standard variable cost per unit:
DM – 4 pieces of wood at P 120 each P 480
DL – 10 hours at P 60 per hour 600
Variable factory overhead – 10 hours at P 40 per hour 400
Fixed Factory overhead at normal capacity,
annual budget for 1,500 tables or 15,000 hours P 60,000

Two Way

1. Controllable variance = Actual FOH vs. BASH

= (798,000 + 76,000) vs. (10 hours x 2,000 x 40) + 60,000
= 874,000 – 860,000
= 14,000 UF

2. Volume variance = BASH vs. SFOH

= 860,000 vs. (10 hours x 2,000) x (40) + (60,000/15,000)
= 860,000 – (20,000 x 44)
= 860,000 – 880,000
= 20,000F

Total = 14,000 UF- 20,000F

= 6,000F

Three Way

1. Controllable
a. Spending variance = AFOH – BAAH
 = 874,000 – (19,000 hrs x 40) + 60,000
= 874,000 – 820,000
= 54,000 UF

b. efficiency variance = BAAH – BASH

= 820,000 – 860,000
= 40,000 F

2. Volume variance = BASH vs. SFOH

= 860,000 vs. (10 hours x 2,000) x (40) + (60,000/15,000)
= 860,000 – (20,000 x 44)
= 860,000 – 880,000
= 20,000F

Total: 54,000UF – 40,000 F – 20,000F

= 6,000F

Four way variance analysis

1. Controllable variance
a. Variable OH spending = actual variable overhead – Budgeted variable OH
= 798,000 – (19,000 hrs x 40)
= 798,000 – 760,000
= 38,000 U

b. Variable efficiency = Budgeted VOH – Applied VOH

= 760,000 – (2,000 x 10 x 40)
= 760,000 – 800,000
= 40,000 F

2. Volume variance
a. FOH spending variance = Fixed OH actual – budgeted fixed OH
= 76,000 – 60,000
= 16,000 UF

b. FOH volume variance = budgted Fixed OH – applied Fixed OH

= 60,000 – (2,000 x 10 hours x 4)
= 60,000 – 80,000
= 20,000F

4. Orlando Corporation uses standard costing in its manufacturing operations. Overhead is

applied based in direct labor hours. The following budget and actual data were provided for the
month of September 2014:
Budgeted fixed overhead costs P 24,000
Budgeted variable overhead costs 48,000
Total budgeted factory overhead P 72,000
 Fixed factory overhead rate P 4.80 per hour
Variable factory overhead rate 9.60 per hour
Overall factory overhead rate P 14.40 per hour

Normal capacity (direct labor hours) 5,000 hours

Standard labor time per unit of product 2 hours

Units produced during the period 2,000 units

Actual hours worked during the period 5,300 hours
Actual factory overhead incurred P61,000

Required:
a. Calculate the overall factory overhead variance (one way variance)

Variance = Actual FOH vs. Standard factory overhead

= 61,000 – (2,000 x 2 x 14.40)
= 61,000 – 57,600
= 3,400 UF

b. Two-way analysis of factory overhead variances

1. Controllable variance = Actual FOH – BASH
= 61,000 – (2,000 units x 2 x 9.60) + 24,000
= 61,000 – (38,400 + 24,000)
= 61,000 – 62,400
= 1,400 F

2. Volume variance = BASH – SFOH

= 62,400 – (2,000 x 2 x 14.40)
= 62,400 – 57,600
= 4,800 UF

Total: 1,400F – 4,800UF

= 3,400UF

c. Three way variance

1. Controllable
a. Spending variance = AFOH – BAAH
= 61,000 – (5,300 x 9.60) + 24,000
= 61,000 – 74,880
= 13,880 F

b. efficiency variance = BAAH – BASH

= 74,880 – 62,400
= 12,480 UF
 2. Volume variance = BASH – SFOH
= 62,400 – (2,000 x 2 x 14.40)
= 62,400 – 57,600
= 4,800 UF

Multiple Choice
1. Nicole Company uses a standard costing system in connection with the manufacture of a
“one size fit all” article of clothing. Each unit of finished product contains 2 yards of
direct materials. However, a 20% direct material spoilage calculated on input quantities
during the manufacturing process. The cost of direct material is P 3.00 per yard. The
standard direct material cost per unit of finished product is
a. P 4.80
b. P 6.00
c. P 7.20
d. P 7.50

2. X’OR uses a standard costing system, and data for the its direct labor costs are
summarized as follows:
Actual direct labor hours 72,500
Standard direct labor hours 75,000
Total direct labor payroll 275,500
Direct labor rate variance – favorable 14,500
Direct labor efficiency variance - favorable 10,000

The standard direct labor rate per hour is –

a. P 3.60
b. P 3.80
c. P 4.00
d. P 4.20

3. Lewis Company calculates its predetermined rates using practical volume, which is
288,000 units. The standard cost system allows 2 direct labor hours per unit produced.
Overhead is applied using direct labor hours. The total budgeted overhead is P 3,168,000
of which P 864,000 is fixed overhead. The actual results for the year are as follows:
Units produced 296,000
Direct labor 570,000 hours @ P 9
Variable overhead P 2,230,000
Fixed overhead P 872,000

Calculate the fixed overhead volume variance

a. P 32,000 U c. P 32,000 F
b. P 24,000 F d. P 24,000
4. Schneider, Inc. had the following information relating to 20x7.
Budgeted factory overhead 74,800
Actual factory overhead 78,300
Applied factory overhead 76,500
Estimated labor hours 44,000

If Schneider, Inc. decides to use the actual results from 20x7 to determine the 20x8
overhead rate, what will the 20x8 overhead rate be?
a. P 1.650
b. P 1.7
c. P 1.738
d. P 1.740

5. How is labor rate variance computed?

a. The difference between standard and actual rate time standard hours.
b. The difference between standard and actual hours times actual rate.
c. The difference between standard and actual rate times actual hours.
d. The difference between standard and actual hours times the difference
between standard and actual rate.

6. Avery uses a predetermined factory overhead rate based on direct labor hours. For the
month of October, Avery’s budgeted overhead was P 300,000 based on a budgeted
volume of 100,000 direct labor hours. Actual overhead amounted to P 325,000 with
actual direct labor hours totaling P 110,000. How much was the overapplied or
underapplied overhead?
e. P 30,000 overapplied
f. P 30,000 underapplied
g. P 5,000 overapplied
h. P 5,000 underapplied