STANDARD COSTING

IECOSAC
Standard Costs
• Carefully predetermined costs
• based on historical data and performance
• Target costs
• attained under efficient operations
• Form of a guide:
• For gauging performance
• For building useful budgets
• For guiding pricing
• For meaningful product costing
• For bookkeeping economy
Purpose of Standard Costs:
• Establishing budgets
• Controlling costs and measuring inefficiencies
• Promoting possible cost reduction
• Simplifying costing procedures and expediting cost
reports
• Assigning costs to materials, WIP and FG inventories
• Forming the basis for establishing bids and contracts and
for setting selling prices

*Goal: not to exceed standard costs

>> Exceeding standard costs will lead to lower profits and inefficient operations
Budget
• Quantitative plan of action
• An aid to coordination and control
• Forecasted financial statements
• Targets encompassing all phases of operations

Types:
Static Budget - fixed
Flexible Budget - variable
Variance
• the difference between the actual costs incurred and the
standard costs:
Actual – Standard

 Favorable variance (F)

 Increases operating income relative to the budgeted amount ( – )
 Actual < Standard

 Unfavorable variance (U)

 Decreases operating income relative to the budgeted amount ( + )
 Actual > Standard
Direct Material Variances:
• 1. Material Price Variance – the difference between actual
material price and budgeted material price multiplied by
the actual quantity of input.
• 2. Material Efficiency (or Usage) Variance – the difference
between the actual quantity of input used and the
budgeted quantity of input that should have been used,
multiplied by the budgeted price.
• (a) Material Mix Variance – the difference between the actual
relative proportion of the various inputs to produce a
quantity of finished output and the budgeted amount.
• (b) Material Yield Variance – the difference between the
actual quantity of finished output units from a standard
mix of inputs and the budgeted amount.
Direct Material Variances
• Material Price Variance

( – ) >> increasing profit

( + ) >> decreasing profit

• Material Efficiency/Usage Variance

Analyze every
proportion compared
to the budget

Difference between
the total quantity and
the budgeted amount
 STANDARD COSTING FORMULA SHEET

A. Material/Labor Variances:
Actual Costs Flexible Flexible
Incurred: Budget: Budget:
Standard Input
Allowed for
Actual Input x Actual Output x
Actual Input x Standard Standard
Actual Price/Rate Price/Rate Price/Rate

Price/Rate Variance Efficiency Variance

Flexible Budget Variance

C. Material/Labor Efficiency (Mix and Yield) Variances
Material Mix Variance = [(Actual Individual Quantity Used x Individual Standard
Price)] - (Actual Total Quantity Used x Weighted Standard
Input Price)
Material Yield Variance = (Actual Total Quantity Used - Standard Input for Actual
Total Output) x Weighted Standard Input Price
Illustrative Problem # 1:
Given:
• Standard material quantity = 4 ft2/unit Standard input
• Standard cost of material = Php 0.65/ft2 Standard price
• Actual production = 1,000 units Actual output
• Actual material used = 4,300 ft2 Actual input
• Actual cost of material = Php 0.70/ft2 Actual price

Find:
(a) Material Price Variance
(b) Material Efficiency Variance
Illustrative Problem # 1:
Given:
• Standard material quantity = 4 ft2/unit Standard input
• Standard cost of material = Php 0.65/ft2 Standard price
• Actual production = 1,000 units Actual output
• Actual material used = 4,300 ft2 Actual input
• Actual cost of material = Php 0.70/ft2 Actual price

(a) Material Price Variance

= (4,300ft2 * Php 0.70/ft2) – (4,300ft2 * Php 0.65/ft2)
= + Php 215 (U)
Illustrative Problem # 1:
Given:
• Standard material quantity = 4 ft2/unit Standard input
• Standard cost of material = Php 0.65/ft2 Standard price
• Actual production = 1,000 units Actual output
• Actual material used = 4,300 ft2 Actual input
• Actual cost of material = Php 0.70/ft2 Actual price

(b) Material Efficiency Variance

= (4,300ft2 * Php 0.65/ft2) – (4ft2/unit * 1,000units * Php 0.65/ft2)
= + Php 195 (U)
Direct Labor Variances
1. Labor Rate Variance – the difference between actual
labor rate and budgeted labor rate multiplied by the
actual labor hours.

2. Labor Efficiency (or Usage) Variance – the difference

between the actual labor hours used and the budgeted
labor hours that should have been used, multiplied by the
budgeted rate.
Direct Labor Variances
• Labor Rate Variance

• Labor Efficiency/Usage Variance

*Reasons for having exceeding hours of production:

- Overtime
- Rejects
- Unskilled workers
 STANDARD COSTING FORMULA SHEET

A. Material/Labor Variances:
Actual Costs Flexible Flexible
Incurred: Budget: Budget:
Standard Input
Allowed for
Actual Input x Actual Output x
Actual Input x Standard Standard
Actual Price/Rate Price/Rate Price/Rate

Price/Rate Variance Efficiency Variance

Flexible Budget Variance

C. Material/Labor Efficiency (Mix and Yield) Variances
Material Mix Variance = [(Actual Individual Quantity Used x Individual Standard
Price)] - (Actual Total Quantity Used x Weighted Standard
Input Price)
Material Yield Variance = (Actual Total Quantity Used - Standard Input for Actual
Total Output) x Weighted Standard Input Price
Labor Mix Variance = [(Actual Individual Hours Used x Individual Standard
Rate)] - (Actual Total Hours Used x Weighted Standard
Rate)
Labor Yield Variance = (Actual Input Hours - Standard Hours for Actual Output) x
Weighted Standard Rate
Illustrative Problem # 2:
Given:
• Standard labor hours = 20 hours/unit Standard input
• Standard cost of labor = $ 2.00/hour Standard rate
• Actual production = 1,000 units Actual output
• Actual labor hours = 20,526 hours Actual input
• Actual labor rate = $ 1.90/hour Actual rate

Find:
(a) Labor Rate Variance
(b) Labor Efficiency Variance
Illustrative Problem # 2:
Given:
• Standard labor hours = 20 hours/unit Standard input
• Standard cost of labor = $ 2.00/hour Standard rate
• Actual production = 1,000 units Actual output
• Actual labor hours = 20,526 hours Actual input
• Actual labor rate = $ 1.90/hour Actual rate

(a) Labor Rate Variance

= (20,526 hours * $1.90/hour) – (20,526 hours * $2.00/hour)
= - $2,052.60 (F)
Illustrative Problem # 2:
Given:
• Standard labor hours = 20 hours/unit Standard input
• Standard cost of labor = $ 2.00/hour Standard rate
• Actual production = 1,000 units Actual output
• Actual labor hours = 20,526 hours Actual input
• Actual labor rate = $ 1.90/hour Actual rate

(b) Labor Efficiency Variance

= (20,526 hours * $2.00/hour) – (20hours/unit * 1,000units * $2.00/hour)
= + $1,052 (U)
Factory Overhead Variances:
1. FOH Spending Variance – the difference between
actual expenses incurred and the budget allowance
based on actual hours worked.

2. FOH Efficiency Variance – the difference between

actual hours worked and the standard hours that should
have been worked, multiplied by the standard overhead
rate.

3. FOH Production Volume Variance – indicates the cost

of capacity available but not utilized.
Factory Overhead Variances
• FOH Spending Variance
• FOH Efficiency Variance
• FOH Production Volume Variance
Breakdown of the total:
Variable OH + Fixed OH Total budgeted OH
(actual) (charge/budget)

FOH Control FOH Applied

Factory Overhead Variances

3-variance method

2-variance method
B. Factory Overhead Variances:
Flexible Flexible Budget: Applied:
Budget: Standard Input Standard Input
Allowed for Allowed for
Actual Actual
Actual Costs Actual Input x Output x Output x
Incurred Standard Rate Standard Rate Standard Rate

Spending Variance Efficiency Variance Production Volume

Variance

Flexible Budget Variance Production Volume

Variance

Total Overhead Variance

Illustrative Problem # 3:
Standard output
Cost application base
Variable standard rate

Total standard rate

Actual OH cost
Standard input for actual output Actual input

FOH Control
= variable + fixed
FOH Applied
= total
Two-variance method:
Flexible Budget Variance
= P7,384 variable OH fixed OH
– [(3,400hrs*P1.20/hr)+P3,200]
= + P104 (U)
Production Volume Variance
= [(3,400hrs*P1.20/hr)+P3,200]
– (3,400hrs*P2.00/hr)
= + P480 (U)
Illustrative Problem # 3:
Standard output
Cost application base
Variable standard rate

Total standard rate

Actual OH cost
Standard input for actual output Actual input

FOH Control FOH Applied

= variable + fixed = total Three-variance method:
Spending Variance
FOH std. rate = P7,384
= variable + fixed – [(3,475hrs*P1.20/hr)+P3,200]
= + P14 (U)
Efficiency Variance
= [(3,475hrs*P1.20/hr)+P3,200]
– [(3,400hrs*P1.20/hr)+P3,200]
= + P90 (U)
Production Volume Variance
= + P480 (U)
Illustrative Problem # 3:
Standard output
Cost application base
Variable standard rate

Total standard rate

Actual OH cost
Standard input for actual output Actual input

FOH Control FOH Applied

= variable + fixed = total

Total OH Variance
= P7,384 – (3,400hrs*P2.00/hr)
= + P584 (U)
 Illustrative Problem # 4:
Individual standard prices

Weighted standard
input price (average)
= P300/1,200lbs

Actual prices

Standard
Actual input × rate
labor rate
(labor)

Actual OH costs Standard FOH

Actual output rates (total, fixed
and variable)

Material
Purchase-Price
Variance
Illustrative Problem # 4:
Material Price Variance
(The materials price variance is assumed to be realized at the time of purchase.)

Qty.
Materials Purchased Actual Price Std. Price Variance
Gumbase 162,000 lbs P 0.24/lb P 0.25/lb - P 1,620
Corn syrup 30,000 lbs P 0.42/lb P 0.40/lb + P 600
Sugar 32,000 lbs P 0.11/lb P 0.10/lb + P 320
Material Purchase-Price Variance = - P700 (F)

(162,000 x 0.24) – (162,000 x 0.25 = -1,620

(30,000 x 0.42) – (30,000 x 0.40) = 600
(32,000 x 0.11) – (32,000 x 0.10) = 320
Illustrative Problem # 4:
Material Mix Variance

Quantity Used = Beginning Inventory + Purchases – Ending Inventory

Actual Individual Qty. Used
Materials Qty. Used Std. Price × Individual Std. Price

Gumbase 10,000 + 162,000 - 15,000 = 157,000 lbs P 0.25/lb P 39,250

Corn syrup 12,000 + 30,000 - 4,000 = 38,000 lbs P 0.40/lb P 15,200
Sugar 15,000 + 32,000 - 11,000 = 36,000 lbs P 0.10/lb P 3,600
Total Qty. Used = 231,000 lbs
Material Mix Variance = (P 39,250+15,200+3,600) – (231,000lbs*P0.25/lb) = + P 300 (U)
Illustrative Problem # 4:
Material Yield Variance

Actual Total Quantity Used = 231,000

Standard Input for Actual Total Output = ?
Weighted Standard Input Price = P 0.25/lb

Standard Input for Actual Total Output:

Actual Total Output = 200,000 lbs
Given: 1,200 lbs of input are needed to produce 1,000 lbs of output
Unknown: Standard input for Actual Total Output (x)

x = 240,000 lbs of Standard input for actual total output

Material Yield Variance = (231,000lbs – 240,000lbs) * P0.25/lb

= - P 2,250 (F)
Illustrative Problem # 4:
Labor Rate Variance
= P 11,552 – (3,800hrs * P3/hr)
Actual direct labor
hours of 3,800 hours
at P11,552

= + P 152 (U)

Labor Efficiency Variance

= (3,800hrs * P3/hr) – (4,000hrs*P3/hr)
Normal (standard)
= - P 600 (F) OH with 4000
direct labor hours

Standard labor input

for actual output:
 Illustrative Problem # 4:
FOH Variances
Standard FOH rates:
Total = P 5/hr
Fixed = P 3/hr
Variable = P 2/hr
Normal OH = P20,000 (with 4000 hrs)
= (P3/hr*4000) fixed
+ (P2/hr*4000) variable

Hence, standard fixed OH = P12,000

Three-variance method:
Two-variance method: Spending Variance
Flexible Budget Variance = P22,000 – [(3800hrs*P2/hr)+P12,000]
= P22,000 – [(4000hrs*P2/hr)+P12,000] = + P2,400 (U)
= + P2,000 (U) Efficiency Variance
= [(3800hrs*P2/hr)+P12,000]
Production Volume Variance
– [(4000hrs*P2/hr)+P12,000]
= [(4000hrs*P2/hr)+P12,000] = - P400 (F)
– (4000hrs*P5/hr)
Total OH Variance
= P0
= P22,000 – (4000hrs*P5/hr) = + P2,000 (U)
CLASS EXERCISE:
ANSWER NO. 1 AND 4 IN PROBLEM SET
Problem Set # 1:
Actual price
Standard price
Standard input
Actual input
Actual output

Material Price Variance Material Efficiency Variance

= (48,000 * $14) – (48,000 * $12) = (48,000 * $12) – (5 * 10,000 * $12)
= + $96,000 (U) = - $24,000 (F)
Material Flexible-Budget Variance
= (48,000 * $14) – (5 * 10,000 * $12) = + $72,000 (U
Problem Set # 1:
Actual price
Standard price
Standard input
Actual input
Actual output

Labor Rate Variance Labor Efficiency Variance

= (22,000 * $9) – (22,000 * $10) = (22,000 * $10) – (2 * 10,000 * $10)
= - $22,000 (F) = + $20,000 (U)
Labor Flexible-Budget Variance
= (22,000 * $9) – (2 * 10,000 * $10) = - $2,000 (F)
Problem Set # 1:
Actual price
Standard price
Standard input
Actual input
Actual output

Focus on all unfavorable variances (actual > standard):

- Material Price
- Material Flexible Budget
- Labor Efficiency
Problem Set # 4:
Variable OH
Fixed OH

FOH standard rate (total)

Actual OH cost
Standard input
Actual input
for actual output

*FOH standard rate (total) = P18,000/8,000hrs = P2.25/hr

*Actual input = 8,000hrs(125%) = 10,000 hrs

Variable OH rate?
2 unknowns
Fixed OH?

Use 2 equations to solve for the unknowns (i.e. VOH & FOH):
8,000hrs(VOH) + FOH = 18,000
7,200hrs(VOH) + FOH = 16,800
800hrs(VOH) = 1,200
VOH = P1.50/hr FOH = P6,000
 Problem Set # 4:
Variable OH
*FOH standard rate (total) = P2.25/hr Fixed OH
*Actual input = 10,000 hrs
*VOH rate = P1.50/hr
*FOH = P 6,000
FOH standard rate (total)

Actual OH cost
Standard input
Actual input
for actual output

Two-variance method:
Flexible Budget Variance
= P21,120 – [(10,150hrs*P1.50/hr)+P6,000]
= - P105 (F)
Production Volume Variance
= [(10,150hrs*P1.50/hr)+P6,000]
– (10,150hrs*P2.25/hr)
= - P1612.50 (F)
 Problem Set # 4:
Variable OH
*FOH standard rate (total) = P2.25/hr Fixed OH
*Actual input = 10,000 hrs
*VOH rate = P1.50/hr
*FOH = P 6,000
FOH standard rate (total)

Actual OH cost
Standard input
Actual input
for actual output

Three-variance method: Total OH Variance

Spending Variance = P21,120 – (10,150hrs*P2.25/hr)
= P21,120 – [(10,000hrs*P1.50/hr)+P6,000] = - P1,717.50 (F)
= + P120 (U)
Efficiency Variance
= [(10,000hrs*P1.50/hr)+P6,000]
– [(10,150hrs*P1.50/hr)+P6,000]
= - P225 (F)
Production Volume Variance
= - P1612.50 (F)