LESSON 8.
STANDARD COSTING and VARIANCES
STANDARD COST is the predetermined cost of manufacturing a single unit of product during a
specific period
Uses of Standard Cost
1. Cost control. To aid management in the production of a unit at the lowest possible cost,
making sure that the cost is justified given the benefits derived
2. Pricing decision. Standard costing provides a measure of consistency by eliminating
fluctuations in actual cost and establish cost of a product with fair marking for profit
3. Performance appraisal. Standards provide measurements that can be applied uniformly to
all personnel being evaluated
4. Costing inventories. Standard cost eliminates complex computation for inventories and cost
of goods sold
5. Planning budgets. Standard cost and budget are both predetermined costs. However,
budget is a total amount while standard is a unit amount.
Possible causes of material price variance
1. Fluctuations in market prices of materials
2. Purchasing from distant suppliers resulting in additional transportation costs
3. Failure to avail of cash discounts
4. Purchasing materials of inferior quality
5. Unfavorable purchase contract terms
Possible causes of material quantity variance
1. Loss of materials due to poor handling
2. Use of defective or substandard materials
3. Lack of proper tools or machines
4. Spoilage or waste due to use of inferior quality materials
5. Variations in yields from materials
Possible causes of labor rate variance
1. Hiring of inexperienced workers
2. Change in labor rate
3. Hiring of workers with pay higher than that assumed when the standard for a job was set
Possible causes of labor efficiency variance
1. Lack of training for workers
2. Poor scheduling of work
3. Lack of supervision
4. Faulty inefficient equipment
5. Lack of experience on the job
6. Machine breakdown
Possible causes of volume variance
1. Poor production scheduling
2. Unusual machine breakdowns
3. Shortage of skilled workers
4. Decrease in demand from customers
5. Unused plant capacity
Types of Variances
Variances are the differences between the total actual cost incurred and the total standard costs
A. Direct Materials Variance. This is usually divided into price & usage/efficiency components
1. Material Price Variance: (Actual Price – Standard Price) x Actual Quantity
2. Material Quantity Variance:(Actual Quantity Used – Standard Quantity) x Standard Price
B. Direct Labor Variance. This arises from two sources
1. Labor Rate Variance: (Actual Rate – Standard Rate) x Actual Hours
2. Labor Efficiency Variance: (Actual Hours – Standard Hours) x Standard Rate
C. Factory Overhead. The procedures for determining the variances are different because
factory overhead includes many types of costs, which are variable as well as fixed.
1. One variance method: actual overhead – applied OH
2. Two variance method: this method is comprised of two components: Controllable and
Volume variance
a. Controllable (spending) variance: actual overhead – budgeted overhead based on std. hrs.
(fixed as budgeted + variable)
b. Volume variance: budgeted overhead on std. hrs. – (standard hrs. x standard overhead rate)
3. Three variance method. This method is comprised of three components with two variations:
1. Spending Variance, Idle Capacity Variance, and Efficiency Variance
2. Spending Variance, Variable Efficiency Variance and Volume Variance
a. Spending variance: (actual overhead – budgeted overhead based on actual hrs.)
b. Efficiency variance = (actual hrs. – standard hours) x standard OH rate
c. Volume variance (idle capacity): budgeted overhead – (std. hrs. x standard OH rate)
4. Four variance method. Under this method, the factory overhead variance is comprised of
four components: Spending variance, Idle Capacity Variance, Variable Efficiency Variance
and Fixed Efficiency Variance
a. Controllable (spending) variance: actual overhead – budgeted-in actual hrs.
b. Variable efficiency variance: (actual hrs. – standard hrs.) x variable standard OH rate
c. Fixed efficiency variance: (actual hrs. – standard hrs.) x fixed standard OH rate
d. Volume variance (idle capacity): budgeted-in actual hrs. – (std. hrs. x standard OH rate)
(illustrative problem de Leon… page 416)
Last month, the following events took place at Shangrila Company
a. Produced 50,000 plastic microcomputer cases
b. Standard variable cost per unit (per case)
Direct materials; 2 pounds at P1.00 P2.00
Direct labor; 0.10 hours at P15 1.50
Variable manufacturing overhead; 0.10 at P5 0.50
c. Fixed manufacturing overhead cost
Monthly budget – for 40,000 cases or 4,000
standard hours P80,000
d. Actual production cost
Direct materials purchased 200,000 lbs. at P1.20 240,000
Direct materials used – 110,000 lbs. at P1.20 132,000
Direct labor – 6,000 hours at P14 84,000
Factory overhead 111,000
Requirements: Compute the materials, labor and overhead variances
1. Materials variances
a. Materials price variance: (AP – SP) x AQ = Materials price variance
(P1.20 – P1.00) x 200,000 = P40,000 (U)
b. Material quantity variance: (AQ – SQ) x SP = Materials quantity variance
(110,000 – 100,000) x P1.00 = P10,000 (U)
2. Labor variances
a. Labor rate variance: (AR – SR) x Actual Hrs. = Labor rate variance
(P14.00 – P15.00) 6,000 = P6,000 (F)
b. Labor efficiency variance: (Actual Hrs. – Standard Hrs.) x Standard Rate
(6,000 – 5,000) P15.00 = P15,000 (U)
3. Factory overhead variance
A. Two-variance method
1. Controllable variance
(Actual OH – Budgeted OH on Std. Hrs.) = controllable variance
(P111,000 – [P80,000] Fixed + {50,000 x .10 x 5}] Variable)
(P111,000 – P105,000) = P6,000 (U)
2. Volume Variance
(Budgeted OH on Std. Hrs. – [Std. Hrs. x Std. OH rate]) = volume variance
(P105,000 – [50,000 x .10 x P25])
(P105,000 – P125,000) = P20,000 (F)
B. Three-variance method
1. Spending variance
(Actual OH – Budgeted OH on Actual Hrs.) = spending variance
(P111,00 - [P80,000] Fixed + [6,000 x P5.00] Variable) = P1,000 (U)
2. Variable Efficiency variance
(Actual Hrs. – Budgeted OH on Std. Hrs.) = variable efficiency variance
(P110,000 – P105,000) = P5,000 (U)
3. Volume Variance
(Budgeted OH on Std. Hrs. - [Std. Hrs. x Std. OH rate]) = volume variance
(P105,000 – P125,000) = P20,000 (F)
C. Four-Variance method
1. Actual variable factory overhead P 36,000
Less: Actual hours x VO rate (6,000 DLHrs. X P5) 30,000
Variable Spending variance - Unfavorable P 6,000
2. Actual hours x variable overhead rate P 30,000
Less: Std. hrs. x VO rate (50,000 x .10 x P5) 25,000
Variable efficiency variance – Unfavorable P 5,000
3. Actual fixed overhead P 75,000
Less: Budgeted fixed overhead at normal capacity 80,000
Fixed spending variance - Favorable (P 5,000)
4. Budgeted fixed overhead at normal capacity P 80,000
Less: Std. hrs. x Fixed OH rate (5,000 x P20) 100,000
Volume variance - Favorable (P 20,000)
Analysis of Factory Overhead
One-factor Two-factor
Actual factory overhead P111,000 Controllable variance Volume variance
Less: Applied overhead 125,000 P 6,000 U (P20,000) F
Total variance (F) (P 14,000)
Total overhead variance (P 14,000) F
Three-factor
Spending variance Efficiency variance Volume variance
P 1,000 U P 5,000 U (P 20,000) F
Total overhead variance (P 14,000) F
Four-factor
Variable Spending Variance Fixed Spending Variance Efficiency Variance Volume Variance
P 6,000 U (P 5,000) F P 5,000 U (P20,000) F
Total overhead variance (P 14,000) F
N.B. Take note that the total variances of the one, two, three and four methods are all the
same P14,000 favorable
