PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION

CPA REVIEW

MANAGEMENT ADVISORY SERVICES DR. RAUL C. ADDATU

STANDARD COSTS and VARIANCE ANALYSIS

DEFINITIONS:
STANDARD COSTS are predetermined or target units costs or production which should
be attained under efficient conditions. It is the amount and costs of direct material, direct
labor, and factory overhead required to produce one unit of finished product.
STANDARD COST SYSTEM is an accounting system which uses standard costs rather
than actual costs to account for units as they flow through the manufacturing process.
OBJECTIVES OF A STANDARD COST SYSTEM
1. To help a business operate more effectively and more efficiently.
2. It helps accomplish organization goals by obtaining optimum output from the
inputs available.
USES OF STANDARD COSTING
1. Inventory 4. Budget preparation
2. Planning and controlling costs 5. Motivating employees
3. Measurement of performance
TYPES OF STANDARDS
1. Basic (Fixed) Cost Standards – are standards that are unchanged year after
year.
2. Perfection (Ideal or Theoretical) Cost Standards - are absolute minimum costs
attainable under operating conditions.
3. Current Attainable Cost Standards – standards that can be attained under
efficient operating conditions. It is useful for employee motivation, product
costing and budgeting.
VARIANCE ANALYSIS
Analysis of variances reveals that causes of deviations between standard and
actual costs. This feedback aids in planning future goals, controlling costs and
evaluating performance.
VARIANCES – are the differences between standard and actual costs. A variance is
considered FAVORABLE if actual costs are less than standard costs, and
UNFAVORABLE if actual costs exceed standard costs.
SETTING DIRECTMATERIAL STANDARDS
Standard Quantity
Industrial engineers develop specification for the kinds and quantities of
materials used in producing the goods budgeted. Operation schedules list the
materials and quantities required for the expected volume of production.
Traditionally, quantity standards contained an allowance for waste or shrinkage.
Nowadays, the popular zero defect philosophy does not include an allowance for
waste.
Standard Price
The purchasing department receives the operation schedule and bills of
material established jointly by the engineering department the manufacturing
supervisor and the accountant. This information becomes the basis for the
material price standard. Because the purchasing department agents are
responsible for price variances, they should reflect the study of market conditions,
vendor’s quoted prices and the optimum size of a purchase order. The JUST IN
TIME ( JIT ) management philosophy which many companies adopt, minimizes
inventories, keeping on hand only the amount needed in production until the next
order arrives.

STANDARD COSTS and VARIANCE ANALYSIS Page 1 of 15

SETTING LABOR STANDARDS
Standard Time
Examination of past payroll and production records can reveal the worker-
hours used on various jobs and can help determine standard performance. Time
reports from the workers for a limited period will be a good basis for the standard.
If possible, time and motion study should be the basis for setting time standards.
The time study seeks to develop time standards and piece rates which the average
operator can meet daily.
Standard Labor Rate
Labor rates should be determined by considering the current rates as well
as the competitive markets. The company may use any of the following methods in
determining the labor rate standards:
a. A Company my establish a standard rate for the job; regardless of who
performs the job, the rates stays the same, or
b. A Company may establish a rate for an individual worker and the worker
receives this rate regardless of the work performed.
If labor contracts exist, the wage is relatively fixed and can be used as standard.
SETTING OVERHEAD STANDARDS
Factory overhead cost standards provide a means of allocating factory overhead
to cost inventories for pricing decisions and controlling expenses. A standard cost
system uses budgeted rates based on standards hours or other cost drivers allowed for
actual production.
A capacity level is selected as the volume based or denominator capacity.
Theoretical capacity is rarely chosen because it does not represent attainable level of
performance. Standards set on practical capacity are more like to be attainable level of
performance. Either normal capacity or expected actual capacity is the basis for current
standards.
After selecting the capacity level, costs are allocated on a volume related or non-
volume related base. Commonly used volume-related bases include machine hours,
direct labor-hours, direct labor costs, direct material costs and units of production. An
activity-based costing system uses nonvolume related activities such as number of
scheduled production runs or inspections. After expressing volume based on machine
hours, the number of inspection, or another basis, the factory incurred at this level is
estimated.
OPERATING PERFORMANCE EVALUATION
Analysis of Variances
Basically, the variance or difference between actual costs and standard costs can
be separated and analysed into two components: a price variance and an efficiency
variance.
DIRECT MATERIALS VARIANCE ANALYSIS
The difference between actual costs and standard cost of materials used is called
a material cost variance. This variance is made up of a price variance and a usage or
quantity or efficiency variance.
The possible causes of materials price variance are as follows:
1. Fluctuations in market prices of materials.
2. Purchasing from distant suppliers, which results in additional transportation
costs.
3. Failure to take cash discounts available.
4. Purchasing materials of substandard quality or in uneconomical lots.
5. Unfavorable purchase contract terms.
Responsibility: The Purchasing Department is usually responsible for material price
variances. However, the Production Planning Department could be
responsible for unfavorable price variance occurring (1) because of a
request for rush order due to poor scheduling or (2) when they specify

STANDARD COSTS and VARIANCE ANALYSIS Page 2 of 15

 certain brand-name materials or materials of certain grade or quality
other than those initially included in the bill of materials.
The possible causes of materials quantity or usage variance are as follows:
1. Waste and loss of material in handling and processing.
2. Substitution of defective or non-standard materials.
3. Spoilage or production of excess scrap because of inexperienced workers or
poor supervision.
4. Lack of proper tools or machines.
5. Variation in yields from materials.
Responsibility: Production line supervisors should be held responsible for materials
under their control.
Direct Labor Variance Analysis
Labor cost variance is the difference between actual labor cost and standard labor
cost. This variance may be analysed into two components, namely, the labor rate
variance and the labor usage or efficiency variance.
The possible causes of labor rate variance are as follows:
1. Inexperienced workers hired.
2. Change in labor rate particularly peak season that has not been incorporated in
standard rate.
3. Use of an employee having a wage classification other than that assumed when
the standard for a job was set.
4. Use of a greater number of higher-paid employees in the group than
anticipated.
Responsibility: If production line supervisors have the authority to match workers and
machines to task by hiring the proper grade of labor, line supervisors
should be responsible. They will also be responsible if they control
the wage rate of their labor force. If they do not, the Personnel
Department may be responsible.
The possible causes of labor efficiency variance are as follows:
1. Good or poor training of workers.
2. Poor materials or faulty equipment
3. Good orpoor supervision and scheduling of work
4. Experience or lack of experience on the job
5. Inefficient equipment
6. Machine breakdown
7. Nonstandard materials being used
Responsibility: Production line supervisors should be held responsible for labor
under their control. The Production Planning Department or the
Purchasing Department should be held responsible for any labor
efficiency variance that results from the use of non-standard material.
FACTORY OVERHEAD VARIANCE ANALYSIS
Variable Manufacturing Overhead
Total variance manufacturing overhead variance is the difference between actual
variable overhead and standard variable overhead allowed on actual output. This may be
broken down into:
a) Variable overhead spending variance
b) Variable overhead efficiency variance
The possible causes of variable overhead spending or price/controllable variance are as
follows:
1. Actual costs, for example, machine power, materials handling, supplies were
different from those expected because of fluctuations in market prices or
rates.
2. Increase in energy costs.
3. Waste in using supplies.
4. Avoidable machine breakdowns
STANDARD COSTS and VARIANCE ANALYSIS Page 3 of 15
 5. Wrong grade of indirect material and indirect labor
6. Lack of operators or tools.
Responsibility: Supervisors of cost centers are responsible because they have some
degree of control over these budget or expense factors.

The possible causes of variable overhead efficiency variance are as follows:

This is attributable to efficiency in using the base on which variable overhead is
applied. So that if the basis of the variable overhead application is direct labor hours, the
causes of the labor efficiency variance will also be the causes of the variable overhead
efficiency variance.
Responsibility: Production line supervisors are responsible for this variance. This
variance shows how much of the factory’s capacity has been
consumed or released by off-standard labor performance. If machine-
hours are the basis for applying factory overhead, the variance
measures the efficiency of machine usage.
FIXED MANUFACTURING OVERHEAD VARIANCE ANALYSIS
In variance analysis, fixed manufacturing costs are treated differently from variable
manufacturing costs. It is usually assumed that fixed costs are unchanged when volume
changes, soothe amount budgeted for fixed overhead is the same in both the master and
flexible budgets. This is consistent with the variable costing method of product costing.
There are no input-output-relationships for fixed overhead. The difference between the
actual fixed overhead and the budgeted fixed overhead at normal capacity falls under the
category of a price variance (also called spending or budget variance). While the
difference between the budgeted fixed overhead and applied fixed overhead represents
the volume or capacity variance.
The possible causes of capacity or volume variance are as follows:
1. Poor production scheduling.
2. Unusual machine breakdowns.
3. Storms or strikes.
4. Fluctuations over time.
5. Decrease in customer demand.
6. Excess plant capacity.
7. Shortage of skilled workers.
Responsibility: Line supervisors can control fixed overhead when the costs are
discretionary rather than committed. Top sales executives may be
held responsible if budgeted volume is matched with anticipated long-
run sales. Responsibility usually rests with top management, for the
volume variance represents under-or overutilization of plant and
equipment.

FORMULA 1

Materials Price Variance

Actual Price Pxx
Less: Standard Price xx
Difference in Price Pxx
Multiplied by: Actual Quantity Purchased* xx
Unfavorable (Favorable) Pxx
*Actual quantity used if quantity purchased is not known.
FORMULA 2
Materials Quantity Variance
Actual Quantity Pxx
Less: Standard Quantity xx
Difference in Quantity Pxx
Multiplied by: Standard Price xx
STANDARD COSTS and VARIANCE ANALYSIS Page 4 of 15
 Unfavorable (Favorable) Pxx
When the manufacturing process uses several different direct materials that
are supposed to be combined in a standard proportion, the materials quantity
variance may be broken down into:
a) Materials Mix variance and
b) Materials Yield variance
Materials Mix Variance may be computed as follows:
Actual quantity x Standard Price (per material) Pxx
Less: Total Actual Input x Average Standard Price xx
Unfavorable (Favorable) Pxx
Materials Yield Variance is computed as follows:
Total Actual Input x Average Standard Price Pxx
Less: Standard Quantity x Standard Price (per material) xx
Unfavorable (Favorable) Pxx

FORMULA 3
Labor Rate Variance
Actual Labor Rate Pxx
Less: Standard Labor Rate xx
Difference in Rate Pxx
Multiplied by: Actual Hours xx
Unfavorable (Favorable) Pxx

FORMULA 4
Labor Efficiency or Time Variance
Actual hours Pxx
Less: Standard hours xx
Difference in Hours Pxx
Multiplied by: Standard Labor Rate xx
Unfavorable (Favorable) Pxx
If several different materials are used in manufacturing process, the labor
usage variance may further be analysed into:
a) Labor efficiency variance
b) Labor yield variance
These variances are computed as follows:
Labor Efficiency Variance
Actual Hours x Standard Labor Rate Pxx
Less: Standard Hours based on actual input (SHAI)
x Standard Labor Rate xx
Unfavorable (Favorable) Pxx

Labor Yield Variance

SHAI x Standard Labor Rate Pxx
Less: Standard Hours based on actual output (SHAO)
x Standard Labor Rate xx
Unfavorable (Favorable) Pxx

FORMULA 5
COMBINED MANUFACTURING OVERHEAD (Variable and Fixed) VARIANCE ANALYSIS:
A. If the company is using a flexible budget, the total overhead variances may be
analysed as follows:
I. Under the Two-Variance Method
Controllable Variance
Actual Factory Overhead (AFOH) Pxx
Less: Budget allowed based on Standard Hours (BASH)
STANDARD COSTS and VARIANCE ANALYSIS Page 5 of 15
 Fixed (at normal capacity) Pxx
Variable (Standard Hours* x Variable
overhead rate xx xx
Unfavorable (Favorable) Pxx
Capacity Variance
Budget allowed based on Standard Hours (BASH) Pxx
Less: Standard hours x Standard Overhead Rate (SHSR) xx
Unfavorable (Favorable) Pxx
Total Manufacturing Overhead Variance Pxx

*Standard Hours = Equivalent Production or Allowed hours

based on
actual production x Standard hours per unit.
II. Under the Three-Variance Method
Spending Variance
Actual Factory Overhead (AFOH) Pxx
Less: Budget allowed on actual hours (BAAH)
Fixed (at normal capacity) Pxx
Variable (Actual hours x variable overhead rate xx xx
Unfavorable (Favorable) Pxx
Variable Efficiency Variance
Budget Allowed on Actual Hours (BAAH) Pxx
Less: Budget Allowed on Standard Hours (BASH)
Fixed (at normal capacity) Pxx
Variable (Standard hours x Variable overhead
rate xx xx
Unfavorable (Favorable) Pxx
Volume Variance
Budget Allowed on Standard Hours (BASH) Pxx
Less: Standard hours x Standard Overhead Rate (SHSR) xx
Unfavorable (Favorable) Pxx

Total Overhead Variance Pxx

III.Under the Four-Variance Method

Spending Variance
Actual Factory Overhead (AFOH) Pxx
Less: Budget Allowed based on Actual Hours (BAAH) xx
Unfavorable (Favorable) Pxx
Variable Efficiency Variance
Budget Allowed based on Actual Hours (BAAH) Pxx
Less: Budget Allowed based on Standard Hours (BASH) xx
Unfavorable (Favorable) Pxx
Fixed Efficiency or Effectiveness Variance
Standard Hours Pxx
Less: Actual Hours xx
Unfavorable (Favorable) xx
Multiplied by: Fixed Overhead Rate xx
Unfavorable (Favorable) Pxx
Idle Capacity variance
Normal Capacity Hours Pxx
Less: Actual Hours xx
Unfavorable (Favorable) xx
Multiplied By: Fixed Overhead Rate xx
Unfavorable (Favorable) Pxx
STANDARD COSTS and VARIANCE ANALYSIS Page 6 of 15
 PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION
CPA REVIEW

MANAGEMENT ADVISORY SERVICES

STANDARD COSTS and VARIABLE ANALYSIS DR. RAUL C. ADDATU

STRAIGHT PROBLEMS
PROBLEM 1:
The RCA Household Company has established standard costs for the cabinet
department, in which one size of PX cabinet is made. The standard costs of producing
one of these PX cabinets are shown below:

Standard Cost Card – PX Cabinet

Direct material: Lumber 50 board feet at P4 P200
Direct labor: 8 hours at P10 80
Overhead costs: Variable – 8 hours at P5 40
Fixed – 8 hours at P3 24
Total Standard Unit Cost P344
During June 2004,500 of these cabinets were produced. The cost of operations
during the month are shown below. There are no work-in-process at the beginning and
end of the month.
Direct material purchased: 30,000 board feet at P4.10 P123,000
Direct materials used: 24,000 board feet
Direct labor: 4,200 hours at P9.50 39,900
Overhead Costs: Variable costs 22,000
Fixed costs 11,000
The budgeted overhead for the cabinet department based on normal monthly
activity of 4,500 hours is P36,000 of which P22,500 is variable and P13,500 is fixed
overhead.
REQUIRED: 1. Compute for the following variances for Prime Costs:
a. Direct material price variance
b. Direct material usage variance
c. Direct labor rate variance
d. Direct labor efficiency variance
2. Compute for the Factory Overhead Variance using:
e. Two-way analysis
f. Three-way analysis
g. Four-way analysis: 1) Method 1 2) Method 2
3. Journal entries to record the above information.
PROBLEM 2:
The following events took place at Certified Containers, Inc. during the month of
December:
1. Produced and sold 50,000 plastic water containers at a sales price of P10 each.
(Budgeted sales were 45,000 units at P10.15).
2. Standard variable cost per unit:
Direct materials: 2 lbs. at P1 P2.00
Direct labor: 0.10 hours at P15 1.50
Variable manufacturing overhead: 0.10 hours at P5 0.50
P4.00 per unit
3. Fixed manufacturing overhead cost:
Monthly budget P80,000
4. Actual production costs
Direct materials purchased:
200,000 pounds at P1.20 P240,000

STANDARD COSTS and VARIANCE ANALYSIS Page 7 of 15

 Direct materials used:
110,000 pounds at P1.20 132,000
D8irect labor: 6,000 hours at P14 84,000
Variable overhead 28,000
Fixed overhead 83,000
REQUIRED:
1. Compute the direct materials, labor and variable manufacturing overhead price
and efficiency variances.
2. Compute the fixed manufacturing overhead price (spending) variance.
PROBLEM 3:
VENER Corporation manufactures a product with the following standard costs:
Direct materials – 20 yards at P1.35 per yard P 27
Direct labor – 4 hours at P9.00 per hour 36
Factory overhead – applied at 5/6 of direct labor.
Ratio of variable costs to fixed costs: 2 to 1 30
Standard cost per unit of output P.93
Standards are based on normal monthly production involving 2,400 direct labor
hours (600 units of output). The following information pertains to the month of July 2004:
Direct materials purchased 18,000 yards at P1.38/yard P24,840
Direct materials used 9,500 yards
Direct labor – 2,100 hours at P9.15 per hour P19,215
Actual factory overhead P16,650
Actual units produced 500
REQUIRED:
A. Prepare the following schedules computing:
1) Variable factory overhead rate per direct labor hour.
2) Total fixed factory overhead based on normal activity.
B. Prepare the following schedules for the month of July 2004, indicating whether
each variance is favourable or unfavourable.
1) Materials price variance (based on purchases)
2) Labor rate variance
3) Labor efficiency variance
4) Controllable overhead variance
5) Volume (capacity) overhead variance
PROBLEM 4:
STAR Company uses a standard cost system. Standard costs on a per unit for the
company’s main product, JAM, were as follows:
Materials, 2 kilos at P3.33 per kilo P 6.66
Labor, 1 ½ hours at P6.00 per hour 9.00
Factory overhead (based on normal capacity of 5,000
units, 7,500 labor hours):
Variable portion at P0.20 per hour 0.30
Fixed portion at P0.40 per hour 0.90
Total Standard Cost per Unit P16.56
Actual data for the month:
Materials purchases, 14,000 kilos at P3.30 per kilo.
Production, 6,000 completed units requiring 12,500 kilos material
Actual labor hours, 8,950 hours at P6.00 per hour.
Actual factory overhead, P5,120.
REQUIRED: Prepare an analysis of
a) Direct materials variances
b) Direct labor variances
c) Factory overhead variances (three-variance method)
PROBLEM 5:

STANDARD COSTS and VARIANCE ANALYSIS Page 8 of 15

 The HAPPY MIX Company uses a standard cost system. It manufactures Product
MM which is produced by mixing materials A, B, and C. Materials standards and cost for
the production of 10,0000 units of output are:
Input Quantity: Kilos Unit Cost
Percent
Material A 5,000 P4.30 50%
Material B 4,400 P3.50 40%
Material C 1,100 P2.50 10%
TOTAL 11,000 100%
Total Costs:
Material A (5,000 x P4.30) P23,650
Material B (4,400 x P3.50) 15,400
Material C (1,100 x P2.50) 2,750
Total Costs P41,800
Weighted average standard price based on input (P41,800/11,000) P3.80
Weighted average standard price based on output (41,800/10,000) P4.18
The monthly factory overhead budget for a normal capacity level of 16,500 direct
labor hours is as follows:
Fixed factory overhead P123,750
Variable factory overhead 82,500
To convert 11,000 kilos of materials into 10,000 kilos of finished Product MM
requires 5,000 direct labor hours at P7.50 per hour. Factory overhead is applied on direct
labor hour basis. HAPPY MIX produced 32,000 kilos of Product MM in June and the
following costs were incurred:
Direct labor hours at P7.95 per hour 15,800 hours
Fixed factory overhead P110,750
Variable factory overhead 84,900
Material A Material B Material C
Materials purchased – kilos 20,000 12,000 5,000
Materials requisitioned – kilos 18,700 11,000 4,400
Cost per kilo P 4.40 P 3.70 P2.70
There were no inventories of materials or work-in-process at the beginning of
June. The materials price variance is recognized at the time of purchase.
REQUIRED: Compute for the following:
1) a. Material price variance 2) a. Direct labor rate variance
b. Material mix variance b. Direct labor efficiency variance
c. Material yield variance c. Direct labor yield variance
3) a. Overhead spending variance 4) a. Overhead efficiency
variance
b. Overhead idle capacity variance b. Overhead yield variance
PROBLEM 6:
The CITY Company uses a standard cost system. The standard cost card for one of
its product shows the following material standards:
Materials Kilos x Std. Cost per Kilo = Amount
A 4 P7.00 P28.00
B 1 4.00 5.00
C 5 2.00 10.00
Total Material cost per unit P42.00
The standard 50 kilo mix cost per kilo is P0.84 (42/50 kilos). The standard mix
should produce 40 kilos of finished product, and the standard cost of finished product
per kilo is P1.05 (P42/40 kilos). Materials of 250,000 kilos were used as follows:
Material A 115,000 kilos at P8.00
Material B 25,000 kilos at P3.50
Material C 110,000 kilos at P2.50
The output of the finished product was 195,000 kilos.
STANDARD COSTS and VARIANCE ANALYSIS Page 9 of 15
REQUIRED: Prepare an analysis showing
a. Material price variance
b. Material mix variance
c. Material yield variance

MULTIPLE CHOICE PROBLEMS

1. SOL Company had budgeted 50,000 units of output using 50,000 units of raw
materials at a total material cost of P100,000. Actual output was 50,000 units of
product that require 45,000 units of raw materials at a cost of P2.10 per unit. The
direct-material price variance and usage variance are:
Price Usage__
a. P 4,500 UF P10,000 F
b. P 4,500 F P10,500 F
c. P 5,000 UF P10,500 UF
d. P10,000 F P 4,500 UF
2. Information on SHANE Company’s direct labor costs for May 2004 is as follows:

Standard direct labor rate P 6.00

Actual direct labor rate 5.80
Standard direct labor hours 20,000
Actual direct labor hours 21,000
Direct labor rate variance-unfavorable P 4,200
What is SHANE’s total direct labor payroll for May 2004?
a. P116,000 c. P120,000
b. P117,600 d. P121,800
3. Information on DEE Company’s direct labor costs for the month of September 2004
is as follows:
Actual direct labor hours 34,500
Standard direct labor hours 35,000
Total direct labor payroll P241,500
Direct labor efficiency variance-favorable P 3,200
What is Dee’s direct labor rate variance?
a. P17,250 UF c. P21,000 UF
b. P20,700 UF d. P21,000 F
4. During March 2004, BATA Company’s direct materials costs for the manufacture of
Product T were as follows:
Actual unit purchase price P6.50
Standard quantity allowed for actual production 2,100
Quantity purchased and used for actual production 2,300
Standard unit price P6.25
The material usage variance for March 2004 was
a. P1,250 UF c. P1,300 UF
b. P1,250 F d. P1,300 F
5. CATHY Company’s direct labor costs for the month of March 2004 were as follows:
Standard direct labor hours 42,000
Actual direct labor hours 40,000
Direct labor rate variance-favorable P8,400
Standard direct labor rate per hour P 6.30
What was CATHY’s total direct labor payroll for March 2004?
a. P243,600 c. P260,400
b. P256,200 d. P2763
6. MYE Company installs shingle roofs on residential houses. The standard material
cost for a Type R house is P1,250 based on 1,000 units at a cost of P1.25 each.
During April 2004, MYE installed roofs on 20 type R houses using 22,000 units of

STANDARD COSTS and VARIANCE ANALYSIS Page 10 of 15

 material at a cost of P1.20 per unit, and a total cost of P26,400. What is MYE’s
material price variance for April 2004?
a. P1,000 Favorable c. P1,400 Unfavorable
b. P1,100 Favorable d. P2,500 Unfavorable
7. Information on RCA Company’s direct labor cost is as follows:
Standard direct labor rate P 3.75
Actual direct labor rate P 3.50
Standard direct labor hours 10,000
Direct labor efficiency variance-unfavorable P4,200
What were the actual hours worked, rounded to the nearest hour?
a. 10,174 c. 11,200
b. 11,120 d. 11,914
8. Information on JFK Company’s direct materials costs is as follows:
Standard unit price P3.60
Actual quantity purchased 1,600
Standard quantity allowed for actual production 1,450
Materials purchase price variance-favorable P 240
What was the actual purchase price per unit, rounded to the nearest centavo?
a. P3.06 c. P3.45
b. P3.11 d. P3.75
9. Information on LYN Company’s direct material cost is as follows:
Actual units of direct material used 20,000
Actual direct material costs P40,000
Standard price per unit 2.10
Direct material efficiency variance-favorable P 3,000
What was the company’s direct material price variance?
a. P1,000 F c. P2,000 F
b. P1,000 UF d. P2,000 UF
10. LOVE Corporation uses a standard cost system. Direct labor information for
Product C for October 2004 is as follows:
Standard rate per hour P 6.00
Actual rate paid 6.10
Standard hours allowed for actual production 1,500
Direct labor efficiency variance-unfavorable P 600
What are the actual hours worked?
a. 1,400 c. 1,598
b. 1,402 d. 1,600
Items 11 and 12 are based on the following information:
DISCOVERY Company uses a standard cost system in accounting for its
manufacturing costs. Data on direct labor costs are given below:
Standard direct labor hours 30,000
Actual direct labor hours 29,000
Direct labor efficiency variance – favourable P 4,000
Direct labor rate variance – favourable P 5,800
Total payroll P110,200
11. What was DISCOVERY’s actual direct labor rate?
a. P3.60 c. P4.00
b. P3.80 d. P5.80
12. What was DISCOVERY’s standard direct labor rate?
a. P3.54 c. P4.00
b. P3.80 d. P5.80
13. Information on ALEX’s direct labor cost for the month of October 2004 is as
follows:
Actual direct labor rate P 7.50
Standard direct labor hours allowed 11,000
STANDARD COSTS and VARIANCE ANALYSIS Page 11 of 15
 Actual direct labor hours 10,000
Direct labor rate variance – favourable P5,500
What was the standard direct labor rate in effect for the month of October 2004?
a. P6.95 c. P7.00
b. P8.00 d. P8.05
14. The following pertains to BABES Company’s direct labor for September 2004:
Standard direct labor hours 21,000
Actual direct labor hours 20,000
Favorable direct labor rate variance P8,400
Standard direct labor rate P 6.30
What was BABES’s actual direct labor costs for September 2004?
a. P117,600 c. P134,000
b. P118,000 d. P134,400
15. Information on RJ Co.’s direct material costs for May 2004 is as follows:
Actual quantity of direct materials purchased and used in pounds 30,000
Actual cost of direct materials P84,000
Unfavorable materials usage variance P 3,000
Standard quantity of direct materials allowed for May production 29,000
For the month of May, what was RJ’s direct material price variance?
a. P2,800 F c. P6,000 UF
b. P2,800 UF d. P6,000 F
16. FUNNY Company uses a flexible budget system. It operated at 80% of capacity
during 2004, but applied factory overhead based on the 90% capacity level. The
following data were prepared for 2004:
Percent of Capacity
80% 90%__
Direct labor hours 24,000 27,000
Variable factory overhead P 48,000 P 54,000
Fixed factory overhead P108,000 P108,000
Total overhead rate per direct labor hour P6.50 P6.00
Assuming that actual factory overhead was equal to the budgeted amount for the
attained capacity, what is the amount of overhead variance for the year?
a. P6,000 over c. P12,000 over
b. P6,000 under d. P12,000 under
17. MIKE Company had total under-applied overhead of P15,000. Additional
information is as follows:
Variable Overhead:
Applied based on standard direct labor hours allowed P42,000
Budgeted based on standard direct labor hours 38,000
Fixed Overhead:
Applied based on standard direct labor hours allowed 30,000
Budgeted based on standard direct labor hours 27,000
What is the actual total overhead?
a. P50,000 c. P80,000
b. P57,000 d. P87,000
18. Information on CEEJAY Company’s overhead costs for the month of October 2004
is as follows:
Budgeted fixed overhead P 75,000
Standard fixed overhead rate per direct labor hour P 3.00
Standard variable overhead rate per direct labor hour P 6.00
Standard direct labor hours allowed for actual output 24,000
Actual overhead incurred P220,000
CEEJAY has a standard absorption and flexible budgeting system, and uses the
two-variance method for overhead variances. The volume (denominator) variance
for October 2004 is:
STANDARD COSTS and VARIANCE ANALYSIS Page 12 of 15
 a. P3,000 UF c. P4,000 UF
b. P3,000 F d. P4,000 F
19. MYLENE Company manufactures tables with vinyl tops. The standard material cost
for the vinyl used per Type R table is P7.80 based on six square feet of vinyl at a
cost of P1.30 per square foot. A production run of 1,000 tables in October 2004
resulted in usage of 6,400 square feet of vinyl at a cost of P1.20 per square foot, a
total cost of P7,680.
The usage variance resulting from the above production is:
a. P120 F c. P480 UF
b. P520 UF d. P640 F
20. EDEN Company has standard cost system and uses the two-way analysis of
overhead variances.
Selected data for September 2004 production activity is as follows:
Budgeted fixed factory overhead costs P 64,000
Actual factory overhead P230,000
Variable overhead rate per direct labor hour P 5.00
Standard direct labor hours 32,000
Actual direct labor hours 33,000
The budget (controllable) variance for September 2004 is:
a. P1,000 F c. P6,000 F
b. P1,000 UF d. P6,000 UF
21. Information ALAB Company’s overhead costs is as follows:
Actual variable overhead P73,000
Actual fixed overhead P17,000
Standard hours allowed for actual production 32,000
Standard variable overhead rate per direct labor hour P 2.50
Standard fixed overhead rate per direct labor hour P 0.50
What is the total overhead variance?
a. P1,000 UF c. P6,000 UF
b. P6,000 F d. P7,000 F
22. Information on CASEY Company’s overhead costs is as follows:
Standard applied overhead P80,000
Budgeted overhead based on standard hours allowed P84,000
Budgeted overhead based on actual hours allowed P83,000
Actual total overhead P86,000
What is the total overhead variance?
a. P2,000 UF c. P4,000 F
b. P3,000 F d. P6,000 UF
23. LAZY, Inc. uses a standard cost system. Overhead cost information for Product
COR for the month of October is as follows:
Total overhead cost incurred P12,600
Fixed overhead budgeted P 3,300
Total standard overhead rate per direct labor hour 4.00
Variable overhead rate per direct labor hour 3.00
Standard hours allowed for actual production 3,500
What is the overall (net) overhead variance?
a. P1,200 F c. P1,400 F
b. P1,200 UF d. P1,400 UF
Items 24 and 25 are based on the following information:
BETTY Company’s budgeted fixed factory overhead costs are P50,000 per month
plus a variable factory overhead rate of P4.00 per direct labor hour. The standard direct
labor hours allowed for October production were 18,000. An analysis of the factory
overhead indicates that, in October, BETTY had an unfavourable controllable variance of
P1,000 and a favourable volume variance of P500. BETTY uses a two-way analysis for
factory overhead variances.
STANDARD COSTS and VARIANCE ANALYSIS Page 13 of 15
24. The actual factory overhead incurred in October is:
a. P121,000 c. P122,500
b. P122,000 d. P123,000
25. The applied factory overhead in October is:
a. P121,000 c. P122,500
b. P122,000 d. P123,500
26. The following information is available from the BONSAI Company:
Actual factory overhead P15,000
Actual fixed overhead P 7,200
Budgeted fixed overhead P 7,000
Actual hours 3,500
Standard hours 3,800
Variable overhead rate per direct labor hour P 2.50
Assuming that BONSAI uses a three-way analysis of overhead variances, what is
the spending variance?
a. P750 F c. P 950 F
b. P750 UF d. P1,500 UF
Items 27, 28 and 29 are based on the following information:
The data below relate to the month of September 2004 for UNANO, Inc. which uses a
standard cost system:
Actual total direct labor P43,400
Actual hours used 14,000
Standard hours allowed for good output 15,000
Direct labor rate variance – debit P 1,400
Actual total overhead P32,000
Budgeted fixed costs P 9,000
“Normal” activity in hours 12,000
Standard overhead rate P 2.25
UNANO uses a two-way analysis of overhead variances: Controllable and Volume.
27. What was UNANO’s direct labor (usage) efficiency variance for September 2004?
a. P3,000 F c. P3,200 F
b. P3,000 UF d. P3,200 UF
28. What was UNANO’s controllable variance for September 2004?
a. P500 F c. P2,250 F
b. P500 UF d. P2,250 UF
29. What was UNANO’s volume variance for September 2004?
a. P500 F c. P2,250 F
b. P500 UF d. P2,250 UF
30. The following information relates to a given department of YUM Company for the
fourth quarter of 2004:
Actual total overhead (Fixed plus Variable) P178,500
Budget formula P110,000 plus P.50 per hour
Total factory overhead application rate P1.50 per hour
Spending variance – unfavorable P 8,000
Volume variance – favorable P 5,000
The total overhead variance is divided into 3 variances: Spending, Efficiency and
Volume.
What were the actual hours worked in this during the quarter?
a. 110,000 c. 137,000
b. 121,000 d. 153,000
31. MARIA Company uses a two-way analysis of overhead variances. Selected data for
September 2004 production activity are as follows:
Actual variable factory overhead incurred P196,000
Variable overhead rate per direct labor hour P 6.00
Standard direct labor hours 33,000
STANDARD COSTS and VARIANCE ANALYSIS Page 14 of 15
 Actual direct labor hours 32,000
Assuming that budgeted fixed overhead costs are equal to actual fixed costs, the
controllable variance for September 2004 is:
a. P2,000 F c. P4,000 F
b. P4,000 UF d. P6,000 F
32. MANNY Company uses a standard cost system and prepared the following budget
at normal capacity for the month of October 2004 :
Direct labor hours 24,000
Variable factory overhead P 48,000
Fixed factory overhead P108,000
Total factory overhead rate per direct labor hour P 6.50
Actual data for October 2004 were as follows:
Direct labor hours worked 22,000
Total factory overhead P147,000
Standard direct labor hours allowed for capacity attained 21,000
Using the two-way analysis of overhead variances, what is the controllable
variance for the month of October 2004:
a. P3,000 F c. P 9,000 F
b. P5,000 F d. P10,500 UF
Items 33 and 34 are based on the following information:
Based on a monthly normal volume of 50,000 units (100,000 direct labor hours),
RANDY Co.’s standard cost system contains the following overhead costs:
Variable P6.00 per unit Fixed P8.00 per unit
The following information pertains to the month of September 2004:
Units actually produced 38,000
Actual direct labor hours worked 80,000
Actual overhead incurred: Variable P250,000
Fixed 384,000
33. For September 2004, the unfavourable variable overhead spending variance was
a. P 6,000 c. P12,000
b. P10,000 d. P22,000
34. For September 2004, the fixed overhead volume variance was
a. P96,000 UF c. P80,000 UF
b. P96,000 F d. P80,000 F
35. UNITY Company uses a standard cost accounting system. The following overhead
costs and production data are available for August 2004:
Standard fixed overhead rate per direct labor hour P 1.00
Standard variable overhead rate per direct labor hour 4.00
Budgeted monthly direct labor hours 40,000
Actual direct labor hours worked 39,500
Standard direct labor allowed for actual output 39,000
Overall factory overhead variance – favourable P 2,000
The applied factory overhead for August 2004 should be:
a. P195,000 c. P197,500
b. P197,000 d. P199,500

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