MAS_1.2.

3 INTEGRATED REVIEW & REFRESHER IN ACCOUNTANCY

R.D.BALOCATING
UNIVERSITY OF LUZON
COLLEGE OF ACCOUNTANCY

MANAGEMENT ADVISORY SERVICES

STANDARD COSTING

A. Costing Systems
Product Costing System Manufacturing Costs
Direct Materials Direct Labor Overhead
Actual costing system Actual Actual Actual
Normal costing system Actual Actual Budgeted
Standard costing system Standard Standard Standard

B. Development of a Standard Cost System

1. A standard is a benchmark or norm used for planning and control purposes; it is a model or budget against which actual results
are compared and evaluated.
2. A standard cost system is a product costing system that determines product cost by using standards or norms for quantities and/or
prices of component elements; it allows actual costs to be compared against norms for cost control purposes.
3. A standard cost is a budgeted or estimated cost to manufacture a single unit of product or perform a single service.
4. Developing a standard cost involves judgment and practicality in identifying the material and labor types, quantities, and prices
as well as understanding the types of organizational overhead and how they behave.
5. A primary objective in manufacturing a product is to minimize unit cost while achieving certain quality specifications.
6. After management has determined the input resources needed to achieve desired output quality at reasonable cost, it can develop
quantity and price standards.
7. Standards should be developed by a group, composed of representatives from the following areas:
a. cost accounting;
b. industrial engineering;
c. personnel;
d. data processing;
e. purchasing; and
f. management.
8. To ensure credibility of the standards and to motivate people to operate close to the standards as possible, standard-setting
involvement of managers and workers whose performance will be compared to standards is vital.

C. Why Standard Cost Systems are Used?

1. Clerical efficiency – a company that uses standard costs to trace the flow of costs through its accounting system usually discovers
that less clerical time and effort are required than in an actual cost system.
2. Motivation – standards represent a technique of communicating management’s expectations of efficiency to workers.
3. Planning – managers can use currently available standard costs to estimate future quantities and costs.
4. Controlling – the control process begins with the establishment of standards which provide a basis against which actual costs can
be measured so variances may be computed.
a. Variance analysis is the process of categorizing the nature (favorable or unfavorable) of the differences between standard
and actual costs and determining the reasons for those differences.
b. The setting of upper and lower tolerance limits for deviations allows managers to implement the management by exception
concept
5. Decision making – standard cost information availability facilitates many decisions.
6. Performance evaluation – summary variance reports focus attention on the operating performance of subordinate managers,
allowing top managers to determine when costs were and were not controlled by which managers. Top management can then
provide vital feedback to the subordinate managers.

D. Variance Computations
1. A variance is any difference between an actual cost and a standard or budgeted cost.
a. Such a difference is favorable if actual cost is less than standard cost.
b. A variance is unfavorable if actual cost is greater than standard cost.
2. Variance analysis involves the following process:
a. Decide whether the variance is significant.
b. If insignificant, no further investigation is needed.
c. If significant, investigate the cause of the variance and take corrective action if necessary.

E. Types of Variance
1. Generally, there are two factors that cause the variance, the price at which the inputs are purchased and the quantity of inputs
used. Therefore, the variance can be classified as either price variance or usage/quantity variance.
2. The types of variance in each category of manufacturing cost are the following:
MAS_1.2.3 INTEGRATED REVIEW & REFRESHER IN ACCOUNTANCY
R.D.BALOCATING
Variance due to price of input Variance due to quantity of input
Materials: Materials Price Variance Materials Quantity Variance
Labor: Labor Rate Variance Labor Efficiency Variance
Variable Overhead: Variable Overhead Spending Variance Variable Overhead Efficiency Variance
Fixed Overhead: Fixed Overhead Spending Variance Fixed Overhead Volume Variance

F. Variance Formula
1. Materials
a. Purchase Price Variance = (AP – SP) x AQP
b. Price Usage Variance = (AP – SP ) x AQU
c. Quantity Variance / Usage Variance / Materials Efficiency Variance = (AQU – SQ) x SP
Formula a is used when price variance is isolated at the time of purchase. This is the best point of isolating price variance.
Formula b is used when price variance is isolated at the time the materials are issued to production.
AP = Actual Price SP = Standard Price
AQP= Actual Quantity Purchased AQU= Actual Quantity Used SQ= Standard Quantity
Responsibility:
 Responsibility for the materials price variance is usually assigned to the purchasing agent.
 The production manager is usually responsible for materials usage because the production manager can minimize scrap,
waste, and rework in order to meet the standard.
2. Labor
a. Labor rate variance/ Labor price variance = (AR – SR ) x AH
b. Labor time/labor efficiency variance/ labor usage variance= (AH – SH) x SR
c. Actual labor cost (AH X AR) xx
Less: Standard labor cost (SH X SR) xx
Total labor cost variance xx
Labor Rate
Variance

Total Labor
Cost Variance
Labor Efficiency
Variance

AR=Actual Rate SR=Standard Rate AH=Actual Hours SH=Standard hours

Responsibility:
 Responsibility for the labor rate variance is often assigned to the individual, such as the production manager, who decides
how labor will be used.
 Usually production managers are responsible for the direct labor efficiency variance; however, once the cause of the variance
is discovered, responsibility may be assigned elsewhere.

3. Factory Overhead:
Actual FOH xx
Less: Standard FOH* (SH X SOR) xx
Total overhead variance – over / under applied xx

*This is the applied FOH under standard costing. In normal costing, applied FOH is computed as Actual hours x FOH rate.

Two-Variance Analysis:
Actual FOH xx
Less: Budget allowed on SH
Fixed budget xx
Variable (VOR X SH) xx xx
Budget or controllable variance xx

Budget allowed on SH xx
Less: Std. FOH xx
Volume variance xx or (Budgeted Fixed OH – Applied Fixed OH)
MAS_1.2.3 INTEGRATED REVIEW & REFRESHER IN ACCOUNTANCY
R.D.BALOCATING
Three –Variance Analysis:
Actual FOH xx
Less: Budget allowed on AH
Fixed budget xx
Variable (VOR x AH) xx xx
Spending Variance xx

Budget allowed on AH xx
Less: Budget allowed on SH
Fixed xx
Variable (SH X VOR) xx xx
Variable efficiency variance xx or (AH – SH) x VOR

Budget allowed on SH xx
Less : Standard FOH xx
Volume variance xx

Four-Variance Analysis:
Actual variable OH xx
Less: Budget allowed on AH (variable)
(VOR X AH) xx
Variable spending variance xx

Actual fixed OH xx
Less: Budgeted fixed OH xx
Fixed spending variance xx

Variable efficiency variance = Same as three-variance analysis

Volume variance = Same as three-variance analysis
SH = Standard Hour SOR = Standard Overhead Rate VOR = Variable Overhead Rate
Responsibility:
 Price changes of variable overhead items are essentially beyond the control of supervisors; therefore, the variable overhead
spending variance is usually assigned to the production departments.
 If variable overhead costs change in proportion to changes in the base, such as direct labor hours, then responsibility for the
variable overhead efficiency variance should be assigned to the production manager because the production manager has
responsibility for the use of direct labor.

Overhead Variances Analyzed by Behavior:

Total Variable Overhead Variance
Applied variable overhead
Actual variable Variable overhead Variable overhead
overhead rate × Actual hours rate × Standard hours
(VOR × AH) (VOR × SH)

Variable overhead spending variance Variable overhead efficiency variance

Total variable overhead variance
Total Fixed Overhead Variance
Actual fixed overhead Budgeted fixed Applied fixed overhead
overhead (SH × SFxOR)

Fixed overhead spending variance Fixed overhead volume variance

Total fixed overhead variance
G. DISPOSITION OF VARIANCES
1. Close to Cost of Goods Sold if immaterial (all variances)
2. Prorating it among inventories, and Cost of Goods Sold if material.
For materials price variance computed at time of purchase, allocate to:
a. raw materials inventory c. finished goods
b. work in process d. cost of goods sold
For materials price variance computed when materials are issued and all other variances, allocate to:
a. work in process
b. finished goods
c. cost of goods sold
 MAS_1.2.3 INTEGRATED REVIEW & REFRESHER IN ACCOUNTANCY
R.D.BALOCATING
H. Mix and Yield Variances
For some production processes, it may be possible to substitute one direct material input for another or one direct
labor input for another. A mix variance is created whenever the actual mix of inputs differs from the standard mix. A
yield variance occurs whenever the actual output differs from the standard output. For direct materials, the sum of the
mix and yield variance equals the direct materials usage variance. For direct labor, the sum of the mix and yield
variance equals the labor efficiency variance.

AQ of materials used x individual standard price xxx

Less: AQ of materials used x average standard materials price xxx
Materials Mix variance xxx

AQ of materials used x average standard materials cost xxx

Less: Actual output or actual yield x standard material cost per yield xxx
Materials Yield variance xxx
Or Materials yield variance = (Standard yield – Actual yield) x Standard material cost per yield

AH worked x individual standard rate xxx

Less: AH worked x average standard labor rate xxx
Labor Mix variance xxx

AH worked x average standard labor rate xxx

Less: Actual output or actual yield x standard labor cost per yield xxx
Labor Yield variance xxx
Or Labor yield variance = (Standard yield – Actual yield) x Standard labor cost per yield

Multiple Choice:

1. Standard costing will produce the same results as actual or conventional costing when standard cost variances are
distributed to
a. cost of goods sold c. cost of goods sold and inventories
b. an income or expense account d. a balance sheet account

2. Which is an accepted purpose of standard costing?

a. Determine profits c. Control costs
b. Determine “Break – even” production d. Allocate costs with more accuracy

3. To which of the following is a standard cost nearly like?

a. estimated cost b. budgeted cost c. product cost d. period cost

4. A difference between standard costs used for cost control and budgeted costs
a. Can exist because standard cost must be determined after the budget is completed
b. Can exist because standard costs represent what cost should be, whereas budgeted costs represent expected
actual costs
c. Can exist because budgeted cost are historical costs, whereas standard cost are based on engineering studies
d. Cannot exist because they should be the same amounts

5. Which of the following management practices involves concentrating on areas that deserve attention and placing less
attention on areas operating as expected?
a. Management by objectives c. Benchmarking
b. Responsibility accounting d. Management by exception

6. Under a standard cost system, the materials efficiency variances are the responsibility of
a. Production and industrial engineer c. Purchasing and sales
b. Purchasing and industrial engineer d. Sales and industrial engineer

7. A favorable materials price variance coupled with an unfavorable materials usage variance would most likely result
from
a. Machine efficiency problems
b. Product mix production changes
c. The purchase and use of higher than the standard quality materials
 MAS_1.2.3 INTEGRATED REVIEW & REFRESHER IN ACCOUNTANCY
R.D.BALOCATING
d. The purchase of lower than standard quality materials

8. The efficiency variance for either labor or materials can divided into
a. Spending variance and yield variance c. Volume variance and mix variance
b. Yield variance and price variance d. Yield variance and mix variance

9. The labor mix and the labor yield variances together equal the
a. Total variance c. Labor efficiency variance
b. Labor rate variance d. Overhead efficiency variance

10. Kell Company has the following selected debit balance accounts at the end of the current year: Work-in-Process, P100,000;
Finished Goods Inventory, P50,000; Cost of Goods Sold, P150,000; and Factory Overhead, P24,000. If over- or underapplied
factory overhead is disposed of by the allocation method, the amount charged to Cost of Goods Sold will be
a. P6,000 c. P12,000 e. P8,000
b. P24,000 d. P4,000

11. Account balances are as follows:

Manufacturing overhead P120,000 underapplied
Work in process inventory 50,000
Finished goods inventory 150,000
Cost of goods sold 400,000

If underapplied or overapplied overhead is material and is allocated to Work in Process Inventory, Finished Goods Inventory, and
Cost of Goods Sold (based on ending account balances), Cost of Goods Sold after adjustment would have a balance of

a. P720,000 c. P680,000
b. P520,000 d. P480,000

12. The following information is from Trannee Corporation.

Standard quantity Standard price
or hours or rate
Direct materials 5 ounces P3.00
Direct labor 3 hours P5.00
During the month, 12,000 ounces of material were purchased for P3.05 per ounce. Nine thousand ounces of the
material were used to produce 1,700 units of product. The materials price variance is determined at time of purchase.
The materials price variance and quantity variance were:
a. P600 unfavorable and P1,500 favorable, respectively
b. P600 favorable and P1,500 favorable, respectively
c. P600 unfavorable and P1,500 unfavorable, respectively
d. P600 favorable and P1,500 unfavorable, respectively

13. The following information is from Eyesberg Corporation.

Standard quantity Standard price
or hours or rate
Direct materials 5 kilograms P3.00
Direct labor 3 hours P5.00
During the month, 12,000 kilograms of material were purchased for P3.05 per kilogram. All of the material was used
to produce 2,200 units of product. The materials variances are determined at time of issue. The materials price
variance and the materials quantity variance were:
a. P600 unfavorable and P3,000 favorable, respectively
b. P600 favorable and P3,000 favorable, respectively
c. P600 favorable and P3,000 unfavorable, respectively
d. P600 unfavorable and P3,000 unfavorable, respectively

14. The standard cost per board foot of furniture-grade oak lumber is P8. Each table contains 60 board feet. Two hundred
tables were produced with 12,600 board feet of lumber at a standard materials cost of P100,800. The materials quantity
variance was:
a. P4,800 favorable b. P4,800 unfavorable c. P1,680 favorable d. P1,680,unfavorable

15. Information from Treanne Company follows:

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 MAS_1.2.3 INTEGRATED REVIEW & REFRESHER IN ACCOUNTANCY
R.D.BALOCATING
Standard quantity Standard price
or hours or rate
Direct materials 5 tons P3.00
Direct labor 3 hours P5.00
During the month, 6,500 hours of labor were used at P5.20 per hour to produce 2,200 units of product.
The labor rate variance and the labor efficiency variance were:
a. P1,300 unfavorable and P500 favorable, respectively
b. P1,300 favorable and P500 favorable, respectively
c. P1,300 unfavorable and P500 unfavorable, respectively
d. P1,300 favorable and P500 unfavorable, respectively

16. Information from Lucky Co. follows:

Standard quantity Standard price
or hours or rate
Direct labor 3 hours P 5.00
Variable overhead 3 hours P 6.00
During the month, 6,800 hours of labor were used to produce 2,200 units of product. The actual variable overhead
costs were P39,984. The variable overhead spending variance and efficiency variance was:
a. P816 unfavorable and P384 favorable, respectively
b. P816 favorable and P1,200 unfavorable, respectively
c. P816 favorable and P384 unfavorable, respectively
d. P816 unfavorable and P1,200 favorable, respectively

17. Excellent Corporation’s direct labor cost for the month of March were as follows:
Standard direct labors hours 42,000
Actual direct labor hours 40,000
Direct labor rate variance – favorable P8,400.00
Standard direct labor rate per hour P 6.30
What was Excellent’s total direct labor payroll for the month of March?
a. P243,600 b. P252,000 c. P264,600 d. P260,400

18. Kansas Company uses a flexible budgeted system and prepared the following information for the year:
Percent capacity 80% 90%
Direct labor hours 24,000 27,000
Variable factory overhead P 48,000 P 54,000
Fixed factory overhead P108,000.00 P108,000.00
Total factory overhead rate per DLH 6.50 6.00

Kansas’s operated at 80% of capacity during the year but applied factory overhead based on the 90% capacity level.
Assuming that the 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-absorbed b. P6,000 under-absorbed

c. P12,000 over-absorbed d. P12,000 under-absorbed

19. America Company uses a standard cost system and prepared the following budget at normal capacity for the month of
January

Direct labor hours 24,000

Variable factory overhead P 48,000
Fixed factory overhead 108,000
Total factory overhead per DLH 6.50
Actual data for January were as follows
Direct labor hours worked 22,000
Total factory overhead P147,000
Standard DLH allowed for capacity attained 21,000

Using the two-way analysis of overhead variances, what is the budget (controllable) variance for January?
a. P3,000 favorable b. P13,500 unfavorable
c. P9,000 favorable d. P10,500 unfavorable
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R.D.BALOCATING

20. In connection with standard cost system being developed by X Co., the following information is being considered with
regard to standard hours allowed for output of one unit of product:
Average historical performance for the past three years 1.85 hours
Production level to satisfy average consumer demand over a seasonal time span 1.60
Engineering estimates based on attainable performance 1.50
Engineering estimates based on ideal performance 1.25

To measure controllable production inefficiencies, what is the best basis for X Co. to use in establishing standard hours
allowed?
a. 1.25 b. 1.50 c. 1.60 d. 1.85