Standard Costing

& Variances

1
Standard Cost Systems
⚫ Manufacturing
⚫ Service
⚫ Not-for-Profit

⚫ Record standard and actual costs in the

accounting records
Standards
⚫ Standard costs are budgeted costs to
⚫ Manufacture a single unit of product or
⚫ Perform a single service
⚫ To develop standards, identify
⚫ Material and labor types, quantities, and prices
⚫ Overhead types and behavior
Manufacturing Objective

Minimize unit cost while achieving certain

quality specifications.

Input Output
Resources Quality
Material Standards
⚫ Materials used ⚫ From
⚫ Types ⚫ Product specifications,
⚫ Quantity observation, inquiry
⚫ Quality ⚫ Bill of materials
⚫ Price

▪ Balance cost, quality, and projected sales price

Standard
Material = Unit Purchase Price * quantity
Cost
Labor Standards
⚫ Labor used ⚫ From
⚫ Types ⚫ Industrial engineering
⚫ Production, setup, studies including
cleanup, and rework methods-time
⚫ Quantity measurement (MTM),
⚫ Cost time and motion studies,
historical data
⚫ Include wages, payroll
taxes, and fringe ⚫ Operations flow
benefits document
Standard
Labor = Hours * Wage Rate
Cost
Overhead Standards
◼ Variable and fixed manufacturing
overhead
◼ Estimated level of activity
◼ Estimated costs
◼ Predetermined factory overhead
application rates
Standard Cost Card
For one unit of output (a bike)
Standard Direct Material Components
Standard Direct Labor Components
Manufacturing Overhead
Variable Overhead
Fixed Overhead
Variance
▪ Variance is the difference between
an actual cost and a standard cost.
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 Total Variance
Total actual cost incurred minus total standard cost
applied to output produced

Actual price of Standard cost of

actual actual
production input production
output

Total Variance*
*Favorable or unfavorable
 Total Variance
AP x AQ SP x SQ

Total Variance
Inputs Outputs

AP = actual cost/price per unit of materials or hours of

labor
AQ = actual quantity of materials or hours of labor
SP = standard cost/price per unit of materials or
hours of labor
SQ = standard quantity of materials or hours of labor
Price Variance

AP x AQ SP x AQ SP x SQ
Price/Rate
Variance
Total Variance
What What should
was (AP – SP) x AQ* have been
paid paid
*Favorable or unfavorable
Usage Variance

AP x AQ SP x AQ SP x SQ
Usage
Variance
Total Variance
What
was
What should
used (AQ – SQ) x SP* have been
used for the
*Favorable or unfavorable
level of output
Material Price Variance (MPV)

AP x AQ SP x AQ SP x SQ

MPV
Total Variance
What What should
was (AP – SP) x AQ* have been
paid paid
*Favorable or unfavorable
MPV Calculations
⚫ Calculate MPV at
⚫ Point of purchase or

⚫ When materials used

Material Quantity Variance (MQV)

AP x AQ SP x AQ SP x SQ

MQV
What Total Variance
was
used What should
(AQ – SQ) x SP* have been
used for
*Favorable or unfavorable
level of output
Gemini Chemical Industries provides the following
information from their records:
For making 10 kgs. of GEMCO, the standard material
requirement is
Material Quantity Rate per kg.
A 8 units Rs. 6.00
B 4 units Rs. 4.00
During April, 20XX, 1000 kgs of GEMCO were produced.
The actual
consumption of material is as under:
Material Quantity Rate per kg.
A 750 units Rs. 7.00
B 500 units Rs. 5.00
Calculate:
a) Material Cost Variance
b) Material Price Variance
c) Material Usage Variance 21
Material Cost Variance
= Standard Cost – Actual Cost
Material x : Rs.4800 – Rs.5250 = Rs.450 (A)
Material y : Rs 1600 – Rs. 2500 = Rs. 900 (A)
Total Material x and y
= Rs. 450 (A) + Rs. 900 (A) = Rs. 1350 (A)

Material Price Variance

= (Standard Price – Actual Price) × Actual Quantity
Material x = (Rs. 6 – Rs. 7) x 750= Rs. (–1) 750 = Rs.750 (A)
Material y = (Rs. 4 – Rs. 5) × 500 = Rs. 500 (A)
x + y Material = Rs.750 (A) + Rs.500 (A) = Rs. 1250 (A)

Material Usage Variance = (Standard Quantity – Actual Quantity) ×

Standard Price for actual output
= Material x + Material y
=(800 kg. – 750 kg)x Rs. 6 + (400 kg – 500 kg) xRs4
= Rs.300 (F) + Rs.400 (A)
= Rs. 100 (A)
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1) Material Cost Variance = (Standard Quantity - Actual Quantity)
A =(1,60,000 kgs × Rs. 2.50) – (157000 kgs × Rs. 2.40)
= Rs. 400,000 – Rs. 3,76,800 = Rs. 23200 (F)

B = (40,000 kgs × Rs. 4) – (38000 kgs × Rs. 4.20)

= Rs. 160,000 – Rs. 159,600 = Rs. 400 (F)

C = (40,000 kg × Re. 1) – (36000 kgs × Rs. 1.10)

= Rs.40,000 – Rs.39,600 = Rs.400 (F)
M.C.V = Rs. 24000 (F)

2) Material Price Variance = (Standard Price - Actual Price) × Actual

Quantity
Material A = (Rs. 2.50 – Rs. 2.40) × 1,57,000 = Rs. 15,700 (F)
Material B = (Rs. 4.00 – Rs. 4.20) × 38,000 = Rs. 7,600 (A)
Material C = (Rs. 1.00 – Rs. 1.10) × 36,000 = Rs. 3,600 (A)
Total Material Price Variance Rs. 4,500 (F)

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Material Mix Variance: (Revised Standard Mix – Actual Mix) ×
Standard Price
Revised Standard Mix = Standard Material/ Total Standard Materials x Total
Actual Material
or
Total Actual Material × Standard Ratio
A = 800/1200 × 231000 = 1,54,000 kg. or 231000 kg × 4/6 =1,54,000 kg

B = 200/1200 × 231000 = 38,500 kg. or 231000 kg × 1/6 = 38,500 kg

C = 200/1200 ×231000=38,500 [Link] 231000 kg × 1/6 =38,500 kg

Material Mix Variance

Material A = (1,54,000 – 1,57,000) × Rs.2.50 = Rs.7,500 (A)
Material B = (38,500 – 38,000) × Rs.4.00 = Rs.2,000 (F)
Material C = (38,500 – 36,000) × Re. 1.00 = Rs.2,500 (F)
= Rs.3,000 (A)

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Material Yield Variance = (Standard Yield – Actual Yield) x Std. output
Price

where,
Standard Yield = Actual Usage of Material/ Standard Usage per unit of
Output
=231000 kgs / 1.2kg (i.e 1200 kg ÷1000 kg) = 1,92,500 kg.

Std. material cost per unit of output (800*2.5+200*4+200*1)

= Rs. 3000 ÷1000 output = Rs 3 per unit

Material Yield Variance = (Actual Yield – Standard Yield) ×

Standard output price
= (200,000- 192,500) × Rs. 3 = Rs.22,500(F)

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Material Usage Variance = (Standard Quantity for actual output –
Actual Quantity) × Standard Price
Material A = (1,60,000kg – 1,57,000kg) × 2.50 = Rs. 7500 (F)
Material B = (4,00,00 kg – 38,000 kg) × 4.00 = Rs. 8000 (F)
Material C = (4,00,00 kg – 36,000 kg) ×1.00 = Rs. 4000 (F)

The following formulae may be used for verification of material

variance:
1) Material Cost Variance (MCV) = Material Price Variance + Material
Usage Variance
(MPV + MUV)
Rs. 24000 (F) = Rs. 4500 (F) + Rs.19500 (F)
Rs.19500 (F
2) Material Usage Variance (MUV) = Material Mix Variance + Material Yield Variance
(MMV + MYV)
Rs. 19500 (F) = Rs.3000 (A) + Rs.22500 (F)
3) Material Cost Variance = Material Price Variance (MCV) + Material Mix Variance
+ Material Yield Variance (MPV + MMV + MYV)
Rs.24000 (F) = Rs.4500 (F) + Rs.3000(A) + Rs.22500 (F)
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Labor Rate Variance (LRV)

AP x AQ SP x AQ SP x SQ

LRV
Total Variance
What
What should
was (AP – SP) x AQ* have been
paid
paid
*Favorable or unfavorable
Labor Efficiency Variance (LEV)

AP x AQ SP x AQ SP x SQ

LEV
What Total Variance
was
used What should
(AQ – SQ) x SP* have been
used for
*Favorable or unfavorable
level of output
The following information is supplied to you:
Standard time for a month : 4000 Hours
Standard wage rate : Rs. 2.25 per hour
Number of labourers employed : 30
Average working days in a month : 25
No. of hours a worker works per day : 7 hours
Total wage bill in a month : Rs. 13,125
Idle time due to power failure : 100 hours
You are required to calculate the following:
a) Labour Cost Variance
b) Labour Rate Variance
c) Labour Efficiency Variance
d) Labour Idle Time Variance

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Actual time worked and the exact wage rate
will be calculated as follows:
Standard time = 4000 hours
Standard wage rate = Rs. 2.25
Actual time = 30 workers × 25 days × 7 hours
= 5250 hours
= Actual Wage Rate =Total Wage Bill / Actual time
Rs.13125/5250 hours
= Rs.2.50

a) Labour Cost Variance = Standard Labour Cost – Actual Labour Cost

= (Std. Time × Std. Rate) – (Actual time × Actual Rate)

= (4000 hours × Rs. 2.25) – (5250 hours × Rs. 2.50)

= Rs.9000 – Rs. 13125
= Rs. 4125 (A

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b) Labour Rate Variance = Actual Time (Std. Labour Rate – Actual
Labour Rate)
= 5250 hours (Rs. 2.25 – Rs.2.50)
= 5250 × 0.25
= Rs. 1312.50 (A)

c) Labour Efficiency Variance = Standard Labour Rate × (Std. Time –

Actual Time)
= Rs. 2.25 (4000 hours – 5250 hours)
= Rs. 2.25 × 1250 hours
= Rs. 2812.50 (A)

d) Labour Idle Time Variance = Idle Time × Standard Rate

= 100 hours × Rs. 2.25
= Rs. 225 (A)

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Overhead Variances
Variable Overhead Fixed Overhead

Actual variable overhead Actual fixed overhead is

is total of various ledger total of various ledger
accounts accounts

SP = Predetermined SP = Predetermined
variable overhead rate fixed overhead rate
Variable Overhead Variances
Actual Budgeted Applied
VOH VOH VOH
Actual SP x AQ SP x SQ
VOH VOH
Spending Efficiency
For Variance Variance
actual Total VOH Variance What should
hours have been
used used for level
of output
VOH Spending Variance
⚫ Caused by price differences
⚫ Managers have little control over prices
⚫ Caused by shrinkage or waste
⚫ Managers should be held accountable
Fixed Overhead Variances
Actual Budgeted Applied
FOH FOH FOH
SP x SQ
FOH FOH
Spending Volume
Constant Variance Variance
Amount Total FOH Variance What should
have been
used for level
of output
FOH Spending and Volume
Variance
⚫ FOH Spending ⚫ FOH Volume Variance
Variance ⚫ Measures capacity
⚫ Calculate variance for utilization
each component ⚫ Caused by producing at
⚫ Caused by price a level that differs from
differences the capacity level used to
⚫ May reflect compute the
mismanagement of predetermined overhead
resources rate
⚫ Also called the
noncontrollable variance
Alternative Overhead
Variance Approaches

⚫ One variance
⚫ Two variance

⚫ Three variance

⚫ Four variance
One Variance Approach

Actual Standard
OH Cost of
OH
SP x SQ

Total OH Variance
Applied
Overhead
Two Variance Approach

Actual Budgeted OH Standard

OH based on SQ Cost of
OH
SP x SQ
Budget Volume
Variance Variance
Total OH Variance Applied
Overhead
Three Variance Approach
Budgeted OH
Actual Standard
based on based on
OH Actual Inputs Actual Output OH
SP x SQ
OH OH
Spending Efficiency Volume
Variance Variance Variance
Total OH Variance Applied
Overhead
Standard Cost Journal Entries
◼ Variances recorded in accounting system
◼ Favorable variances
❑ Credits
❑ Represent savings in production costs
◼ Unfavorable variances
❑ Debits
❑ Represent excess production costs
◼ Inventories are recorded at standard cost
during the period
Conversion Costs
⚫ Combine direct labor and manufacturing
overhead
⚫ Variances
⚫ Spending variance for overhead
⚫ Efficiency variances for machinery and production
costs
⚫ Volume variances for production
 Material Price, Mix, and Yield
Variances
AM x AM x SM x SM x
AQ x AQ x AQ x SQ x
AP SP SP SP

Material Material Material

Price Mix Yield
Variance Variance Variance
What should
AM—Actual Mix
have been
SM—Standard Mix used for level
of output?
 Labor Rate, Mix, and Yield Variances
AM x AM x SM x SM x
AH x AH x AH x SH x
AR SR SR SR

Labor Labor Labor

Rate Mix Yield
Variance Variance Variance
What should
M—Mix have been
H—Hours used for level
R—Rate of output?
Potential Ethical Issues
⚫ Setting high standards to create favorable variances
⚫ Ignoring effects of one production area on another
⚫ Setting overhead rates too low based on high
production levels to distort inventory cost and
operating income
⚫ Producing inventory only to create a favorable volume
variance
⚫ Not updating standards so that favorable variances
are created
⚫ Using low quality materials or labor to create favorable
variances and low quality products