Standard Costing

Definitions
“Standard/Budgeted Amount” = Set @ beginning of year (in Master Budget)
“Applied/Flexible Overhead” = (Std VOH rate) x (Flexible budget hrs, based on actual production)

Materials Price Variance = AQ(AP – SP)

Quantity Variance = SP(AQ - SQ)

Fixed O/H Volume Variance = Budgeted FOH (master budget) – FOH applied (std FOH rate *std
hours based on actual activity output)
• i.e. -> Measures how actual output compares with what was budgeted

Unfavorable = Dr.
Favorable = Cr.

Big Six Variances (Top > Bottom = Unfavorable)

1. Materials Price Variance (based on purchases)
a. (AQ purch x AP) compared to (AQ purch x SP)

2. Materials Usage Variance

a. (AQ used x SP) compared to (SQ x SP)
b. AQ used = output x DM required per unit

Total Material Variance -> Combine Material Price/Usage

3. Labor Rate (Price) Variance
a. (Act hours worked x AP) compared to (Act hours worked x SP)

4. Labor Efficiency (Usage) Variance

a. (Act hrs worked x SP) compared to (Std hrs scheduled x SP)
b. Std hrs scheduled = (Output x labor hours per unit of output)

Total Labor Variance -> Combine Rate/Efficiency Variances

5. Controllable Factory OH Variance
a. Factory OH is both variable and fixed
b. Factory OH represents all indirect manufacturing costs
c. Flexible Budget = Fixed + (VOH rate * Actual hours)

Two-way Analysis of Factory O/H Example

Controllable O/H Variance (Fixed & Variable)

Actual overhead costs (given) = $16,500

Standard Hours Flexible Budget for OH = (Fixed + VOH rate*units produced)

Volume O/H Variance (Fixed O/H ONLY is under/over applied)
Overhead Applied to WIP = (Predetermined rate * Standard hours that are budgeted)

Three Way Analysis of Overhead Variance

• Spending
• Efficiency
• Volume