Chapter 17
Standard Costing: Setting Standards and Analyzing Variances
Discussion Question
1) Standard costs are the predetermined costs of
manufacturing products during a specific period
under current or anticipated operating conditions.
Standards aid in planning and controlling operations.
A few uses of standard costs are: (a) establishing
budgets (b) controlling costs by motivating
employees and measuring efficiencies (c) simplifying
costing procedures and expediting cost reports (d)
assigning costs to materials, work in process, and
finished goods inventories (e) forming the basis for
establishing contract bids and for setting sales prices.
2)
3) To set sales prices, executives need cost
information furnished by the accounting department.
Since standard costs represent the cost that should be
attained in a well managed plant operated at normal
capacity, they are ideally suited for furnishing
information that will enable the sales department to
price products. Budgets are used for planning and
coordinating future activities and for controlling
current activities. When budget figures are based on
standard costs, the accuracy of the resulting budget is
strongly influenced by the reliability of the standard
costs. With standards available, production figures
can be translated into the manufacturing costs.
4) Standards are an integral part of job order and
process cost accumulation, but do not comprise a
system that could be utilized in lieu of one of the
accumulation methods. Costs may be accumulated
with or without the use of standards.
5) Criteria to be used when selecting the operational
activities for which standards are to be set include the
following: (a) The activity should be repetitive in
nature, with the repetition occurring in relatively
short cycles. (b) The input and output (product or
service) of the activity should be measurable and
uniform.
(c) The elements of cost, such as direct materials,
direct labor, and factory overhead, must be defined
clearly at the unit level of activity.
6) Behavioral issues that need to be considered when
selecting the level of performance to be incorporated
into standards include the following: (a) The
standards must be legitimate. The standards need not
reflect the actual cost of a single item or cycle.
However, they ideally will represent the cost that
should be incurred in the production of a given
product or the performance of a given operation. (b)
The standards must be attainable. When the standards
are set too high, the repeated failure to achieve them
will tend to reduce the motivation for attainment. The
converse is also true. Standards that are too loose
represent an invitation to relax. (c) The participant
should have a voice or influence in the establishment
of standards and resulting performance measures.
Involvement in the formulation of standards gives the
participant a greater sense of understanding and
commitment.
7) (a) The role of the accounting department in the
establishment of standards is to determine their
ability to be quantified and to provide dollar values
for specific unit standards. (b) In the establishment of
standards, the role of the department in which the
performance is being measured is to provide
information for realistic standards, and to allow for
subsequent performance evaluation for the purpose of
detecting problems and improving performance. (c)
The role of the industrial engineering department in
the establishment of standards is to provide reliable
measures of physical activities related to the
standards of performance, and to verify the
consistency of the performance between departments.
8) After variances have been determined,
management should: (a) decide whether each
variance is sufficiently significant to require
investigation and explanation (b) investigate and
obtain, from the responsible department head,
explanations of significant variances (c) take
corrective action and recognize and reward desirable
performance, where appropriate (d) revise standards
if needed.
9) (a) Features of tolerance limits include: (1) A
standard cost control system is established,
specifying expected performance levels. (2) An
information system is designed to highlight the area’s
most in need of investigation and possible corrective
action. (3) Variance ranges for areas and items are
computed. Management does not spend time on parts
of the operations that produce satisfactory
performance levels within these ranges. (4)
Management’s attention and efforts are concentrated
on significant variances from expected results, which
signal the presence of unplanned conditions needing
investigation. (b) Tolerance limits have potential
benefits because they may result in more effective
use of management time. The manager’s time is not
wasted on the process of identifying important
problems or in working on unimportant ones. The
manager should be able to concentrate efforts on
important problems, because the technique highlights
them. (c) It may be difficult to determine which
variances are significant. Also, by focusing on
variances above a certain level, other useful
information, such as trends, may not be noticed at an
early stage. If the evaluation system is in any way
directly tied to the variances, subordinates may be
tempted to cover up negative exceptions or not report
them at all. In addition, subordinates may not receive
reinforcement for the reduction and maintenance of
cost levels, but only reprimands for those items
which exceed the range. Subordinate morale may
suffer because of the lack of positive reinforcement
for work well done. Using tolerance limits may also
affect supervisory employees in an unsatisfactory
manner. Supervisors may feel that they are not
getting a complete review of operations because they
are always keying on problems. In addition,
supervisors may think that they are excessively
critical of their subordinates. A negative impact on
supervisory morale may result.
 Exercises
E-1
Given
Standard cost per unit = $ 13.50 / pound
Material purchased = 4,500 pounds
Purchase price/cost = $ 60,975
Actual unit cost = 60,975/4,500 = $ 13.55/pound
Material used = 3,900 pounds
Standard quantity allowed for use = 3,800 pounds
Solutions:
Req. (1) purchase price variance
Quantity (pounds) x $ unit cost = $ Amount
Actual Quantity purchased at actual cost 4,500 x 13.55 = 60,975
Actual Quantity purchased at standard cost 4,500 x 13.50 = 60,750
_______ _______
unfavorable $ 0.05 $ 225

Req. (2) Price Usage Variance

Actual Quantity used at actual cost 3,900 x 13.55 = 52,845
Actual Quantity used at standard cost 3,900 x 13.50 = 52,650
Unfavorable 0.05 195
Req. (3) Quantity Variance

Actual Quantity used at standard cost 3,900 x 13.50 = 52,650

Standard Quantity Allowed at standard cost 3,800 x 13.50 = 51,300

Unfavorable 100 1,350

E-2 Given
Unites produced = 1,200 units

Actual hours/ capacity = 650 hours

Actual total cost = $ 6,435

Actual unit cost = 6,435/650 = $9.9/hour

Standard hours/capacity = 12,000 x ½ = 600 hours

Standard unit cost = 10/unit

Solutions:

Req. (1) Labor rate Variance

Hours x $Rate = $ Amounts

Actual Hours at actual rate 650 x 9.9 = 6,435

Actual hours at standard Rate 650 x 10 = 6,500

Favorable (0.1) (65)

Req. (2) Labor Efficiency Variance

Actual hours at standard Rate 650 x 10 = 6,500

Standard hours at standard Rate 600 x 10 = 6,000

Unfavorable 50 500
E-3 (1) Given ????

Solutions:

Req. (1) purchase price variance

Quantity (pounds) x $ unit cost = $ Amount
Actual Quantity purchased at actual cost 1,500 x 3.80 = 5,700
Actual Quantity purchased at standard cost 1,500 x 4.0 = 6,000
_______ _______
favorable ($ 0.2) ($ 600)

Req. (2) Price Usage Variance

Actual Quantity used at actual cost 1,020 x 3.80 = 3,876
Actual Quantity used at standard cost 1,020 x 4.0 = 4,080
favorable (0.2) (204)
Req. (3) Quantity Variance

Actual Quantity used at standard cost 1,350 x 4.0 = 5,400

Standard Quantity Allowed at standard cost 1,020 x 4.0 = 4,080

Unfavorable 330 1,320

E-3 (2)
Req. (1) Labor rate Variance

Hours x $Rate = $ Amounts

Actual Hours at actual rate 310 x 12.10 = 3,751

Actual hours at standard Rate 310 x 12 = 3,720

Unfavorable (0.1) 31

Req. (2) Labor Efficiency Variance

Actual hours at standard Rate 310 x 12 = 3,720

Standard hours at standard Rate 340 x 12 = 4,080

Favorable 30 (360)

E-4 (two variance) Given

Normal capacity = 12,000 hours

F.O.H Applied Rate = $12.50/hour

Estimated F.O.H

Fixed $96,000

Variable $54,000 (12,000 x 4.5)

$150,000

Variable F.O.H Rate = $4.50/hour

Fixed F.O.H Rate = $8/hour

Actual capacity = 12,500 hours

Actual F.O.H = $166,000

Standard Capacity Allowed = 11,000 hours

E- 4 Solutions:

Overall/total variance

Actual F.O.H $166,000

F.O.H Applied $ 137,500 (11,000 x 12.50)

Unfavorable $28,500

(1) Spending Variance

Actual F.O.H $166,000

Estimated F.O.H

Fixed $ 96,000

Variable (11,000 x 4.50) $ 49,500 $145,500

Unfavorable $20,500

(2) Capacity Variance

Estimated F.O.H $145,500

F.O.H Applied $137,500

Unfavorable $8000

Verification: 28,500 = 20,500 + 8000

E-5 (three variance Method A) Given
Normal capacity = 16,000 hours

F.O.H Applied Rate = $10.40/hour

Estimated F.O.H

Fixed $64,000

Variable $102,400 (16,000 x 6.40)

$166,400

Variable F.O.H Rate = $6.40/hour

Fixed F.O.H Rate = $4/hour

Actual capacity = 15,000 hours

Actual F.O.H = $157,000

Standard Capacity Allowed = 15,300 hours

E-5 Solutions:

Overall/total variance

Actual F.O.H $157,000

F.O.H Applied $ 159120 (153,000 x 10.40)

Favorable ($2,120)

(1) Spending Variance

Actual F.O.H $157,000

Estimated F.O.H

Fixed $ 64,000

Variable (15,000 x 6.40) $ 96,000 $160,000

Favorable ($3,000)
 (2) Capacity Variance

Estimated F.O.H $160,000

F.O.H Applied (15,000 x 10.40) $156,000

Unfavorable $4000

(3) Efficiency Variance

F.O.H Applied at actual Capacity $156,000

F.O.H Applied at standard Allowed Capacity $ 159,120

Favorable ($3,120)

Verification: -2,120 = -3,000 + 4,000 – 3,120

E-6 (Three Variance Method B) Given

Normal capacity = 4,500 hours

F.O.H Applied Rate = $24.80/hour

Estimated F.O.H

Fixed $85,500

Variable $26,100 (4,500 x 5.80)

$111,600

Variable F.O.H Rate = $5.80/hour

Fixed F.O.H Rate = $19/hour

Actual capacity = 4,600 hours

Actual F.O.H = $121,000

Standard Capacity Allowed = 4,200 hours

E-6 Solutions:

Overall/total variance

Actual F.O.H $121,000

F.O.H Applied $ 104160 (4,200 x 24.80)

Unfavorable $16,840

(1) Spending Variance

Actual F.O.H $121,000

Estimated F.O.H

Fixed $ 85,500

Variable (4,600 x 5.80) $ 26,680 $112,180

Unfavorable $8,820

(2) Capacity Variance

Estimated F.O.H

Fixed $ 85,500

Variable (4,200 x 5.80) $ 24,360 $109,860

F.O.H Applied (4,200 x 24.80) $104,160

Unfavorable $5,700

(3) Variable Efficiency Variance

Estimated Variable F.O.H at actual Capacity (4,600 x 5.80) $26,680

Estimated Variable F.O.H at standard Allowed Capacity (4,200 x 5.80) $ 24,360

Unfavorable $2,320

Verification: 16,840 = 8,820+5,700+2,320

E-7 (four Variance) Given
Normal (standard) capacity = 2,000 hours

Estimated F.O.H

Fixed $7,000

Variable $3,000

$10,000

F.O.H Applied Rate = 10,000/2,000 = $5/hour

Variable F.O.H Rate = 3,000/2,000 = $1.50/hour

Fixed F.O.H Rate = 7,000/2,000 = $3.5/hour

Actual capacity = 1,900 hours

Actual F.O.H = $9,750

Standard Capacity Allowed = 2,050 hours

E-7 Solutions:

Overall/total variance

Actual F.O.H $9,750

F.O.H Applied $ 10,250 (2,050 x 5)

Favorable ($500)

(1) Spending Variance

Actual F.O.H $9,750

Estimated F.O.H

Fixed $ 7,000

Variable (1,900 x 1.50) $ 2,850 $9,850

Favorable ($100)
 (2) Variable Efficiency Variance

Estimated Variable F.O.H at actual Capacity (1,900 x 1.50) $2,850

Estimated Variable F.O.H at standard Allowed Capacity (2,050 x 1.50) $ 3,075

Favorable ($225)

(3) Fixed Efficiency Variance

Estimated Fixed F.O.H at actual Capacity (1,900 x 3.50) $6,650

Estimated Fixed F.O.H at standard Allowed Capacity (2,050 x 3.50) $ 7,175

Favorable ($525)

(4) Capacity Variance

Fixed F.O.H at normal Capacity (2,000 x 3.50) $7,000

Fixed F.O.H at actual Capacity (1,900 x 3.50) $ 6,650

Unfavorable $350

Verification: -500 = -100-225-525+350

E-8 (two, three A, Three B and four Variance) Given
Normal (standard) capacity = 80,000 hours

Variable F.O.H Rate = $6/hour

Fixed F.O.H Rate = $3/hour

F.O.H Applied Rate = $6+3 = $9/hour

Estimated F.O.H

Fixed (80,000 x 6) $480,000

Variable (80,000 x 3) $240,000

$720,000

Actual capacity = 77,500 hours

Actual F.O.H = $700,000

Production = 38,000 units

Standard Capacity Allowed = 38,000 x 2 = 76,000 hours

Solutions: (two Variance)

Overall/total variance

Actual F.O.H $700,000

F.O.H Applied $ 684,000 (76,000 x 9)

Unfavorable $16,000
 (1) Spending Variance

Actual F.O.H $700,000

Estimated F.O.H

Fixed $ 480,000

Variable (76,000 x 6) $ 456,000 $936,000

Favorable ($236,000)

(2) Capacity Variance

Estimated F.O.H $936,000

F.O.H Applied $684,000

Unfavorable $,252000

Verification: 16,000 = -236,000 + 252,000

E-9

BENJAMIN PRODUCTS COMPANY

Department 2
Factory Overhead Variance Report
For Month Ending June 30
(1) (2) (3) (4)
Budget Budget Controllable
Allowable Allowance Variance
Normal Standard Actual Unfav. (Fav.)
Capacity Hours Cost (3) – (2)

Direct labor hours 6,000 5,100

Capacity 100% 85%_

Variable factory overhead:

Indirect labor $ 2,400 $ 2,040 $ 2,100 $ 60
Manufacturing supplies 2,100 1,785 1,805 20
Repairs 800 680 650 (30)
Heat, power, and light 100 85 105 20
Total variable cost $ 5,400 $ 4,590 $ 4,660

Fixed factory overhead:

Supervision $ 6,000 $ 6,000 $ 6,200 200
Indirect labor 5,400 5,400 5,400 0
Manufacturing supplies 1,020 1,020 1,020 0
Maintenance 960 960 960 0
Heat, power, and light 120 120 120 0
Machinery depreciation 540 540 540 0
Insurance and taxes 360 360 372 12

Total fixed cost $14,400 $14,400 $14,612 ------

Total factory overhead $19,800 $18,990 $19,272 $282

unfav.

Standard factory overhead chargeable to

work in process (5,100 x$3.30) 16,830
Volume variance $ 2,160 unfav

Reconciliation of variances:
Actual factory overhead $19,272
Standard factory overhead chargeable
to work in process 16,830
Overall factory overhead variance $ 2,442 unfav.
Controllable variance $ 282 unfav.
Volume variance 2,160 unfav.
Overall factory overhead variance $ 2,442 unfav.
E-10

Materials pounds actual cost total amount

per unit

A 230,000 $0.80 $184,000

B 50,000 0.35 17,500

C 220,000 0.25 55,000

Actual cost of materials put in process $256,500

Materials pounds standard cost total amount

Per unit

A 230,000 $0.70 $161,000

B 50,000 0.40 20,000

C 220,000 0.20 44,000

Actual quantity at standard price $225,000

1) Material price usage variance = $256,500 -- $225,000 = $31,500 unfav.

Actual quantity at individual standard material costs $225,000

Less:

Actual quantity at weighted average of standard material cost 210,000

Input (500,000 x $0.42) or output (400,000 x $0.525)

2) Material mix variance $ 15,000 unfav.

Actual quantity at weighted average of standard material cost $ 210,000

Less:

Actual output quantity at standard material costs 204,750

(390,000 x $0.525)

3) Material yield variance $5,250 unfav.

E-11

1) Material Price Variance

Ingredients pounds actual cost standard cost material price

Variance

Cocoa beans 225,000 $95,625 $101,250 $(5,625)

Milk 14,00,000 746,200 700,000 46,200

Sugar 250,000 60,000 62,500 (2,500)

18,75,00 $901,825 $863,750 $38,075 unfav.

2) Materials Mix variance

Ingredients actual Q standard Q difference standard cost material

Cost per

pound mix variance

Cocoa beans 225,000 300,000 (75,000) $0.45 $(33,750)

Milk 14,00,000 13,87,500 12,500 0.50 6,250

Sugar 250,000 187,500 62,500 0.25 15,625

18,75,000 18,75,000 $(11,875) fav.

3) Material yield variance

Input (18,75,00 pounds) 375 batches

Output (given) 387_______

Material yield gain (12) Batches @ $2,335 per batch

Material yield variance $(28,020) fav.

Conclusion Favorable Unfavorable

Material price variance $38,075

Material mix variance $(11,875)

Material yield variance (28,020)

$(39,895) $38,075

Net variance = $(1,820) fav.

E-12

Labor rate and efficiency variance for each class

Labor actual direct actual direct standard direct per hour rate
Class labor hours labor rate labor rate rate variance variance
Per hour per hour

III 550 $8.50 $8 $0.50 $275

II 650 7.50 7 0.50 325

I 375 5.40 5 0.40 150

Direct labor rate variance $750 Unfav.

Labor actual direct standard direct direct standard direct efficiency

Class labor hours labor hour labor hour labor rate per hour variance

Allowed variance

III 550 500 50 $8 $400

II 650 500 150 7 1050

I 375 500 (125) 5 (625)

Direct labor efficiency variance $825 unfav.

2) Labor Mix and yield Variance

Labor standard direct x standard direct = standard direct

Class labor rate labor hours labor hours

Per hour allowed for output cost

III $8 500 $4,000

II 7 500 3,500

I 5 500 2,500

1,500 $10,000

Weighted average standard DLH rate: $10,000/1,500 = $6.66667

Actual DLH at standard DLH rates:

Labor class

III (550 x $8) = $4,400

II (650 x 7) = 4,550

I (375 x 5) = 1,875 $10,825

Actual DLH at weighted average

Standard DLH rate (1,575 x $6.66667) 10,500

Direct labor mix variance $ 325 unfav.

Actual DLH at weighted average

Standard DLH rate $10,500

Standard DLH at weighted average

Standard DLH rate (1,500 x $6.66667) 10,000

Direct labor yield variance $ 500 unfav.

PROBLEMS

P-1 (1) Factory overhead per unit:

Variable ($30 × 2/3) $20

Fixed ($30 × 1/3) 10
$30
Variable factory overhead per unit = $20
Direct labor hours per unit   

= $5 variable overhead rate per direct labor hour

Normal capacity direct labor hours (2,400) × Fixed factory overhead rate per direct labor
hour ($10 ÷ 4) = 2,400 × $2.50 = $6,000 fixed factory overhead based on normal
monthly capacity.

(2) Yards × Unit Cost = Amount

Actual quantity purchased 18,000 $1.38 actual $ 24,840
Actual quantity purchased 18,000 1.35 standard 24,300
Materials purchase price
Variance 18,000 $ .03 $ 540 unfav.

Actual quantity used 9,500 $1.35 standard $12,825

Standard quantity allowed 10,000 1.35 standard 13,500
Materials quantity variance (500) 1.35 standard $ (675) fav.

Hours × Rate = Amount

Actual hours worked 2,100 $9.15 actual $19,215
Actual hours worked 2,100 9.00 standard 18,900
Labor rate variance 2,100 $ .15 $ 315 unfav

Actual hours worked 2,100 $9.00 standard $18,900

Standard hours allowed 2,000 9.00 standard 18,000
Labor efficiency variance 100 9.00 standard $ 900 unfav.

Actual factory overhead $16,650

Budget allowance based on standard hours allowed:
Variable overhead (2,000 standard hours allowed
× $5 variable overhead rate) $10,000
Fixed overhead budgeted 6,000 16,000
Controllable variance $ 650 unfav.

Budget allowance based on standard hours allowed $16,000

Overhead charged to production (2,000 × $7.50) 15,000
Volume variance $1,000 unfav.
P-2
Equivalent production for September.
Materials Conversion
Transferred out 42,000 42,000
Less beginning inventory 10,000 10,000
Started and finished this period 32,000 32,000
Add beginning inventory (work this period) 0 5,000
Add ending inventory (work this period) 5,000 4,500
Equivalent units of product 37,000 41,500

Pieces × Unit Cost = Amount

Actual quantity used 76,000 $.50 actual $ 38,000
Actual quantity used 76,000 .48 standard 36,480
Materials price usage variance 76,000 $.02 $ 1,520 unfav.

Actual quantity used 76,000 $.48 standard $ 36,480

Standard quantity allowed
(37,000 × 2) 74,000 .48 standard 35,520
Materials quantity variance 2,000 .48 standard $ 960 unfav.

Hours × Rate = Amount

Actual hours worked 22,500 $8.00 actual $180,000
Actual hours worked 22,500 7.60 standard 171,000
Labor rate variance 22,500 $ .40 $ 9,000 unfav

Actual hours worked 22,500 $7.60 standard $171,000

Standard hours allowed
(41,500 × 1/2) 20,750 7.60 standard 157,700
Labor efficiency variance 1,750 7.60 standard $13,300 unfav.

Actual factory overhead $42,000

Budget allowance based on actual hours worked:
Variable cost (22,500 actual hours ×
$1.40 variable overhead rate $31,500
Fixed cost budgeted 8,000 39,500
Spending variance $ 2,500* unfav.

*The spending variance includes the difference between actual and budgeted fixed cost,
$200 ($8,200 – $8,000). This portion could be separately labeled as a fixed spending
variance, leaving a balance of $2,300 as the variable spending variance.

Budget allowance based on actual hours worked $39,500

Actual hours (22,500) × standard overhead rate ($1.80) 40,500
Idle capacity variance $ (1,000) fav.
Actual hours (22,500) × standard overhead rate ($1.80) $40,500
Standard hours (41,500 × 1/2) × standard overhead rate
($1.80) 37,350
Efficiency variance $ 3,150 unfav.

P-3

P-4
Raw material:
Gallons × Unit Cost = Amount
Actual quantity purchased 600,000 $1.917 actual $1,150,000
Actual quantity purchased 600,000 2.000 standard 1,200,000
Materials purchase price variance 600,000 $(.083) $(50,000) fav.

Actual quantity used 700,000 $2 standard $1,400,000

Standard quantity allowed 600,000 2 standard 1,200,000
Materials quantity variance 100,000 2 standard $200,000 unfav.

Drums:
Drums × Unit Cost = Amount
Actual quantity purchased 85,000 $1 actual $85,000
Actual quantity purchased 85,000 1 standard 85,000
Materials purchase price variance 85,000 0 0

Actual quantity used 60,000 $1 standard $ 60,000

Standard quantity allowed 60,000 1 standard 60,000
Materials quantity variance 0 1 standard 0__

Direct labor:
Hours × Rate = Amount
Actual hours worked 65,000 $7.231 actual $470,000
Actual hours worked 65,000 7.000 standard 455,000
Labor rate variance 65,000 $ .231 $15,000 unfav.

Actual hours worked 65,000 $7 standard $ 455,000

Standard hours allowed 60,000 7 standard 420,000
Labor efficiency variance 5,000 7 standard $35,000 unfav.
Factory overhead:
Actual factory overhead $666,500
Budget allowance based on actual hours worked:
Variable overhead (65,000 actual hours ×
$6 variable overhead rate) $390,000
Fixed overhead budget 275,000 665,000
Spending variance $1,500 unfav.

Budget allowance based on actual hours worked (see above) $665,000

Actual hours (65,000) × standard overhead rate ($10) 650,000
Idle capacity variance $15,000 unfav.

Budget allowance, based on actual hours worked (see above) $665,000

Budget allowance based on standard hours allowed:
Variable overhead (60,000 standard hours
allowed × 6 variable overhead rate) $360,000
Fixed overhead budgeted 275,000 635,000
Variable efficiency variance $ 30,000 unfav.

65,000 actual hours × $4 fixed overhead rate $260,000

60,000 standard hours allowed × $4 fixed overhead rate 240,000
Fixed efficiency variance (5,000 hours × $4) $ 20,000 unfav.