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Standard Costs

and Variance
Analysis
Prepared by:
Bunagan, Janella
Perez, Cristopherson

Clarificatory points:
Planning

Budget vs. Flexible

Budget
Variance Analysis Cycle and
Management by Exception
Important Subtlety in Materials
Variances
Analysis and Evaluation of
Controls

Planning Budget vs. Flexible


Budget
Static; Used Dynamic;
Used in
in planning
evaluating
costs

Inconsiderate of
the level of activity
for the period
What do you plan
happen?

Takes into account


the level of activity
What should have
happened given
the level of
activity?

Ricks Hairstyling
Planning Budget
For the Month Ended March 31
Planning
Budget

Actual
Results

Client-Visits (q)

1,000

1,100

Revenue (P180.00q)

P180,000

P194,200

Variances

14,200 F

Expenses:
Wages and Salaries (P65,000 +
P37q)

102,000

106,900

Hairstyling gratuities (P1.50q)

1,500

1,620

120 U

Client gratuities (P4.10q)

4,100

6,870

2 770 U

Electricity (P1,500 + 0.10q)

1,600

1,550

50 F

28, 500

28,500

Liability Insurance (P2,800)

2,800

2,800

Employee Health Insurance


(P21,300)

21,300

22,600

1,300 U

1,400

2,130

730 U

163,200

172,970

9,770U

Rent (P28,500)

Miscellaneous (P1,200 + P0.20q)


Total Expense
NET OPERATING INCOME

P16,800

P21,230

4,900 U

P4,430 F

Ricks Hairstyling
Planning Budget
For the Month Ended March 31
Flexible
Budget

Actual
Results

Client-Visits (q)

1,100

1,100

Revenue (P180.00q)

P198,000

P194,200

Variances

3,800 U

Expenses:
Wages and Salaries (P65,000 +
P37q)

105,700

106,900

Hairstyling gratuities (P1.50q)

1,650

1,620

Client gratuities (P4.10q)

4,510

6,870

2, 360 U

Electricity (P1,500 + 0.10q)

1,610

1,550

60 F

28,500

28,500

Liability Insurance (P2,800)

2,800

2,800

Employee Health Insurance


(P21,300)

21,300

22,600

1,300 U

1,420

2,130

710 U

167,490

172,970

5,480 U

Rent (P28,500)

Miscellaneous (P1,200 + P0.20q)


Total Expense
NET OPERATING INCOME

P30,510

P21,230

1,200 U
30 F

P9,280 U

What actually happens


usually differs from what
is supposed to happen.
-Brewer, Garrison, &
Noreen

Management by Exception
A

management system that


compares actual results to a
budget so that significant
deviations can be flagged as
exceptions and investigated
further
Variance Analysis is an important
tool

Variance Analysis Cycle


Identify questions

Receive
explanations

Take corrective
action

Conduct next
periods operations

Analyze variances

Prepare Performance
Report

Begin

Standard Costs
A

standard is a benchmark in
measuring performance
Quantity standards specify how
much input should be used in
production
Price standards specify how
much should be paid to produce
a product or render a service

Advantages of Standard
Costs
Enhances
responsibility
accounting

Management by
exception

Advantages
Simplified
bookkeepin
g

Promotes economy
and efficiency

Potential Problems with Standard


Costs
Standard cost
reports may
not be timely.

Potential
Problems

mphasizing standards
may exclude other
important objectives.

Invalid assumptions
about the relationship
between labor
cost and output.

Favorable
variances may
be misinterpreted.

Emphasis on
negative may
impact morale.

Continuous
improvement may
be more important
than meeting standards

Setting the Standards


Standard
Standard Price
Quantity Allowed
for Actual Output

Direct Materials

Standard quantity
per unit produced

Standard price per


unit

Direct Labor

Standard hour per


unit produced

Standard rate per


hour

Variable
Manufacturing
Overhead

Standard hours
per unit (or
depending on the
companys
denominator
activity)

Standard price per


hour or
denominator
activity (or variable
portion of the
predetermined
overhead rate)

Fixed
Manufacturing
Overhead

Depending on the
companys
denominator
activity

Fixed portion of the


predetermined
overhead rate

Standard cost card


Inputs

Standard
Quantity or
Hours (1)

Standard
price or rate
(2)

Direct
Materials

3.0 pounds

P4.00 per
pound

Direct Labor

0.50 hours

P22.00 per
hour

Variable
Manufacturin
g overhead

0.50 hours

P6.00 per
hour

Total Standard
cost per unit

Standard
Cost (1 X 2)

P12.00

11.00

3.00

P 26.00

General Model: Standard Costs


Analysis Variance
(1)
Standard Quantity
Allowed for Actual
Output, at
Standard Price
(SQ X SP)

(2)
Actual Quantity of
Input, at Standard
price (AQ X SP)

Quantity variance
(2) (1)
Materials Quantity variance
Labor efficiency variance
Variable overhead
efficiency variance

(3)
Actual Quantity of
Input, at Actual
Price (AQ X AP)

Price variance
(3) (2)
Materials price variance
Labor rate variance
Variable overhead rate
variance

Spending Variance
(3) (1)

Ultimately,

entities compare
actual results to standard costs
based on the actual level of
activity. Through standard cost
variance analysis, an entity
decomposes spending variances
from the flexible budget into
price or quantity variances.

Inputs

Standard
Quantity or
Hours (1)

Standard
Standard
price or rate Cost (1 X 2)
(2)

Direct
Materials

3.0 pounds

P4.00 per
pound

Direct Labor

0.50 hours

P22.00 per
hour

Variable
Manufacturin
g overhead

0.50 hours

P6.00 per
hour

Total
Standard cost
per unit

P12.00
11.00
3.00

P 26.00

Actual data were as follow:


Actual output in
June........................................................2000
units
Actual direct materials in
June....................................P24,700
Actual direct labor cost in

Preparing the flexible budget, we


have:
Flexible
Budget

Spending
Variances

Actual
Results

Bookends actually
produced

2,000

2,000

Direct Materials
(P12.00q)

P24,000

P700
unfavorabl
e

P24,700

Direct Labor
(P11.00q)

P22,000

P680
unfavorabl
e

P22,680

Variable
Manufacturing
Overhead(P3.00q)

P6,000

P1,140
unfavorabl
e

P7,140

Flexible
Budget

Spending
Variances

Actual
Results

Bookends actually
produced

2,000

2,000

Direct Materials
(P12.00q)

P24,000

P700
unfavorabl
e

P24,700

Direct Labor
(P11.00q)

P22,000

P680
unfavorabl
e

P22,680

Variable
Manufacturing
Overhead(P3.00q)

P6,000

P1,140
unfavorabl
e

P7,140

Flexible
Budget

Through Standard Cost


Bookends actually
2,000
Variance
Analysis, an
produced
entity can determine
Direct Materials
P24,000
whether
this spending
(P12.00q)
variance is due to prices
Direct Labor
P22,000
going
up
or
quantity
(P11.00q)
being overproduced.
Variable
Manufacturing
Overhead(P3.00q)

P6,000

Spending
Variances

Actual
Results
2,000

P700
unfavorabl
e

P24,700

P680
unfavorabl
e

P22,680

P1,140
unfavorabl
e

P7,140

Important Subtlety in Materials


Variances
Most

companies use the quantity


of materials purchased in
computing the price variance
and the quantity of materials
used in computing quantity
variance.

Inputs

Standard
Quantity
or Hours
(1)

Standard
price or
rate (2)

Standard
Cost (1 X
2)

Direct
Materials

3.0 pounds

P4.00 per
pound

P12.00

Direct Labor

0.50 hours

P22.00 per
hour

11.00

Variable
Manufacturi
ng overhead

0.50 hours

P6.00 per
hour

Total
Standard
cost per unit

3.00

Actual data were as follow:


Actual output in
June........................................................
2000 units
Actual quantity of materials
used.....6,500 pounds
Actual quantity of materials
purchased......7000 pounds at P3.80
each

P 26.00

Standard quantity allowed for actual output = 3.0 pounds x 2000 units
= 6000 pounds
Standard price = P4.00 per pound
Actual quantity of materials used = 6,500 pounds
Actual quantity of materials purchased = 7000 pounds
Actual price of purchased materials = P3.80
Compute for Total variance, Price variance, and Quantity variance.
Prove that total variance is not equal to the sum of the two if materials
used are not equal to materials purchased.

Predetermined Overhead rates in


a Standard Costing System
Serves

as the standard rate of


manufacturing overhead
Computed as :

Represents the amount of overhead allocated to each unit of denominator a


which is often expressed in hours (machine-hours or labor-hours)

Overhead Applied
Refers

to the standard cost given


the same level of output
Overhead applied =
Predetermined Overhead rate
(Estimated rate) x Standard hours
allowed for the actual output
The counterpart of the Standard
Quantity Allowed for Actual
Output, at Standard Price in
overhead

Given the following data:

Budgeted production 25, 000 motors


Standard machine-hours per motor 2 hours

Budgeted machine hours (25,000 x 2) 50,000 hours

Actual production 20,000 motors


Actual machine-hours 42,000 machine-hours

Standard machine-hours allowed for actual production


(20,000 x 2) 40,000 hours

Other informaton:
Budgeted Variable manufacturing overhead P75,000
Budgeted Fixed manufacturing overhead P300,000
Total budgeted man. Overhead (300,000 + 75,0000)- P375,000
Actual variable manufacturing overhead P71,000
Actual fixed manufacturing overhead- P308,000
Total actual man. Overhead P379,000

Compute for:
Predetermined overhead rate
2. Variable component of the POR
3. Fixed component of the POR
1.

Fixed Overhead variance


(1)
Fixed Overhead
Applied to Work in
Process
(FPOR x SHAAP)

(2)
Budgeted Fixed
Overhead
(FPOR x Budgeted
hours)

Volume variance
(2) (1)

(3)
Actual Fixed
Overhead

Budget variance
(3) (2)

Total variance
(3) (1)

Compute for:
Fixed

Overhead variance (both


volume and budget)
Variable Overhead variance (both
efficiency and rate)
Analyze the volume and budget
variances.

Given the following data:

Budgeted production 25, 000 motors


Standard machine-hours per motor 2 hours

Budgeted machine hours (25,000 x 2) 50,000 hours

Actual production 20,000 motors


Actual machine-hours 42,000 machine-hours

Standard machine-hours allowed for actual production


(20,000 x 2) 40,000 hours

Other informaton:
Budgeted Variable manufacturing overhead P75,000
Budgeted Fixed manufacturing overhead P300,000
Total budgeted man. Overhead (300,000 + 75,0000)- P375,000
Actual variable manufacturing overhead P71,000
Actual fixed manufacturing overhead- P308,000
Total actual man. Overhead P379,000

International Uses of
Standard Cost
Standard

costs are used by companies


throughout the world. One study found that
three fourths of the companies surveyed in
the United Kingdom, two-thirds of the
companies surveyed in Canada, and 40% of
the companies surveyed in Japan used
standard cost systems.
World War II Standard costs were first
introduced in Japan
Nippon Electronic Companies (NEC)

Number of Companies:
95- USA
52- UK
82- Canada
646- Japan