The document summarizes standard costing and variance analysis. Standard costing involves setting standard costs for direct materials, direct labor, and factory overhead based on expected efficiencies. Variances measure the difference between actual and standard costs. There are variances for direct material price and usage, direct labor rate and efficiency, and factory overhead which includes a controllable variance and volume variance. Variance analysis identifies reasons for differences to improve performance.

1. Chapter Eleven VARIANCE ANALYSIS AND STANDARD COSTING

2. Outline The usage of standard costing Setting of standard cost and types of standard Calculation of variance: Direct material Direct labor Factory overhead

3. Standard Costing  The cost that has been pre-determined after considering other factors.  Those are estimated costs which are considered to be ideal for each of the cost component ( direct material, direct labor and factory overhead ).  The standard cost system enable the management to determine how much a product should cost.

4. The usage of standard costing  Planning and controlling:  Product costing: Compare actual cost & budgeted cost Improve performance Increase efficiency Provide readily available unit cost information

5. Setting of Standard Cost Analysis on the historical cost experience: Provide initial guidelines for standard setting Engineering studies: Determine the most efficient way to operate Input from operating personnel: Accountable for meeting the standards Involve joint efforts on:

6. Types of Standards  Ideal standard  Normal standard Maximum efficiency Can be achieved if everything operates perfectly. Currently attainable standard Allowance is made for breakdown, interruptions etc..

7. Variance Analysis  Variances are the difference between the actual manufacturing cost and the standard cost at the actual level of production.  The significance of the variance for each element in manufacturing cost needs further analysis to determine the corrective actions.

8. Calculation of variance  Direct material  Direct labor  Factory overhead

9. Standard Cost  The expected cost per unit product Illustration 1: The followings are the standard cost for each unit (bottle) of peanut butter produced by Syarikat Sedap Selalu :

10. Standard Standard Standard Cost Price Usage RM Direct material: Peanut Butter Sugar Direct labor: Machine operator Packaging Factory OH: Variable costs Fixed costs Standard cost per unit 2.80/kg 0.15kg 0.42 2.70/kg 0.10kg 0.27 1.20/kg 0.25kg 0.30 0.99 4.00/hour 0.02hour 3.00/hour 0.01hour 0.08 0.03 0.11 5.00/hour 0.01hour 12.00/hour 0.01hour 0.05 0.12 0.17 1.27

11. If Syarikat Sedap Selalu produces 10,000 bottles of peanut butter, the expected total cost would be: Direct material Direct labor Factory overhead Total cost 10,000 x 0.99 9,900 10,000 x 0.11 10,000 x 0.17 1,100 1,700 12,700

12. Calculation of variance Cost element Actual cost Standard cost Variance Direct material Direct labor Factory overhead 9,900 1,100 1,700 9,500 400 (F) 1,050 50 (F) 2,000 300 (U) F = (Favorable) U = (Unfavorable)

13. Direct Material Variance Direct Material Price Variance Direct Material Usage (Quantity) Variance  To measure the difference between the actual cost and the standard cost of direct materials.

14. 1. Direct material price variance (Actual Price x Actual Quantity) - (Standard Price x Actual Quantity) Simplified to be: Actual Quantity (Actual Price – Standard Price) AQ ( AP – SP )

15. 2. Direct material usage (quantity) variance (Standard Price x Actual Quantity) - (Standard Price x Standard Quantity) Simplified to be: Standard Price (Actual Quantity – Standard Quantity) SP ( AQ – SQ )

16. Actual Price x Actual Qty Std Price x Actual Qty Std Price x Std Qty Price Variance Usage Variance Direct material variance

17. Illustration 2 The followings are the actual price and quantity for direct material used by the company in producing 10,000 bottles of peanut butter: Actual Price Actual Quantity Peanut RM2.70/kg 1,400kg Butter RM2.505/kg 1,200kg Sugar RM1.18/kg 2,300kg

18. Direct material price variance: Peanut: 1,400 (2.70 – 2.80) = 140 (F) Butter: 1,200 (2.505 – 2.70) = 234 (F) Sugar: 2,300 (1.18 – 1.20) = 46 (F) 420 (F) AQ ( AP – SP )

19. Direct material usage variance: Peanut: 2.80 (1,400 – 1,500) = 280 (F) Butter: 2.70 (1,200 – 1,000) = 540 (U) Sugar: 1.20 (2,300 – 2,500) = 240 (F) 20 (U) Therefore , Total direct material variance = 420 (F) + 20 (U) = 400 (F) SP ( AQ – SQ )

20. Direct Labor Variance Direct Labor Rate Variance Direct Labor Efficiency Variance  Measures the differences between the actual cost and the cost that suppose to be paid to the labor.

21. 1. Direct Labor Rate Variance (Actual Hour x Actual Rate) - (Actual Hour x Standard Rate) Simplified to be: Actual Hour ( Actual Rate – Standard Rate ) AH ( AR – SR )

22. 2. Direct Labor Efficiency Variance (Standard Rate x Actual Hour) - (Standard Rate x Standard Hour) Simplified to be: Standard Rate ( Actual Hour – Standard Hour ) SR ( AH – SH )

23. Actual Hour x Actual Rate Std Hour x Actual Rate Std Hour x Std Rate Rate Variance Efficiency Variance Direct Labor Variance

24. Illustration 3: The followings are actual rate and labor hour in the production of 10,000 bottles of peanut butter: Actual labor rate Actual labor hour Machine operator RM3.90/hour 190 hours Packaging RM2.81/hour 110 hours

25. Direct Labor Rate Variance: Machine Operator: 190 (3.90 – 4.00 ) = 19 (F) Packaging: 110 (2.81 – 3.00) = 21 (F) 40 (F) AH ( AR – SR )

26. Direct Labor Efficiency Variance: Machine Operator: 4.00 (190 – 200) = 40 (F) Packaging: 3.00 (110 – 100) = 30 (U) 10 (F) SR ( AH – SH ) Therefore, total direct labor variance: = 40 (M) + 10 (M) = 50 (M)

27. Factory Overhead Variance Variable Factory Overhead Controllable Variance Fixed Factory Overhead Volume Variance  Measures the differences between the actual cost and the supposed related cost of factory overhead.

28. Total variable costs $14,400 $16,200 $18,000 Variable costs per hour $ 3.60 $ 3.60 $3.60 Total fixed costs $12,000 $12,000 $12,000 Fixed costs per hour $ 3.00 $ 2.67 $ 2.40 Total costs per hour $ 6.60 $ 6.27 $ 6.00 Western Rider Inc. Factory Overhead Cost Budget For the Month Ended June 30, 2003 Direct Labor Hours 4,000 4,500 5,000 80% 90% 100% Overhead is applied at $6.00 per direct labor hour based on estimated 5,000 total hours. % of Normal Capacity

29. Variable costs $14,400 $10,400 $4,000 F ($3.60 x 4,000 hours) Fixed costs 9,600 12,000 2,400 U ($2.40 x 4,000 hours) Total costs $24,000 $22,400 $1,600 F Western Rider Inc. Factory Overhead Variances For the Month Ended June 30, 2003 Revised Actual Budget Costs Variance Factory overhead applied at $6.00 per direct labor hour based on 4,000 actual hours . Actual factory overhead per general ledger. Actual Hour 4,000

30. Variable costs $14,400 $10,400 $4,000 F ($3.60 x 4,000 hours) Fixed costs 9,600 12,000 2,400 U ($2.40 x 4,000 hours) Total costs $24,000 $22,400 $1,600 F Western Rider Inc. Factory Overhead Variances For the Month Ended June 30, 2003 Revised Actual Budget Costs Variance Controllable variance based on variable costs

31. Variable costs $14,400 $10,400 $4,000 F ($3.60 x 4,000 hours) Fixed costs 9,600 12,000 2,400 U ($2.40 x 4,000 hours) Total costs $24,000 $22,400 $1,600 F Western Rider Inc. Factory Overhead Variances For the Month Ended June 30, 2003 Revised Actual Budget Costs Variance Volume variance based on fixed costs

32. Actual variable overhead $10,400 Budgeted variable overhead 14,400 (4,000 actual hours x $3.60) Favorable controllable variance $(4,000) Variable Factory Overhead Controllable Variance For the Month Ended June 30, 2003 Controllable variance measures the efficiency of using variable overhead resources. A revised budget based on the actual hours used

33. Budgeted volume (direct labor hours) 5,000 Actual volume (direct labor hours) 4,000 Capacity not used (direct labor hours) 1,000 Standard fixed rate x $2.40 Unfavorable volume variance $2,400 Fixed Factory Overhead Volume Variance For the Month Ended June 30, 2003 Volume variance measures the utilization of fixed overhead resources. Rate based on 5,000 direct labor hours.

34. End of The Syllabus Good Luck For Your Final Exam