Standard-Costing

1. Standard Costing &
Variance Analysis!

2. Definitions
• Standard Cost: (CIMA) “Standard cost is the pre-
determined cost based on the technical estimates for
materials, labour and overhead for a selected period
of time for a prescribed set of working conditions.”
• Standard Costing: (CIMA) “the preparation of
standard costs and applying them to measure the
variations from the actual costs and analyzing the
causes of variations with a view to maintain
maximum efficiency of the operations so that any
remedial action may be taken immediately.

3. Variance Analysis
• Cost Variance: is the difference between
the standard cost and the actual costs.
• Variance Analysis: is the resolution into
constituent parts and the explanation of the
variances.
 Favorable & Unfavorable Variances.
Controllable & Uncontrollable Variances

4. What all could be
the reasons for the
actual
manufacturing cost
or the sales/profit
to vary from their
standard costs and
price/profit?

5. Types of
Variances
1. Material
Variance
Material Cost
variance
Material Price
Variance
Material Usage
Variance
Material Mix
Variance
Material Yield
Variance
2. Labour
Variance
Labour Cost
Variance
Labour Rate
Variance
Labour
Efficiency
Variance
Labour Mix
Variance
Idle Time
Variance
3. Overhead
Variance
Overhead Cost
Variance
Variable
overheads Var.
Variable o/h
efficiency var.
Variable o/h
expenditure var.
Fixed overhead
variance
4. Other
Variances
Calendar
Variance
Sales Value
variance
Sales price
variance
Sales volume
variance
Profit Variance

6. Favorable & Unfavorable Variances
• Favorable variances(F) arise when actual costs
are less than budgeted costs or actual sales/profit
exceed budgeted.
• Un favorable variances(U) arise when actual
costs exceed budgeted or actual sales/profit are
less than budgeted.
Profit Revenue Costs
Actual > Expected F F U
Actual < Expected U U F

7. Standard Costs
Benchmarks for
measuring performance.
The expected level
of performance.
Based on carefully
predetermined amounts.
Used for planning labor, material
and overhead requirements.
Standard
Costs are

8. Setting Standard Costs
Accountants, engineers, personnel administrators,
and production managers combine efforts to set
standards based on experience and expectations.

9. Standards vs. Budgets
Are standards the same
as budgets?
A standard is the expected
cost for one unit.
A budget is the expected
cost for all units.

10. The price variance is computed
on the entire quantity
purchased.
The quantity variance is
computed only on the quantity
used
How will the material price
variance and material
usage be computed if the
quantity purchased is
different from the quantity
used?

11. Material Cost Variance
• Material cost variance arises due to variance in the price of material
or its usage.
• This can be calculated by using the following formula,
• Material Cost Variance = (SQ x SP) – (AQ x AP) ,
• Where,
SQ = Standard quantity for the actual output
SP = Standard price per unit of material
AQ = Actual quantity
AP = Actual price per unit of material
• A positive result implies favorable variance and a negative result
implies unfavorable variance (adverse variance).

12. Material Price Variance
• Material price variance may arise due to number of reasons like
fluctuations in market prices, error in buying due to wrong
purchasing policy etc,
• This can be calculated by using the following formula,
• Material Price Variance = (SP – AP) x AQ
• Where,
SP = Standard price per unit of material
AQ = Actual quantity
AP = Actual price per unit of material
• A positive result implies favorable variance and a negative result
implies unfavorable variance (adverse variance).

13. Material usage Variance
• Material Usage variance is the difference between the actual
quantities of raw materials used in production and the standard
quantities that should have been used to produce the product,
• MUV may arise due to number of reasons like Pilferage of
materials , Wastage , Sub-standard or defective materials etc,
• This can be calculated by using the following formula,
• Material Usage Variance = (SQ – AQ) x SP

14. Material Mix Variance
• MMV is calculated when a product uses mixture of different raw
materials,
• MMV is that portion of the materials quantity variance, which is
due to the difference between the standard and actual
composition of a mixture.
• It can be represented by the following formula:
Material mix variance = (Standard cost of actual
quantity of the standard mixture – Standard cost of actual quantity
of the actual mixture) or (Revised SQ – AQ) x SP

15. Practical Problems
1. A furniture company uses sunmica tops for tables.
It provides the following data:
St. Quantity for sunmica per table 4 sq. ft
St. price per sq. ft of sunmica ₱ 5
Actual prod. Of tables 1000
Sunmica actually used 4,300 sq.ft
Actual purchase price per sq. ft ₱ 5.50
Calculate Material variances.

16. St. price x St. Quantity 5 x 4000 = 20,000.00
St. price x Actual Quanity 5 x 4300 = 21,500.00
Actual Price x Actual Quanity 5.5 x 4300 = 23,650.00
Material Cost Variance (3,650.00)
Material Usage Variance (1,500.00)
Material Price Variance (2,150.00)
Solution:

17. 2. From the following information calculate (i) material cost
variance (ii) material price variance (iii) Material Usage
variance
Standard output 100 units
Standard Material per unit 3 Ibs
Standard price per Ib. ₱ 2
Actual output 80 units
Actual price ₱ 5.50
Actual materials used 250 Ibs
Material Cost Variance 65
Material Usage Variance -60
Material Price Variance 125

18. 3. From the following information calculate (i) material cost
variance (ii) material price variance (iii) Material Usage variance
Quantity of material purchased 3000 units
Value of material purchased ₱ 9000
St. quantity of raw material req. p.u. 25 units
Standard rate of material unit ₱ 2
Opening stock of material Nil
Closing stock of material 500 units
Finished production during the period 80 units

19. St. price x St. Quantity 2 x 2,000 = 4,000
St. price x Actual Quanity 2 x 2,500 = 5,000
Actual Price x Actual Quanity 3 x 2,500 = 7,500
Material Cost Variance (3,500)
Material Usage Variance (1,000)
Material Price Variance (2,500)
Solution:

20. 4. The standard output of the production house has been set at
1000 pieces per month. However actually 1020 pieces were
produced. Following is the data for actual and standard
production.
Standard Actual Results
Usage 1.5 sq. ft per pad 1.3 sq. ft per pad
Price Rs. 0.15 per sq. ft Rs. 0.18 per sq. ft
Calculate all material variances.

21. St. price x St. Quantity 0.15 x 1,530 = 229.50
St. price x Actual Quanity 0.15 x 1,326 = 198.90
Actual Price x Actual Quanity 0.18 x 1,326 = 238.68
Material Cost Variance (9.18)
Material Usage Variance 30.60
Material Price Variance (39.78)
Solution:

22. 5. A mfg. concern, which has adopted standard costing, furnishes
the following information:
Standard:
Material for 70 kg. Of finished products 100 kgs.
Price of materials ₱ 1 per kg.
Actual:
Output 210,000 kgs
Material used 280,000 kgs.
Cost of materials ₱ 2,520,000
Calculate all material variances.

23. St. price x St. Quantity 1 x 300,000 = 300,000
St. price x Actual Quanity 1 x 280,000 = 280,000
Actual Price x Actual Quanity 0.9 x 280,000 = 252,000
Material Cost Variance 48,000
Material Usage Variance 20,000
Material Price Variance 28,000
Solution:

24. Material Mix Variance
• Material Mix Variance
= [Revised St. Qty – Actual Qty] x St. Price
Rev. St. Qty = St. Qty of 1 Mat. x Actual Total
Standard Total

25. From the following information regarding a standard product,
compute 1. Mix 2. Price 3. Usage Variance:
Raw Material Standard Actual
X 40 units @ Rs. 50 p.u. 50 units @ Rs. 50 p.u.
Y 60 units @ Rs. 40 p.u. 60 units @ Rs. 45 p.u.
Total 100 units 110 units
Rev.ST. Qty St. Price St. Qty Act.Price Act. Qty
Revised St. Qty X 40/100 x 110 = units 44 50 40 50 50
Revised St. Qty Y 60/100 x 110 = units 66 40 60 45 60
Material Mix Variance
For X -300
For Y 240 -60 MMV
Material Usage Variance
For X -500
For Y 0 -500 MUV
Material Price Variance
For X 0

26. From the following information regarding a standard product,
compute 1. Mix 2. Price 3. Usage Variance:
Material
Standard Actual
Qty. Rs. p.u. Total Qty
Unit
Price Total
A 4 1.00 4.00 2 3.50 7.00
B 2 2.00 4.00 1 2.00 2.00
C 2 4.00 8.00 3 3.00 9.00
Total 8 7.00 16.00 6.00 8.50 18.00
St. Price St. Qty Act.Price Act. Qty
Revised St. Qty A 4/8*6= units 3.00 1.00 4 3.50 2
Revised St. Qty B 2/8*6= units 1.50 2.00 2 2.00 1
Revised St. Qty C 2/8*6= units 1.50 4.00 2 3.00 3
Material Mix Variance
For A 1
For B 1 -4 MMV
For C -6
Material Usage Variance
For A 2
For B 2 0 MUV
For C -4
Material Price Variance
For A -5
For B 0 -2 MPV
For C 3

27. Material variances
• Labour Cost Variance SH*SR – AH*AR
• Labour Usage/Efficie. Var (SH-AHactual)*SR
• Labour Rate Variance (SR-AR)* AH
• Idle time Variance SR*Idle time
Labour Variances

28. Practice Problem
A firm gives you the following data:
Standard time per unit 2.5 hours
Actual hours worked 2,000 hours
Standard rate of pay Rs. 2 per hour
25 % of the actual hours has been lost as idle time.
Actual output 1,000 units
Actual wages Rs. 4,500
Calculate all labour variances.
St. Rate 2 LUV 2000F
St. Hrs 2500 LPV -500U
Actual Rate 2.25 ITV 1000F
Actual Hrs 2000 LCV 500F
Idle time 500

29. Practice Problems
Compute the Labour variances from the
information given below:
Standard time 3 hours per unit
Standard rate of wages Rs. 6 per hour
Actual production 700 units
Actual time taken 2000 hours
Actual Wages Rs. 14000
Idle time 50 hours
St. Rate 6 LUV 900F
St. Hrs 2100 LPV -2000U
Actual Rate 7 LCV -1400U
Actual Hrs 2000 IDV 300
Idle time 50

30. Labor Efficiency Variance- Causes
Unfavorable
Efficiency
Variance
Poorly
trained
workers
Poor
quality
materials
Poorly
maintained
equipment
Poor
supervision
of workers

31. Responsibility for Labor Variances
I am not responsible for
the unfavorable labor
efficiency variance!
You purchased cheap
material, so it took more
time to process it.
You used too much
time because of
poorly trained
workers and poor
supervision.

32. Overhead Variances
• Overhead variances arise due to the difference
between actual overheads and absorbed overheads.
The estimate of budget of the overheads is to be
divided into fixed and variable elements. i.e.
1. Variable overhead variances.
– Variable overhead budget or expenditure variance, and
– Variable overhead efficiency variance.
2. Fixed overhead variances.

33. Formulas
1. Variable overhead variances.
(Standard variable o/hfor actual prodn. – Actual variable o/h)
2. Variable overhead budget or expenditure variance,
(Budgeted variable overhead for actual hours – Actual
variable overhead) i.e. AH*BR – Actual Cost
3. Variable overhead efficiency variance.
Standard variable overhead rate per hour [Std. hours for
actual output – Actual hours] i.e. (SH-AH) *SR
4. Fixed Overhead Variance
Budgeted FO- AFO

34. Sales Variances
• Sales Margin Price Margin = (AP-BP)*AQ
• Sales Margin Volume variance = (AQ-BQ)*BC
• Total Sales Margin variance = AQ*AC – BQ*BC