Topic 11(short)

KAL1013 Chapter Eleven 1

Chapter Eleven

VARIANCE ANALYSIS

AND

STANDARD COSTING

KAL1013 Chapter Eleven 2

Outline The usage of standard costing

Setting of standard cost and types of

standard

Calculation of variance: Direct material

Direct labor

Factory overhead

KAL1013 Chapter Eleven 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.

KAL1013 Chapter Eleven 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

KAL1013 Chapter Eleven 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:

KAL1013 Chapter Eleven 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..

KAL1013 Chapter Eleven 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.

KAL1013 Chapter Eleven 8

Calculation of variance

Direct material

Direct labor

Factory overhead

KAL1013 Chapter Eleven 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 :

KAL1013 Chapter Eleven 10

Standard Standard Standard Cost Price Usage RM

Direct material:

PeanutButterSugar

Direct labor:

Machine operatorPackaging

Factory OH:

Variable costsFixed costs

Standard cost per unit

2.80/kg 0.15kg 0.422.70/kg 0.10kg 0.271.20/kg 0.25kg 0.30

0.99

4.00/hour 0.02hour

3.00/hour 0.01hour

0.080.03

0.11

5.00/hour 0.01hour

12.00/hour 0.01hour

0.05

0.12 0.17

1.27

KAL1013 Chapter Eleven 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

KAL1013 Chapter Eleven 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)

KAL1013 Chapter Eleven 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.

KAL1013 Chapter Eleven 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 )

KAL1013 Chapter Eleven 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 )

KAL1013 Chapter Eleven 16

Actual Price x Actual Qty Std Price x Actual Qty Std Price x Std Qty

Price Variance Usage Variance

Direct material variance

KAL1013 Chapter Eleven 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

KAL1013 Chapter Eleven 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 )

KAL1013 Chapter Eleven 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 )

KAL1013 Chapter Eleven 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.

KAL1013 Chapter Eleven 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 )

KAL1013 Chapter Eleven 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 )

KAL1013 Chapter Eleven 23

Actual Hour x Actual Rate Std Hour x Actual Rate Std Hour x Std Rate

Rate Variance Efficiency Variance

Direct Labor Variance

KAL1013 Chapter Eleven 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

KAL1013 Chapter Eleven 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 )

KAL1013 Chapter Eleven 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)

KAL1013 Chapter Eleven 27

Factory Overhead Variance

Factory Overhead Flexible Budget Variance

Factory Overhead Volume Variance

Measures the differences between the actual cost and the supposed related cost of factory overhead.

KAL1013 Chapter Eleven 28

1. Factory Overhead Flexible Budget Variance

Actual Overhead Costs - Flexible Overhead Costs

Flexible OH Costs = Variable OH + Fixed OH

= (Variable OH rate x Actual production) +

(Fixed OH rate x Standard production)

KAL1013 Chapter Eleven 29

2. Factory Overhead Volume Variance

Flexible OH Costs - Standard OH at actual production

Standard OH at actual production

= Variable OH + Fixed OH

Variable OH rate x Actual production=

+ Fixed OH rate x Actual production

KAL1013 Chapter Eleven 30

Actual OH Costs Flexible OH Costs Std OH at actual prod.

Flexible BudgetVariance

Production Volume Variance

Overhead Variance

KAL1013 Chapter Eleven 31