PSBA-ManilaACCOUNTING 10

Second Semester SY 2013-2014Prof. C. Gonzaga

TOPIC: STANDARD COSTING SYSTEM/VARIANCE ANALYSIS________________________________________________________________________________________________________________

Terminologies

Bill of materials a document that contains information about the product materials components and their specifications (including quality and quantities needed)

Budget variance the difference between total actual overhead and budgeted overhead based on standard hours allowed for the production achieved during the period; computed as part of two-variance overhead analysis; also referred to as the controllable variance

Controllable variance the budget variance of the two-variance approach to analyzing overhead variances

Expected standard a standard set at a level that reflects what is actually expected to occur in the future period; it anticipates future waste and inefficiencies and allows for them; is of limited value for control and performance evaluation purposes

Fixed overhead spending variance the difference between the total actual fixed overhead and budgeted fixed overhead; it is computed as part of the four-variance overhead analysis

Flexible budget a presentation of multiple budgets that costs according to their behavior at different levels of activity

Ideal standard a standard that provides for no inefficiencies of any type; impossible to attain on a continuous basis

Labor efficiency variance the number of hours actually worked minus the standard hours allowed for the production achieved multiplied by the standard rate to establish a value for efficiency (favorable) or inefficiency (unfavorable) of the workforce

Labor mix variance (actual mix × actual hours × standard rate) minus (standard mix × actual hours × standard rate); it presents the financial effect associated with changing the proportionate amount of higher or lower paid workers in production

Labor rate variance the actual rate (or actual weighted average rate) paid to labor for the period minus the standard rate multiplied by all hours actually worked during the period; it is actual labor cost minus (actual hours × standard rate)

Labor yield variance (standard mix × actual hours × standard rate) minus (standard mix × standard hours × standard rate); it shows the monetary impact of using more or fewer total hours than the standard allowed

Material price variance total actual cost of material purchased minus (actual quantity of material × standard price); it is the amount of money spent below (favorable) or in excess (unfavorable) of the standard price for the quantity of materials purchased; it can be calculated based on the actual quantity of material purchased or the actual quantity used

Material quantity variance (actual quantity × standard price) minus (standard quantity allowed × standard price); the standard cost saved (favorable) or expended (unfavorable) due to the difference between the actual quantity of material used and the standard quantity of material allowed for the goods produced during the period

Material mix variance (actual mix × actual quantity × standard price) minus (standard mix × actual quantity × standard price); it computes the monetary effect of substituting a nonstandard mix of material

Material yield variance (standard mix × actual quantity × standard price) minus (standard mix × standard quantity × standard price); it computes the difference between the actual total quantity of input and the standard total quantity allowed based on output and uses standard mix and standard prices to determine variance

Mix any possible combination of material or labor inputs

Noncontrollable variance the fixed overhead volume variance; it is computed as part of the two-variance approach to overhead analysis

Normal capacity the long-run (5–10 years) average production or service volume of a firm; it takes into consideration cyclical and seasonal fluctuations

Operations flow document a document listing all operations necessary to produce one unit of product (or perform a specific service) and the corresponding time allowed for each operation

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Overhead efficiency variance the difference between total budgeted overhead at actual hours and total budgeted overhead at standard hours allowed for the production achieved; it is computed as part of the three-variance analysis; it is the same as variable overhead efficiency variance

Overhead spending variance the difference between total actual overhead and total budgeted overhead at actual hours; it is computed as part of the three-variance analysis; it is equal to the sum of the variable and fixed overhead spending variances

Practical capacity the physical production or service volume that a firm could achieve during normal working hours with consideration given to ongoing, expected operating interruptions

Practical standard a standard that can be reached or slightly exceeded with reasonable effort by workers; it allows for normal, unavoidable time problems or delays and for worker breaks; it is often believed to be most effective in inducing the best performance from workers, since such a standard represents an attainable challenge

Standard cost a budgeted or estimated cost to manufacture a single unit of product or perform a single service

Standard cost card a document that summarizes the direct material, direct labor, and overhead standard quantities and prices needed to complete one unit of product

Standard quantity allowed the quantity of input (in hours or some other cost driver measurement) required at standard for the output actually achieved for the period

Theoretical capacity the estimated maximum production or service volume that a firm could achieve during a period

Total overhead variance the difference between total actual overhead and total applied overhead; it is the amount of underapplied or overapplied overhead

Total variance the difference between total actual cost incurred and total standard cost for the output produced during the period

Variable overhead efficiency variance the difference between budgeted variable overhead based on actual input activity and variable overhead applied to production

Variable overhead spending variance the difference between total actual variable overhead and the budgeted amount of variable overhead based on actual input activity

Variance analysis the process of categorizing the nature (favorable or unfavorable) of the differences between standard and actual costs and determining the reasons for those differences

Volume variance a fixed overhead variance that represents the difference between budgeted fixed overhead and fixed overhead applied to production of the period; is also referred to as the noncontrollable variance

Yield the quantity of output that results from a specified input

Lecture Outline

Development of a Standard Cost System

1. A standard is a benchmark or norm used for planning and control purposes; it is a model or budget against which actual results are compared and evaluated.

2. A standard cost system is a product costing system that determines product cost by using standards or norms for quantities and/or prices of component elements; it allows actual costs to be compared against norms for cost control purposes.

A standard cost is a budgeted or estimated cost to manufacture a single unit of product or perform a single service.

Variance Computations

1. A variance is any difference between an actual cost and a standard or budgeted cost.

a. Such a difference is favorable if actual cost is less than standard cost.

b. A variance is unfavorable if actual cost is greater than standard cost.

2. A total variance is the difference between total actual cost incurred and total standard cost for the output produced during the period.

a. A total variance can be computed for each production cost element.

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b. Total variances indicate differences between actual and expected production costs, but they do not provide useful information for determining why such differences occurred.

3. Total variances for materials and labor are subdivided into price and usage variances in order to help managers in their control objectives.

a. A price variance reflects the difference between what was actually paid for inputs and what should have been paid for inputs during the period.

b. A usage variance shows the difference between the quantity of actual inputs and the quantity of standard inputs allowed for the actual output of the period. Usage variances focus on the efficiency of results—the relationship of inputs to outputs.

4. The standard quantity allowed is the quantity of input (in hours or some other cost driver measurement) required at standard for the output actually achieved for the period.

Material and Labor Variance Computations

1. The total material usage variance can be subdivided into the material price variance and the material quantity variance.

AP × AQP SP × AQP

Material Material Purchase Price Variance Quantity Variance

Total Material Variance

a. The material price variance (MPV) is the total actual cost of materials purchased minus (actual quantity of materials × standard price); it is the amount of money spent below (favorable) or in excess (unfavorable) of the standard price for the quantity of materials purchased; it can be calculated based on the actual quantity of materials purchased or the actual quantity used.

b. The material purchase price variance is the materials price variance when calculated based on the quantity of materials purchased during the period rather than the quantity of materials used, and is used in what is referred to as the point of purchase material variance model.

c. The material price usage variance is the material price variance when calculated based on the quantity of materials used during the period.

d. The material quantity variance (MQV) is the standard cost saved (favorable) or expended (unfavorable) due to the difference between the actual quantity of materials used and the standard quantity of materials allowed for the goods produced during the period; (actual quantity × standard price) minus (standard quantity allowed × standard price).

2. The total labor variance can be subdivided into the labor rate variance and the labor efficiency variance.

AP × AQ SP × AQ SP × SQ

Labor LaborRate Variance Efficiency Variance

Total Labor Variance

a. The labor rate variance (LRV) is the actual rate (or actual weighted average rate) paid to labor for the period minus the standard rate multiplied by all hours actually worked during the period; actual labor cost minus (actual hours × standard rate).

b. The labor efficiency variance (LEV) is the number of hours actually worked minus the standard hours allowed for the production achieved multiplied by the standard rate to establish a value for efficiency (favorable) or inefficiency (unfavorable) of the workforce.

Overhead Variances

1. Capacity refers to any measure of activity.

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a. Theoretical capacity is the estimated maximum potential activity for a specified time.

b. Practical capacity is the activity level that could be achieved during normal working hours given unused capacity and ongoing, regular operating interruptions, such as holidays, downtime, and start-up time.

c. Normal capacity is a firm’s long-run average activity (over 5 to 10 years) which gives effect to historical and estimated future production levels and to cyclical and seasonal fluctuations.

d. Expected capacity is a short-run concept representing the anticipated level of the firm for the upcoming annual period.

2. The use of separate variable and fixed overhead rates and accounts allows the calculation of separate variances for each type of overhead, providing managers with maximum detail and optimal flexibility for control and performance evaluation purposes. The use of separate rates permits a four-variance approach to be taken in analyzing overhead.

3. The total variable overhead variance is the difference between actual variable overhead costs incurred for the period and standard variable overhead cost applied to the period’s actual production or service output.

Actual VOHBudgeted VOH Applied VOHAP × AQ SP × AQ SP × SQ

(Price Subvariance) (Usage Subvariance)VOH VOH

Spending Variance Efficiency Variance

Total Variable Overhead Variance(Underapplied or Overapplied Variable Overhead)

a. The variable overhead spending variance is the difference between total actual variable overhead and the budgeted amount of variable overhead based on actual hours; it is computed as part of the four-variance analysis.

b. The variable overhead efficiency variance is the difference between budgeted variable overhead based on actual hours and variable overhead applied based on standard hours allowed for the production achieved; it is computed as part of the four-variance analysis.

4. The total fixed overhead variance is the difference between actual fixed overhead costs incurred and standard fixed overhead cost applied to the period’s actual production.

Budgeted FOH Applied FOH Actual FOH (budgeted) SP × SQ

FOHSpending Variance Volume Variance

Total Fixed Overhead Variance(Underapplied or Overapplied Fixed Overhead)

a. The fixed overhead spending variance is the difference between the total actual fixed overhead and budgeted fixed overhead.

b. The fixed overhead volume variance is the difference between budgeted and applied fixed overhead and is equal to the overhead volume variance. The volume variance is also called the noncontrollable variance.

c. To calculate fixed overhead variances, a company must have a flexible budget. A flexible budget is a planning document that presents expected overhead costs at different levels of activity.

d. In a flexible budget, all costs are treated as either variable or fixed; thus, mixed costs must be separated into their variable and fixed elements.

5. A four-variance approach is unworkable if the accounting system does not distinguish between variable and fixed costs.

6. The total overhead variance is the difference between total actual overhead and total applied overhead, and is the only variance computed under the one-variance approach.

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Total Applied Overhead(Combined OH Rate × Standard

Input Allowed for ActualTotal Actual Overhead Production)

(Variable OH + Fixed OH) (SP × SQ)

Total Overhead Variance

7. A middle column representing budgeted overhead based on standard quantity is inserted between total actual overhead and total applied overhead under the two-variance approach.

Budgeted OHBased onStandardQuantity

Total Actual OH for Overhead(Variable OH Output Total Applied OH+ Fixed OH) Achieved SP × SQ

Budget Variance Volume Variance(Controllable (Noncontrollable

Variance) Variance)

Total Overhead Variance

a. The budget variance is the difference between total actual overhead and budgeted overhead based on standard hours allowed for the production achieved; it is computed as part of the two-variance analysis; it is also referred to as the controllable variance.

b. The volume variance can be computed under the four-variance, three-variance, or two-variance analysis.

8. A column representing budgeted overhead based on actual hours is inserted immediately to the right of total actual overhead under the three-variance approach.

BudgetedOverheadBased onStandard

Budgeted QuantityTotal Actual Overhead Allowed for Total AppliedOverhead Based on Output Overhead

(VOH + FOH) Actual Hours Achieved (SP × SQ)

Overhead Overhead OverheadSpending Efficiency VolumeVariance Variance Variance

Total Overhead Variance

a. The overhead spending variance is the difference between total actual overhead and total budgeted overhead at actual input activity; thus, a flexible budget is required. It is computed as part of the three-variance analysis; it is equal to the sum of the variable and fixed overhead spending variances.

b. The overhead efficiency variance is the difference between total budgeted overhead at actual input activity and total budgeted overhead at standard input allowed (output activity); it is computed as part of the three-variance analysis; it is the same as variable overhead efficiency variance.

Mix and Yield Variances1. A mix is any possible combination of materials or labor inputs.2. A yield is the quantity of output that results from a specified input.3. Material price, mix, and yield variances can be calculated.

a. The material mix variance measures the monetary effect of substituting a nonstandard mix of materials; (actual mix × actual quantity × standard price) minus (standard mix × actual quantity × standard price).

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b. The material yield variance is the difference between the actual total quantity of input and the standard total quantity allowed based on output and uses standard mix and standard prices to determine variance; (standard mix × actual quantity × standard price) minus (standard mix × standard quantity × standard price).

4. Labor rate, mix, and yield variances can be calculated.

a. The labor mix variance presents the financial effect associated with changing the proportionate amount of higher or lower paid workers in production; (actual mix × actual hours × standard rate) minus (standard mix × actual hours × standard rate).

b. The labor yield variance shows the monetary impact of using more or fewer total hours than the standard allowed; (standard mix × actual hours × standard rate) minus (standard mix × standard hours × standard rate).

CLASS REVIEW PROBLEMSProblem 1ABC Company has the following information available for the current year:

Standard:Material 3.5 feet per unit @ P2.60 per footLabor 5 direct labor hours @ P8.50 per unit

Actual:Material 95,625 feet used (100,000 feet purchased @ P2.50 per foot)Labor 122,400 direct labor hours incurred per unit @ P8.35 per hour

25,500 units were produced REQUIRED: (1) Compute the material purchase price and quantity variances. (2) Compute the labor rate and efficiency variances. (3) Journal entries to record purchase of materials, issuance of materials to production, payroll, and charging of labor cost to Production.

Problem 2OP Co. applies overhead based on direct labor hours and has the following available for November:

Standard:Direct labor hours per unit 5Variable overhead per DLH P.75Fixed overhead per DLH (based on 8,900 DLHs) P1.90

Actual:Units produced 1,800Direct labor hours 8,900Variable overhead P6,400Fixed overhead P17,500

REQUIRED: (1) Compute all the appropriate variances using the two-variance approach. (2) Compute all the appropriate variances using the three-variance approach. (3) Compute all the appropriate variances using the four-variance approach.

Problem 3A firm producing one product has a budgeted overhead of P100,000, of which P20,000 is variable. The budgeted direct labor is 10,000 hours.

Required: Fill in the blanks.a. Volume

Production Flexible Budget Applied Variance

120% ____________ ____________ ____________100% ____________ ____________ ____________

80% ____________ ____________ ____________60% ____________ ____________ ____________

b. What is the budget variance at the 80 percent level if the actual overhead incurred is P87,000?Problem 4Berry Co. manufactures a product effective in controlling beetles. The company uses a standard cost system and a flexible budget. Standard cost of a gallon is as follows:

Direct material:2 quarts of A P144 quarts of B 16

Total direct material P30

Direct labor:2 hours 16

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Manufacturing overhead 12Total P58

The flexible budget system provides for P50,000 of fixed overhead at normal capacity of 10,000 direct labor hours. Variable overhead is projected at P1 per direct labor hour.

Actual results for the period indicated the following:

Production: 5,000 gallonsDirect material:

A 12,000 quarts purchased at a cost of P7.20/quart; 10,500 quarts used B 20,000 quarts purchased at a cost of P3.90/quart; 19,800 quarts used

Direct labor: 9,800 hours worked at a cost of P79,380Overhead: Fixed P48,100

Variable 21,000Total overhead P69,100

Required: 1. What is the application rate per direct labor hour, the total overhead cost equation, the standard quantity for each

material, and the standard hours?2. Compute the following variances:

a. Total material price varianceb. Total material quantity variancec. Labor rate varianced. Labor efficiency variancee. MOH volume variancef. MOH efficiency varianceg. MOH spending variance, both fixed and variable

PROBLEM 5The following July information is for Kingston Company:

Standards: Material 3.0 feet per unit @ P4.20 per foot Labor 2.5 hours per unit @ P7.50 per hour

Actual: Production 2,750 units produced during the month Material 8,700 feet used; 9,000 feet purchased @ P4.50 per foot Labor 7,000 direct labor hours @ P7.90 per hour

1. What is the material price variance (calculated at point of purchase)?2. What is the material quantity variance?3. What is the labor rate variance?4. What is the labor efficiency variance?

PROBLEM 6Timothy Company has the following information available for October when 3,500 units were produced (round answers to the nearest peso).

Standards:Material 3.5 pounds per unit @ P4.50 per poundLabor 5.0 hours per unit @ P10.25 per hour

Actual:Material purchased 12,300 pounds @ P4.25Material used 11,750 pounds17,300 direct labor hours @ P10.20 per hour

1. What is the labor rate variance?2. What is the labor efficiency variance?3. What is the material price variance (based on quantity purchased)?4. What is the material quantity variance?5. Assume that the company computes the material price variance on the basis of material issued to production. What is the total

material variance?

PROBLEM 7 Redd Co. uses a standard cost system for its production process and applies overhead based on direct labor hours. The following information is available for August when Redd made 4,500 units:

Standard:DLH per unit 2.50Variable overhead per DLH P1.75Fixed overhead per DLH P3.10

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Budgeted variable overhead P21,875Budgeted fixed overhead P38,750

Actual:Direct labor hours 10,000Variable overhead P26,250Fixed overhead P38,000

1. Using the one-variance approach, what is the total overhead variance?2. Using the two-variance approach, what is the controllable variance?3. Using the two-variance approach, what is the noncontrollable variance?4. Using the three-variance approach, what is the spending variance? 5. Using the three-variance approach, what is the efficiency variance?6. Using the three-variance approach, what is the volume variance?7. Using the four-variance approach, what is the variable overhead spending variance?8. Using the four-variance approach, what is the variable overhead efficiency variance?9. Using the four-variance approach, what is the fixed overhead spending variance?10. Using the four-variance approach, what is the volume variance?

Problem 8 The following information is available for Raxco for the current year: Standard:

Material X: 3.0 pounds per unit @ P4.20 per poundMaterial Y: 4.5 pounds per unit @ P3.30 per poundClass S labor: 3 hours per unit @ P10.50 per hourClass US labor: 7 hours per unit @ P8.00 per hourActual:Material X: 3.6 pounds per unit @ P4.00 per pound (purchased and used)Material Y: 4.4 pounds per unit @ P3.25 per pound (purchased and used)Class S labor: 3.8 hours per unit @ P10.60 per hourClass US labor: 5.7 hours per unit @ P7.80 per hourRaxco produced a total of 45,750 units.

REQUIRED: (1) Compute the material price, mix, and yield variances (round to the nearest peso). (2) Compute the labor rate, mix, and yield variances (round to the nearest peso).

Problem 9Saksena Corp. produces a product using the following standard proportions and costs of material:

Cost PerPounds Pound Amount

Material A 50 P5.00 P250.00Material B 40 6.00 240.00Material C 60 3.00 180.00

150 4.4667 P670.00Standard shrinkage (33 1/3%) 50 ______Net weight and cost 100 6.70 P670.00

A recent production run yielding 100 output pounds required an input of: Cost Per

Amount PoundMaterial A 40 P5.15Material B 50 6.00Material C 65 2.80

Required: Material price, mix, and yield variances.

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