Standard Costing By
B Dr. Mich
hael Consta
as
Page 1
9 Sta
andard Costing
g: A Functional-Based C
Control A
Approac
ch
Compan
nies prepare cost budg
gets as parrt of their
planning
g process. These budgets
b
as
ssume a
given le
evel of activ
vity (e.g., fiinancial sta
atements
assume that 10,00
00 units willl be produ
uced and
sold). Budgets
B
tha
at are tied to a specific
c level of
activity are
a referred
d to as Static Budgets..
Firms will
w compare
e their budg
geted costs
s to their
actual costs
c
in ord
der to conttrol costs, evaluate
employe
ee performa
ance, and evaluate
e
th
he budgetin
ng process.. This comp
parison is d
done
by comp
puting Budg
get Varianc
ces. A variance is the d
dollar differrence betwe
een a budg
geted
cost and
d the actua
al cost. Unfortunatel
U
ly, the actu
ual activity level is ve
ery likely to be
differentt from the budgeted
b
ac
ctivity level (e.g., firm a
actually pro
oduced 9,00
00 units).
ble Costs, iin order to have
When dealing with Variab
a meaningful
m
ccomparison
n, the budgeted and a
actual
cos
sts must re
elate to the
e same activity level ((e.g.,
com
mparing yo
our actual labor cossts [when you
produce 9,000
0 units to yo
our labor co
ost budget (that
b
on 10
0,000 unitss)]. Consider the follo
owing
is based
ana
alogous sit uation, asssume that your employer
ask
ks you to: (ii) produce a spectacu
ular commercial,
and
d (ii) reserve a 30-second spot during the S
Super
Bow
wl in which
h you will sshowcase the comme
ercial.
udget for th
his project. Instead of producing a
and running
g the
You are given a $10 million bu
ontract with
h PBS to tak
ke over the
e sponsorsh
hip of Maste
erpiece The
eatre
commerrcial, you co
from Exx
xon Mobil for
f $9 millio
on. Coming
g $1 million under budget is not vvery impresssive,
when th
he activity that
t
you did (Masterp
piece Theattre) is sign
nificantly diffferent than
n the
activity assumed
a
in
n the budge
et (Super Bo
owl).
In orderr to have a valid comp
parison for Variable C
Costs, we use Flexible
e Budgets w
when
computing Budget Variances
s. A Flexib
ble Budget is a cost function th
hat producces a
differentt budgeted cost for diffferent activ
vity levels (e.g., Flexible Budgett says that your
labor co
ost is equall to $30 forr each unit produced)). Using a Flexible B
Budget, you
u can
compare
e: (i) the ac
ctual cost, with
w (ii) a budgeted
b
co
ost for the work that yyou actuallyy did
(actual activity
a
leve
el).
Budge
ets and Va
ariances
As note
ed above, Budget Variances
V
are
a
importtant tools used in e
evaluating your
operatio
ons. When
n comparing actual re
esults to a Flexible B
Budget, the
ere can be
e two
differentt reasons fo
or a Budge
et Variance
e. For exam
mple, if your Direct La
abor Costs on a
particula
ar project exceeded
e
th
he amount budgeted for that pro
oject, it can be due tto: (i)
s
comm
ments and corrections
c
to
t me at [email protected]
Please send
Standard Costing By Dr. Michael Constas
Page 2
paying your workers a higher rate per hour than you budgeted (Reason 1), and/or (ii)
your workers spending more time doing the project than you expected (Reason 2). It is
important for you to know which of the reasons is true. If the Budget Variance was due
to the first reason, then you need to talk to your HRM department (or whoever hires and
sets compensation). If the variance was due to the second reason, then you need to
speak to the person supervising the project. We subdivide Budget Variances in order to
identify which of the reasons is applicable to our situation.
The total difference between the actual cost and the Flexible Budget is called the
Budget Variance. We calculate a Budget Variance for each component of cost. The
Budget Variance is divided into a Price Variance and a Quantity Variance. The Price
Variance quantifies how much of the Budget Variance is due to a company having paid
an actual price for a cost component that is different than the budgeted price (Reason
1). The Quantity Variance quantifies how much of the Budget Variance is due to a firm
using an actual amount of a cost component that is different than the budgeted amount
(Reason 2).
Standards
As part of the budgeting process, firms develop standards:

Standard Price (SP) is the estimated price per unit of the cost component (not a
unit of product) that will be paid for that cost component (e.g., $10 per hour for
Direct Labor Costs).

Standard Quantity (SQ) is the estimated amount of the cost component that is
expected to be used to make one unit of product (e.g., 3 Direct Labor Hours to
produce one computer). When calculating Quantity Variances, the term,
“Standard Quantity,” is used to describe the amount of a cost component that is
expected to be used to make all of the units of product actually produced in a
given period. (e.g., we expect it to take 3 Direct Labor Hours to make a
computer; we made 1,000 computers this month; we therefore think it should
take 3,000 Direct Labor Hours to make those 1,000 computers). Because the
Standard Quantity is linked to the actual number of units of product produced, it
creates the Flexible Budget for a cost when it is multiplied by the Standard Price
($10 x 3 DLHs x 1,000 units = $30,000).
Companies develop these standards using a variety of sources (e.g., historical
experience, engineering studies, and input from operating personnel). Standards can
either be attainable or ideal. If they are ideal, you run the risk of debasing the value of
the standard cost because your workers know that it is unlikely that the standards will
be met.
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Standard Costing By Dr. Michael Constas
Page 3
Calculation
When calculating Budget Variances, we also need to know the following information
about our actual costs:

Actual Price (AP) is the actual price that the firm paid for a unit of a cost
component (e.g., $11 per Direct Labor Hour).

Actual Quantity (AQ) is the actual amount of a cost component that was used to
make all of the units of the product produced (e.g., 3,300 Direct Labor Hours to
make 1,000 computers).
For a given component of cost: (i) the actual costs are calculated by multiplying the
Actual Price by the Actual Quantity; and (ii) the Flexible Budget is calculated by
multiplying the Standard Price by the Standard Quantity. In the following table, we set
up two columns to reflect the actual cost of a cost component (left column) and the
Flexible Budget for that cost component (right column). The difference between the
totals of each of these columns is the Budget Variance for the cost component in
question:
Actual Cost
AP X AQ
Flexible Budget
SP X SQ
In a Standard Costing system, which we will discuss shortly, the standard cost to
produce a unit is treated as the cost of each unit produced, and this amount is added to
Work In Process. The cost applied to Work In Process is the amount that appears in
the Flexible Budget column, and the difference between the two columns represents the
variance that appears in the accounting system. This is similar to the Manufacturing
Overhead Variance that we discussed previously, where the difference between the
actual overhead and the amount applied to Work In Process constituted the amount of
the variance.
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Standard Costing By Dr. Michael Constas
Page 4
In order to divide the Budget Variance into a Price Variance and a Quantity Variance,
we will introduce a middle column that consists of the product of the Standard Price
multiplied by Actual Quantity. Once you have the totals of the three columns, you then
subtract the middle column from the left column in order to get the Price Variance. You
also subtract the right column from the middle column in order to get the Quantity
Variance:
Actual Cost
Mixed
Flexible Budget
AP X AQ
SP X AQ
SP X SQ
|_________ ________________| |________________ ________|
(-)
(-)
Price Variance
Quantity Variance
AQ (AP – SP)
SP (AQ – SQ)
Subtracting the middle column from the left column produces the following result:
(AP x AQ) - (SP x AQ)
When you factor out the common Actual Quantity, you get the formula used to calculate
the Price Variance:
AQ (AP - SP)
As the equation indicates, when we subtract the columns, we are holding the Actual
Quantity constant and comparing the Standard Price (budget) of a cost component to
the Actual Price paid. This comparison gives us the Price Variance.
Subtracting the right column from the middle column produces the following result:
(SP x AQ) - (SP x SQ)
When you factor out the common Standard Price, you get the formula used to calculate
the Quantity Variance:
SP (AQ - SQ)
As the equation indicates, by subtracting the right column from the middle column, we
are holding the Standard Price constant and comparing the Standard Quantity (budget)
of the cost component to the Actual Quantity used. This comparison gives you the
Quantity Variance.
Notice that you are always subtracting the budget (standard) from the actual. If you are
over budget, then the actual will be greater than the standard and you have a positive
number. Because we do not want to be over budget, this is referred to as an
“unfavorable” variance. If you are under budget, then the standard is greater than the
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Standard Costing By
B Dr. Mich
hael Consta
as
Page 5
actual, and
a you ha
ave a negattive number. Because
e we want tto be underr budget, th
his is
referred to as a “fav
vorable” va
ariance.


Favorable
e Variance
Unfavorab
ble Variance
e
N
Negative Nu
umber
P
Positive Num
mber
Variance Example
Assume
A
th
hat Ralph, Inc., a clothing and
frragrance manufactu
urer, wish
hes to b
begin
production
p
o
of a new lin
ne of shirtss with reallyy big
lo
ogos (for p
people who
o are nearssighted). R
Ralph
estimates
e
th
hat every new shirt will cost $
$6 in
Direct
D
Materrials using tthe followin
ng standard
ds:


$ 2.0
00 a yard fo
or the materrial; and
3 yarrds of material used in each shirt.
onth of operations, Ralph,
R
Inc. produced 1,000 shiirts at a D
Direct
During its first mo
Materials cost of $5
5,880. Ralph paid $2.10 a yard for materia
als and it ussed 2,800 yyards
duce the sh
hirts. You would calcculate the D
Direct Mate
erials Price
e and
of material to prod
y Variances
s as follows
s:
Quantity
Actu
ual Cost
Mixed
Fle
exible Budg
get
AP
P X AQ
SP
S X AQ
SP X SQ
$2.10 x 2,800 yds
s
$2.00
0 x 2,800 yd
ds
$2.0
00 x 3,000 yds
$5,880
$5,600
$6,000
|________
__ ______
__________
__| |_____
__________
___ ____
_____|
(-)
(-)
Price
e Variance
Qua
antity Varian
nce
$5,880 - $5,600 = $280 U
$5,600 - $6,000 = - $400 F
Budget Variance
V
 $5,880 - $
$6,000 = -$1
120 F
The $120 favorab
ble Direct Materials Budget V
Variance ($
$3880 - $6
6000=-$120
0) is
ded into the Price Varia
ance and th
he Quantityy Variance [[$280 + (-$400) = -$12
20].
subdivid
Use off Variance
es
These variances
v
are used in the
t evaluatting the perrformance o
of workers,, as well ass, the
validity of
o the stand
dards used
d. In the Ra
alph, Inc. e
example, th
he Price Va
ariance give
es us
informattion on the job perform
mance of Ralph’s
R
ma
aterials buyyer. Ralph should askk the
buyer to
o explain why
w he or she paid $2
2.10 per ya
ard for Direcct Materialss when Ra
alph’s
Standard Price is $2.00
$
per ya
ard. This difference
d
ccost Ralph $
$280 (the P
Price Varian
nce).
s
comm
ments and corrections
c
to
t me at [email protected]
Please send
Standard Costing By Dr. Michael Constas
Page 6
It is possible that the standard is too low. It is also possible that there may have been
an unforeseeable event that caused material prices to change. A poor job performance
by the purchaser is another possible explanation.
The Quantity Variance tells us that Ralph’s production supervisor used $400 less Direct
Materials than Ralph expected. Ralph should examine the supervisor’s performance in
order to determine whether the favorable variance is due to the Production
Department’s superior performance (e.g., there was less waste than is usually the
case), or whether it is likely to be repeated (e.g., due to instituting new techniques, or
the standard was too low to begin with). If the performance is likely to be repeated, then
Ralph should consider revising its Standard Quantity per unit.
Variance Names
The procedure described above (along with the formulas) can be used to calculate
variances for each of the Variable Costs of production: Direct Labor, Direct Materials,
and Variable Manufacturing Overhead. A number of different names are given to these
variances. Common variance names used for Variable Costs include:
Input
Direct Materials:
Direct Labor:
Variable Overhead:
Type
Price:
Quantity:
Price:
Quantity:
Price:
Quantity:
Variance Name
Materials Price Variance
Materials Usage, Efficiency or Quantity Variance
Labor Rate or Price Variance
Labor Efficiency Variance
Variable OH Spending or Price Variance
Variable Efficiency Variance
Special Rule For Materials Price Variance
In the foregoing example, we assumed that the firm bought the same amount of Direct
Materials that it used in the production process. If we buy an amount of Direct Materials
that is different from the amount used, then, contrary to the suggestion made in your
book, most firms calculate the Material Price Variance using the Actual Quantity
purchased rather than the Actual Quantity used.
There are two reasons for using the amount purchased in the calculation of the
Materials Price Variance:

First, if the Actual Quantity used is included in the calculation, then there would
be a delay in the evaluation of the material buyer’s job performance. The job
performance occurs when materials are purchased. The evaluation occurs when
the variance is calculated. Depending on the firm, the time between the
purchase of materials and their use in the production process could be lengthy.
Most firms want timely performance evaluations, and calculating the variance at
the time that the materials are purchased accomplishes this.
Please send comments and corrections to me at [email protected]
Standard Costing By Dr. Michael Constas

Page 7
Second, when using the Standard Costing system (which we will discuss shortly),
a company only knows the amount purchased at the time that the Materials Price
Variance is calculated.
Continuing with the Ralph, Inc. example, if Ralph bought 5,000 yards of Direct Materials
for the period in question, and it calculated the Materials Price Variance at the time of
purchase, then you would calculate the Direct Materials Variances as described below:
Actual Cost
Mixed
Flexible Budget
AP X AQ
SP X AQ
$2.10 x 5,000 yds
$2.00 x 5,000 yds
$10,500
$10,000
|________ ________|
(-)
Price Variance
SP X AQ
SP X SQ
$2.00 x 2,800 yds
$2.00 x 3,000 yds
$5,600
$6,000
|________ ________|
(-)
Quantity Variance
$10,500 - $10,000 = $500 U
$5,600 - $6,000 = - $400 F
AQ is the quantity purchased in the Materials Price Variance, and AQ is the quantity
used in the Materials Quantity Variance.
Fixed Manufacturing Overhead
The variances for Fixed Manufacturing Overhead are calculated differently than the
variances for the Variable Costs that we discussed above. This difference is due to the
fact that Fixed Manufacturing Overhead is a Fixed Cost, and a comparison of actual
costs to the Static Budget (rather than a Flexible Budget) provides a meaningful Budget
Variance. Having a budget change as the number of units produced changes is
appropriate for Variable Costs (Flexible Budget). By definition, the total Variable Cost
changes as the volume of the number of units changes. Fixed Manufacturing
Overhead, however, is a Fixed Cost, and we expect that the total Fixed Cost will remain
unchanged regardless of a change in the number of units produced (Static Budget).
For example, if:
(i)
(ii)
(iii)
you believe that your Fixed Manufacturing Overhead will be $100,000,
you apply Fixed Manufacturing Overhead as a function of units of product
produced, and
you estimate that you will produce 10,000 units,
then your Standard Price will be $10 per unit ($100,000/10,000). If you only produce
9,000 units, your Flexible Budget will produce a cost of $90,000. Traditionally, Fixed
Costs do not change if your activity level changes, and your budget for Fixed
Manufacturing Overhead should still be $100,000 at this production level (not $90,000).
The amount of Fixed Manufacturing Overhead that the Flexible Budget column
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Standard Costing By Dr. Michael Constas
Page 8
produces will only coincide with your true budget for Fixed Manufacturing Overhead
when you produce 10,000 units. Because the right column does not really reflect your
budget for Fixed Manufacturing overhead, it is a misnomer to label that column as the
“Flexible Budget.” Instead, we will call it the “Standard Cost.”
This is a major problem with Fixed Manufacturing Overhead. As we saw in our
discussion of Normal Costing, we estimate our Fixed Manufacturing Overhead and then
divide it by our estimated Cost Driver. We then apply the overhead as a function of the
Cost Driver despite the fact that a Fixed Cost has no relationship with its Cost Driver. At
the end of the year, it is likely that you will have applied an amount of Fixed
Manufacturing Overhead that is different than your actual Fixed Manufacturing
Overhead cost because: (i) your estimate of your Fixed Manufacturing Overhead is
wrong (Reason A); and/or (ii) your estimate of your Cost Driver is wrong (Reason B).
We create two Fixed Manufacturing Overhead variances in order to quantify how much
of the Fixed Manufacturing Overhead Budget Variance is due to each reason: (i) the
Fixed Overhead Spending Variance (Reason A), and (ii) the Fixed Overhead Volume
Variance (Reason B).
In order to calculate these two variances, we replace the middle (Mixed) column with a
new middle column, which contains the true budget for Fixed Manufacturing Overhead
(Static Budget).
Actual Cost
Static Budget
Standard Amount
AP X AQ
The Fixed Overhead Budget
SP X SQ
|________ __________| |___________ ________|
(-)
Spending Variance
(-)
Volume Variance
If you have not been given the Static Budget for Fixed Manufacturing Overhead, you
can calculate it. Remember that the Predetermined Fixed Overhead Rate is the
Standard Price (SP):
Fixed Overhead Budget / Estimated Number of Units = SP
Fixed Overhead Budget = SP x Estimated Number of Units
In order to calculate the Static Budget, you need to be given the estimated number of
units (or other Cost Driver) that was used in calculating the Standard Price for Fixed
Manufacturing Overhead. The Estimated Number of Units is sometimes referred to as
the firm’s Normal Capacity.
The Fixed Overhead Volume Variance compares: (i) the Static Budget, and (ii) the
Standard Cost for Fixed Manufacturing Overhead. It is called the Volume Variance
because the reason that the variance exists is the fact that the number of units (volume)
that you assumed when calculating the Standard Price is different than the actual
number of units produced. An unfavorable Volume Variance indicates that you
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Standard Costing By
B Dr. Mich
hael Consta
as
Page 9
produce
ed fewer units than you
u estimated
d. It is conssidered unffavorable because you
u are
under-uttilizing yourr factory. A favorable
e Volume V
Variance ind
dicates tha
at you produced
more un
nits than you estimated
d. It is cons
sidered favvorable because you a
are utilizing your
factory at
a a rate tha
at is higher than expec
cted.
describe an
Some authorities
a
a unfavora
able Volum
me Variancce is the ccost incurre
ed to
obtain fa
actory capa
acity that yo
ou did not use.
u
This i nterpretatio
on of the Vo
olume Variance
is not ac
ccurate. If your budge
et for Fixed
d Manufact uring Overhead at the
e actual levvel of
production is the same
s
as yo
our budget at the estim
mated level of producction, then tthere
was no additional cost
c
incurre
ed in order to obtain th
he unused capacity. T
The truth iss that
you just guessed wrong
w
on the
e activity le
evel when yyou calculatted the Stan
ndard Price
e.
xed Overhe
ead Spend
ding Varian
nce compa
ares: (i) w
what you sspent on F
Fixed
The Fix
Manufac
cturing Ove
erhead (ac
ctual), to (ii)
( your tru
ue budget for Fixed Manufactu
uring
Overhea
ad. There is
i no need to divide th
he variance into a Pricce Variance
e and a Qua
antity
Variance
e, because
e Fixed Cos
sts are a fu
unction of p
price alone. In theoryy, quantity does
not affec
ct Fixed Co
osts.
Standa
ard Costing
As we ha
ave mention
ned previou
usly, when
n you
use actua
al amounts as the co
ost compon
nents
that you re
ecord in your accounting system, it is
referred to
o as an Acctual Costing System
m. A
Normal Co
osting Syste
em uses th
he actual co
ost of
Direct Matterials and Direct Labo
or, but usess the
Standard Price and
d Actual Q
Quantity fo
or its
Manufactu
uring Overh
head. Thiss is the system
that we learned under Job-O
Order Cossting.
With a Sta
andard Cossting Syste
em, you use
e the
Standard Price and the Standa
ard Quantitty for
all of the
e cost components. Iff a Standarrd Costing System, th
he Flexible Budget Column
(and the
e Standard Amount Column)
C
in our table b
becomes th
he cost of tthe units th
hat is
transferrred to Work
k In Process.
With a Standard
S
Co
osting Systtem, all of th
he Budget Variances that we lea
arned above
e are
recorded
d in the acc
counting sy
ystem. Whe
en a cost iss incurred, tthe actual ccost is reco
orded
in the ac
ccounting system,
s
whe
en the costt is applied to the Worrk In Processs Accountt, it is
applied using the Standard
S
Price
P
and th
he Standarrd Quantity. The diffe
erence betw
ween
osts is reco
orded in the
e appropriate variance
e account. At the end
d of the yea
ar, all
these co
of these
e variances are closed
d to Cost off Goods So
old (or Cosst of Goodss Sold, Finished
Goods, and Work In Process)).
s
comm
ments and corrections
c
to
t me at [email protected]
Please send
Standard Costing By Dr. Michael Constas
Page 10
When you buy Direct Materials:
Dr.
Materials Inventory
Materials Price Variance (Dr. or Cr.)
Cr. Accounts Payable
SP x AQ
AQ (AP – SP)
AP x AQ
As noted above, when using Standard Costing, the Materials Price Variance is
calculated using the amount purchased as the Actual Quantity because the amount
used is not known at this point.
When you requisition Direct Materials:
Dr.
Work In Process
Materials Usage Variance (Dr. or Cr.)
Cr. Materials Inventory
SP x SQ
SP (AQ – SQ)
SP x AQ
When you incur Direct Labor:
Dr.
Work In Process
Labor Rate Variance (Dr. or Cr.)
Labor Efficiency Variance (Dr. or Cr.)
Cr. Wages Payable
SP x SQ
AQ (AP – SP)
SP (AQ – SQ)
AP x AQ
In the Standard Costing system, you can divide your Manufacturing Overhead into two
accounts, Variable Manufacturing Overhead and Fixed Manufacturing Overhead. As
we saw in the Job-Order Costing discussion, the amounts remaining in the overhead
accounts at the end of the period represent the amounts of the overhead variances.
Debits are actual costs incurred and the credits are the Standard Costs applied:
When you incur Variable Manufacturing Overhead (actual):
Dr.
Variable Manufacturing Overhead
Cr.
Accounts Payable
AP x AQ
AP x AQ
When you apply Variable Manufacturing Overhead (standard):
Dr.
Work In Process
Cr.
Variable Manufacturing Overhead
SP x SQ
SP x SQ
When you incur Fixed Manufacturing Overhead (actual):
Dr.
Fixed Manufacturing Overhead
Cr.
Accounts Payable
AP x AQ
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AP x AQ
Standard Costing By Dr. Michael Constas
Page 11
When you apply Fixed Manufacturing Overhead (standard):
Dr.
Work In Process
Cr.
Fixed Manufacturing Overhead
SP x SQ
SP x SQ
At the end of the period, we close these accounts to the appropriate variance accounts.
Whether accounts are debited or credited depends upon: (i) whether the overhead is
over-applied or under applied, and (ii) whether the variance in question is favorable or
unfavorable.
For example, if the Fixed Manufacturing Overhead was under-applied (a debit balance
remains in the Fixed Manufacturing Overhead account), and you had an unfavorable
Fixed Overhead Spending Variance and an unfavorable Fixed Overhead Volume
Variance:
Dr.
Fixed Overhead Spending Variance
Fixed Overhead Volume Variance
Cr.
Fixed Manufacturing Overhead
(AQxAP) – Budget
Budget – (SPxSQ)
(APxAQ)-(SPxSQ)
If the Variable Manufacturing Overhead was over-applied (a credit balance remains in
the Variable Manufacturing Overhead account), and you had a favorable Variable
Overhead Spending Variance and a favorable Variable Overhead Efficiency Variance:
Dr. Variable Manufacturing Overhead
Cr. Variable Overhead Spending Variance
Variable Overhead Efficiency Variance
(APxAQ)-(SPxSQ)
AQ (AP – SP)
SP (AQ – SQ)
Two- and Three Overhead Variance Analyses
In a Standard Costing System that we discussed above, The Fixed and Variable
Manufacturing Overhead was applied to production in separate, dual application rates.
This information was used to calculate four overhead variances. If a company wanted
to apply overhead in a single application rate, then it may not have sufficient information
regarding the actual amount of Fixed and Variable Manufacturing Overhead to permit it
to calculate the four overhead variances that we have discussed previously . In this
case, a firm can calculate either two overhead variances or three overhead variances:
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Standard Costing By Dr. Michael Constas
Page 12
Two overhead variances are calculated as follows:
Actual
Flexible Variable & Static
Fixed Overhead Budget
Standard Cost
AP X AQ
[SP(Variable Only) x SQ] +
The Fixed Overhead Budget
SP X SQ
|________ __________| |___________ ________|
(-)
O/H Budget Variance
(-)
Volume Variance
The middle column represents your true budget for Manufacturing Overhead. The fixed
portion of the middle column is the Static Budget, and the variable portion is the Flexible
Budget. The Budget Variance represents how much a firm’s actual overhead exceeded
the amount of overhead that a firm really estimated.
Three overhead variances are calculated as follows:
Actual
Mixed Variable +
Static Fixed O/H
Flexible Variable & Static
Fixed Overhead Budget
Standard Cost
AP X AQ
[SP(Var. Only) x AQ]
+ Fixed O/H Budget
[SP(Variable Only) x SQ] +
Fixed Overhead Budget
SP X SQ
|________ ________| |_______ ________________| |__ ________|
(-)
O/H Spending Variance
(-)
Variable O/H Efficiency Variance
(-)
Volume Variance
The Spending Variance is a combined figure for both Fixed and Variable Manufacturing
Overhead.
PROBLEMS
E-1. The Wright Company has a standard costing system. The following data are
available for September:
Actual quantity of direct materials purchased ........
Standard price of direct materials ...........................
Material price variance ...........................................
25,000 pounds
$2 per pound
$2,500 unfavorable
The actual price per pound of direct materials purchased in September is:
A) $1.85.
B) $2.00.
C) $2.10.
D) $2.15.
Please send comments and corrections to me at [email protected]
Standard Costing By Dr. Michael Constas
Page 13
E-2. The Cox Company uses standard costing. The following data are available for
April:
Actual quantity of direct materials used .....
Standard price of direct materials ...............
Material quantity variance ..........................
12,200 gallons
$4 per gallon
$2,000 unfavorable
The standard quantity of material allowed for April production is:
A) 14,200 gallons.
B) 12,700 gallons.
C) 11,700 gallons.
D) 10,200 gallons.
E-3. Palo Corp. manufactures one product with a standard direct labor cost of 2 hours
at $6.00 per hour. During March, 500 units were produced using 1,050 hours at
$6.10 per hour. The unfavorable direct labor efficiency variance is:
A) $100.
B) $105.
C) $300.
D) $305.
E-4. The following labor standards have been established for a particular product:
Standard labor hours per unit of output .....
9.0 hours
Standard labor rate ..................................... $15.10 per hour
The following data pertain to operations concerning the product for the last
month:
Actual hours worked ........... 8,100 hours
Actual total labor cost ......... $119,880
Actual output....................... 800 units
What is the labor rate variance for the month?
A) $11,160 F
B) $13,320 U
C) $11,160 U
D) $2,430 F
Please send comments and corrections to me at [email protected]
Standard Costing By Dr. Michael Constas
Page 14
E-5. The following standards for variable manufacturing overhead have been
established for a company that makes only one product:
Standard hours per unit of output..........
3.5 hours
Standard variable overhead rate............ $15.20 per hour
The following data pertain to operations for the last month:
Actual hours .......................................... 3,800 hours
Actual total variable overhead cost.......
$59,090
Actual output......................................... 800 units
What is the variable overhead efficiency variance for the month?
A) $15,550 U
B) $15,200 U
C) $16,530 U
D) $980 F
E-6. The following standards for variable manufacturing overhead have been
established for a company that makes only one product:
Standard hours per unit of output.........
Standard variable overhead rate...........
1.2 hours
$19.80 per hour
The following data pertain to operations for the last month:
Actual hours ..........................................
Actual total variable overhead cost.......
Actual output.........................................
2,100 hours
$40,740
1,600 units
What is the variable overhead spending variance for the month?
A) $2,724 U
B) $3,492 U
C) $840 F
D) $768 U
Please send comments and corrections to me at [email protected]
Standard Costing By Dr. Michael Constas
Page 15
Use the following to answer questions E-7 through E-11:
Cox Engineering performs cement core tests in its laboratory. The following standards
have been set for each core test performed:
Direct materials.............................
Direct labor ...................................
Variable manufacturing overhead .
Standard
Hours or
Quantity
3 pounds
0.4 hours
0.4 hours
Standard Price
or Rate
$0.75 per pound
$12 per hour
$9 per hour
During March, the laboratory performed 2,000 core tests. On March 1 no direct
materials (sand) were on hand. Variable manufacturing overhead is assigned to core
tests on the basis of direct labor hours. The following events occurred during March:
- 8,600 pounds of sand were purchased at a cost of $7,310.
- 7,200 pounds of sand were used for core tests.
- 840 actual direct labor hours were worked at a cost of $8,610.
- Actual variable manufacturing overhead incurred was $3,200.
E-7. The materials price variance for March is:
A) $860 unfavorable.
B) $860 favorable.
C) $281 unfavorable.
D) $281 favorable.
E-8. The materials quantity variance for March is:
A) $ 900 favorable.
B) $1,950 favorable.
C) $1,950 unfavorable.
D) $ 900 unfavorable.
E-9. The labor rate variance for March is:
A) $4,578 unfavorable.
B) $1,470 unfavorable.
C) $4,578 favorable.
D) $1,470 favorable.
E-10. The labor efficiency variance for March is:
A) $480 favorable.
B) $480 unfavorable.
C) $192 favorable.
D) $192 unfavorable.
Please send comments and corrections to me at [email protected]
Standard Costing By Dr. Michael Constas
Page 16
E-11. The variable overhead efficiency variance for March is:
A) $320 unfavorable.
B) $320 favorable.
C) $360 unfavorable.
D) $360 favorable.
For the following question(s) refer to the information below.
Actual direct labor-hours used
Standard materials price per pound
Actual direct labor rate per hour
Standard quantity of direct materials used
Standard direct labor-hours used
Actual direct materials price
Standard direct labor rate per
Actual quantity of direct materials purchased & used
315 hours
$2.50 per lb.
$3.00
450 lbs.
300 hours
$2.52 per lb.
$3.10
445 lbs.
E-12 What is the amount of the materials efficiency (quantity) variance? Indicate
whether it is favorable or unfavorable.
A.
$12.60
B.
$12.50
C.
$ 9 .10
D.
$ 9 .00
E-13 What is the amount of the materials price variance? Indicate whether it is
favorable or unfavorable.
A.
$8.90
B.
$8.00
C.
$9.90
D.
$9.00
E-14 If 450 pounds had been purchased, but only 445 pounds had been used,
what would be the amount of the materials price variance? Indicate whether
it is favorable or unfavorable.
A. $8.90
B. $8.00
C. $9.90
D. $9.00
E-15
A.
B.
C.
D.
What is the amount of the labor rate (price) variance?
31.50 favorable
31.50 unfavorable
30.00 favorable
30.00 unfavorable
Please send comments and corrections to me at [email protected]
Standard Costing By Dr. Michael Constas
E-16
A.
B.
C.
D.
Page 17
What is the amount of the labor efficiency (quantity) variance?
$45.50 favorable
$45.50 unfavorable
$46.50 favorable
$46.50 unfavorable
For the following question(s) refer to the information below.
The following information relates to the month of April for The Marilyn
Manufacturing Company which uses a standard cost accounting system.
Actual total direct labor cost
Actual direct hours labor used (DLH)
Standard hours allowed for actual output
Direct labor rate variance (unfavorable)
Actual variable overhead cost
Actual fixed overhead cost
Budgeted fixed overhead cost
"Normal" activity in hours
Total overhead application rate per standard DLH
$43,400
14,000
15,000
$1,400
$22,000
$10,000
$9,000
12,000
$2.25
E-17 What is the Marilyn’s fixed overhead standard price?
A.
B.
C.
D.
$ 1.00
$ .75
$ .60
$ 1.10
E-18 What was the amount of Marilyn's fixed overhead volume variance for April?
(Indicate whether the variance was favorable or unfavorable.)
A.
B.
C.
D.
$ 500
$1,000
$1,750
$2,250
E-19 What was the amount of Marilyn's fixed overhead spending variance for
April? (Indicate whether the variance was favorable or unfavorable.)
A.
B.
C.
D.
$ 500
$1,000
$1,750
$2,250
Please send comments and corrections to me at [email protected]
Standard Costing By Dr. Michael Constas
Page 18
E-20
A.
B.
C.
D.
What is Marilyn’s variable overhead standard price?
$ 1.00
$ 1.25
$ 1.35
$ 1.50
E-21
A.
B.
C.
D.
What is the amount of the variable overhead spending variance?
$1,000 favorable
$1,000 unfavorable
$1,500 favorable
$1,500 unfavorable
E-22
A.
B.
C.
D.
P-1
What is the amount of the variable overhead efficiency variance?
$1,000 favorable
$1,000 unfavorable
$1,500 favorable
$1,500 unfavorable
The following actual and standard cost data for Direct Materials and Direct Labor
relate to the production of 2,000 units of a product:
Direct
Materials:
Direct Labor :
Actual Costs
4,200 lbs. @ $4.90
Standard Costs
4,000 lbs. @ $5.20
5,700 hrs. @ $9.30
6,000 hrs. @ $9.50
Determine the following variances:
a. Material Price Variance.
b. Material Usage Variance.
c. Labor Rate Variance.
d. Labor Efficiency Variance.
P-2
Marshfield Company considers 8,000 direct labor hours or 4,000 units of product
its normal monthly capacity. Its standard Variable and Fixed Manufacturing
Overhead rates are $4 and $7, respectively, per Direct Labor hour. During the
current month, $31,500 of Variable Manufacturing Overhead cost and $51,600
Fixed Manufacturing Overhead cost were incurred in working 7,500 Direct Labor
hours to produce 3,600 units of product. The Fixed Manufacturing Overhead
budget was $56,000.
Determine the following variances, and indicate whether each is favorable or
unfavorable:
a. Variable Overhead Spending Variance.
b. Variable Overhead Efficiency Variance.
c. Fixed Overhead Spending Variance.
d. Fixed Overhead Volume Variance.
Please send comments and corrections to me at [email protected]
Standard Costing By Dr. Michael Constas
P-3
Page 19
The following summary data relate to the operations of Dobson Company for
April, during which 9,000 finished units were produced. Normal monthly capacity
was 20,000 Direct Labor hours and the Fixed Manufacturing Overhead budget
for April was $50,000.
Std. Unit
Costs
Direct Materials:
Standard (4 lbs. @ $2.20/lb.)
Actual (38,000 lbs. @ $2.00/lb.)
$8.80
Direct Labor::
Standard (2 hrs. @ $11.00/hr.)
Actual (18,500 hrs. @ $11.30/hr.)
22.00
Variable Manufacturing Overhead:
Standard (2 hrs. @ $3.00/hr.)
Actual
Fixed Manufacturing Overhead:
Standard (2 hrs. @ $2.50/hr.)
Actual
Total
Actual Total
Costs
$76,000
209,050
6.00
54,900
5.00
_______
$41.80
52,000
$391,000
Determine the following variances and indicate whether each is favorable or
unfavorable:
a. Material Price and Usage Variances.
b. Labor Rate and Efficiency Variances.
c. Variable Overhead Spending and Efficiency Variances.
d. Fixed Overhead Spending and Volume Variances.
Please send comments and corrections to me at [email protected]
Standard Costing By Dr. Michael Constas
P-4
Page 20
The following summary data relate to the operations of Randolph Company for
July, during which 4,500 finished units are produced:
Std. Unit
Costs
Direct Materials:
Standard (0.6 lb. @ $9.00/lb.)
Actual (3,000 lbs. @ $9.40/lb.)
$ 5.40
Direct Labor::
Standard (0.8 hr. @ $12.80/hr.)
Actual (3,800 hrs. @ $12.50/hr.)
10.24
Actual Total
Costs
$ 28,200
47,500
Variable Manufacturing Overhead:
Standard (0.8 hr. @ $ 7.50/hr.)
6.00
Actual
30,100
Fixed Manufacturing Overhead*:
Standard (0.8 hr. @ $22.50/hr.)
18.00
Actual
_______
88,700
Total
$39.64
$194,500
* Fixed overhead budget is $90,000 at normal monthly capacity of 4,000
direct labor hours.
Determine the following variances and indicate whether each is favorable or
unfavorable:
a. Material Price and Usage Variances.
b. Labor Rate and Efficiency Variances.
c. Variable Overhead Spending and Efficiency Variances.
d. Fixed Overhead Spending and Volume Variances.
Please send comments and corrections to me at [email protected]
Standard Costing By Dr. Michael Constas
P-5
Page 21
The following summary data relate to the operations of Brown Company for May,
during which 2,000 finished units were produced. Normal monthly capacity was
1,100 Direct Labor hours and the Fixed Manufacturing Overhead budget for April
was $6,600.
Std. Unit
Costs
Direct Materials:
Standard (3 lbs. @ $2.00/lb.)
Actual (6,400 lbs. @ $2.20/lb.)
$6.00
Direct Labor::
Standard (.5 hrs. @ $14.00/hr.)
Actual (950 hrs. @ $13.70/hr.)
7.00
Variable Manufacturing Overhead:
Standard (.5 hrs. @ $4.00/hr.)
Actual
Fixed Manufacturing Overhead:
Standard (.5 hrs. @ $6.00/hr.)
Actual
Total
Actual Total
Costs
$14,080
13,015
2.00
4,300
3.00
______
$18.00
6,820
$38,215
Determine the following variances and indicate whether each is favorable or
unfavorable:
a. Material Price and Usage Variances.
b. Labor Rate and Efficiency Variances.
c. Variable Overhead Spending and Efficiency Variances.
d. Fixed Overhead Spending and Volume Variances.
Please send comments and corrections to me at [email protected]
Standard Costing By Dr. Michael Constas
P-6.
Page 22
Brown, Inc. considers 30,000 direct labor hours or 10,000 units of product its
normal monthly capacity. Brown believes that it should take 8 pounds of
materials to make one unit. Its standard variable and fixed factory overhead
rates are $3 and $2, respectively, per direct labor hour. During the current
month, $148,000 of direct materials, $293,800 of direct labor, $80,000 of variable
overhead cost and $63,000 of fixed overhead cost were incurred to produce
9,000 finished units of product. Normal monthly capacity is 30,000 direct labor
hours and the fixed overhead budget is $60,000. Brown spent $2 per pound on
materials and $11.30 per hour for labor. Brown thought that it would spend $2.20
per pound on material and $11 per hour for labor. Overhead is applied using
direct labor hours.
Determine the following variances and indicate whether each is
favorable or unfavorable:
P-7.
Material Price Variance:
$______________
Material Efficiency (Usage or Quantity) Variance:
$______________
Labor Price (Rate) Variance):
$______________
Labor Efficiency (Quantity) Variance:
$______________
Variable Overhead Price (Spending) Variance:
$______________
Variable Overhead Efficiency (Quantity) Variance:
$______________
Fixed Overhead Spending Variance:
$______________
Fixed Overhead Volume Variance:
$______________
ABC Company has the following information available for the current year:
Standard:
Material:
Labor:
Actual:
Material:
Labor:
3.5 feet per unit @ $2.60 per foot
5 direct labor hours @$8.50 per unit
95,625 feet used (100,000 feet purchased @ $2.50 per foot)
122,400 direct labor hours incurred per unit @ $8.35 per hour
25,500 units were produced
Compute the material purchase price and quantity/efficiency variances.
Compute the labor rate and efficiency variances.
Please send comments and corrections to me at [email protected]
Standard Costing By Dr. Michael Constas
P-8.
Page 23
DEF Company has the following information available for the current year:
Standard:
Direct labor hours per unit:
Variable overhead per DLH:
Fixed overhead per DLH:
Normal monthly capacity:
5
$ .75
$1.90
8900 Direct Labor Hours
Actual:
Units produced:
Direct labor hours:
Variable overhead:
Fixed overhead:
1800
8900
$6,400
$17,500
Compute the variable overhead spending variance.
Compute the variable overhead efficiency variance.
Compute the fixed overhead spending variance.
Compute the fixed overhead volume variance.
SOLUTIONS
E-1
C is correct.
Actual Cost
Mixed
AP X AQ
SP X AQ
$? x 25,000 lbs
$2.00 x 25,000 lbs
$?
$50,000
|________ ________|
(-)
Price Variance
Flexible Budget
SP X AQ
SP X SQ
(-)
Quantity Variance
$? - $50,000 = $2,500 U
The actual cost has to be $52,500. The actual price is obtained by dividing
$52,500/25,000 = $2.10.
Please send comments and corrections to me at [email protected]
Standard Costing By Dr. Michael Constas
E-2
Page 24
C is correct.
Mixed
Actual Cost
Flexible Budget
AP X AQ
SP X AQ
SP X SQ
$4.00 x 12,200 gals
$4.00 x ? gals
$48,800
$?
|________ ________________| |________________ ________|
(-)
(-)
Price Variance
Quantity Variance
$48,800 - $? = $2,000 U
The flexible budget must be $46,800. In order to get the standard quantity you need to
divide $46,800/4.00 = 11,700 gallons
E-3 C is correct.
Actual Cost
Mixed
AP X AQ
SP X AQ
$6.00 x 1,050 hrs
$6,300
|________ ________________|
|__________
(-)
Rate Variance
Flexible Budget
SP X SQ
$6.00 x (2 x 500) hrs
$6,000
________|
(-)
Efficiency Variance
$6,300 - $6,000 = $300 U
E-4
D is correct.
Actual Cost
Mixed
AP X AQ
$? x 8,100 hrs
$119,880
SP X AQ
$15.10 x 8,100 hrs
$122,310
________________|
|________
|__________
(-)
Rate Variance
Flexible Budget
SP X SQ
(-)
Efficiency Variance
$119,800 – $122,310 = -$2,430 F
Please send comments and corrections to me at [email protected]
Standard Costing By Dr. Michael Constas
E-5
Page 25
B is correct.
Actual Cost
Mixed
AP X AQ
SP X AQ
$15.20 x 3,800 hrs
$57,760
|________ ________________|
|__________
(-)
Spending Variance
Flexible Budget
SP X SQ
$15.20 x (3.5 x 800) hrs
$42,560
________|
(-)
Efficiency Variance
$57,760 - $42,560 = $15,200 U
E-6
C is correct.
Actual Cost
Mixed
SP X AQ
$19.80 x 2,100 hrs
$40,740
$41,580
|________ ________________|
|__________
(-)
Spending Variance
Flexible Budget
AP X AQ
SP X SQ
________|
(-)
Efficiency Variance
$40,740 - $41,580 = -$840 F
E-7
A is correct.
Actual Cost
AP X AQ
SP X AQ
$? x 8,600 lbs
$.75 x 8,600 lbs
$7,310
$6,450
|________ ________|
(-)
Price Variance
$7,310 - $6,450 = $860 U
E-8
Mixed
Flexible Budget
SP X AQ
SP X SQ
$.75 x 7200
$.75 x (3 x 2000)
$5,400
$4,500
|________ ________|
(-)
Quantity Variance
$5,400 - $4,500 = $900 U
D is correct. See above table.
Please send comments and corrections to me at [email protected]
Standard Costing By Dr. Michael Constas
E-9
Page 26
D is correct.
Actual Cost
Mixed
AP X AQ
SP X AQ
$12 x 840 hrs
$8,610
$10,080
________________|
|________
|__________
(-)
Rate Variance
$8,610 – $10,080 = -$1,470 F
Flexible Budget
SP X SQ
$12 x (.4 x 2000) hrs
$9,600
________________|
(-)
Efficiency Variance
$10,080 - $9,600 = $480 U
E-10 B is correct. See above table.
E-11 C is correct.
Actual Cost
Mixed
AP X AQ
SP X AQ
$9 x 840 hrs
$7,560
________________|
|________
|__________
(-)
Spending Variance
Flexible Budget
SP X SQ
$9 x (.4 x 2000) hrs
$7,200
________________|
(-)
Efficiency Variance
$7,560 - $7,200 = $360 U
E-12 Answer: B favorable
AP x AQ
$2.52 x 445
1121.4
1121.4 – 1112.5 = 8.9U
Price Variance
SP x AQ
$2.50 x 445
1112.5
SP x SQ
$2.50 x 450
1125
1112.5 – 1125 = -12.5F
Quantity Variance
E-13 Answer: A unfavorable (See table above)
Please send comments and corrections to me at [email protected]
Standard Costing By Dr. Michael Constas
Page 27
E-14 Answer: D unfavorable
AP x AQ
SP x AQ
$2.52 x 450
$2.50 x 450
1134
1125
1134 – 1125 = 9U
Price Variance
E-15
Answer: A
AP x AQ
SP x AQ
SP x SQ
$3.00 x 315
$3.10 x 315
$3.10 x 300
945
976.5
930
945 – 976.5 = -31.5F
976.5 – 930 = 46.5U
Price Variance
Quantity Variance
E-16 Answer: D See Above Chart.
E-17 Answer B
SP (FO/H) = Fixed O/H Budget/Normal Capacity
SP (FO/H) = $9,000 / 12,000 = $ 0.75
E-18
Answer: D favorable
AP x AQ
FO/H Budget
$10,000
$9,000
$10K - $9K = $1KU
Spending Variance
SP x SQ
$.75 x 15,000
$11,250
$9K – $11,250 = -$2,250F
Volume Variance
E-19
Answer: B unfavorable See above chart.
E-20
Answer D
SP (FO/H) = Fixed O/H Budget/Normal Capacity
SP (FO/H) = $9,000 / 12,000 = $ 0.75
SP (VO/H) = Total Overhead Application Rate – FO/H SP
SP (VO/H) = $2.25 - $.75 = $1. 50
E-21
Answer: B
AP x AQ
SP x AQ
SP x SQ
$1.50 x 14,000
$1.50 x 15,000
$22,000
$21,000
$22,500
$22,000 – $21,000 = $1,000 U
$21,000 – $22,500 = -$1,500 F
Spending Variance
Efficiency Variance
E-22
Answer: C (See above chart.)
Please send comments and corrections to me at [email protected]
Standard Costing By Dr. Michael Constas
Page 28
P-1
Mixed
Flexible Budget
Actual Cost
AP X AQ
SP X AQ
SP X SQ
$4.90 X 4200
$5.20 X 4200
$5.20 X 4000
$20,580
$21,840
$20,800
|_________ ________________| |________________ ________|
(-)
(-)
Material Price Variance
Material Usage Variance
-$1,260 F
$1,040 U
Actual Cost
Mixed
Flexible Budget
AP X AQ
SP X AQ
SP X SQ
$9.30 X 5700
$9.50 X 5700
$9.50 X 6000
$53,010
$54,150
$57,000
|_________ ________________| |________________ ________|
(-)
(-)
Labor Rate Variance
Labor Efficiency Variance
-$1,140 F
-$2,850 F
P-2
Actual Cost
AP X AQ
Mixed
Flexible Budget
SP X AQ
SP X SQ
$4.00 X 7,500
$4.00 X 7,200 (2 x 3,600)
$31,500
$30,000
$28,800
|_________ _____________| |______________ __________|
(-)
(-)
Variable Overhead Spending Variance
Variable Overhead Efficiency Variance
$1,500 U
Actual Cost
AP X AQ
$1,200 U
Fixed Overhead Static Budget
Standard
SP X SQ
$7.00 X 7,200 (2 x 3,600)
$51,600
$56,000
$50,400
|_________ ________________| |______________ ________|
(-)
(-)
Fixed Overhead Spending Variance
Fixed Overhead Volume Variance
-$4,400 F
$5,600 U
Please send comments and corrections to me at [email protected]
Standard Costing By Dr. Michael Constas
Page 29
P-3
a. Direct Materials variances:
Actual Cost
Mixed
Flexible Budget
AP X AQ
SP X AQ
SP X SQ
$2.00 X 38,000
$2.20 X 38,000
$2.20 X 36,000 (4x9000)
$76,000
$83,600
$79,200
|_________ _______________| |______________ __________|
(-)
(-)
Material Price Variance
Material Usage Variance
-$7,600 F
$4,400 U
b. Direct Labor variances:
Actual Cost
Mixed
Flexible Budget
AP X AQ
SP X AQ
SP X SQ
$11.30 X 18,500
$11.00 X 18,500
$11.00 X 18,000 (2x9,000)
$209,050
$203,500
$198,000
|_________ _____________| |______________ __________|
(-)
(-)
Labor Rate Variance
Labor Efficiency Variance
$5,550 U
$5,500 U
c. Variable Manufacturing Overhead variances:
Actual Cost
AP X AQ
Mixed
Flexible Budget
SP X AQ
SP X SQ
$3.00 X 18,500
$3.00 X 18,000 (2 x 9,000)
$54,900
$55,500
$54,000
|_________ _____________| |______________ __________|
(-)
(-)
Variable Overhead Spending Variance
Variable Overhead Efficiency Variance
-$600 F
$1,500 U
Please send comments and corrections to me at [email protected]
Standard Costing By Dr. Michael Constas
Page 30
d. Fixed Manufacturing Overhead variances:
Standard
SP X SQ
$2.50 X 18,000 (2 x 9,000)
$52,000
$50,000
$45,000
|_________ ______________| |_____________ __________|
(-)
(-)
Fixed Overhead Spending Variance
Fixed Overhead Volume Variance
Actual Cost
AP X AQ
Fixed Overhead Static Budget
$2,000 U
$5,000 U
P-4
a. Direct Materials variances:
Actual Cost
Mixed
Flexible Budget
AP X AQ
SP X AQ
SP X SQ
$9.40 X 3,000
$9.00 X 3,000
$9.00 X 2,700 (.6x4,500)
$28,200
$27,000
$24,300
|_________ _______________| |______________ _________|
(-)
(-)
Material Price Variance
Material Usage Variance
$1,200 U
$2,700 U
b. Direct Labor variances:
Actual Cost
Mixed
Flexible Budget
AP X AQ
SP X AQ
SP X SQ
$12.50 X 3,800
$12.80 X 3,800
$12.80 X 3,600 (.8x4,500)
$47,500
$48,640
$46,080
|_________ _____________| |______________ __________|
(-)
(-)
Labor Rate Variance
Labor Efficiency Variance
-$1,140 F
$2,560 U
Please send comments and corrections to me at [email protected]
Standard Costing By Dr. Michael Constas
Page 31
c. Variable Manufacturing Overhead variances:
Mixed
Flexible Budget
SP X AQ
SP X SQ
$7.50 X 3,800
$7.50 X 3,600 (.8 x 4,500)
$30,100
$28,500
$27,000
|_________ _____________| |______________ __________|
(-)
(-)
Variable Overhead Spending Variance
Variable Overhead Efficiency Variance
Actual Cost
AP X AQ
$1,600 U
$1,500 U
d. Fixed Manufacturing Overhead variances:
Actual Cost
AP X AQ
Fixed Overhead Static Budget
Standard
SP X SQ
$22.50 X 3,600 (.8 x 4,500)
$88,700
$90,000
$81,000
|_________ ______________| |____________ __________|
(-)
(-)
Fixed Overhead Spending Variance
Fixed Overhead Volume Variance
-$1,300 F
$9,000 U
9-5
a. Direct Material variances:
Actual Cost
Mixed
Flexible Budget
AP X AQ
SP X AQ
SP X SQ
$2.20 X 6,400
$2.00 X 6,400
$2.00 X 6,000 (3x2,000)
$14,080
$12,800
$12,000
|_________ _______________| |______________ _________|
(-)
(-)
Material Price Variance
Material Usage Variance
$1,280 U
$800 U
Please send comments and corrections to me at [email protected]
Standard Costing By Dr. Michael Constas
Page 32
b. Direct Labor variances:
Mixed
Flexible Budget
Actual Cost
AP X AQ
SP X AQ
SP X SQ
$13.70 X 950
$14.00 X 950
$14.00 X 1,000 (.5x2,000)
$13,015
$13,300
$14,000
|_________ _____________| |______________ __________|
(-)
(-)
Labor Rate Variance
Labor Efficiency Variance
-$285 F
-$700 F
c. Variable Manufacturing Overhead variances:
Actual Cost
AP X AQ
Mixed
Flexible Budget
SP X AQ
SP X SQ
$4.00 X 950
$4.00 X 1,000 (.5 x 2,000)
$4,300
$3,800
$4,000
|_________ _____________| |______________ __________|
(-)
(-)
Variable Overhead Spending Variance
Variable Overhead Efficiency Variance
$500 U
-$200 F
d. Fixed Manufacturing Overhead variances:
Actual Cost
AP X AQ
Fixed Overhead Static Budget
Standard
SP X SQ
$6.00 X 1,000 (.5 x 2,000)
$6,820
$6,600
$6,000
|_________ ______________| |____________ __________|
(-)
(-)
Fixed Overhead Spending Variance
Fixed Overhead Volume Variance
$220 U
$600 U
Please send comments and corrections to me at [email protected]
Standard Costing By Dr. Michael Constas
Page 33
P-6.
Material Variances:
We produced 9,000 units this month.
Direct Materials:
Actual Cost
Mixed Cost
Standard Cost (Budget/Applied)
AP x AQ
SP x AQ
SP x SQ
_$2.00 x 74,000*_
$2.20 x 74,000*
$2.20 x (8 x 9,000 = 72,000 lbs)
$148,000
$162,800
$158,400
(-) $14,800 (favorable)
$4,400 (unfavorable)
Material Price Variance
Material Quantity Variance
*We spent $148,000 on materials this month, and we paid $2 per pound. Therefore, we
bought 74,000 pounds (actual quantity)
Labor Variances:
The fact that normal monthly capacity is either 30,000 DLH or 10,000 units of product
means that the two amounts represent the same amount of work. We, therefore, think
(standard) that it takes 30,000 DLH to make 10,000 units of product. This means that it
we think (standard) that it takes 3 DLHs to make one unit of product. That is the
standard quantity of DLHs for one unit.
Actual Cost
AP x AQ
$11.30 x 26,000*
$293,800
$7,800 (unfavorable)
Labor Rate Variance
Direct Labor:
Mixed Cost
SP x AQ
$11 x 26,000*
$286,000
Standard Cost (Budget/Applied)
SP x SQ
$11 x (3 x 9,000 = 27,000 DLHs)
$297,000
(-)$11,000 (favorable)
Labor Efficiency Variance
Variable Overhead Variances:
*We spent $293,800 on direct labor this month, and we paid $11.30 per hour.
Therefore, we had 26,000 direct labor hours this month (actual quantity).
Variable Overhead:
Actual Cost
Mixed Cost
Standard Cost (Budget/Applied)
AP x AQ
SP x AQ
SP x SQ
? x 26,000*
$3 x 26,000*
$3 x (3 x 9,000 = 27,000* DLHs)
$80,000
$78,000
$81,000
$2,000 (unfavorable)
(-)$3,000 (favorable)
Variable Overhead Spending Variance
Variable Overhead Efficiency Variance
Please send comments and corrections to me at [email protected]
Standard Costing By Dr. Michael Constas
Page 34
*Got DLHs from Labor Variance calculations.
Fixed Overhead:
Actual Cost
Fixed O/H Budget
Standard Cost (Budget/Applied)
AP x AQ
SP x AQ
SP x SQ
_________
$2 x 30,000*
$2 x (3 x 9,000 = 27,000** DLHs)
$63,000
$60,000
$54,000
$3,000 (unfavorable)
$6,000 (unfavorable)
Fixed Overhead Budget Variance
Fixed Overhead Volume Variance
* Normal Monthly capacity.
** From Labor Variances.
P-7.
We produced 25,500 units this month.
Actual Cost
Direct Materials:
Mixed Cost
Standard Cost (Budget/Applied)
AP x AQ
SP x AQ
SP x SQ
Purchased
Used
$2.50 x 100,000*
$2.60 x100,000* $2.60 x 95,625** $2.60 x (3.5 x 25,500 = 89,250 ft)
$250,000
$260,000
$248,625
$232,050
(-) $10,000 (favorable)
$16,575 (unfavorable)
Material Price Variance
Material Quantity Variance
* Amount Purchased
** Amount Used
Direct Labor:
Actual Cost
Mixed Cost
Standard Cost (Budget/Applied)
AP x AQ
SP x AQ
SP x SQ
$8.50 x 122,400
$8.50 x (5 x 25,500 = 127,500 DLHs)
$8.35 x 122,400
$1,022,040
$1,040,400
$1,083,750
(-) $18,360 (favorable)
(-)$43,350 (favorable)
Labor Rate Variance
Labor Efficiency Variance
Please send comments and corrections to me at [email protected]
Standard Costing By Dr. Michael Constas
P-8.
Page 35
We produced 1800 units
Variable Overhead:
Actual Cost
Mixed Cost
Standard Cost (Budget/Applied)
AP x AQ
SP x AQ
SP x SQ
_______
$.75 x 8,900
$.75 x (5 x 1,800 = 9,000 DLH)
$6,400
$6,675
$6,750
(-) $275 (favorable)
(-)$75 (favorable)
Variable Overhead Spending Variance
Variable Overhead Efficiency Variance
Fixed Overhead:
Actual Cost
Fixed O/H Budget
Standard Cost (Budget/Applied)
AP x AQ
SP x Normal Capacity
SP x SQ
$1.90 x (5 x 1,800 = 9,000 DLHs)
_________
$1.90 x 8,900
$17,500
$16,910
$17,100
$590 (unfavorable)
(-) $190 (favorable)
Fixed Overhead Budget Variance
Fixed Overhead Volume Variance
Please send comments and corrections to me at [email protected]