STANDARD

COSTING &
VARIANCE
ANALYSIS
Prepared by: Cristopherson A. Perez, CPA
NATURE OF STANDARD
COSTING
 The use of standard cost is an effective cost management tool.
 Objective of setting standards is to measure the efficiency and to monitor costs by assigning
responsibility for deviations from the standards.
 Three basic parts: (a) predetermined or standard performance level, (b) measure of actual
performance, (c) comparison between actual and standard performance.
 All inventories are carried at standard costs. Actual costs are never entered into inventory
accounts. At the end of a period, actual costs are compared with standard costs to determine
variances.
 When actual price/usage of inputs > standard price/usage of inputs, unfavorable variance
occurs. When actual price/usage of inputs < standard price/usage of inputs, favorable
variance occurs. Unfavorable variances are always debits and favorable variances are always
credits
ADVANTAGES OF STANDARD
COSTING
The use of standard costing is widespread in the manufacturing industry because of several
advantages:
a. Standard costs provide a very useful tool in measuring the performance of one company,
and it helps management in their planning activities
b. The resulting variances after comparing the actual performance and standard set by the
company provide a means of giving rewards to deserving employees based on performance
evaluation.
c. The use of standard costs helps production managers highlight variances in management by
exception.
d. It is easier to use than actual or normal costing because costing of inventories and cost of
sales is simplified.
ANALYSIS OF VARIANCES
AND JOURNAL ENTRIES
DIRECT MATERIALS VARIANCE
There are two variances in DM variance:
1. Materials Price Variance – indicates whether the amount paid for materials
was below or above the standard price
2. Materials Quantity or Usage Variance – measures the difference between the
actual quantity of materials used and the standard quantity of materials
allowed by actual production at standard price
TWO INSTANCES WHEN A MATERIALS
PRICE VARIANCE IS RECOGNIZED
a. Materials price variance is computed at the time of
purchase – the price variance is called Materials
Purchase Price variance.
b. Materials price variance is computed at the time of
issuance – the price variance is called Materials Usage
Price variance.
 ANALYSIS
a. The materials price variance is computed at the time of purchase

Actual quantity Actual quantity Actual quantity Standard quantity

allowed for actual
purchased x Actual purchased x issued x Standard production x Standard
Price Standard Price Price Price

Materials Usage/
Materials Purchase Quantity Variance
Price Variance

Total Materials
Variance
 SHORTCUT FORMULAS
a. The materials price variance is computed at the time of purchase

Actual quantity Actual quantity Actual quantity Standard quantity

allowed for actual
purchased x Actual purchased x issued x Standard production x Standard
Price Standard Price Price Price

Materials Usage/
Materials Purchase Quantity Variance
Price Variance
AQ purchased x (AP (AQ issued – SQ allowed) x SP
– SP)
 ANALYSIS
b. The materials price variance is computed at the time of issuance

Actual quantity Actual quantity Standard quantity

issued x Actual allowed for actual
issued x Standard production x Standard
Price Price Price

Materials Usage/
Materials Usage Price Quantity Variance
Variance
Total Materials
Variance
 ANALYSIS
b. The materials price variance is computed at the time of issuance

Actual quantity Actual quantity Standard quantity

issued x Actual allowed for actual
issued x Standard production x Standard
Price Price Price

Materials Usage/
Materials Usage Price Quantity Variance
Variance
AQ issued x (AP – (AQ issued – SQ allowed) x SP
SP)
ILLUSTRATION: MATERIAL
VARIANCE
The standard material cost to produce a unit of a company’s major product line is given below:

Actual cost data gathered from the cost accountant of the company are given below:
 Materials purchases:

A - 17,000 lbs @ P9.50 per lb.

B - 4,500 lbs. @ P20.50 per lb.
 15,500 lbs of Material A are issued to Dept. 1 while 3,800 lbs. of Material B are issued to Dept.
2. Actual production for the period total 3,200 units of the main product.
ILLUSTRATION: MATERIAL
VARIANCE
Requirement: For both departments,

1. Materials price variance assuming (a) computed at the

time of purchase and (b) computed at the time of issuance
2. Materials quantity variance
3. Total materials variance assuming price variance (a)
computed at the time of purchase and (b) computed at the
time of issuance
4. Journal entries per department
 SOLUTION: DEPARTMENT 1
a. The materials price variance is computed at the time of purchase

Actual quantity Actual quantity Actual quantity Standard quantity

allowed for actual
purchased x Actual purchased x issued x Standard production x Standard
Price Standard Price Price Price

Materials Usage/
Materials Purchase Quantity Variance
Price Variance
AQ purchased x (AP (AQ issued – SQ allowed) x SP
– SP)
 SOLUTION: DEPARTMENT 1
a. The materials price variance is computed at the time of purchase

3,200 x 5 = 16,000 lbs.

17,000 lbs. x P9.50 17,000 lbs. x P10 15,500 lbs. x 10 per allowed for actual
per lb. = 161,500 per lb. = 170,000 lb. = 155,000 production x 10 per lb.
= 160,000
161,500 – 170,000 = 155,000 – 160,000 =
P8,500 favorable 5,000 favorable

Materials Usage/
Materials Purchase Quantity Variance
Price Variance
17,000 lbs. x (9.50 - 10) = (15,500 – 16,000) x 10 = 5,000
8,500 favorable Total materials favorable
variance: 8,500F +
5,000F = 13,500F
JOURNAL ENTRIES (PRICE
VARIANCE COMPUTED AT
TIME OF PURCHASE)
 SOLUTION: DEPARTMENT 1
b. The materials price variance is computed at the time of issuance

Actual quantity Actual quantity Standard quantity

allowed for actual
issued x Actual issued x Standard production x Standard
Price Price Price

Materials Usage/
Materials Usage Price Quantity Variance
Variance
AQ issued x (AP – (AQ issued – SQ allowed) x SP
SP)
 SOLUTION: DEPARTMENT 1
b. The materials price variance is computed at the time of issuance

3,200 x 5 = 16,000 lbs.

15,500 lbs. x P9.50 15,500 lbs. x 10 per allowed for actual
per lb. = 147,250 lb. = 155,000 production x 10 per lb.
= 160,000

147,250 – 155,000 = 155,000 – 160,000 =

P7,750 favorable 5,000 favorable

Materials Usage/
Materials Usage Price Quantity Variance
Variance
15,500 lbs. x (9.50 - 10) = (15,500 – 16,000) x 10 = 5,000
7,750 favorable Total materials favorable
variance: 7,750F +
5,000F = 12,750F
JOURNAL ENTRIES (PRICE
VARIANCE COMPUTED AT
TIME OF ISSUANCE)
 SOLUTION: DEPARTMENT 2
a. The materials price variance is computed at the time of purchase

Actual quantity Actual quantity Actual quantity Standard quantity

allowed for actual
purchased x Actual purchased x issued x Standard production x Standard
Price Standard Price Price Price

Materials Usage/
Materials Purchase Quantity Variance
Price Variance
AQ purchased x (AP (AQ issued – SQ allowed) x SP
– SP)
 SOLUTION: DEPARTMENT 2
a. The materials price variance is computed at the time of purchase

3,200 x 1 = 3,200 lbs.

4,500 lbs. x P20.50 4,500 lbs. x P20 per 3,800 lbs. x 20 per allowed for actual
per lb. = 92,250 lb. = 90,000 lb. = 76,000 production x 20 per lb.
= 64,000
92,250 – 90,000 = 76,000 – 64,000 =
P2,250 unfavorable 12,000 unfavorable

Materials Usage/
Materials Purchase Quantity Variance
Price Variance
4,500 lbs. x (20.50 - 20) = (3,800 – 3,200) x 20 = 12,000
2,250 unfavorable Total materials variance: unfavorable
2,250UF + 12,000UF =
14,250UF
JOURNAL ENTRIES (PRICE
VARIANCE COMPUTED AT
DATE OF PURCHASE)
 SOLUTION: DEPARTMENT 2
b. The materials price variance is computed at the time of issuance

Actual quantity Actual quantity Standard quality

allowed for actual
issued x Actual issued x Standard production x Standard
Price Price Price

Materials Usage/
Materials Usage Price Quantity Variance
Variance
AQ issued x (AP – (AQ issued – SQ allowed) x SP
SP)
 SOLUTION: DEPARTMENT 2
b. The materials price variance is computed at the time of issuance

3,200 x 1 = 3,200 lbs.

3,800 lbs. x 20.50 3,800 lbs. x 20 per allowed for actual
per lb. = 77,900 lb. = 76,000 production x 20 per lb.
= 64,000

77,900 – 76,000= 76,000 – 64,000 =

P1,900 unfavorable 12,000 unfavorable

Materials Usage/
Materials Usage Price Quantity Variance
Variance
3,800 lbs. x (20.50 - 20) = (3,800 – 3,200) x 20 = 12,000
1,900 unfavorable Total materials variance: unfavorable
1,900UF + 12,000UF =
13,900UF
JOURNAL ENTRIES (PRICE
VARIANCE COMPUTED AT
DATE OF ISSUANCE)
DIRECT LABOR VARIANCE
There are two variances identified with Direct Labor:
1. Labor rate variance: measures the difference between the actual
rate paid to laborers and the standard rate
2. Labor efficiency variance: measures the difference between the
actual hours that were actually utilized and the standard labor
hours that should have been allowed for the actual production.
 ANALYSIS OF DIRECT LABOR
VARIANCES
Standard DL hours
Actual DL hours x Actual DL hours x allowed for actual
Actual Rate Standard Rate production x Standard
Rate

Labor rate variance Labor efficiency

variance
Actual DL hours x (Actual DL hours – Standard
(AR – SR) DL hours allowed) x SR
Total Labor Variance
ILLUSTRATION: LABOR
VARIANCE ANALYSIS
Below is a summary of standard labor costs to produce a unit of a company’s major product line:

Actual labor cost data gathered from the cost accountant of the company are given on the other
page:

Actual production for the period – 3,200 units

REQUIRED:
1. Labor rate variance
2. Labor efficiency variance
3. Total Labor variance
4. Journal entries
 SOLUTION: DEPARTMENT 1
Standard DL hours
Actual DL hours x Actual DL hours x allowed for actual
Actual Rate Standard Rate production x Standard
Rate

Labor rate variance Labor efficiency

variance
Actual DL hours x (Actual DL hours – Standard
(AR – SR) DL hours allowed) x SR
Total Labor Variance
 SOLUTION: DEPARTMENT 1
3,200 x 1 = 3,200 DL
3,300 hours x 3,300 hours x 32.50 hours allowed for actual
33.00 = 108,900 per hour = 107,250 production x 32.50 per
hour = 104,000

108,900 – 107,250 = 107,250 – 104,000 =

1,650 unfavorable 3,250 unfavorable

Labor rate variance Labor efficiency

variance
3,300 hours x (33 – 32.50) = (3,300 – 3,200) x 32.50 = 3,250
1,650 unfavorable unfavorable
Total Labor Variance = 1,650
unfavorable + 3,250 unfavorable =
4,900 unfavorable
JOURNAL ENTRY
 SOLUTION: DEPARTMENT 2
Standard DL hours
Actual DL hours x Actual DL hours x allowed for actual
Actual Rate Standard Rate production x Standard
Rate

Labor rate variance Labor efficiency

variance
Actual DL hours x (Actual DL hours – Standard
(AR – SR) DL hours allowed) x SR
Total Labor Variance
 SOLUTION: DEPARTMENT 2
3,200 x 2 = 6,400
5,900 hours x 5,900 hours x 30 standard DL hours
31.50 = 185,850 per hour = 177,000 allowed for actual
production x 30 = 192,000

185,850 – 177,000= 177,000 – 192,000=

8,850 unfavorable 15,000 favorable

Labor rate variance Labor efficiency

variance
5,900 hours x (31.50 – 30) = (5,900 – 6,400) x 30 = 15,000
8,850 unfavorable favorable
Total Labor Variance = 8,850
unfavorable + 15,000 favorable
=6,150 favorable
JOURNAL ENTRY
OVERHEAD VARIANCES
Three ways to compute for overhead variance:
1. One-way variance: provides only a total overhead variance, which is the difference between
actual overhead and applied overhead

Actual Factory Applied Factory Overhead

(Factory OH rate x Std. Qty.
Overhead Allowed for actual output)

Total overhead variance

 OVERHEAD VARIANCES
Three ways to compute for overhead variance:
2. Two-way variance: provides information about budget and volume variance. Budget (or
controllable variance) is the difference between actual overhead and budgeted overhead at
standard quantity allowed for actual output. Volume (or noncontrollable variance) is the
difference between budgeted overhead at standard quantity allowed for actual output and the
applied overhead.
Budgeted overhead at std. qty.
Actual Factory for actual output (BASH): Applied Overhead: (Fixed OH
Budgeted Fixed Overhead + rate x Std. Qty. for Actual
Overhead output) + (VOH rate x Std.
(VOH rate x Std. Qty. for
actual output) Qty. for actual output)

Budget or Volume or
Controllable Noncontrollable
variance variance
OVERHEAD VARIANCES
Three ways to compute for overhead variance:
3. Three-way variance: provides information on spending, efficiency, and volume variance. The
budget or controllable variance in two-way variance is analyzed further into two sub-variances:
Spending and Efficiency variance.
 Spending variance: difference between actual overhead and budget allowed based on actual
level of activity
 Efficiency variance: difference between budget allowed based on actual level of activity and
budget allowed based on standard quantity allowed for actual output
 OVERHEAD VARIANCES
Three ways to compute for overhead variance:
3. Three-way variance: provides information on spending, efficiency, and volume variance. The
budget or controllable variance in two-way variance is analyzed further into two sub-variances:
Spending and Efficiency variance.

Budgeted overhead at std. qty. Budgeted overhead at std. qty.

for actual output (BAAH): Applied Overhead: (Fixed OH
Actual Factory Budgeted Fixed Overhead +
for actual output (BASH):
rate x Std. Qty. for Actual
Budgeted Fixed Overhead +
Overhead (VOH rate x actual level of (VOH rate x Std. Qty. for
output) + (VOH rate x Std.
activity) Qty. for actual output)
actual output)

OH spending
OH efficiency Volume
variance
variance variance
 OVERHEAD VARIANCES
Three ways to compute for overhead variance:
3. Four-way variance: used to determine the variances related to variable and fixed overhead.
 Variable Overhead spending variance: difference between actual variable overhead and budgeted
variable overhead based on actual hours.
 Variable Overhead efficiency variance: difference between budgeted variable overhead based on actual
hours and applied overhead based on standard qty. allowed for actual output

Actual Variable Actual activity x Applied Overhead (Variable

Overhead OH rate x Std. qty. allowed
Variable OH rate
for actual output)

Variable OH Variable OH
spending variance efficiency variance
 OVERHEAD VARIANCES
Three ways to compute for overhead variance:
3. Four-way variance: used to determine the variances related to variable and fixed overhead.
 Fixed Overhead spending variance: difference between actual fixed overhead and budgeted fixed
overhead.
 Fixed Overhead volume variance: difference between budgeted fixed overhead and applied fixed
overhead based on standard qty. allowed for actual output

Actual Variable Budgeted Fixed Applied Fixed Overhead

Overhead (Fixed OH rate x Std. Qty.
Overhead
allowed for actual output)

Fixed OH spending Fixed OH volume

rate variance
ILLUSTRATION: OH
VARIANCE ANALYSIS, ALL
METHODS
The standard requirement to produce a unit of product for Caribbean Manufacturing Company is as
follows:
 Variable overhead, 2 machine hrs. @ P40
 Fixed overhead, 2 machine hrs. @ P160
 Budgeted Fixed Factory Overhead………………….P320,000
 Budgeted volume of production………………………….1,000 units

Actual data for the current period were as follows:

• Actual machine hours………………………………………1,890 hours
• Actual variable overhead………………………………...90,000
• Actual fixed overhead…………………………………...310,000
• Actual units produced………………………………………..900 units
ONE VARIANCE METHOD
TWO-WAY VARIANCE
THREE-WAY VARIANCE
FOUR-WAY VARIANCE
(VARIABLE)
FOUR-WAY VARIANCE
(FIXED)
JOURNAL ENTRIES
REFERENCE:
Rante, G.A. (2016). Cost Accounting. Millenium Books, Inc.