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1
VARIANCE ANALYSIS
AND
STANDARD COSTING
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Outline
• The usage of standard costing
• Setting of standard cost and types of
standard
• Calculation of variance:
– Direct material
– Direct labor
– Factory overhead
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Standard Costing
The cost that has been pre-determined after considering other factors.
Those are estimated costs which are considered to be ideal for each of the cost component ( direct
material, direct labor and factory overhead ).
The standard cost system enable the management to determine how much a product should cost.
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The usage of standard costing
Planning and controlling:
Product costing:
Compare actual cost & budgeted cost
Improve performance
Increase efficiency
Provide readily available unit cost
information
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Setting of Standard Cost
Analysis on the historical cost experience:Provide initial guidelines for standard setting
Engineering studies:Determine the most efficient way to operate
Input from operating personnel:Accountable for meeting the standards
Involve joint efforts on:
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Types of Standards
Ideal standard
Normal standard
Maximum efficiency
Can be achieved if everything operates perfectly.
Currently attainable standard
Allowance is made for breakdown, interruptions etc..
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Variance Analysis
Variances are the difference between the actual manufacturing cost and the standard cost at the actual level of production.
The significance of the variance for each element in manufacturing cost needs further analysis to determine the corrective actions.
Variance analysis
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Calculation of variance
Direct material
Direct labor
Factory overhead
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Standard Cost
The expected cost per unit product
Illustration 1:
The followings are the standard cost for each unit (bottle) of peanut butter produced by Syarikat Sedap Selalu :
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Standard Standard Standard Cost Price Usage RM
Direct material:
PeanutButterSugar
Direct labor:
Machine operatorPackaging
Factory OH:
Variable costsFixed costs
Standard cost per unit
2.80/kg 0.15kg 0.422.70/kg 0.10kg 0.271.20/kg 0.25kg 0.30
0.99
4.00/hour 0.02hour
3.00/hour 0.01hour
0.080.03
0.11
5.00/hour 0.01hour
12.00/hour 0.01hour
0.05
0.12 0.17
1.27
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If Syarikat Sedap Selalu produces 10,000 bottles of peanut butter, the expected total cost would be:
Direct material
Direct labor
Factory overhead
Total cost
10,000 x 0.99 9,900
10,000 x 0.11
10,000 x 0.17
1,100
1,700
12,700
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Calculation of variance
Cost element Actual cost Standard cost Variance
Direct material
Direct labor
Factory overhead
9,900
1,100
1,700
9,500 400 (F)
1,050 50 (F)
2,000 300 (U)
F = (Favorable) U = (Unfavorable)
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Direct Material Variance
Direct Material Price Variance
Direct Material Usage (Quantity) Variance
To measure the difference between the actual cost and the standard cost of direct materials.
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1. Direct material price variance
(Standard Price x Actual Quantity) - (Actual Price x Actual Quantity)
Simplified to be:
Actual Quantity (Standard Price – Actual Price)
AQ ( SP – AP )
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2. Direct material usage (quantity) variance
(Standard Price x Standard Quantity) - (Standard Price x Actual Quantity)
Simplified to be:
Standard Price (Standard Quantity – Actual Quantity)
SP ( SQ – AQ )
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Actual Price x Actual Qty Std Price x Actual Qty Std Price x Std Qty
Price Variance Usage Variance
Direct material variance
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Illustration 2
The followings are the actual price and quantity for direct material used by the company in producing 10,000 bottles of peanut butter:
Actual Price Actual Quantity
Peanut RM2.70/kg 1,400kg
Butter RM2.505/kg 1,200kg
Sugar RM1.18/kg 2,300kg
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Direct material price variance:
Peanut: 1,400 (2.70 – 2.80) = 140 (F)
Butter: 1,200 (2.505 – 2.70) = 234 (F)
Sugar: 2,300 (1.18 – 1.20) = 46 (F)
420 (F)
AQ ( SP – AP )
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Direct material usage variance:
Peanut: 2.80 (1,400 – 1,500) = 280 (F)
Butter: 2.70 (1,200 – 1,000) = 540 (U)
Sugar: 1.20 (2,300 – 2,500) = 240 (F)
20 (U)Therefore ,
Total direct material variance = 420 (F) + 20 (U)
= 400 (F)
SP ( AQ – SQ )
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Direct Labor Variance
Direct Labor Rate Variance
Direct Labor Efficiency Variance
Measures the differences between the actual cost and the cost that suppose to be paid to the labor.
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1. Direct Labor Rate Variance
(Actual Hour x Standard Rate) - (Actual Hour x Actual Rate)
Simplified to be:
Actual Hour ( Standard Rate – Actual Rate )
AH ( SR – AR )
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2. Direct Labor Efficiency Variance
(Standard Rate x Standard Hour) - (Standard Rate x Actual Hour)
Simplified to be:
Standard Rate ( Standard Hour – Actual Hour )
SR ( SH – AH )
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Actual Hour x Actual Rate Std Hour x Actual Rate Std Hour x Std Rate
Rate Variance Efficiency Variance
Direct Labor Variance
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Illustration 3:
The followings are actual rate and labor hour in the production of 10,000 bottles of peanut butter:
Actual labor rate Actual labor hour
Machine operator RM3.90/hour 190 hours
Packaging RM2.81/hour 110 hours
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Direct Labor Rate Variance:
Machine Operator: 190 (3.90 – 4.00 ) = 19 (F)
Packaging: 110 (2.81 – 3.00) = 21 (F)
40 (F)
AH ( AR – SR )
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Direct Labor Efficiency Variance:
Machine Operator: 4.00 (190 – 200) = 40 (F)
Packaging: 3.00 (110 – 100) = 30 (U)
10 (F)
SR ( AH – SH )
Therefore,
total direct labor variance: = 40 (M) + 10 (M)
= 50 (M)
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Factory Overhead Variance
Variable Factory Overhead Controllable Variance
Fixed Factory Overhead Volume Variance
Measures the differences between the actual cost and the supposed related cost of factory overhead.
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Western Rider Inc.Factory Overhead Cost Budget
For the Month Ended June 30, 2003
Direct Labor Hours4,000 4,500 5,000
80% 90% 100%
Overhead is applied at Rs.6.00 per direct labor hour based on estimated 5,000 total hours.
Overhead is applied at Rs.6.00 per direct labor hour based on estimated 5,000 total hours.
Total variable costs Rs.14,400 Rs.16,200Rs.18,000Variable costs per hour Rs. 3.60 Rs. 3.60Rs.3.60Total fixed costs Rs.12,000 Rs.12,000Rs.12,000Fixed costs per hour Rs. 3.00 Rs. 2.67 Rs. 2.40
% of Normal Capacity
Total costs per hour Rs. 6.60 Rs. 6.27 Rs. 6.00Rs. 6.00
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Western Rider Inc.Factory Overhead Variances
For the Month Ended June 30, 2003
Variable costs Rs.14,400 Rs.10,400Rs.4,000F (Rs.3.60 x 4,000 hours)Fixed costs 9,600 12,000 2,400 U (Rs.2.40 x 4,000 hours)Total costs Rs.24,000 Rs.22,400Rs.1,600F
Revised ActualBudget Costs Variance
Factory overhead applied at Rs.6.00 per direct labor hour based on 4,000 actual hours.
Factory overhead applied at Rs.6.00 per direct labor hour based on 4,000 actual hours.
Actual factory overhead per general ledger.
Actual factory overhead per general ledger.
Actual Hour4,000
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Western Rider Inc.Factory Overhead Variances
For the Month Ended June 30, 2003
Revised ActualBudget Costs Variance
Variable costs Rs.14,400 Rs.10,400Rs.4,000Rs.4,000FF (Rs.3.60 x 4,000 hours)Fixed costs 9,600 12,000 2,400 U (Rs.2.40 x 4,000 hours)Total costs Rs.24,000 Rs.22,400Rs.1,600F
Controllable variance based on variable costs
Controllable variance based on variable costs
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Western Rider Inc.Factory Overhead Variances
For the Month Ended June 30, 2003
Revised ActualBudget Costs Variance
Volume variance based on fixed costs
Volume variance based on fixed costs
Variable costs Rs.14,400 Rs.10,400Rs.4,000F (Rs.3.60 x 4,000 hours)Fixed costs 9,600 12,000 2,4002,400 UU (Rs.2.40 x 4,000 hours)Total costs Rs.24,000 Rs.22,400Rs.1,600F
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Variable Factory Overhead Controllable VarianceFor the Month Ended June 30, 2003
Actual variable overhead Rs.10,400 Budgeted variable overhead 14,400 (4,000 actual hours x Rs.3.60) Favorable controllable variance Rs.(4,000)
Controllable variance measures the efficiency of using variable overhead resources.
Controllable variance measures the efficiency of using variable overhead resources.
A revised budget based on the actual hours used
A revised budget based on the actual hours used
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Fixed Factory Overhead Volume VarianceFor the Month Ended June 30, 2003
Budgeted volume (direct labor hours) 5,000Actual volume (direct labor hours) 4,000Capacity not used (direct labor hours) 1,000Standard fixed rate x Rs.2.40Unfavorable volume variance Rs.2,400
Volume variance measures the utilization of fixed overhead resources.
Volume variance measures the utilization of fixed overhead resources.
Rate based on 5,000 direct labor hours.
Rate based on 5,000 direct labor hours.
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