CHAPTER 16

STANDARD COSTS AND OPERATING PERFORMANCE MEASURES

I.
Questions
1.
Standard costs are superior to past data for comparison with actual cost
s because they ask the question Is present performance better than the past? .
2.
No. Cost control and cost reduction are not the same, but cost reductio
n does affect the standards which are used as basis for cost control. Cost redu
ction means finding ways to achieve a given result through improved design, bett
er methods, new layouts and so forth. Cost reduction results in setting new sta
ndards. On the other hand, cost control is a process of maintaining performance
at or as new existing standards as is possible.
3.
Managerial judgment is the basis for deciding whether a given variance i
s large enough to warrant investigation. For some items, a small amount of vari
ance may spark scrutiny. For some items, 5%, 10% or 25% variances from standard
may call for follow-up. Management may also derive the standard deviation base
d on past cost data.
4.
The techniques for overhead control differ because
1)
The size of individual overhead costs usually does not justify elaborate
individual control systems;
2)
The behavior of individual overhead item is either impossible or difficu
lt to trace to specific lots or operations; and
3)
Various overhead items are the responsibility of different people.
5.
In the year-to-year planning of fixed costs, managers must consider:
1)
the projected maximum and minimum levels of activity,
2)
prices of cost factors, and
3)
changes in facilities and organization.
6.
Four criteria for selecting a volume base are:
1)
Cause of cost variability.
2)
Adequacy of control over the base.
3)
Independence of activity unit.
4)
Ease of understanding.
7.
Non-volume factors which cause costs to vary are:
1)
Changes in plant and equipment.
2)
Changes in products made, materials used, or methods of manufacturing.
3)
Changes in prices paid for cost factors.
4)
Changes in managerial policy toward costs.
5)
Lag between cost incurrence and measurement of volume.
8.
A budget is usually expressed in terms of total pesos, whereas a standar
d is expressed on a per unit basis. A standard might be viewed as the budgeted
cost for one unit.
9.
Under management by exception, managers focus their attention on operati
ng results that deviate from expectations. It is assumed that results that meet
expectations do not require investigation.
10.
Separating an overall variance into a price variance and a quantity vari
ance provides more information. Moreover, prices and quantities are usually the
responsibilities of different managers.
11.
The materials price variance is usually the responsibility of the purcha
sing manager. The materials quantity variance is usually the responsibility of
the production managers and supervisors. The labor efficiency variance generall
y is also the responsibility of the production managers and supervisors.
12.
If used as punitive tools, standards can breed resentment in an organiza
tion and undermine morale. Standards must never be used as an excuse to conduct
witch-hunts, or as a means of finding someone to blame for problems.
13.
Several factors other than the contractual rate paid to workers can caus
e a labor rate variance. For example, skilled workers with high hourly rates of
pay can be given duties that require little skill and that call for low hourly
rates of pay, resulting in an unfavorable rate variance. Or unskilled or untrai

ned workers can be assigned to tasks that should be filled by more skilled worke
rs with higher rates of pay, resulting in a favorable rate variance. Unfavorabl
e rate variances can also arise from overtime work at premium rates.
14.
Poor quality materials can unfavorably affect the labor efficiency varia
nce. If the materials create production problems, a result could be excessive l
abor time and therefore an unfavorable labor efficiency variance. Poor quality
materials would not ordinarily affect the labor rate variance.
15.
If labor is a fixed cost and standards are tight, then the only way to g
enerate favorable labor efficiency variances is for every workstation to produce
at capacity. However, the output of the entire system is limited by the capaci
ty of the bottleneck. If workstations before the bottleneck in the production p
rocess produce at capacity, the bottleneck will be unable to process all of the
work in process. In general, if every workstation is attempting to produce at c
apacity, then work in process inventory will build up in front of the workstatio
ns with the least capacity.
II.

Matching Type

1.
2.

E
G

III.

Exercises

3.
4.

C
H

5.
6.

A
D

7.
8.

J
B

9.
10.

I
F

Exercise 1 (Setting Standards; Preparing a Standard Cost Card)

Requirement 1
Cost per 2 kilogram container
P6,000.00
Less: 2% cash discount
120.00
Net cost
P5,880.00
Add freight cost per 2 kilogram container
(P1,000 10 containers)
100.00
Total cost per 2 kilogram container (a)
P5,980.00
Number of grams per container
(2 kilograms 1000 grams per kilogram) (b)
2,000
Standard cost per gram purchased (a) (b)
P

2.99

Requirement 2
Beta ML12 required per capsule as per bill of materials

6.00

grams
Add allowance for material rejected as unsuitable
(6 grams 0.96 = 6.25 grams;
6.25 grams
6.00 grams = 0.25 grams)
0.25
Total
6.25
grams
Add allowance for rejected capsules
(6.25 grams 25 capsules)
0.25
grams
Standard quantity of Beta ML12 per salable capsule
grams

grams

6.50

Requirement 3
Item
Standard Quantity per Capsule
Cost per Capsule
Beta ML12
6.50 grams
P2.99
Exercise 2 (Material Variances)

Standard Price per Gram Standard

P19.435

Requirement 1
Number of chopping blocks
4,000
Number of board feet per chopping block

Standard board feet allowed

10,000
Standard cost per board foot
P1.80
Total standard cost
P18,000
Actual cost incurred
Standard cost above
Total variance unfavorable

2.5

P18,700
18,000
P

700

Requirement 2
Actual Quantity of Inputs, at
Actual Price
Actual Quantity of Inputs, at
Standard Price Standard Quantity Allowed for Output, at Standard Price
(AQ AP)
(AQ SP)
(SQ SP)
P18,700 11,000 board feet
P1.80 per board foot
10,000 board feet
P1.80 per board foot
= P19,800
= P18,000

Alternatively:
Materials Price Variance = AQ (AP
SP)
11,000 board feet (P1.70 per board foot*

P1.80 per board

foot) =
P1,100 F
* P18,700 11,000 board feet = P1.70 per board fo
ot.
Materials Quantity Variance = SP (AQ SQ)
P1.80 per board foot (11,000 board feet
10,000 board fee
t) = P1,800 U
Exercise 3 (Labor and Variable Overhead Variances)
Requirement 1
Number of units manufactured
20,000
Standard labor time per unit
0.4*
Total standard hours of labor time allowed
8,000
Standard direct labor rate per hour

P6
Total standard direct labor cost
P48,000
*24 minutes 60 minutes per hour = 0.4 hour
Actual direct labor cost
Standard direct labor cost

P49,300
48,000

Total variance unfavorable

P 1,300

Requirement 2
Actual Hours of Input, at
the Actual Rate Actual Hour of Input, at
Standard Rate Standard Hours Allowed for Output, at the Standard Rate
(AH AR)
(AH SR)
(SH SR)
P49,300 8,500 hours P6 per hour
8,000 hours* P6 per hour
= P51,000
= P48,000

*20,000 units 0.4 hour per unit = 8,000 hours

Alternative Solution:
Labor Rate Variance = AH (AR SR)
8,500 hours (P5.80 per hour* P6.00 per hour) = P1,700 F
*P49,300 8,500 hours = P5.80 per hour
Labor Efficiency Variance = SR (AH
SH)
P6 per hour (8,500 hours 8,000 hours) = P3,000 U
Requirement 3
Actual Hours of Input, at
the Actual Rate Actual Hour of Input, at
Standard Rate Standard Hours Allowed for Output, at the Standard Rate
(AH AR)
(AH SR)
(SH SR)
P39,100 8,500 hours P4 per hour
8,000 hours P4 per hour
= P34,000
= P32,000

Alternative Solution:
Variable Overhead Spending Variance = AH (AR
SR)
8,500 hours (P4.60 per hour* P4.00 per hour) = P5,100 U
*P39,100 8,500 hours = P4.60 per hour
Variable Overhead Efficiency Variance = SR (AH
SH)
P4 per hour (8,500 hours 8,000 hours) = P2,000 U
Exercise 4 (Working Backwards from Labor Variances)
Requirement 1
If the total variance is P330 unfavorable, and if the rate varia
nce is P150 favorable, then the efficiency variance must be P480 unfavorable, si
nce the rate and efficiency variances taken together always equal the total vari
ance.
Knowing that the efficiency variance is P480 unfavorable, one ap
proach to the solution would be:
Efficiency Variance = SR (AH
SH)

P6 per hour (AH

420 hours*) = P480 U
P6 per hour AH P2,520 = P480**
P6 per hour AH = P3,000
AH = 500 hours
*
168 batches 2.5 hours per batch = 420 hours
**
When used with the formula, unfavorable variances are positive and favor
able variances are negative.
Requirement 2
Knowing that 500 hours of labor time were used during the week,
the actual rate of pay per hour can be computed as follows:
Rate Variance = AH (AR
SR)
500 hours (AR
P6 per hour) = P150 F
500 hours AR P3,000 = P150*
500 hours AR = P2,850
AR = P5.70 per hour
*
When used with the formula, unfavorable variances are positive and favor
able variances are negative.

IV.

Problems

Problem 1 (Comprehensive Variance Analysis)

Requirement 1
a.
Actual Quantity of Inputs, at
the Actual Price
Actual Quantity of Inputs, at
Standard Price Standard Quantity Allowed for Output, at the Standard Price
(AQ AP)
(AQ SP)
(SQ SP)
25,000 pounds x
P2.95 per pound 25,000 pounds x
P2.50 per pound 20,000 pounds* x
P2.50 per pound
= P73,750
= P62,500
= P50,000

* 5,000 metal molds 4.0 pounds per metal mold = 20,000 pounds
Alternatively:
Materials Price Variance = AQ (AP
SP)
25,000 pounds (P2.95 per pound P2.50 per pound) = P11,25
0 U
Materials Quantity Variance = SP (AQ
SQ)
P2.50 per pound (19,800 pounds 20,000 pounds) = P500 F
b.
Actual Hours of Input, at
the Actual Rate Actual Hours of Input, at
the Standard Rate
Standard Hours Allowed for Output, at the Standard Rate
(AH AR)
(AH SR)
(SH SR)

3,600 hours x
P8.70 per hour 3,600 hours x
P9.00 per hour 3,000 hours* x
P9.00 per hour
= P31,320
= P32,400

= P27,000

* 5,000 metal molds 0.6 hour per metal mold = 3,000 hours
Alternatively:
Labor Rate Variance = AH (AR
SR)
3,600 hours (P8.70 per hour
P9.00 per hour) = P1,080 F
Labor Efficiency Variance = SR (AH SH)
P9.00 per hour (3,600 hours
3,000 hours) = P5,400 U
c.
Actual Hours of Input, at
the Actual Rate Actual Hours of Input, at
the Standard Rate
Standard Hours Allowed for Output, at the Standard Rate
(AH AR)
(AH SR)
(SH SR)
P4,320 1,800 hours P2 per hour
1,500 hours* P2 per hour
= P3,600
= P3,000

*5,000 metal molds 0.3 hours per metal mold = 1,500 hours
Alternatively:
Variable Overhead Spending Variance = AH (AR SR)
1,800 hours (P2.40 per hour* P2.00 per hour) = P720 U
* P4,320 1,800 hours = P2.40 per hour
Variable Overhead Efficiency Variance = SR (AH
SH)
P2.00 per hour (1,800 hours
1,500 hours) = P600 U
Requirement 2
Summary of variances:
Material price variance
P11,250 U
Material quantity variance
500
F
Labor rate variance
1,080 F
Labor efficiency variance
5,400 U
Variable overhead spending variance
720
U
Variable overhead efficiency variance
600
U
Net variance
P16,390 U
The net unfavorable variance of P16,390 for the month caused the
plant s variable cost of goods sold to increase from the budgeted level of P80,00
0 to P96,390:
Budgeted cost of goods sold at P16 per metal mold
Add the net unfavorable variance (as above)
Actual cost of goods sold
P96,390

P80,000
16,390

This P16,390 net unfavorable variance also accounts for the diff
erence between the budgeted net operating income and the actual net loss for the
month.

Budgeted net operating income

P15,000
Deduct the net unfavorable variance added to cost of goods sold for the month
16,390
Net operating loss
P(1,390)
Requirement 3
The two most significant variances are the materials price varia
nce and the labor efficiency variance. Possible causes of the variances include
:
Materials Price Variance:
Outdated standards, uneconomical quantit
y purchased, higher quality materials, high-cost method of transport.
Labor Efficiency Variance:
Poorly trained workers, poor quality mat
erials, faulty equipment, work interruptions, inaccurate standards, insufficient
demand.
Problem 2
1.
2.
3.

1,000 units
25,000 lbs.
P2.01 per lb.

4.
5.
6.

14,900 lbs.
3,100 hours
P3.98 per hour

Problem 3
Material mix variance:
Actual quantity x Standard price
Material A (8,000 x P0.30)
P2,400
Material B (2,400 x P0.20)
480
Material C (2,800 x P0.425)
1,190
Less: Total actual input x Average
Standard price (13,200 x 0.30*) 3,960
Unfavorable Mix Variance
P 110
*

Average Standard price

P4,070

P0.

P0.

30
Material yield variance:
Total actual input at Average Standard price
P3,960
Less: Total actual output at Standard raw material cost
(10,000 x 0.36**)
3,600
Unfavorable yield variance
P 360
**

Standard Material Cost

36
Problem 4 (Comprehensive Variance Analysis; Journal Entries)
Requirement 1
a.
Actual Quantity of Inputs, at
Actual Price
Actual Quantity of Inputs, at
Standard Price Standard Quantity Allowed for Output, at Standard Price
(AQ AP)
(AQ SP)
(SQ SP)

21,120 yards x
P3.35 per yard 21,120 yards x
P3.60 per yard 19,200 yards* x
P3.60 per yard
= P70,752
= P76,032

= P69,120

* 4,800 units 4.0 yards per unit = 19,200 yards

Alternatively:
Materials Price Variance = AQ
21,120 yards (P3.35 per yard
Materials Quantity Variance =
P3.60 per yard (21,120 yards

(AP
SP)
P3.60 per yard) = P5,280 F
SP (AQ
SQ)
19,200 yards) = P6,912 U

b.

Raw Materials (21,120 yards @ P3.60 per yard)

Materials Price Variance
(21,120 yards @ P0.25 per yard F)
5,280
Accounts Payable
(21,120 yards @ P3.35 per yard)
70,752

76,032

Work in Process (19,200 yards @ P3.60 per yard)

Materials Quantity Variance
(1,920 yards U @ P3.60 per yard)
6,912
Raw Materials (21,120 yards @ P3.60 per yard)

69,120
76,032

Requirement 2
a.
Actual Hours of Input, at
the Actual Rate Actual Hours of Input,
the Standard Rate
Standard Hours
(AH AR)
(AH SR)
6,720 hours* x
P4.85 per hour 6,720 hours x
P4.50 per hour 7,680 hours** x
P4.50 per hour
= P32,592
= P30,240

*
**

at
Allowed for Output, at the Standard Rate
(SH SR)

= P34,560

4,800 units 1.4 hours per unit = 6,720 hours

4,800 units 1.6 hours per unit = 7,680 hours

Alternatively:
Labor Rate Variance = AH (AR SR)
6,720 hours (P4.85 per hour
P4.50 per hour) = P2,352 U
Labor Efficiency Variance = SR (AH SH)
P4.50 per hour (6,720 hours
7,680 hours) = P4,320 F

b.

Work in Process (7,680 hours @ P4.50 per hour)

Labor Rate Variance
(6,720 hours @ P0.35 per hour U)
2,352
Labor Efficiency Variance
(960 hours F @ P4.50 per hour)
4,320
Wages Payable (6,720 hours @ P4.85 per hour)

34,560

32,592

Requirement 3
Actual Hours of Input, at
the Actual Rate Actual Hours of Input, at
the Standard Rate
Standard Hours Allowed for Output, at the Standard Rate
(AH AR)
(AH SR)
(SH SR)
6,720 hours x
P2.15 per hour 6,720 hours x
P1.80 per hour 7,680 hours x
P1.80 per hour
P14,448 = P12,096
= P13,824

Alternatively:
Variable Overhead Spending Variance = AH (AR
SR)
6,720 hours (P2.15 per hour
P1.80 per hour) = P2,352 U
Variable Overhead Efficiency Variance = SR (AH SH)
P1.80 per hour (6,720 hours
7,680 hours) = P1,728 F
Requirement 4
No. This total variance is made up of several quite large indiv
idual variances, some of which may warrant investigation. A summary of variance
s is shown on the next page.
Materials:
Price variance
P5,280 F
Quantity variance
6,912 U
Labor:
Rate variance
2,352 U
Efficiency variance
4,320 F
Variable overhead:
Spending variance
2,352 U
Efficiency variance
1,728 F
Net unfavorable variance

P1,632 U
1,968

F
624
P

U
288 U

Requirement 5
The variances have many possible causes. Some of the more likely causes
include:
Materials variances:
Favorable price variance: Fortunate buy, inaccurate standards, inferior
quality materials, unusual discount due to quantity purchased, drop in market pr
ice.
Unfavorable quantity variance: Carelessness, poorly adjusted machines, u
nskilled workers, inferior quality materials, inaccurate standards.

Labor variances:
Unfavorable rate variance: Use of highly skilled workers, change in wage
rates, inaccurate standards, overtime.
Favorable efficiency variance: Use of highly skilled workers, high quali
ty materials, new equipment, inaccurate standards.
Variable overhead variances:
Unfavorable spending variance: Increase in costs, inaccurate standards,
waste, theft, spillage, purchases in uneconomical lots.
V.

Favorable efficiency variance: Same as for labor efficiency variance.

Multiple Choice Questions

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

C
C
A
B
A
B
C
C
B
B

11.
12.
13.
14.
15.
16.
17.
18.
19.
20.

B
A
B
C
A
D
D
A
D
B

21.
22.
23.
24.
25.
26.
27.
28.
29.
30.

A
C
C
C
C
D
E
B
B
A

31.
32.
33.
34.
35.
36.
37.
38.
39.
40.

A
B
B
D
B
B
C
D
D
A

41.
42.
43.
44.
45.

B
C
D
A
B