Aida Maria Camara Carranza

Explain how unit standards are set and why standard

cost systems are adopted.
Explain the purpose of a standard cost sheet.
Describe the basic concepts underlying variance
analysis and explain when variances should be
investigated.
Compute the materials and labour variances and
explain how they are used for control.
Compute the variable and fixed overhead variances
and explain their meaning.

(Appendix A)
Use variance analysis as an analytical tool for
profitability analysis.

(Appendix B)
Prepare journal entries for materials and labour
variances and describe the accounting for
overhead variances.


To determine the unit standard cost for a
particular input, two decisions must be made:
1. How much of the input should be used per unit of
output ? (Quantity decision)
2. How much should be paid for the quantity of the
input to be used ? (Pricing decision)
Ideal Standards demand
maximum efficiency and can be
achieved only if everything
operates perfectly.

Currently Attainable Standards
can be achieved under efficient
operating conditions.
1. Historical experience
2. Engineering studies
3. Input from operating
personnel
1. Market forces
2. Quality
3. Discounts
4. Freight
1. Market forces
2. Trade unions
3. Payroll taxes
4. Qualifications

To improve planning and control
To facilitate product costing

Manufacturing Costs


Direct Direct
Materials Labour Overhead

Actual costing system Actual Actual Actual

Normal costing system Actual Actual Budgeted

Standard costing system Standard Standard Standard

Standard Standard Standard
Description Price Usage Cost/Unit

Direct materials $1.50/kg. 10 kg. $15.00
Direct labour $6.00/hr. 2 hours 12.00
Variable overhead $10.00/hr. 2 hours 20.00
Fixed Overhead
1
$8.00/hr. 2 hours 16.00
$63.00
Other Operating Data for Period:
Units produced 20,000 units
210,000 kilograms purchased @ $1.55 per kilogram;
205,000 kilograms used
Direct labour costs 39,000 hours @ $6.10 per hour
Variable overhead $410,000

1
Fixed overhead $300,000; Rate = ($310,000/38,750 hrs)
Actual Quantity of
Input at Actual Price
AQ x AP
Actual Quantity of
Input at Standard Price
AQ x SP
Standard Quantity of
Input at Standard Price
SQ x SP
Price
Variance
AQ x (AP - SP)
Usage
Variance
SP x (AQ - SQ)
Budget
Variance
(AQ x AP) - (SQ x SP)
Variances are investigated if two
conditions are met:
1. The variance is material
2. The benefits of investigating and
taking corrective action are greater
than its costs
Investigating occurs for values outside the
allowable range.

Example: Assume the allowable deviation may be
the lesser of $8,000 or 10% of the standard. Suppose
the standard is $50,000 and the actual deviation
from standard is $6,000. Will the variance be
investigated.

Answer: Yes. Ten percent of standard is $5,000. Since
$6,000 is larger than the allowable deviation, an
investigation will take place.
Formula Approach:
MPV = (AP - SP)AQ MUV = (AQ - SQ)SP
= ($1.55-$1.50)210,000 = (205,000 - 200,000)$1.50
= $10,500 U = $7,500U
Diagram Approach:
AQ x AP AQ x SP AQ x SP SQ x SP
210,000 x $1.55 210,000 x $1.50 205,000 x $1.50 200,000 x $1.50
MPV = $10,500U MUV = $7,500U
Flexible Budget Variance = $18,000U
Responsibility: Responsibility:
Purchasing Manufacturing
SQ = 20,000 units x 10 lbs per unit
Formula Approach:
LRV = (AR - SR)AH LEV= (AH - SH)SR
= ($6.10 - $6.00)39,000 = (39,000 - 40,000)$6.00
= $3,900 U = $6,000 F
Diagram Approach:
AH x AR AH x SR SH x SR
39,000 x $6.10 39,000 x $6.00 40,000 x $6.00
LRV = $3,900 U LEV = $6,000 F
Flexible Budget Variance = $2,100 F
Responsibility: Responsibility:
Human Resources Manufacturing
SQ = 20,000 units x 2 hrs. per unit
Formula Approach:
OSV = (AVOR - SVOR)AH OEV = (AH - SH)SVOR
= $410,000 - ($10 X 39,000 hrs) = (39,000 - 40,000)$10.00
= $20,000 U = $10,000 F
Diagram Approach:
AH x AVOR AH x SVOR SH x SVOR
$410,000 39,000 x $10.00 40,000 x $10.00
OSV = $20,000 U OEV = $10,000 F
Flexible Budget Variance = $10,000 U
Responsibility: Responsibility:
Manufacturing Manufacturing
SQ = 20,000 units x 2 hrs. per unit
Actual Overhead Budgeted Overhead Applied Overhead
$300,000 $310,000 SOR x SH ($8 x40,000)
OSV = $10,000F DV = 10,000F
Responsibility: Responsibility:
Manufacturing Difficult to Assess
Alternative Approach for Computing FOH Denominator Variance
Planned level 38,750 hrs.
Applied level (SOR) 40,000 hrs.
Over 1,250 hrs.
x $8
FOH Denominator Variance $10,000 F
======
Scooter Company has the following standard cost sheet using an expected capacity of 120,000
units:
Direct materials ..................... 25 pounds @ $ 1.20 $ 30.00
Direct labor ........................... 2 hours @ 12.50 25.00
Overhead:
Variable ............................. 3 machine hours @ 8.00 24.00
Fixed ................................ . 3 machine hours @ 12.00 36.00
Total ................................ ...... $115.00
During the year, 125,000 units were produced. Actual costs included the following:
Direct materials ..................... 3,200,000 pounds purchased for $3,725,000.
3,110,000 pounds were used in production.
Direct labor ........................... 260,000 hours worked; payroll totaled $3,320,000.
Overhead .............................. Variable: $3,025,000
Fixed: $4,275,000
Machine hours. ..................... 378,000 actually used
Required:
Calculate as many variances as possible.




Comparing the flexible to the static (master) budget isolates the effects of volume on
profits This in turn can be broken down into an industry volume variance and a market
share variance

Industry volume variance = 36,000 30,000 = $ 6,000 (F)
Market share variance = 18,000 36,000 = - 18,000 (U)
_______
Profit volume variance = 18,000 30,000 = $ - 12,000 (U)
=========
IVV = 10% of CM of $60,000
MSV= 30,000 loss of revenues to maintain the same market share x CMR of 0.60


Master Budget
(1,000 units)
Master
Budget
adjusted for
Actual
Industry
Volume


Flexible Budget
(800 units)


Actual
(800 units)
Sales $ 100,000 $ 110,000 $ 80,000 $ 82,000
Variable Costs 40,000 44,000 32,000 39,000
Contribution
Margin
60,000 66,000 48,000 43,000
Fixed Costs 30,000 30,000 30,000 34,000
Operating Income 30,000 36,000 18,000 9,000
Industry Volume and Market Share Variances
Assume that the previous statement was for a multi-
product company, and that its budgeted CMR at its
budgeted mix was 0.60.

Assume further that the actual sales mix would have
resulted in a budgeted CMR of 0.58 instead

How much is the Sales Mix Variance?

Answer: - 0.02 x 80,000 = $ -1,600 U

The following spreadsheet includes a comprehensive
analysis of all profit variances


Master
Budget

Master
Budget
adjusted for
Actual
Industry
Volume


Flexible
Budget

Flexible
Budget
adjusted for
Actual Sales
Mix



Actual

Sales $ 100,000 $ 110,000 $ 80,000 $ 80,000 $ 82,000
Variable Costs 40,000 44,000 32,000 33,600 39,000
Contribution
Margin
60,000 66,000 48,000 46,400 43,000
Fixed Costs 30,000 30,000 30,000 30,000 34,000
Operating Income 30,000 36,000 18,000 16,400 9,000


Summary of Variances
Industry volume variance = 36,000 30,000 = $ 6,000 (F)
Market share variance = 18,000 36,000 = - 18,000 (U)
Profit volume variance = 18,000 30,000 = $ - 12,000 (U)
Sales mix variance = 16,400 18,000 = - 1,600 (U)

Sales price variance = 82,000 80,000 = 2,000 (F)
Variable cost variances = 33,600 39,000 = - 5,400 (U)
Fixed cost variances = 30,000 34,000 = - 4,000 (U)
__________
Total variances - 21,000 (U)
=========
Profit Variances - A Comprehensive Analysis
1. Total CM per Master Budget
A 9,000 x $8 = $72,000
B 6,500 x 11 = 71,500 $143,500
Total standard CM for Actual Quantities
A 10,000 x $8 = $80,000
B 6,000 x 11 = 66,000 $146,000

Profit Volume Variance (gross) 2,500 F
=======
2. Weighted average CM per unit based on Master Budget
$143,500/15,500 = 9.2581

Total standard CM for Actual Quantity 146,000
Total standard CM for 16,000 units
assuming budgeted sales mix
16,000 x $9.2581 148,129
Sales mix variance $ 2,129 U

Profit volume variance (net)
(16,000 - 15,500) x $9.2581 = 4,629 F

3. Decline in industry sales
(77,500 - 64,000) x 77,500 = 17.42%
Industry volume variance
.1742 x 15,1500 x 9.2581 = $24,997 U
Budgeted market share: 15,500/77,500 = 20%
Market share variance
(16,000-[0.20 x 64,000]) x 9.2581 = $29,626 F

4. Sales Price Variance
A 10,000($21 - 20) = 10,000 F
B 6,000($32 - 30) = 12,000 F $22,000 F
5. Variable cost flexible budget variances
Variable manufacturing costs
A 10,000($12 - 11) = 10,000 U
B 6,000($20 - 18) = 12,000 U = $22,000 U
Variable marketing and administrative
A 10,000($1.10 - 1) = 1,000 U
B 6,000($1.10 - 1) = 600 U = $ 1,600 U
$23,600 U
6. Fixed cost flexible budget variance
Manufacturing 36,000 - 34,500 = 1,500 U
Mktg and admin 44,000 - 40,000 = 4,000 U $5,500 U
7. Budgeted net income $69,000
Industry volume variance $24,997 U
Market share variance 29,626 F
Profit volume variance (net) 4,629 F
Sales mix variance 2,129 U
Profit Volume Variance (gross) 2,500 F
Sales price variance $22,000 F
Variable cost flex. bud. var. $23,600 U
Fixed cost flex. bud. var. 5,500 U
Total profit variances $ 4,600U
Actual net income $ 64,400

Journal Entry for Purchase of Direct Materials

Materials (AQ x SP) 315,000
MPV (AP - SP)AQ 10,500
Accounts Payable (AQ x AP) 325,500


Rule: Unfavourable variances are recorded by a debit
and favourable variances are recorded by a credit.
Recording the Issuance of Materials to Production

Work in Process (SQ x SP) 300,000
MUV [(AQ - SQ)SP] 7,500
Materials (AQ x SP) 307,500


AQ = Actual quantity used in production
Recording the Direct Labour Costs

Work in Process (SH x SR) 240,000
LEV [(AH - SH) SR] 3,900
Accrued Payroll (AH x AR) 237,900
LRV [(AR - SR) AH] 6,000


Recording Variable Overhead

Work in Process (SQ x SP) 400,000
Manufacturing Applied (SQ x SP) 400,000

Manufacturing Overhead (Actual) 410,000
Various Accounts 410,000


Recording Fixed Overhead

Work in Process (SQ x SP) 320,000
Manufacturing Overhead Applied 320,000

Manufacturing Overhead (Actual) 300,000
Various Accounts 300,000


Recording O/H Variances and Closing the O/H Accounts

Manufacturing O/H Applied (Variable) 400,000
Manufacturing O/H Applied (Fixed) 320,000
OSV (Variable) 20,000
Manufacturing Overhead (Variable) 410,000
Manufacturing Overhead (Fixed) 300,000
OEV (Variable) 10,000
OSV (Fixed) 10,000
DV (Fixed) 10,000
Disposition of Overhead Variances

OEV (Variable) 10,000
OSV (Fixed) 10,000
DV (Fixed) 10,000
OSV (Variable) 20,000

Cost of Goods Sold 10,000
ABC Company produced 25,000 units of Product XP-1
during 2000. Each product required 6 pounds of material at
$11 per pound and 2 hours of direct labor at $15 per hour.
During 2003, 160,000 pounds of material were purchased
and used for $1,750,000; payroll totaled $743,900 for
49,000 hours.


Required:
Calculate the direct materials price and usage variances and
the direct labor rate and efficiency variances.

MPV = $1,750,000 (160,000 $11)
= $1,750,000 $1,760,000
= $10,000 Favorable

MUV = (160,000 $11) (25,000 6 $11)
= $1,760,000 $1,650,000
= $110,000 Unfavorable

LRV = $743,900 (49,000 $15)
= $743,900 $735,000
= $8,900 Unfavorable

LEV = (49,000 $15) (25,000 2 $15)
= $735,000 $750,000