PRACTICAL

ACCOUNTING 2
Monday, July 13, 2015

STANDARD COSTING - Variance Analysis

STANDARD COSTING - Variance Analysis

A variance is the difference between an actual result and an expected result. The process by which the total
difference between standard and actual results is analyzed is known as variance analysis. When actual results are
better than the expected results, we have a favorable variance (F). If, on the other hand, actual results are worse than
expected results, we have an unfavorable variance (U).
Reasons for variances
Material price

(F) unforeseen discounts received, greater care taken in purchasing, change in material standard

(U) price increase, careless purchasing, change in material standard.

Material usage

(F) material used of higher quality than standard, more effective use made of material

(U) defective material, excessive waste, theft, stricter quality control

Labor rate

(F) use of workers at rate of pay lower than standard

(U) wage rate increase

Idle time

Machine breakdown, non-availability of material, illness

Labor efficiency

(F) output produced more quickly than expected because of work motivation, better quality of equipment
or materials

(U) lost time in excess of standard allowed, output lower than standard set because of deliberate
restriction, lack of training, sub-standard material used.
Overhead expenditure

(F) savings in cost incurred, more economical use of services.

(U) increase in cost of services used, excessive use of services, change in type of services used
Overhead volume

(F) production greater than budgeted

(U) production less than budgeted

Interdependence between variances
The cause of one (unfavorable variance) variance may be wholly or partly explained by the cause of another
(favorable) variance.

Material price or material usage and labor efficiency

Labor rate and material usage

Sales price and sales volume
The significance of variances

The decision as to whether or not a variance is so significant that it should be investigated should take a number of
factors into account.

The type of standard being used

Interdependence between variances

Controllability

Materiality

Use this example throughout this Exercise:

Standard cost of Product A
Materials (5kgs x P10 per kg)
Labor (4hrs x P5 per hr)
Variable OH(4 hrs x P2 per hr)
Fixed OH(4 hrs x P6 per hr)
Budgeted results
Production:
Sales:
Selling price:

P50
20
8
24
102
ACTUAL Results

1,200 units
1,000 units
P150 per unit

Production:
Sales:
Materials:
Labor:
Variable OH:
Fixed OH:
Selling price:

1,000 units
900 units
4,850 kgs, P46,075
4,200 hrs, P21,210
P9,450
P25,000
P140 per unit

1. Variable cost variances

Direct material variances
The direct material total variance is the difference between what the output actually cost and what it should have
cost, in terms of material.
From the example above the material total variance is given by:

1,000 units should have cost (x P50)

But did cost
Direct material total variance

P50,000
46,075
3, 925 (F)

It can be divided into two sub-variances

The direct material price variance
This is the difference between what the actual quantity of material used did cost and what it should have cost.

4,850 kgs should have cost (x P10)

But did cost
Direct material price variance

P 48,500
46,075
2,425 (F)

The direct material usage variance

This is the difference between how much material should have been used for the number of units actually produced
and how much material was used, valued at standard cost

1,000 units should have used (x 5 kgs)

5,000 kgs

But did use

Variance in kgs
Valued at standard cost per kg
Direct material usage variance in P

4,850 kgs
150 kgs (F)
x P10
P1,500 (F)

The direct material price variance is computed on material purchases in the period if closing stocks of raw
materials are valued at standard cost or material used if closing stocks of raw materials are valued at actual cost
(FIFO).
Direct labor total variance
The direct labor total variance is the difference between what the output should have cost and what it did cost, in
terms of labor.

1,000 units should have cost (x P20)

But did cost
Direct material price variance

P20,000
21,210
1,210 (U)

Direct labor rate variance

This is the difference between what the actual number of hours worked should have cost and what it did cost.

4200hrs should have cost (4200hrs x P5)

But did cost
Direct labor rate variance

P21000
P21210
P210(U)

The direct labor efficiency variance

The is the difference between how many hours should have been worked for the number of units actually produced
and how many hours were worked, valued at the standard rate per hour.

1,000 units should have taken (x 4 hrs)

But did take
Variance in hrs
Valued at standard rate per hour
Direct labor efficiency variance

4,000 hrs
4,200 hrs
200 hrs
x P5
P1,000 (U)

When idle time occurs the efficiency variance is based on hours actually worked (not hours paid for) and an idle
time variance (hours of idle time x standard rate per hour) is computed.
2. Variable production overhead total variances
The variable production overhead total variance is the difference between what the output should have cost and what
it did cost, in terms of variable production overhead.

1,000 units should have cost (x P8)

But did cost
Variable production OH expenditure
variance

P8,000
9,450
1,450 U)

The variable production overhead expenditure variance

This is the difference between what the variable production overhead did cost and what it should have cost

4,200 hrs should have cost @ P2/hr

But did cost
Variable production OH expenditure variance
The variable production overhead efficiency variance

P8,400
9,450
1,050 (U)

This is the same as the direct labor efficiency variance in hours, valued at the variable production overhead rate per
hour.

Labor efficiency variance in hours

Valued @ standard rate per hour
Variable production OH efficiency variance

200 hrs (U)

x P2
P400 (U)

3. Fixed production overhead variances

The total fixed production variance is an attempt to explain the under- or over-absorbed fixed production overhead.

Remember that overhead absorption rate =

Budgeted fixed production overhead

Budgeted level of activity

If either the numerator or the denominator or both are incorrect then we will have under- or over-absorbed
production overhead.

If actual expenditure budgeted expenditure (numerator incorrect) expenditure variance

If actual production / hours of activity budgeted production / hours of activity (denominator incorrect)
volume variance.

The workforce may have been working at a more or less efficient rate than standard to produce a given
output volume efficiency variance (similar to the variable production overhead efficiency variance).

Regardless of the level of efficiency, the total number of hours worked could have been more or less than
was originally budgeted (employees may have worked a lot of overtime or there may have been a strike and so
actual hours worked were less than budgeted) volume capacity variance.
4. The fixed production overhead variances are computed as follows:
Fixed production overhead variance
This is the difference between fixed production overhead incurred and fixed production overhead absorbed (= the
under- or over-absorbed fixed production overhead)

Overhead incurred
Overhead absorbed (1,000 units x P24)
Overhead variance

P25,000
24,000
1,000 (U)

Fixed production overhead expenditure variance

This is the difference between the budgeted fixed production overhead expenditure and actual fixed production
overhead expenditure

Budgeted overhead (1,200 x P24)

Actual overhead
Expenditure variance

P28,800
25,000
3,800 (F)

Fixed production overhead volume variance

This is the difference between actual and budgeted production volume multiplied by the standard absorption rate per
unit.

Actual production at std rate (1,000 x P24)

Budgeted production at std rate (1,200 x P24)

P24,000
28,800
4,800(U)

Fixed production overhead volume efficiency variance

This is the difference between the number of hours that actual production should have taken, and the number of
hours actually worked (usually the labor efficiency variance), multiplied by the standard absorption rate per hour.

Labor efficiency variance in hours

Valued @ standard rate per hour
Volume efficiency variance

200 hrs (U)

x P6
P1,200 (U)

Fixed production overhead volume capacity variance

This is the difference between budgeted hours of work and the actual hours worked, multiplied by the standard
absorption rate per hour

Budgeted hours (1,200 x 4)

Actual hours
Variance in hrs
x standard rate per hour

4,800 hrs
4,200 hrs
600 hrs (U)
x P6
P3,600 (U)

KEY.
The fixed overhead volume capacity variance is unlike the other variances in that an excess of
actual hours over budgeted hours results in a favorable variance and not an unfavorable
variance it does when considering labor efficiency, variable overhead efficiency and fixed
overhead volume efficiency. Working more hours than budgeted produces an over absorption
of fixed overheads, which is a favorable variance.

-o-o-o-

Sales
variances
5. Selling price variance
The selling price variance is a measure of the effect on expected profit of a different selling price to standard selling
price. It is computed as the difference between what the sales revenue should have been for the actual quantity sold,
and what it was.

Revenue from 900 units should have been (x

P150)
But was (x P140)
Selling price variance

135,000
126,000
9,000 (U)

Sales volume variance

The sales volume variance is the difference between the actual units sold and the budgeted quantity, valued at the
standard profit per unit. In other words it measures the increase or decrease in standard profit as a result of the sales
volume being higher or lower than budgeted.

Budgeted sales volume

1,000 units

Actual sales volume

Variance in units
x standard margin per unit (x P (150 102) )
Sales volume variance

900 units
100 units (U)
x P48
P4,800 (U)

KEY.
Dont forget to value the sales volume variance at standard contribution marginal costing is in use.

PROBLEM

Thompson Company
Thompson Company has the following information available for the current year:

Standard:
Material
3.5 feet per unit @ $2.60 per foot
Labor
5 direct labor hours @ $8.50 per unit
Actual:
Material
Labor

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

1. Refer to Thompson Company. Compute the material purchase price and quantity variances.
ANS:

Material price variance:

100,000 $2.50 =
100,000 $2.60 =
Material quantity variance:
95,625 $2.60 =
89,250 $2.60 =

$250,000
260,000
$ 10,000

$248,625
232,050
$ 16,575

2. Refer to Thompson Company. Compute the labor rate and efficiency variances.
ANS:

Labor rate variance:

122,400 $8.35 =
122,400 $8.50 =

$1,022,040
1,040,400
$

Labor efficiency variance:

122,400 $8.50 =
127,500 $8.50 =

18,360

$1,040,400
1,083,750
$

43,350

McKinley Company
McKinley Company applies overhead based on direct labor hours and has the following available for November:

Standard:
Direct labor hours per unit
Variable overhead per DLH
Fixed overhead per DLH
(based on 8,900 DLHs)
Actual:
Units produced
Direct labor hours
Variable overhead
Fixed overhead

5
$.75
$1.90

1,800
8,900
$6,400
$17,500

3. Refer to McKinley Company. Compute all the appropriate variances using the two-variance approach.
ANS:

Actual ($6,400 + $17,500)

Budget Variance:
BFOH (8,900 $1.90)
VOH (1,800 5 $.75)
Volume Variance:
Applied OH:
(1,800 5 $2.65)

$23,900
$240 U
$16,910
6,750

$23,660
$190 F

$23,850

4. Refer to McKinley Company. Compute all the appropriate variances using the four-variance approach.
ANS:

Actual VOH
Variable Spending Variance:
Flex. Bud. Based on Actual
Input Hours (8,900 $.75)
Variable Efficiency Variance:
Applied VOH
(1,800 5 $.75)
Actual FOH
FOH Spending Variance:
BUDGETED FOH
FOH Volume Variance:
Applied FOH
(1,800 5 $1.90)

$6,400
$275 F
$6,675
$75 F
$6,750
$17,500
$590 U
$16,910
$190 F
$17,100

5. Refer to McKinley Company. Compute all the appropriate variances using the three-variance approach.
ANS:

Actual
Spending Variance:
Flexible Budget Based on Actual Input
BFOH
VOH (8,900 $.75)
Efficiency Variance:
Flexible Budget Based on Standard DLHs
BFOH
VOH (1,800 5 $.75)
Volume Variance:
Applied OH:
(1,800 5 $2.65)

$23,900
$315 U
$16,910
6,675

$23,585
$75 F

$16,910
6,750

$23,660
$190 F

$23,850

6. The Texas Company has made the following information available for its production facility for the month of June.
Fixed overhead was estimated at 19,000 machine hours for the production cycle. Actual machine hours for the
period were 18,900, which generated 3,900 units.

Material purchased (80,000 pieces)

Material quantity variance
Machine hours used (18,900 hours)
VOH spending variance
Actual fixed overhead
Actual labor cost
Actual labor hours

$314,000
$6,400
$50
$60,000
$40,120
5,900

U
U

Michigans standard costs are as follows:

Direct material
Direct labor
Variable overhead
(applied on a machine hour basis)
Fixed overhead
(applied on a machine hour basis)

20 pieces @ $4 per piece

1.5 hours @ $6 per hour
4.8 hours @ $2.50 per hour
4.8 hours @ $3 per hour

Determine the following items:

a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.

material purchase price variance

standard quantity allowed for material
total standard cost of material allowed
actual quantity of material used
labor rate variance
standard hours allowed for labor
total standard cost of labor allowed
labor efficiency variance
actual variable overhead incurred
standard machine hours allowed
variable overhead efficiency variance
budgeted fixed overhead
applied fixed overhead
fixed overhead spending variance
volume variance
total overhead variance

ANS:

a.

actual material cost

actual pieces at standard cost (80,000 $4)
material purchase price variance

$314,000
320,000
$ 6,000

b.

3,900 units 20 pieces per unit = 78,000 standard quantity allowed

c.

total standard cost of material (78,000 $4) $312,000

d.

standard cost of actual material used

$312,000 + $6,400 U quantity variance
$318,400 $4 = 79,600 actual pieces used

$318,400

e.

actual labor cost

5,900 actual DLHs $6
labor rate variance

$ 40,120
35,400
$ 4,720

f.

3,900 units 1.5 standard hours per unit

g.

5,850 SHA $6

$ 35,100

h.

actual hours standard rate (from e)

standard cost of labor allowed (from g)
labor efficiency variance

$ 35,400
35,100
$
300

actual machine hours standard VOH rate (18,900 $2.50)

VOH spending variance
actual VOH

$ 47,250
50
$ 47,300

i.

j.

3,900 units 4.8 standard hours per unit = 18,720 MH

allowed

k.

standard hours allowed (from j) standard VOH rate

(18,720 $2.50)
actual machine hours standard rate (from i)
(18,900 $2.50)
variable overhead efficiency variance

l.

19,000 machine hours $3

5,850

U
SHA

$ 46,800
47,250
$
450

$ 57,000

m. 3,900 units 4.8 hours per unit $3.00

$ 56,160

n.

actual fixed overhead

budgeted fixed overhead (from l)
fixed overhead spending variance

$ 60,000
57,000
$ 3,000

budgeted fixed overhead (from l)

applied fixed overhead (from m)
volume variance

$ 57,000
56,160
$
840

total actual overhead

[$60,000 + $47,300 (from i)]
total applied overhead (18,720 SHA $5.50)
Total overhead variance

$107,300

o.

p.

Blackridge Company

102,960
$ 4,340

The following information is available for Blackridge Company for the current year:
Standard:
Material X: 3.0 pounds per unit @ $4.20 per pound
Material Y: 4.5 pounds per unit @ $3.30 per pound
Class S labor: 3 hours per unit @ $10.50 per hour
Class US labor: 7 hours per unit @ $8.00 per hour
Actual:
Material X: 3.6 pounds per unit @ $4.00 per pound (purchased and used)
Material Y: 4.4 pounds per unit @ $3.25 per pound (purchased and used)
Class S labor: 3.8 hours per unit @ $10.60 per hour
Class US labor: 5.7 hours per unit @ $7.80 per hour
Blackridge Company produced a total of 45,750 units.
7. Refer to Blackridge Company. Compute the material price, mix, and yield variances (round to the nearest dollar).
ANS:

Standard:

X
Y

3.0/7.5 = 40%
4.5/7.5 = 60%

Actual:
X 3.6 45,750 $4.00 =
Y 4.4 45,750 $3.25 =

658,800

654,225
$1,313,025
$43,005 F price

Actual Standard Prices:

X 3.6 45,750 $4.20 =
Y 4.4 45,750 $3.30 =

691,740

664,290
$1,356,030
$16,470 U mix

Standard Qty. Actual Mix Standard Prices:

$
X 40% 366,000* $4.20 =
Y 60% 366,000 $3.30 =

614,880

724,680
$1,339,560

Standard Standard:
X 40% 343,125** $4.20 =
Y 60% 343,125 $3.30 =

*(45,750 8 = 366,000)
**(45,750 7.5 = 343,125)

576,450

679,388
$1,255,838

$83,722 U yield

8. Refer to Blackridge Company. Compute the labor rate, mix, and yield variances (round to the nearest dollar).
ANS:

Standard:

S
US

3/10 = 30%
7/10 = 70%

Actual Actual Prices:

S
3.8 45,750 $10.60 =
US 5.7 45,750 $7.80 =

Actual:

S
US

3.8/9.5 = 40%
5.7/9.5 = 60%

$1,842,810
2,034,045
$3,876,855
$34,770 F rate

Actual Standard Prices:

S
3.8 45,750 $10.50 =
US 5.7 45,750 $ 8.00 =

$1,825,425
2,086,200
$3,911,625
$108,656 U mix

Standard Qty. Actual Mix Standard Prices:

$1,369,069
S
30% 434,625* $10.50 =
2,433,900
US 70% 434,625 $ 8.00 =
$3,802,969
$200,156 F yield

Standard Standard:
S
30% 457,500** $10.50 =
US 70% 457,500 $ 8.00 =

$1,441,125
2,562,000
$4,003,125

*(45,750 9.5 = 434,625)

**(45,750 10 = 457,500)

9. Houston Corporation produces a product using the following standard proportions and costs of material:

Material A
Material B

Pounds

Cost Per
Pound

Amount

50
40

$5.00
6.00

$250.00
240.00

Material C

60
150

Standard
shrinkage (33
1/3%)
Net weight and
cost

3.00
4.4667

180.00
$670.00

6.70

$670.00

50
100

A recent production run yielding 100 output pounds required an input of:

Material A
Material B
Material C

Amount

Cost Per
Pound

40
50
65

$5.15
6.00
2.80

Required: Material price, mix, and yield variances.

ANS:
MATERIAL PRICE VARIANCE

MATERIAL A
MATERIAL B
MATERIAL C

($5.15 - 5.00) 40 =
($6.00 - 6.00) 50 =
($2.80 - 3.00) 65 =

MIX VARIANCE
A 40 $5 = $200
B 50 $6 = $300
C 65 $3 = $195
$695

$ 6

0
13
$ 7

F
F

YIELD VARIANCE
51 2/3 $5 = $258.33
41 1/3 $6 = $248.00
62 $3 = $186.00
$692.33

$2.67 UNF

50 $5 = $250
40 $6 = $240
60 $3 = $180
$670

$22.33 UNF

10. Moonlight Company began business early in January using a standard costing for its single product. With standard
capacity set at 10,000 standard productive hours per month, the following standard cost sheet was set up for one unit
of product:

Direct material-5 pieces @ $2.00

$10.00

Direct labor (variable)-1 sph @ $3.00

Manufacturing overhead:
Fixed-1 sph @ $3.00
Variable-1 sph @ $2.00

3.00

$3.00
2.00

5.00

Fixed costs are incurred evenly throughout the year. The following unfavorable variances from standard costs were
recorded during the first month of operations:

Material price
Material usage
Labor rate
Labor efficiency
Overhead volume
Overhead budget (2 variance analysis)

0
4,000
800
300
6,000
1,000

Required: Determine the following: (a) fixed overhead budgeted for a year; (b) the number of units completed
during January assuming no work in process at January 31; (c) debits made to the Work in Process account for
direct material, direct labor, and manufacturing overhead; (d) number of pieces of material issued during January;
(e) total of direct labor payroll recorded for January; (f) total of manufacturing overhead recorded in January.
ANS:

a. $3 10,000 12 = $360,000
b. $6,000/$3 = 2,000 under
10,000 - 2,000 = 8,000 units
c. DM = 8,000 $10 = $80,000, DL = 8,000 $3
= $24,000,
MOH = 8,000 $5 = $40,000
d. STD Q = 40,000 (X - 40,000) $2 = $4,000
unit, X = 42,000 pieces issued
e. $24,000 + $800 + $300 = $25,100

f. $40,000 + $6,000 + $1,000 = $47,000