FA1334 Management Accounting

CHAPTER 4: STANDARD COSTING AND VARIANCES

ANALYSIS
Part 1: Definition
A standard cost is a predetermined estimated cost of products or services. Standard costing is
a control technique which compares standard costs and revenues with actual results to obtain
variances which are used to improve company’s performance. Standard cost once set are not
static but need to be revised regularly so as to remain relevant for cost comparison etc.

Variance analysis is the process by which the total difference between standard and actual
results is analysed. There are two outcomes from variance:
• favourable variance (F) – when actual results are better than expected results
• adverse variance (A) – actual results are worse than expected results

Part 2: Direct Material Cost Variances

Material cost variance is the deviation from the standard direct material cost, of the actual
production volume and the actual cost of direct material. Material cost variance is also
concerned as a sum of the direct material usage and price variances.

Example 1
Product X has a standard direct material cost as follow:
10 kgs of material Y at RM11 per kg

During Period 4, 1,000 units of X were manufactured, using 11,700 kgs of material Y which
cost RM98,280.

Required:
Calculate the following variances:
(a) Material price variance (MPV)
(b) Material usage variance (MUV)
(c) Material cost variance (MCV)

Answer
(a) Material price variance = (Standard Price – Actual Price) × Actual Quantity
= (RM11 – RM98,280 / 11,700) × 11,700 kgs
= RM30,420 (F)

(b) Material usage variance = (Standard Quantity – Actual Quantity) × Standard Price
= [(10 kgs × 1,000 units) – 11,700kgs] × RM11
= RM18,700 (A)

(c) Material cost variance = Material price variance + Material usage variance
= RM30,420 (F) + RM18,700 (A)
= RM11,720 (F)
OR

(c) Material cost variance = (Standard Quantity × Standard Price) – (Actual Quantity × Actual
Price)

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= (10,000 kgs × RM11) – RM98,280

= RM11,720 (F)

Part 3: Direct Labour Cost Variances

Direct labour cost variance is the difference between the standard direct labour cost for the
actual output and the actual labour cost paid. Labour cost variance represents the total of the
labour rate variance, labour efficiency variance and labour idle time variance.

Example 2
Standard: 2 hours of grade Z labour at RM5 per hour

During Period 5, 1,500 units of product X were made and the cost of grade Z labour was
RM17,500 for 3,080 hours paid. During the period, however, there is a machine breakdown
resulting in only 2,980 hours worked by the workers.

Required:
Calculate the following variances:
(a) Labour rate variance (LRV)
(b) Labour efficiency variance (LEV)
(c) Idle time variance (ITV)
(d) Labour cost variance (LCV)

Answer
(a) Labour rate variance = (Standard Rate – Actual Rate) × Actual Hours Paid
= (RM5 – RM17,500 / 3,080) × 3,080 hours
= RM2,100 (A)

(b) Labour efficiency variance = (Standard Hours – Actual Hours Worked) × Standard Rate
= [(2 hours × 1,500 units) – 2,980 hours] × RM5
= RM100 (F)

(c) Idle time variance = (Actual Hours Worked – Actual Hours Paid) × Standard Rate
= (2,980 hours – 3,080 hours) × RM5
= RM500 (A)

(d) Labour cost variance = Labour rate variance + Labour efficiency + Idle time variance
variance
= RM2,100 (A) + RM100 (F) + RM500 (A)
= RM2,500 (A)
OR

(d) Labour cost variance = (Standard Hours × Standard Rate) – (Actual Hours Paid × Actual
Rate)
= (3,000 hours × RM5) – RM17,500
= RM2,500 (A)

**
In exam, normally the “Actual Hours Paid” for LRV and “Actual Hours Worked” for LEV will
be the same. Thus, there will be no idle time occurred.

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Part 4: Variable Production Overhead Variances

The variable production overhead total variance can be subdivided into the variable production
overhead expenditure variance and the variable production overhead efficiency variance (based
on actual hours).

Example 3
Suppose that the standard variable production overhead cost of product X per unit is 2 hours at
RM1.50 per hour.

During Period 6, 1,000 units of product X were made. The labour force worked 2,020 hours.
The variable overhead cost was RM3,075.

Required:
Calculate the following variances:
(a) Variable production overhead expenditure variance (VOExV)
(b) Variable production overhead efficiency variance (VOEfV)
(c) Variable overhead cost variance (VOCV)

Answer
(a) Variable overhead = (Actual Hours × Standard Rate) – Actual Variable OVH
expenditure variance
= (2,020 hours × RM1.50) – RM3,075
= RM45 (A)

(b) Variable overhead = (Standard Hours – Actual Hours) × Standard Rate

efficiency variance
= [(2 hours × 1,000 units) – 2,020 hours] × RM1.50
= RM30 (A)

(c) Variable overhead = Variable overhead expenditure + Variable overhead efficiency

cost variance variance variance

= RM45 (A) + RM30 (A)

= RM75 (A)

OR

(c) Variable overhead = (Standard Hours × Standard Rate) – Actual Variable OVH
cost variance
= (2,000 hours × RM1.50) – RM3,075
= RM75 (A)

Part 5: Fixed Production Overhead Variances

Fixed production overhead total variance may be broken down into 2 parts:
• An expenditure variance

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• A volume variance

Fixed overhead cost variance is the difference between fixed overhead absorbed and fixed
overhead incurred.

Fixed overhead expenditure variance is the difference between the budgeted fixed overhead
expenditure and actual fixed overhead expenditure.

Fixed overhead volume variance is the difference between actual and budgeted (planned)
volume multiplied by the standard absorption rate per unit.

Example 4
Suppose that a company plans to produce 1,000 units of product E during August 2016. The
expected time to produce a unit of E is five hours, and the budgeted fixed overhead is
RM20,000. The standard fixed overhead cost per unit of product E will be 5 hours at RM4 per
hour.

Actual fixed overhead expenditure in August 2016 turns out to be RM20,450. The labour force
managed to produce 1,100 units of product E in 5,400 hours of work.

Required:
Calculate the following variances.
(a) Fixed overhead expenditure variance (FOEV)
(b) Fixed overhead volume variance (FOVV)
(c) Fixed overhead cost variance (FOCV)

Answer
(a) Fixed overhead = Budgeted Fixed Overhead – Actual Fixed Overhead
expenditure variance
= RM20,000 – RM20,450
= RM450 (A)

(b) Fixed overhead = (Actual Production Unit – Budgeted Production Unit) × FOAR
volume variance
= (1,100 units – 1,000 units) × RM20 per unit
= RM2,000 (F)

(c) Fixed overhead = Fixed overhead + Fixed overheads

cost variance expenditure variance volume variance

= RM450 (A) + RM2,000 (F)

= RM1,550 (F)

OR

(c) Fixed overhead = Fixed Overhead Absorbed – Actual Fixed Overheads

cost variance
= (RM20 per unit × 1,100 units) – RM20,450

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= RM1,550 (F)

Part 6: Variances Summary

BUDGETED COST = Budgeted cost per unit × budgeted units

STANDARD COST = Budgeted cost per unit × actual units
ACTUAL COST = Actual cost per unit × actual units

MPV = (SP – AP) × AQ

MUV = (SQ – AQ) × SP
MCV = MPV + MUV or (SQSP) – (AQAP)

LRV = (SR – AR) × AHP

LEV = (SH – AHW) × SR
ITV = (AHW – AHP) × SR
LCV = LRV + LEV + ITV or (SHSR) – (AHPAR)
VOExV = (AHSR) – AVO
VOEfV = (SH – AH) × SR
VOCV = VOExV + VOEfV or (SHSR) - AVO

FOEV = BFO – AFO

FOVV = (APU – BPU) × FOAR or (SH – BH) × SR
FOCV = FOEV + FOVV or FO Absorbed - AFO

Example 6
Armoured Kangaroo Sdn. Bhd. manufactures one product, and the entire product is sold as
soon as it is produced. There is no opening or closing stocks and work in progress is negligible.
The company operates a standard costing system and analysis of variances is made every
month.

The standard cost card for the product, a boomerang, is as follows:

RM
Direct materials 0.5 kilos at RM4 per kilo 2.00
Direct wages 2 hours at RM2.00 per hour 4.00
Variable overheads 2 hours at RM0.30 per hour 0.60
Fixed overhead 2 hours at RM3.70 per hour 7.40
Standard cost 14.00

Budgeted output for June was 5,100 units.

Actual results for June were as follows:

Production 4,850 units
Materials consumed in production amounted to 2,300 kilos at a total cost of RM9,800
Labour hours paid for amounted to 8,500 hours at a cost of RM16,800
Variable overheads amounted to RM2,600
Fixed overheads amounted to RM42,300

Required:

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Calculate all variances.

Answer

Material price variance = (Standard Price – Actual Price) × Actual Quantity

= RM4 – RM9,800 / 2,300) × 2,300 kilos
= RM600 (A)

Material usage variance = (Standard Quantity – Actual Quantity) × Standard Price

= [(0.5 kilo × 4,850 units) – 2,300 kilos] × RM4
= RM500 (F)

Labour rate variance = (Standard Rate – Actual Rate) × Actual Hours Paid
= (RM2 – RM16,800 / 8,500) × 8,500 hours
= RM200 (F)

Labour efficiency variance = (Standard Hours – Actual Hours Worked) × Standard Rate
= [(2 hours × 4,850 units) – 8500 hours] × RM2
= RM2,400 (F)

Variable overhead = (Actual Hours × Standard Rate) – Actual Variable OVH

expenditure variance
= (8,500 hours × RM 0.30) – RM2,600
= RM50 (A)

Variable overhead = (Standard Hours – Actual Hours) × Standard Rate

efficiency variance
= [(2 hours × 4,850 units) – 8,500 hours] × RM0.30
= RM360 (F)

Fixed overhead = Budgeted Fixed Overhead – Actual Fixed Overhead

expenditure variance
= (RM7.40 × 5,100 units) – RM42,300
= RM4,560 (A)

Fixed overhead = (Actual Production Unit – Budgeted Production Unit) × FOAR

volume variance
= (4,850 units – 5,100 units) × RM7.40
= RM1,850 (A)

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