Review Materials: Prepared By: Junior Philippine Institute of Accountants UC-Banilad Chapter F.Y. 2019-2020

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Review Materials

Prepared by:
Junior Philippine Institute of
Accountants UC-Banilad Chapter
F.Y. 2019-2020
Standard Costs &
Variance Analysis
Definitions

Standard Costing - is a budgeting control technique with 3


components: (1) a standard, predetermined performance level; (2) a
measure of actual performance; and (3) a measure of the variance, the
difference between the standard and the actual. It is probably most
relevant to manufacturing organizations with repetitive production
processes.
-may be defined basically as a technique of cost accounting which
compares the “standard cost” of each product or service with the actual
cost, to determine the efficiency of the operation, so that any remedial
action may be taken immediately.
Variance - is the difference between a budgeted or standard amount
and the actual amount during a given period.
Variance Analysis - compares standard to actual performance. It
could be done by division, department, program, product, territory, or
any other responsibility unit.
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TYPES OF STANDARDS

1. Basic. These are not changed from period to period and are used in the
same way as an index number.
2. Maximum efficiency. These are perfect standards assuming ideal,
optimal conditions, allowing for no losses of any kind, even those
considered unavoidable. They will always result in unfavorable variances.
3. Currently attainable (practical).These refer to the volume of output
possible if a facility operated continuously, but after allowing for normal
and unavoidable losses such as vacations, holidays, and repairs. Currently
attainable standards are based on efficient activity. They are possible but
difficult to achieve.
4. Expected. These are expected figures based on foreseeable operating
conditions and costs. They come very close to actual figures.

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Capacity Standards

▪ Theoretical(perfection). Standards are set at the highest possible


capacity where there are no allowances for waste, spoilage,
inefficiencies, machine breakdowns and other downtimes, and other
interruptions in the production line.
▪ Practical Standards(currently attainable). Attain the most
reasonable production level, with allowances machine breakdowns,
downtimes, inefficiencies, waste and spoilage, and other normal
production disturbances.
▪ Budgeted(expected output). Capacity is the estimated level of
performance that the company plans to achieve in the next 12
months.
▪ Standard Capacity. Estimated capacity that should have been used
in actual capacity.
▪ Normal Capacity(normal standard). It is the average production
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level over a long-period of time.
Direct Materials Costs Variance Analysis

2-way Variance Analysis


▪ Materials Price Variance = (Actual Price-Standard Price) × Actual
Quantity
▪ Materials Quantity Variance = (Actual Quantity-Standard Quantity) ×
Standard Price
3-way Variance Analysis
▪ Materials Price Variance = (Actual Price-Standard Price) × Standard
Quantity
▪ Materials Quantity Variance = (Actual Quantity-Standard Quantity) ×
Standard Price
▪ Joint Materials Variance = (Actual Price-Standard Price) × (Actual
Quantity-Standard Quantity)

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Example
Quantity Unit Price Amount
Actual 775,000 lbs. P 3.90 P3,022,500
-Standard (150,000 units × 5 lbs.) 750,000 4.00 3,000,000
Variances-UF(F) 25,000 UF P(0.10) F P(22,500) F

Solution: (2-way)
MPV = (AP-SP) × AQ = (P3.90-P4.00) × 775,000 lbs. = P(77,500) F
MQV = (AQ-SQ) × SP = (775,000-750,000) × P4.00 = 100,000 UF
Net Direct Materials Costs Variance P 22,500 UF
(3-way)
MPV = (AP-SP) × SQ = (P3.90-P4.00) × 750,000 lbs. = P(75,000) F
MQV = (AQ-SQ) × SP = (775,000-750,000) × P4.00 = 100,000 UF
JMV = (AP-SP) × (AQ-SQ) = (3.90-4.00) × (775,000-750,000) = ( 2,500) F
Net Direct Materials Costs Variance P 22,500 UF

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Direct Labor Costs Variance Analysis

2-way Variance Analysis


▪ Labor Rate Variance = (Actual Rate-Standard Rate) × Actual Hours
▪ Labor Efficiency Variance = (Actual Hours-Standard Hours) ×
Standard Rate
3-way Variance Analysis
▪ Labor Rate Variance = (Actual Rate-Standard Rate) × Standard Hours
▪ Labor Efficiency Variance = (Actual Hours-Standard Hours) ×
Standard Rate
▪ Joint Labor Variance = (Actual Rate-Standard Rate) × (Actual Hours-
Standard Hours)

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Example

Hours Rate/Hr. Amount


Actual 400,000 P 8.15 P3,260,000
-Standard (150,000 units × 3 hrs.) 450,000 8.00 3,600,000
Variances-UF(F) ( 50,000) F P0.15 UF P(340,000) F

Solution: (2-way)
LRV = (AR-SR) × AH = (P8.15-P8.00) × 400,000 hrs. = P 60,000 UF
LEV = (AH-SH) × SR = (400,000-450,000) × P8.00 = (400,000) F
Net Direct Labor Costs Variance =P(340,000) F
(3-way)
LRV = (AR-SR) × SH = (P8.15-P8.00) × 450,000 hrs. = P 67,500 UF
LEV = (AH-SH) × SR = (400,000-450,000) × P8.00 = (400,000) F
JLV = (AR-SR) × (AH-SH) = (P8.15-P8.00) × (400,000-450,000) = (7,500) F
Net Direct Labor Costs Variance =P(340,000) F
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CONCEPTS TO REMEMBER:

• If the standards set are too high, it will create dysfunctional employee
behavior. If is set too low, it would attract mediocre performance and would
not maximize the potentials of employees.

• Variance should be labeled favorable/unfavorable.

• Normal Variance is when the variance is within the normal deviation.

• Exceptional Variance is when the variance is greater than the normal


variance.

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End of Topic
Please see complementary test bank for
practice problems and theories.

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Dear, you.
Always be in pursuit for
the one you have not yet
become. Keep going!
Love,
Your UCB-JPIA family

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Reference:
DOKUMEN .MAS REVIEWER - STANDARD COSTING.
Retrieved on August 15,2020 from
https://dokumen.tips/documents/mas-reviewer-
standard-costing.html#google_vignette
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