Standard Costing - Materials and Labor

MANILA BUSINESS COLLEGE
MBC Bldg. 1671 Alvarez St., Sta. Cruz Manila City
STRATEGIC BUSINESS ANALYSIS JA Labay STANDARD COSTING (VARIANCE
ANALYSIS – Materials and Labor)
Standard costing is the establishment of cost standards for activities and their periodic analysis to
determine the reasons for any variances. Standard costing is a tool that helps management
account in controlling costs.
Ideal standards are those that can be attained only under the best circumstances. They allow for
no machine breakdowns or other work interruptions, and they call for a level of effort that can be
attained only by the most skilled and efficient employees working at peak effort 100% of the
time.
Practical standards are those standards that are tight but attainable. They allow for normal
machine downtime and employee rest period. They can be attained through reasonable, though
highly efficient, efforts by the average worker.
Purpose of Standard Costing

Standard cost systems aid in planning operations and gaining insights into the probable impact of
managerial decisions on cost levels and profits. Standard costs are used for: 1. Establishing
budgets.
2. Controlling costs, directing, and motivating employees and measuring
efficiencies. 3. Promoting possible cost reduction.
4. Simplifying costing procedures and expediting cost reports.
5. Assigning costs to materials, work in process, and finished goods inventories.
6. Forming the basis for establishing bids and contracts and for setting sales
prices
The comparison of actual costs with standard costs is called variance analysis and it is vital for
controlling costs and identifying ways for improving efficiency and profitability. If actual cost
exceeds the standard costs, it is an unfavorable variance. On the other hand, if actual cost is less
than the standard cost, it is a favorable variance.
Direct Material Variances:

∙ Material Price Variance = (AQ × AP) – (AQ × SP)
∙ Material Quantity Variance = (AQ × SP) – (SQ × SP)

AQ – Actual Quantity / AP – Actual Price
SQ – Standard Quantity / SP – Standard Price
Direct Labor Variances:

∙ Labor Rate (Price) Variance = (AH × AR) – (AH × SR)
∙ Labor Efficiency (Quantity) Variance = (AH × SR) – (SH × SR)

AH – Actual Hours / AR – Actual Rate
SH – Standard Hours / SR – Standard Rate
Standard Costing (Variance Analysis) Page 1

PROBLEMS
1. The following materials standards have been established for a particular product:
Standard quantity per unit of output 5.2 meters
Standard price P15.60 per meter
The following data pertain to operations concerning the product for the last
month: Actual materials purchased 8,500 meters
Actual cost of materials purchased P 139,400
Actual materials used in production 8,200 meters
Actual output 1,640 units
Required:
a. What is the materials price variance for the month?
b. What is the materials quantity variance for the month?
2. The following labor standards have been established for a particular

product: Standard labor hours per unit of output 0.3 hours
Standard labor rate P15.50 per hour
The following data pertain to operations concerning the product for the last
month: Actual hours worked 3,800 hours
Actual total labor cost P 59,470
Actual output 12,800 units
Required:
a. What is the labor rate variance for the month?
b. What is the labor efficiency variance for the month?
3. Lid Company's standard and actual costs per unit for the most recent period, during which 400
units were actually produced, are given below:
Standard Actual
Materials:
Standard: 2 ft. at P1.50 per foot P 3.00
Actual: 2.1 ft. at P1.60 per foot P 3.36
Direct Labor:
Standard: 1.5 hr. at P6.00 per hour 9.00
Actual: 1.4 hr. at P6.50 per hour 9.10
Required:
From the abovementioned information, compute the following variances. Show whether the
variance is favorable (F) or unfavorable (U):
a. Materials price variance.
Standard Costing (Variance Analysis – Materials and Labor) Page 2
b. Materials quantity variance.
c. Direct labor rate variance.
d. Direct labor efficiency variance.
4. Spra Corporation is developing standards for its products. One product requires an input that is
purchased for P62.00 per kilogram from the supplier. By paying cash, the company gets a
discount of 6% off this purchase price. Shipping costs from the supplier's warehouse amount to
P4.45 per kilogram. Receiving costs are P0.50 per kilogram. Each unit of output requires 0.48
kilogram of this input. The allowance for waste and spoilage is 0.04 kilogram of this input for
each unit of output. The allowance for rejects is 0.13 kilogram of this input for each unit of
output.
Required:
a. Determine the standard price per kilogram of this input.
b. Determine the standard kilograms of this input per unit of output.
5. Pitt Corporation is developing direct labor standards. The basic direct labor wage rate is
P13.90 per hour. Employment taxes are 10% of the basic wage rate. Fringe benefits are P4.28
per hour. A particular product requires 0.90 direct labor-hours per unit. The allowance for breaks
and personal needs is 0.07 direct labor-hours per unit. The allowance for cleanup, machine
downtime, and rejects is 0.12 direct labor-hours per unit.
Required:
a. Determine the standard rate per direct labor-hour.
b. Determine the standard direct labor-hours per unit of product.
c. Determine the standard labor cost per unit of product.

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MANILA BUSINESS COLLEGE

MBC Bldg. 1671 Alvarez St., Sta. Cruz Manila City

STRATEGIC BUSINESS ANALYSIS JA Labay STANDARD COSTING (VARIANCE

ANALYSIS – Materials and Labor)

Purpose of Standard Costing

Direct Material Variances:

∙ Material Quantity Variance = (AQ × SP) – (SQ × SP)

Direct Labor Variances:

∙ Labor Efficiency (Quantity) Variance = (AH × SR) – (SH × SR)

Standard Costing (Variance Analysis) Page 1

b. What is the materials quantity variance for the month?

2. The following labor standards have been established for a particular

b. What is the labor efficiency variance for the month?

c. Direct labor rate variance.

d. Direct labor efficiency variance.

b. Determine the standard kilograms of this input per unit of output.

b. Determine the standard direct labor-hours per unit of product.

c. Determine the standard labor cost per unit of product.

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