Integration Management Advisory Services Frederick Alfred D.

Abao, CPA
BSA – IV Handout 3

STANDARD
 A measure of acceptable performance established by management as guide in making economic decisions
 A benchmark or “norm” for measuring performance

Why is standard is needed?

 Primarily, standards are established to systematically manage people by defining order, harmony, and
normalcy.
 In relation to its primary reasons, standard-setting in business has the following uses:
 Motivation
 Planning
 Monitoring or controlling
 Evaluation

TYPES OF STANDARDS
 IDEAL STANDARDS
Also called Theoretical or Maximum-Efficiency Standards, they require highest performance (100%) without
allowances for errors, mistakes, delays, inefficiencies, production stoppages, machine breakdown, etc.

 PRACTICAL STANDARDS
Tight, but attainable standards. They allow for normal machine downtime and employee rest-periods, normal
wastages, and work interruptions.

STANDARDS AND BUDGETS

Both standards and budgets are predetermined amounts. However, a standard is a unit amount, whereas a budget is a
total amount.
 Total budgeted costs – the cost that should be incurred for budgeted production

Total Budgeted Cost = Budgeted Production x Standard Cost per Unit

 Total standard costs – the cost that should have been incurred for actual production

Total Standard Cost = Actual Production x Standard Cost per Unit

VARIANCE
The difference between actual costs and standard costs. It should be described as either favorable (actual < standard) or
unfavorable (actual > standard).

VARIANCE COMPUTATION AND ANALYSES

 Materials
1. Spending or Materials Price Variance = (Actual Price – Standard Price) x Actual Quantity

2. Efficiency or Quantity Variance = (Actual Quantity – Standard Quantity) x Standard Price

 Direct Labor
1. Spending or Rate Variance = (Actual Rate – Standard Rate) x Actual Time

2. Efficiency or Time Variance = (Actual Time – Standard Time) x Standard Rate

 Variable Factory Overhead
1. VOH Spending Variance
Actual Variable Overhead Pxx
Less: Actual hours x Standard VOH rate (xx)
Unfavorable(Favorable) Pxx

2. VOH Efficiency Variance = (Actual hours – Standard hours) x Standard VOH rate

 Total Manufacturing Overhead

 Two-Way Analysis

Controllable Variance
Actual Manufacturing Overhead Pxx
Less: Budget allowed based on Standard hours
Budgeted Fixed Overhead Pxx
Variable (Standard hours x Standard VOH rate) xx xx
Unfavorable (Favorable) Pxx

Capacity or Volume Variance

Budget allowed based on Standard hours Pxx
Less: Standard hours x Total Standard Overhead rate xx
Unfavorable (Favorable) xx

Total Manufacturing Overhead Variance Pxx

 Three-Way Analysis

Spending Variance
Actual Manufacturing Overhead Pxx
Less: Budget allowed on actual hours
Budgeted Fixed Overhead Pxx
Variable (Actual hours x Standard VOH rate) xx xx
Unfavorable (Favorable) Pxx

Variable Efficiency Variance

Budget Allowed on Actual hours
Less: Budget Allowed on Standard hours
Budgeted Fixed Overhead Pxx
Variable (Standard hours x Standard VOH rate) xx xx
Unfavorable (Favorable) Pxx

Capacity or Volume Variance

Budget allowed based on Standard hours Pxx
Less: Standard hours x Total Standard Overhead rate xx
Unfavorable (Favorable) xx

Total Manufacturing Overhead Variance Pxx

 Four-Way Analysis

Variable Overhead Spending Variance

Actual Variable Overhead Pxx
Less: Actual hours x Standard VOH rate xx
Unfavorable (Favorable) Pxx
 Fixed Overhead Spending Variance
Actual Fixed Overhead Pxx
Less: Budgeted Fixed Overhead xx
Unfavorable (Favorable) Pxx

Variable Efficiency Variance

Budget Allowed on Actual hours
Less: Budget Allowed on Standard hours
Budgeted Fixed Overhead Pxx
Variable (Standard hours x Standard VOH rate) xx xx
Unfavorable (Favorable) Pxx

Capacity or Volume Variance

Budget allowed based on Standard hours Pxx
Less: Standard hours x Total Standard Overhead rate xx
Unfavorable (Favorable) xx

Total Manufacturing Overhead Variance Pxx

REVIEW QUESTIONS

1. A primary purpose of using a standard cost system is

A. To make things easier for managers in the production facility.
B. To provide a distinct measure of cost control.
C. To minimize the cost per unit of production
D. B and C are correct

2. Which of the following should be least considered when deciding whether to investigate a variance?
A. Whether the variance is favorable or unfavorable C. Cost of investigating the variance
B. Significance of the variance D. Trend of the variances over time

3. A company employing very tight (high) standards I a standard cost system should expect that
A. No incentive bonus will be paid C. Employees will be strongly motivated to attain standard
B. Most variances will be unfavorable D. Costs will be controlled better than if lower standards were used

4. The budget for a given cost during a given period was P1,600,000. The actual cost for the period was P1,440,000.
Considering these facts, it can be said that the plant manager has done a better than expected job in controlling cost
if:
A. The cost is variable and actual production was 90% of budgeted production
B. The cost is variable and actual production equaled budgeted production
C. The cost is variable and actual production was 80% of the budgeted production
D. The cost is discretionary fixed cost and actual production equaled budgeted production

5. Which of the following is the most probable reason with a company would experience an unfavorable labor rate
variance and a favorable labor efficiency variance?
A. The mix of workers assigned to the particular job was heavily weighted toward the use of highly paid, experienced
individuals.
B. The mix of workers assigned to the particular job was heavily weighted toward the use of new, relatively low paid,
unskilled workers.
C. Because of the productive schedule, workers from other production areas were assigned to assist in this particular
process.
D. Defective materials caused more labor to be used in order to produce a standard unit.

6. A company uses a two-way analysis for overhead variances: controllable and volume. The volume variance is based
on the
A. Total overhead application C. Variable overhead application rate
B. Volume of total expense at various activity levels D. Fixed overhead application rate
7. Assuming that the standard fixed overhead rate is based on full capacity, the cost of available but unused productive
capacity is indicated by
A. Factory overhead cost volume variance C. Direct labor cost rate variance
B. Direct labor cost efficiency variance D. Factory overhead cost controllable variance

8. The unfavorable volume variance may be due to all but which of the following factors?
A. Failure to maintain an even flow of work C. Unexpected increase in the cost of utilities
B. Machine breakdowns D. Failure to obtain enough sales orders

9. The budgeted overhead costs for standard hours allowed and the overhead costs applied to product are the same
amount
A. for both variable and fixed overhead costs.
B. only when standard hours allowed is less than normal capacity.
C. for variable overhead costs.
D. for fixed overhead costs.

10. A favorable materials price variance coupled with an unfavorable materials usage variance would most likely result
from
A. Machine efficiency problems C. Labor efficiency problems
B. Product mix production changes D. The purchase of lower-standard-quality materials

11. Information on Rex Company’s direct material costs for May 2018 is as follows:
Actual quantity of direct materials purchased and used 30,000 lbs.
Actual cost of direct materials P84,000
Unfavorable direct materials usage variance P 3,000
Standard quantity of direct materials allowed for May production 29,000 lbs
For the month of May, what was Rex’s direct materials price variance?
A. P2,800 favorable C. P6,000 unfavorable
B. P2,800 unfavorable D. P6,000 favorable

Questions 12 and 13
Burger Queen uses a standard costing system in the manufacture of its single product. The 35,000 units of raw
material in inventory were purchased for P105,000, and two units of raw materials are required to produce one unit
of final product. In November, the company produced 12,000 units of product. The standard allowed for material
was P60,000, and there was an unfavorable quantity variance of P2,500.

12. Burger Queen’s standard price for one unit of materials is

A. P2.50 B. P3.00 C. P5.00 D. P6.00

13. The units of material used to produce November output totaled

A. 12,000 units B. 23,000 units C. 24,000 units D. 25,000 units

14. Which of the following unfavorable variances is directly affected by the relative position of a production process on
a learning curve?
A. Material mix B. Material price C. Labor rate D. Labor efficiency

15. The difference between the actual labor rate multiplied by the actual hours worked and the standard labor rate
multiplied by the standard labor hours is the
A. Total labor variance C. Labor usage variance
B. Labor rate variance D. Labor efficiency variance

16. For the month of April, Thorp Company’s records disclosed the following data relating to direct labor:
Actual cost P10,000
Rate variance 1,000 favorable
Efficiency variance 1,500 unfavorable
Standard cost P9,500
For the month of April, actual direct labor hours amounted to P2,000. In April, Thorp’s standard direct labor rate per
hour was
 A. P5.50 B. P5.00 C. P4.75 D. P4.50

17. The following direct labor information pertain to the manufacture of product Celeste:
Time required to make one unit 2 DLH
Number of direct workers 50
Number of productive hours per week, per worker 40
Weekly wages per worker P500
Worker’s benefits treated as direct labor costs 20% of wages
What is the standard direct labor cost per unit of product Celeste?
A. P30 B. P24 C. P15 D. P12

18. Sullivan Corporation’s direct labor costs for the month of March were as follows:
Standard direct labor hours 42,000
Actual direct labor hours 40,000
Direct labor rate variance – favorable P8,400
Standard direct labor rate per hour P6.30
What was Sullivan’s total direct labor payroll for the month of March?
A. P243,600 B. P252,000 C. P264,600 D. P260,400

19. Which of the following variances is of least significance from the behavioral control perspective?
A. Unfavorable materials quantity variance amounting to 20% of the quantity allowed for the output attained.
B. Unfavorable labor efficiency variance amounting to 10% more than the budgeted hours for the output attained.
C. Favorable materials price variance obtained by purchasing raw material from a new vendor.
D. Fixed factory overhead volume variance resulting from management decision midway through the fiscal year to
reduce its budgeted output by 20%.

20. Differences in product costs resulting from the application of actual overhead rates rather than predetermined
overhead rates could be immaterial if
A. Production is not stable C. Several products are produced simultaneously
B. Fixed factory overhead is a significant cost D. Overhead is composed only of variable costs.

21. Universal Company uses a standard cost system and prepared the following budgeted amounts at normal capacity
for the month of January 2018:
Direct labor hours 24,000
Variable factory overhead P48,000
Fixed factory overhead P108,000
Total factory overhead per direct labor hour P6.50
Actual data for January 2018 were as follows:
Direct labor hours worked 22,000
Total factory overhead P147,000
Standard direct labor hours allowed for capacity attained 21,000
What is the budget (controllable) variance for January 2018?
A. P3,000 favorable C. P9,000 favorable
B. P5,000 favorable D. P10,500 unfavorable

22. Hope Company uses a flexible budget system and prepared the following for 2018:
Normal Capacity Maximum Capacity
Percent of capacity 80% 100%
Direct labor hours 32,000 40,000
Variable factory overhead P64,000 P80,000
Total factory overhead P160,000 P160,000
Total factory overhead rate per direct labor hour P7 P6
Hope operated at 90% of capacity during 2018. The actual factory overhead for 2018 was P252,000. What was the
budget (controllable) overhead variance for the year?
A. P36,000 unfavorable C. P18,000 unfavorable
B. P20,000 unfavorable D. P0
23. Peters Company uses a flexible budget system and prepare the following information for the year:
Percent of capacity 80% 90%
Direct labor hours 24,000 27,000
Variable factory overhead P48,000 P54,000
Fixed factory overhead P106,000 P108,000
Total factory overhead rate per DLH P6.50 P6.00
Peters operated at 80% capacity during the year but applied overhead based on the 90% capacity level. Assuming
that actual FOH was equal to the budgeted amount for the attained capacity, what is the amount of overhead
variance for the year?
A. P6,000 overabsorbed C. P12,000 overabsorbed
B. P6,000 underabsorbed D. P12,000 underabsorbed

24. The following data are taken from the company’s flexible budget for the current quarter:
Normal activity (direct labor hours) P10,500
Variable overhead cost at 9,000 DLH P225,000
Fixed overhead cost P63,000

A standard cost card showing the standard cost to produce one unit of the company’s product is given below:
Direct materials : 6 lbs at P3 P18.00
Direct labor : 2 hours at P12 24.00
Overhead : 120% of DL cost 28.80
Standard unit cost P70.80

During the quarter, the cost of production report of the company reported an equivalent production of P4,800 units
and incurred the following costs:
Materials purchased, 30,000 lbs. at P2.90 P87,000
Materials used in production (in lbs) 29,050
Direct labor cost incurred, 10,000 hours at P12.20 122,000
Variable overhead cost incurred 230,000
Fixed overhead cost incurred 55,100

REQUIRED:
25. Materials variances
26. Direct labor variances
27. Total overhead variance
28. Variable overhead spending, variance and efficiency variances.
29. Fixed overhead spending, idle capacity variances, and volume variances