performance measurement. In manufacturing companies, standards are classified into two categories: QUANTITY Standard indicates the quantity of raw materials or labor time required to produce a unit of product. This is normally expressed per unit of output. COST Standard indicates what the cost of the quantity standard should be. This is normally expressed per unit of input.
BUDGETS vs. STANDARDS
Standard Cost Variance Analysis VARIANCE = Actual Costs (AC) Standard Costs AC > SC (SC) Variance (debit : Unfavorable balance) AC < SC : Favorable Variance (credit balance) Material Variance Actual Material Cost = Actual Quantity (AQ) x Actual Price (AP) Standard Material Cost = Standard Quantity (SQ) x Standard Price (SP) Analysis: Materials Cost Variance Quantity Variance: Q x SP = Difference in Quantity x SP Price Variance: Q x P = AQ x Difference in Prices Labor Variance Actual Labor Cost = Actual Hours (AH) x Actual Rate (AR) Standard Labor Cost = Standard Hours (SH) x Standard Rate (SR) Analysis: Materials Cost Variance Effieciency Variance: H x SR = Difference in Hours x SR Rate Variance: H x R = AH x Difference in Rate FACTORY OVERHEAD (FOH) Variance = (Actual FOH Cost) (Standard FOH Cost) Materials Price, Mix and Yield Variances Mix and yield variances are normally calculated whenever the production process involves combining several materials to produce a unit of product. Material Variance = Actual Material Cost Standard Material Cost Analysis: Price Variance: A Q x P Mix Variance: ( AQ x SP ) TAQASP Yield Variance: TAQASP Standard Cost
Legend: AQ = Actual Quantity P = Difference in Prices SP = Standard Price TAQASP = Total Actual Quantity at Average Standard Price
Note: mix and yield variances may also apply to direct
labor. IMPORTANT NOTES: Material and Labor Variance Analysis 1. Material Price Variance is also known as: Material spending variance, material money variance, material rate variance 2. Material Quantity Variance is also known as: Material usage variance, material efficiency variance 3. Material usage variance is a quantity variance while material price usage variance is a price variance. 4. Labor Rate Variance is also known as: Labor price variance, labor spending variance, labor money variance 5. Labor Efficiency Variance is also known as: Labor hours variance, labor usage variance, labor time variance 6. Labor efficiency variance excludes idle time spent in the production. If any, idle time is separately explained through the Idle Time Variance, which is regarded as unfavorable. IDLE TIME Variance = Idle time x Standard Labor Rate FACTORY OVERHEAD (FOH) VARIANCE ANALYSIS IMPORTANT NOTES: Factory Overhead Variance Analysis 1. SFOH = Standard Hours x Standard FOH Rate. Under standard costing, SFOH is likewise referred to as the applied factory overhead. 2. If AFOH is more than SFOH, then factory overhead is said to be under applied, hence, under application indicates an unfavorable variance, while over application indicates a favorable variance. 3. The term capacity variance is also used to mean the volume variance. 4. Budget Variance = Actual Cost Budgeted Cost = Actual FOH Budgeted FOH (BFOH) If BFOH is adjusted based on standard hours (BASH), then budget variance is controllable variance. If BFOH is adjusted based on actual hours (BAAH), then budget variance is spending variance. 5. Volume variance is actually the fixed volume variance, there is no such thing as a variable volume variance or variable capacity variance. 6. Under the 3-way approach, the FOH efficiency variance is actually the variable efficiency variance. Other than BAAH BASH, variable FOH efficiency variance may also be computed based on : Change in hours x variable FOH rate = (AH-SH) VR 7. FOH variances may be classified into: Variable FOH Variances = Variable Spending Variance + (variable)Efficiency Variance FFOH Variance = Fixed Spending Variance + (fixed) Volume Variance 8. Manufacturing Efficiency Variance incorporates the effect of both FOH Uses of Standard Costs 1. Cost Control 2. Pricing decisions 3. Costing of inventories 4. Motivation and performance appraisal 5. Cost awareness and cost reduction 6. Preparation of budgets 7. Preparation of cost reports 8. Management by exception
Standard Costing Procedures
1. Establishing standards 2. Measuring actual performance 3. Comparing actual performance with standards 4. Taking corrective actions when needed 5. Revising standards when needed