Topic 11

KAL1013 Chapter Eleven 1

Chapter Eleven

VARIANCE ANALYSIS

AND

STANDARD COSTING


1. Explain and illustrate how standards are used in budgeting2. Explain the standard-setting process3. Describe the types of standards and how they are established for businesses. a. Ideal standards b. Normal standards4. Explain how to calculate and interpret direct material price and quantity variance5. Explain how to calculate and interpret direct labour rate and time variance6. Explain how to interpret factory overhead controllable and volume variances.

Topic Objectives


Outline The usage of standard costing

Setting of standard cost and types of

standard

Calculation of variance: Direct material

Direct labor

Factory overhead


Standard Costing The cost that has been pre-determined after considering other factors.

Those are estimated costs which are considered to be ideal for each of the cost component ( direct

material, direct labor and factory overhead ).

The standard cost system enable the management to determine how much a product should cost.


The usage of standard costing Planning and controlling:

Product costing:

Compare actual cost & budgeted cost

Improve performance

Increase efficiency

Provide readily available unit cost

information


Setting of Standard Cost

Analysis on the historical cost experience:Provide initial guidelines for standard setting

Engineering studies:Determine the most efficient way to operate

Input from operating personnel:Accountable for meeting the standards

Involve joint efforts on:


Types of Standards Ideal standard

Normal standard

Maximum efficiency

Can be achieved if everything operates perfectly.

Currently attainable standard

Allowance is made for breakdown, interruptions etc..


Variance Analysis

Variances are the difference between the actual manufacturing cost and the standard cost at the actual level of production.

The significance of the variance for each element in manufacturing cost needs further analysis to determine the corrective actions.


Calculation of variance

Direct material

Direct labor

Factory overhead


Standard Cost

The expected cost per unit product

Illustration 1:

The followings are the standard cost for each unit (bottle) of peanut butter produced by Syarikat Sedap Selalu :


Standard Standard Standard Cost Price Usage RM

Direct material:

PeanutButterSugar

Direct labor:

Machine operatorPackaging

Factory OH:

Variable costsFixed costs

Standard cost per unit

2.80/kg 0.15kg 0.422.70/kg 0.10kg 0.271.20/kg 0.25kg 0.30

0.99

4.00/hour 0.02hour

3.00/hour 0.01hour

0.080.03

0.11

5.00/hour 0.01hour

12.00/hour 0.01hour

0.05

0.12 0.17

1.27


If Syarikat Sedap Selalu produces 10,000 bottles of peanut butter, the expected total cost would be:

Direct material

Direct labor

Factory overhead

Total cost

10,000 x 0.99 9,900

10,000 x 0.11

10,000 x 0.17

1,100

1,700

12,700


Calculation of variance

Cost element Actual cost Standard cost Variance

Direct material

Direct labor

Factory overhead

9,900

1,100

1,700

9,500 400 (F)

1,050 50 (F)

2,000 300 (U)

F = (Favorable) U = (Unfavorable)


Direct Material Variance

Direct Material Price Variance

Direct Material Usage (Quantity) Variance

To measure the difference between the actual cost and the standard cost of direct materials.


1. Direct material price variance

(Actual Price x Actual Quantity) - (Standard Price x Actual Quantity)

Simplified to be:

Actual Quantity (Actual Price – Standard Price)

AQ ( AP – SP )


2. Direct material usage (quantity) variance

(Standard Price x Actual Quantity) - (Standard Price x Standard Quantity)

Simplified to be:

Standard Price (Actual Quantity – Standard Quantity)

SP ( AQ – SQ )


Actual Price x Actual Qty Std Price x Actual Qty Std Price x Std Qty

Price Variance Usage Variance

Direct material variance


Illustration 2

The followings are the actual price and quantity for direct material used by the company in producing 10,000 bottles of peanut butter:

Actual Price Actual Quantity

Peanut RM2.70/kg 1,400kg

Butter RM2.505/kg 1,200kg

Sugar RM1.18/kg 2,300kg


Direct material price variance:

Peanut: 1,400 (2.70 – 2.80) = 140 (F)

Butter: 1,200 (2.505 – 2.70) = 234 (F)

Sugar: 2,300 (1.18 – 1.20) = 46 (F)

420 (F)

AQ ( AP – SP )


Direct material usage variance:

Peanut: 2.80 (1,400 – 1,500) = 280 (F)

Butter: 2.70 (1,200 – 1,000) = 540 (U)

Sugar: 1.20 (2,300 – 2,500) = 240 (F)

20 (U)Therefore ,

Total direct material variance = 420 (F) + 20 (U)

= 400 (F)

SP ( AQ – SQ )


Direct Labor Variance

Direct Labor Rate Variance

Direct Labor Efficiency Variance

Measures the differences between the actual cost and the cost that suppose to be paid to the labor.


1. Direct Labor Rate Variance

(Actual Hour x Actual Rate) - (Actual Hour x Standard Rate)

Simplified to be:

Actual Hour ( Actual Rate – Standard Rate )

AH ( AR – SR )


2. Direct Labor Efficiency Variance

(Standard Rate x Actual Hour) - (Standard Rate x Standard Hour)

Simplified to be:

Standard Rate ( Actual Hour – Standard Hour )

SR ( AH – SH )


Actual Hour x Actual Rate Std Hour x Actual Rate Std Hour x Std Rate

Rate Variance Efficiency Variance

Direct Labor Variance


Illustration 3:

The followings are actual rate and labor hour in the production of 10,000 bottles of peanut butter:

Actual labor rate Actual labor hour

Machine operator RM3.90/hour 190 hours

Packaging RM2.81/hour 110 hours


Direct Labor Rate Variance:

Machine Operator: 190 (3.90 – 4.00 ) = 19 (F)

Packaging: 110 (2.81 – 3.00) = 21 (F)

40 (F)

AH ( AR – SR )


Direct Labor Efficiency Variance:

Machine Operator: 4.00 (190 – 200) = 40 (F)

Packaging: 3.00 (110 – 100) = 30 (U)

10 (F)

SR ( AH – SH )

Therefore,

total direct labor variance: = 40 (M) + 10 (M)

= 50 (M)


Factory Overhead Variance

Factory Overhead Flexible Budget Variance

Factory Overhead Volume Variance

Measures the differences between the actual cost and the supposed related cost of factory overhead.


1. Factory Overhead Flexible Budget Variance

Actual Overhead Costs - Flexible Overhead Costs

Flexible OH Costs = Variable OH + Fixed OH

= (Variable OH rate x Actual production) +

(Fixed OH rate x Standard production)


2. Factory Overhead Volume Variance

Flexible OH Costs - Standard OH at actual production

Standard OH at actual production

= Variable OH + Fixed OH

Variable OH rate x Actual production=

+ Fixed OH rate x Actual production


Actual OH Costs Flexible OH Costs Std OH at actual prod.

Flexible BudgetVariance

Production Volume Variance

Overhead Variance


Illustration 4

The followings are the actual factory OH costs incurred in producing 10,000 unit / bottles of peanut butter:

Variable OH costs RM560

Fixed OH costs RM1,440

Note: Standard fixed OH costs per unit is calculated based on normal capacity of 12,000 units.


Flexible budget variance:

Variable OH:

Actual cost - (Std OH per unit x actual production )

560 - (0.05 x 10,000)

60 (U)

=

=

Fixed OH : Actual cost - (Std OH per unit x std production )

=

= 1,440 - (0.12 x 12,000)

0

Total flexible budget variance = 60 (U)


Production volume variance:

Variable OH :

Flexible OH costs - (Std OH per unit x actual production )

500 - (0.05 x 10,000)

0

=

=Fixed OH :

Flexible OH costs - (Std OH per unit x actual production )

=

= 1,440 - (0.12 x 10,000)

240 (U)

Total production volume variance = 240 (U)


Total factory OH variance :

Flexible budget variance + Production volume variance

= 60 (U) + 240 (U)

= 300 (U)


Total variance:

Actual Costs:

Direct material 9,500

Direct Labor 1,050

Factory OH 2,000

12,550Standard cost:

(1.27 x 10,000)12,700

150 (F)

Variance:

DM 400 (F)

DL 50 (F)

FOH 300 (U)

150 (F)

Topic 11

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