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Standard Costing

Cost Accounting and Control, 2019, De Leon, et al


Problem
Last month, the following took place at Shangrila Company:
 Produced 50,000 plastic microcomputer case
 Standard variable costs per unit (per case)
Direct materials, 2 pounds at P1.00 P2.00
Direct labor, 0.10 hours at P15 1.50
Variable manufacturing overhead, 0.10 hrs at P5 0.50
 Fixed manufacturing overhead cost
Monthly budget for 40,000 cases or 4,000 hours P 80,000
 Actual production costs
Direct materials purchased 200,000 lbs at P1.20 P240,000
Direct materials used, 110,000 lbs at P1.20 132,000
Direct labor, 6,000 hours at P14 84,000
Factory Overhead 111,000
Fixed Factory Overhead 75,000
Important Notes
1. Total Factory Overhead is given at P111,000
2. Fixed Factory overhead is given at P75,000
3. We can derive the variable overhead at P36,000 (Total FOH – Fixed FOH)
4. Total 50,000 cases produced is given.
5. Actual total hours used to produce 50,000 cases at 6,000 hours is given.
6. We can derive the actual hour per case:
6,000 hours / 50,000 cases or 0.12 hour per case
7. We can derive the variable FOH rate
P36,000 / 6,000 hours = P6 per hour
8. We can derive the fixed FOH rate
P75,000 / 6,000 hours = P12.50 per hour
Material Variance
 Material Price Variance
(Actual Purchase Price – Standard Purchase Price) x No. of units Purchased
(1.20 – P1.00) x 200,000 = P40,000 unfavorable
Unfavorable because the actual price is higher than the standard price.

 Material Usage Variance

(Actual material usage – Standard material usage) x Standard Price


(110,000 – 100,000) x P1.00 = P10,000 unfavorable
Unfavorable because the actual usage is more than the standard usage for
5,000 cases (that is, 5,000 case x 2 lbs per case = 100,000 lbs)
Labor Variance
 Labor Rate Variance
(Actual Labor Rate – Standard Labor Rate) x Actual No. of Hours
(P14 – P15) per hour x 6,000 Hours = P6,000 favorable
Favorable because the actual rate is lower than the standard rate.

 Labor Efficiency Variance


(Actual Hours – Standard Hours Allowed) x Standard Price
(6,000 Hours – (50,000 cases x 0.10 Hours per case)) x P15.00 per hour
(6,000 Hours – 5,000 Hours) x P15 per hour = P15,000 Unfavorable
Unfavorable because the actual (6,000) hours used is more than the
standard hours allowed for 5,000 cases (that is, 5,000 case x 0.10 hour per case
= 5,000 hours)
Factory Overhead – One-Way Variance
 Total Variance = Actual Factory Overhead – Actual Volume at Standard Rates
Actual Factory Overhead:
Variable = 50,000 cases x 0.12 Hours x P6.00 = P 36,000
Fixed = 50,000 cases x 0.12 hours x P12.50 = 75,000
Total actual factory overhead P111,000

Actual Volume at Standard Rates:


Variable = 50,000 cases x 0.10 hours x P5 = P 25,000
Fixed = 50,000 cases x 0.10 hours x P20 = 100,000
Total actual volume at standard rates P125,000
or 50,000 units x 0.10 hours x (P5 + P20) = P125,000
Total variance, favorable P 14,000
Factory Overhead – Two-Way Variance
Controllable Variance + Volume Variance = Total Variance

Note: First, compute the volume variance. Then, deduct the volume variance from
the total variance to get the controllable variance.

Volume Variance: (Actual volume – Budget volume) x Std Hour x Std Fixed Rate
(50,000 cases – 40,000 cases) x 0.10 hour per case x P20 per hour = P20,000 Fav.

Controllable Variance: Total Variance – Volume Variance


P14,000 Fav – P20,000 Fav = P6,000 Unfavorable
Factory Overhead – Three-Way Variance
Spending Variance + Efficiency Variance + Volume Variance = Total Variance

Note: The volume variance in two-way variance is the same in the three-way
variance. Compute for the efficiency variance, then the difference from the total
variance is the spending variance.

Efficiency Variance: Actual volume x (Actual Hour – Std Hour) x Std Variable Rate
50,000 cases x (0.12 – 0.10) x P5 = 50,000 cases x 0.02 x P5 = P5,000 unfav.

Volume Variance: P20,000 Fav. (from two-way variance)

Spending Variance: Total Variance – Efficiency Variance - Volume Variance


P14,000 Fav – P5,000 Unfav – P20,000 Fav = P1,000 Unfavorable
Factory Overhead – Four-Way Variance
Variable Spending Variance + Fixed Spending Variance + Efficiency Variance +
Volume Variance = Total Variance

Note:
1. The sum of variable spending variance and fixed spending variance is Spending
Variance.
2. The efficiency variance in the three-way variance is the same in the four-way
variance.
3. The volume variance in two-way, three-way and four-way are the same.
4. Compute for variable spending variance, then the difference from the total
variance is the fixed spending variance or compute for fixed spending variance to
get the variable spending variance.
Factory Overhead – Four-Way Variance
Variable Spending Variance: Actual Hours x (Actual Var. Rate – Std Var. Rate)
6,000 hours x (P6 – P5) = P6,000 Unfav.

Fixed Spending Variance: Actual Fixed FOH – Budgeted Fixed FOH


Actual: 50,000 cases x 0.12 hours/case x P12.50/case = P 75,000
Budgeted Fixed FOH: 40,000 cases x 0.10 hours/case x P20/case = 80,000
Fixed Spending Variance = Favorable P 5,000

Total Spending Variance = Variable Spending Variance + Fixed Spending Variance


P6,000 Unfav. + P5,000 Fav. = P1,000 Unfav.

Total Variance = Variable Spending Variance + Fixed Spending Variance + Efficiency


Variance + Volume Variance
P6,000 Unfav. + P5,000 Fav. + P5,000 Unfav. + P20,000 Fav. = P14,000 Fav.
I hope the simplified approach in
the FOH variance analysis will
help you.

Thank you!