Standard Costing

Exercise 4-1 Write R if the statement is true. Write W if the statement is false. An unfavorable volume variance may be due to a failure of supervisors to maintain an even flow of work. Favorable volume variances are never harmful, since achieving them encourages managers to run the factory above normal capacity. Volume variance measures fixed factory overhead. Though favorable volume variances are usually good news, if inventory levels are too high, additional production could be harmful. Standard costs are a useful management tool that can be used solely as a statistical device apart from the ledger or they can be incorporated in the accounts. Variances from standard rarely conflict with nonfinancial performance measures, such as employee satisfaction. A variable cost system is an accounting system where standards are set for each manufacturing cost element. Standard costs serve as a device for measuring efficiency. The standard cost is how much a product should cost to manufacture. Standard costs can be used with both the process cost and job order cost systems. Cost systems using detailed estimates of each element of manufacturing cost entering into the finished product are called standard cost systems. The fact that workers are unable to meet a properly determined direct labor standard is sufficient cause to change the standard. The difference between the standard cost of a product and its actual cost is called a variance. Standards are performance goals used to evaluate and control operations. Standards are set for only direct labor and direct materials. Principle of exceptions allows managers to focus on correcting variances between standard costs and actual costs. A favorable cost variance occurs when actual cost is less than budgeted cost at actual volumes. An unfavorable cost variance occurs when budgeted cost at actual volumes exceeds actual cost.

Standards are designed to evaluate price and quantity variances separately. Standard costs should always be revised when they differ from actual costs. In most businesses, cost standards are established principally by accountants. It is correct to rely exclusively on past cost data when establishing standards. Ideal standards are developed under conditions that assume no idle time, no machine breakdowns, and no materials spoilage. Currently attainable standards do not allow for reasonable production difficulties. Standard costs are determined by multiplying expected price by expected quantity. The direct labor time variance measures the efficiency of the direct labor force. The variance from standard for factory overhead cost resulting from operating at a level above or below 100% of normal capacity is termed volume variance. The variance from standard for factory overhead cost resulting from incurring a total amount of factory overhead cost that is greater or less than the amount budgeted for the level of operations achieved is termed controllable variance. The most effective means of presenting standard factory overhead cost variance data is through a factory overhead cost variance report. Since the controllable variance measures the efficiency using variable overhead resources, if budgeted variable overhead exceeds actual results, the variable is favorable. Exercise 4-3 (Multiple Choice – Computation). Encircle the letter that corresponds to the best chosen answer. Use the following information for Questions 1 to 2. Actual costs Standard costs

What is the direct materials price variance? P2,250 favorable P2,250 unfavorable P2,300 favorable P1,700 unfavorable

4,600 pounds at P5.50 4,500 pounds at P6.00

What is the direct materials quantity variance? P550 unfavorable P600 favorable P550 favorable P600 unfavorable USE THE FOLLOWING INFORMATION FOR QUESTIONS 3 TO 4. The following data is given for the Walker Company: Budgeted production Actual production Materials: Standard price per lb Standard pounds per completed unit Actual pounds purchased and used in production Actual price paid for materials Labor: Standard hourly labor rate Standards hours allowed per completed unit Actual labor hours worked Actual total labor costs Overhead: Actual and budgeted fixed overhead Standard variable overhead rate Actual variable overhead costs

Overhead is applied on standard labor hours. The direct material price variance is 600F 600U 80F 80U The direct material quantity variance is: 600F 600U

1,000 units 980 units P2.00 12 11,800 P23,000 P14 per hour 4.5 4,560 P62,928 P27,000 P3.50 per standard labor hour P15,500

80F 80U The following data relate to direct labor costs for the current period: Standard costs Actual costs What is the direct labor time variance?

7,500 hours at P11.60 6,000 hours at P12.00

P3,000 favorable P15,000 unfavorable P2,400 favorable P17,400 favorable The following data relate to direct labor costs for the current period: Standard costs Actual costs What is the direct labor rate variance?

6,000 hours at P.80 per hour 7,500 hours at P11.60

P15,000 unfavorable P3,000 favorable P17,400 unfavorable P2,400 favorable USE THE FOLLOWING INFORMATION FOR QUESTIONS 7 TO 9. The standard costs and actual costs for factory overhead for the manufacture of 2.500 units of actual production are as follows:

Fixed overhead (based on 10,000 hours) Variable overhead

Standard Costs 3 hours @ P.80 per hour 3 hours @ P2 per hour Actual Costs

Total variable cost, P18,000 Total fixed cost, P8,000

The amount of factory overhead volume variance is: P2,000 favorable

P2,000 unfavorable P2,500 unfavorable P0 The amount of total factory overhead cost variance is: P2,000 favorable P5,000 unfavorable P2,500 unfavorable P0 The amount of factory overhead controllable variance is: P2,000 unfavorable P3,000 favorable P3,000 unfavorable USE THE FOLLOWING INFORMATION FOR QUESTIONS 10 TO 19. Forrest Company uses a standard cost system for its production process and applies overhead based on direct labor hours. The following information is available for August when Forrest made 4,500 units: Standard: DLH per unit Variable overhead per DLH Fixed overhead per DLH Budgeted variable overhead Budgeted fixed overhead

2.50 P1.75 P3.10 P21,875 P38,750

Actual: Direct labor hours 10,000 Variable overhead P26,250 Fixed overhead P38,000 Using the one-variance approach, what is the total overhead variance? a. b. c. d.

P6,062.50 U P3,625.00 U P9,687.50 U P6,562.50 U

Using the two-variance approach, what is the controllable variance?

a. b. c. d.

P5,812.50 U P5,812.50 F P4,375.00 U P4,375.00 F

Using the two-variance approach , what is the noncontrollable variance? a. b. c. d.

P3,125.00 F P3,875.00 U P3,875.00 F P6,062.50 U

Using the three-variance approach, what is the spending variance? a. b. c. d.

P4,375 U P3,625 F P8,000 U P15,750 U

Using the three-variance approach, what is the efficiency variance? a. b. c. d.

P9,937.50 F P2,187.50 F P2,187.50 U P2,937.50 F

Using the three-variance approach, what is the volume variance? a. b. c. d.

P3,125.00 F P3,875.00 F P3,875.00 U P6,062.50 U

Using the four-variance approach, what is the variable overhead spending variance? a. b. c. d.

P4,375.00 U P4,375.00 F P8,750.00 U P6,562.50 U

Using the four-variance approach, what is the variable overhead efficiency variance? a. b. c. d.

P2,187.50 U P9,937.50 F P2,187.50 F P2,937.50 F

Using the four-variance approach, what is the fixed overhead spending variance? a. b. c. d.

P7,000 U P3,125 F P750 U P750 F

Using the four-variance approach, what is the volume variance? a. b. c. d.

P3,125 F P3,875 F P6,063 U P3,875 U

Problem 4-1. Materials Standards Swagger 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 output. 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.