topic 11(short)
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KAL1013 Chapter Eleven 1
Chapter Eleven
VARIANCE ANALYSIS
AND
STANDARD COSTING
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KAL1013 Chapter Eleven 2
Outline The usage of standard costing
Setting of standard cost and types of
standard
Calculation of variance: Direct material
Direct labor
Factory overhead
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KAL1013 Chapter Eleven 3
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.
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KAL1013 Chapter Eleven 4
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
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KAL1013 Chapter Eleven 5
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:
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KAL1013 Chapter Eleven 6
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..
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KAL1013 Chapter Eleven 7
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.
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KAL1013 Chapter Eleven 8
Calculation of variance
Direct material
Direct labor
Factory overhead
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KAL1013 Chapter Eleven 9
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 :
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KAL1013 Chapter Eleven 10
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
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KAL1013 Chapter Eleven 11
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
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KAL1013 Chapter Eleven 12
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)
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KAL1013 Chapter Eleven 13
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.
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KAL1013 Chapter Eleven 14
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 )
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KAL1013 Chapter Eleven 15
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 )
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KAL1013 Chapter Eleven 16
Actual Price x Actual Qty Std Price x Actual Qty Std Price x Std Qty
Price Variance Usage Variance
Direct material variance
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KAL1013 Chapter Eleven 17
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
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KAL1013 Chapter Eleven 18
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 )
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KAL1013 Chapter Eleven 19
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 )
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KAL1013 Chapter Eleven 20
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.
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KAL1013 Chapter Eleven 21
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 )
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KAL1013 Chapter Eleven 22
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 )
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KAL1013 Chapter Eleven 23
Actual Hour x Actual Rate Std Hour x Actual Rate Std Hour x Std Rate
Rate Variance Efficiency Variance
Direct Labor Variance
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KAL1013 Chapter Eleven 24
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
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KAL1013 Chapter Eleven 25
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 )
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KAL1013 Chapter Eleven 26
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)
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KAL1013 Chapter Eleven 27
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.
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KAL1013 Chapter Eleven 28
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)
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KAL1013 Chapter Eleven 29
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
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KAL1013 Chapter Eleven 30
Actual OH Costs Flexible OH Costs Std OH at actual prod.
Flexible BudgetVariance
Production Volume Variance
Overhead Variance
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KAL1013 Chapter Eleven 31