Standard Costing and The Balance Scorecard

Standard Costing
&
The Balance
Scorecard
Standard costing and the Balance Scorecard
DEPARTMENT OF ACCOUNTING & INFORMATION SYSTEM

FACULTY OF BUSINESS STUDIES
JAGANNATH UNIVERSITY
STANDARD COSTING AND THE BALANCE SCORECARD
Table of Contents:
Page
Number
10.1. Introduction:
10.2. Unit standard: Standard cost
10.3. Definition of Budgeted Cost:
10.4. Standard Costing Systems and Flexible Budgeting:

10.5. Standard cost sheet
10.6. How Standards Are Developed
10.7. Types of Standards
10.8. Why Standard Cost Systems Are Adopted
10.9. Establishing Cost Standards
10.10. Standard Product costs
10.11. Variance Analysis: General Description
10.12. Variance Analysis: Material and labor
10.13. Direct Materials Usage Variance
10.14. Direct Labor Variances
Illustration
Exercise
10.1. Introduction:
If you were to design a cost accounting system with no accounting education other than financial
accounting courses, you would probably design an accounting system that collects, summarizes,
and reports actual costs. This approach would be consistent with the implicit assumption
throughout every financial accounting course that when financial statements report historical cost
data, such as would normally be the case for cost-of-goods-sold and ending inventory, that the
Page 2 of 76
information reported represents actual costs. Therefore, it comes as a surprise to most students
that the initial journal entries to record the production and movement of inventory in the costing
systems of most manufacturing firms are not based on actual costs at all, but rather are based on
budgeted per-unit costs.
In most manufacturing firms, the initial journal entries to debit work-in-process, finished goods
and cost-of-goods-sold are based on the actual quantity of output produced, multiplied by
budgeted data about the inputs necessary to produce those outputs, and the budgeted costs of
those inputs. Then, at the end of the month (or possibly quarterly), an adjusting or closing
entry is made to record in the inventory accounts the difference between actual costs incurred, and
the budgeted information that has formed the basis for the journal entries during the month. The
nature of this adjusting entry depends on the materiality of the amounts involved. If the
differences between actual costs and budgeted costs are small, this adjusting entry might be made
in an expedient manner, involving only cost-of-goods-sold, but if the differences are large, the
adjusting entry might also involve work-in-process and finished goods inventory accounts.
The accounting system described above is called a standard costing system, and it is widely-used
by companies in the manufacturing sector of the economy. This chapter describes standard costing
systems, and explains why companies use them. But first we discuss a related concept, standard
costs, which constitutes an important component of standard costing systems.
10.2. Standard Costs:
A standard, as the term is usually used in management accounting, is a budgeted amount for a
single unit of output. A standard cost for one unit of output is the budgeted production cost for
that unit. Standard costs are calculated using engineering estimates of standard quantities of
inputs, and budgeted prices of those inputs. For example, for an apparel manufacturer, standard
quantities of inputs are required yards of fabric per jean and required hours of sewing operator
labor per jean. Budgeted prices for those inputs are the budgeted cost per yard of fabric and the
budgeted labor wage rate.
Standard quantities of inputs can be established based on ideal performance, or on expected
performance, but are usually based on efficient and attainable performance. Research in
psychology has determined that most people will exert the greatest effort when goals are
somewhat difficult to attain, but not extremely difficult. If goals are easily attained, managers and
employees might not work as hard as they would if goals are challenging. But also, if goals appear
out of reach, managers and employees might resign themselves to falling short of the goal, and
might not work as hard as they otherwise would. For this reason, standards are often established
based on efficient and attainable performance.
Hence, a standard is a type of budgeted number; one characterized by a certain amount of rigor in
its determination, and by its ability to motivate managers and employees to work towards the
companys objectives for production efficiency and cost control.
There is an important distinction between standard costs and a standard costing system. Standard
costs are a component in a standard costing system. However, even companies that do not use
standard costing systems can utilize standards for budgeting, planning, and variance analysis.
Page 3 of 76
A standard cost is the expected or budgeted cost of materials, labor, and manufacturing overhead
required to produce one unit of product.Standard costs are predetermined costs: target costs that
should be incurred under efficient operating conditions. A standard cost provides cost expectations
per unit of activity and a budget provides the cost expectation for the total activity. Example: If the
budget is for 10 000 units and the budgeted cost is Tk.30 000, the standard cost is Tk.3 per unit.
Standard costs mostly used in organizations with common or repetitive operations, in manufacturing
organizations. The standard costs should be developed for repetitive operations and product standard
costs are derived simply by combining the standard costs from the operations which are necessary to
make the product. Only by comparing the total actual costs with total standard costs for each
operation or responsibility centre for a period can control be effectively achieved. A comparison of
standard product costs with actual costs that involves several different responsibility centres is cl early
inappropriate.
10.3 Budget costs: A budget relates to an entire activity or operation.
Unit Standard Cost:
The unit standard cost is calculated as follows:
Price standard Quantity standard
Price standard: A price standard is the price that should be paid per unit of input (such as pound of
material).
Quantity standard: A quantity standard is the quantity of input allowed per unit of output (for
example, pounds of material allowed per one unit of product).
Standard Costing Systems:
A standard costing system initially records the cost of production at standard. Units of inventory
flow through the inventory accounts (from work-in-process to finished goods to cost of goods sold)
at their per-unit standard cost. When actual costs become known, adjusting entries are made that
restate each account balance from standard to actual (or to approximate such a restatement). The
components of this adjusting entry provide information about the companys performance for the
period, particularly with regard to production efficiency and cost control.
10.4. Standard Costing Systems and Flexible Budgeting:
There is an important connection between flexible budgeting, which was discussed in Chapter 5,
and standard costing. In fact, a standard costing system tracks inventory during the period at the
flexible budget amount. Recall that the flexible budget is the budgeted per-unit cost multiplied by
the actual number of units. Hence, a standard costing system answers the question: what would
the income statement and balance sheet look like, if costs and per-unit input requirements were
exactly as planned, given the actual output achieved (units made and units sold).
Given the point made in the previous paragraph, it follows that the adjustment made at periodend to restate the inventory accounts for the difference between the standard cost account balance
and the actual cost account balance constitutes the difference between the flexible budget amount
and actual costs. For direct costs, such as materials and labor, this adjusting entry represents the
sum of the price (or labor wage rate) variance and the efficiency (or quantity) variance. For
overhead costs, this adjusting entry represents misapplied overhead. For variable overhead,
misapplied overhead consists of the sum of the spending variance and the efficiency variance. For
Page 4 of 76
fixed overhead, misapplied overhead consists of the sum of the spending variance and the volume
variance. These overhead variances are discussed in Chapter 17.
Hence, standard costing systems track inventory at flexible budget amounts during the period,
and post adjusting entries at the end of the period that provide variance information that
managers use for performance evaluation and control.
10.5. Standard cost sheet
A standard cost sheet calculates the total standard cost for one unit of product. It lists the standard
costs for one unit of product for the following:
a. Materials (Price standard Quantity standard)
b. Labor (Price standard Quantity standard)
c. Variable manufacturing overhead (Price standard Quantity standard)
d. Fixed manufacturing overhead (Price standard Quantity standard)
10.6. How Standards Are Developed
Standards can be based on:
e. historical experience
f. engineering studies, and
g. input from operating personnel.
10.7. Types of Standards
1. Basic cost standards: constant standards that are left unchanged over long periods. A base
is provided for a comparison with actual costs through a period of years with the same
standard, and efficiency trends can be established over time. Do not represent current
costs.
2. Ideal standards: Ideal standards are standards that reflect perfect operating efficiency. Ideal
standards are virtually unattainable and can result in low employee morale and a decline in
performance. Perfect performance, the minimum costs that are possible under the most
efficient operating conditions. May have adverse impact on employee motivation.
3. Currently attainable standard costs: Currently attainable standards are demanding but
attainable under efficient operating conditions. Such standards allow for normal machine
downtime and employee rest periods. Costs to be incurred under efficient operating
conditions. Difficult, but not impossible to achieve. Allowances are made for normal
spoilage, machine breakdowns and lost time. The standards represent a target that can be
achieved under efficient conditions, but which is also viewed as being neither too easy to
achieve nor impossible to achieve, provides the best norm to which actual costs should be
compared. Planning and control. 46% of the 300 UK manufacturing companies reported
that they used achievable but difficult to attain standards, 50% used average past
performance standards and 4% used maximum efficiency standards.
Challenging but attainable standards tend to result in higher performance levels than ideal standards. If
standards are too tight and never achievable, workers become frustrated and performance levels
decline.
Page 5 of 76
10.8. Why Standard Cost Systems Are Adopted/ Purposes of standard costingor Reasons for
using a Standard Costing System:
(i) To assist in setting budgets and evaluating managerial performance.
(ii) To improve planning and control. A standard cost system compares actual amounts with
standard amounts to determine variances from the standard. The use of a standard cost
system for operational control in an advanced manufacturing environment can produce
dysfunctional behavior. However, standards in the advanced manufacturing environment
are still useful for planning, such as developing bids.
(iii) To facilitate product costing.Standard costing uses standard costs for direct materials, direct
labor, and overhead. Standard cost systems provide readily available unit cost information
that can be used for pricing decisions.
(iv)Act as a control device by highlighting those activities that do not conform to plan, and
thus alerting decision-makers to those situations that may be out of control and in need of
corrective action.
(v) To provide a prediction of future costs that can be used for decision-making purposes.
(vi)To simplify the task of tracing costs to products for inventory valuation purposes.
(vii) To provide a challenging target that individuals are motivated to achieve.
Costs under the three product cost assignment approaches are summarized below:
PRODUCT COSTING SYSTEM
Actual costing system
Normal costing system
Standard costing system
MANUFACTURING COSTS
Direct Materials
Actual
Actual
Standard
Page 6 of 76
Direct Labor
Actual
Actual
Standard
Overhead
Actual
Budgeted
Standard
10.9.ESTABLISHING COST STANDARDS

10.9.1. Direct material standards
Product specifications derived from an intensive study of the input quantity necessary
for each operation.
The most suitable materials for each product based on product design and quality
policy, and the optimal quantity that should be used after taking into account any
wastage or loss that is considered inevitable in the production process.
Material quantity standards are recorded on a bill of materials, which describes and
states the required quantity of materials for each operation to complete the product.
Standard prices, which are obtained from the purchasing department.
Price standards take into account the advantages to be obtained by determining the
most economical order quantity and quantity discounts. NB vendor reliability
10.9.2. Direct labour standards
Each operation is studied and an allowed time computed
Analyse each operation to eliminate any unnecessary elements and to determine the
most efficient production method. Then the most efficient methods of production,
equipment and operating conditions are standardized. Time measurements to
determine the number of standard hours required by an average worker to complete
the job.NB Unavoidable delays! Wage policy!
10.9.3. Overhead standards
Many different costs, power used to operate machinery vary directly and
proportionately with activity
Standard overhead rate per unit of activity where overheads vary with activity
The cost of variable overhead resources per unit of output cannot be studied and
measured. There is no observable direct relationship between resources required and
units of output. Necessary to measure the relationship using past data.
Page 7 of 76
Variable overhead rates are estimated by examining past relationships between

changes in departmental overhead costs and changes in departmental activity. Several
different activity measures exist. For example, volume-related overhead variable
overheads can vary with direct labour hours of input, machine hours, quantity of
materials used, number of units of output, etc.
Objective: to find the activity measure that exerts the greatest influence on cost
Mostly used: direct labour hours or machine hours: variable overhead rate per unit of
activity derived from the statistical analysis is applied to the standard labour or
machine usage to derive a standard variable overhead cost per unit of output.
Fixed overheads are largely independent of changes in activity, and remain constant
over wide ranges of activity in the short term.
It is inappropriate for cost control purposes to unitize fixed overheads to derive a fixed
overhead rate per unit of activity.
SSAP requires fixed manufacturing overheads be traced to products.
Necessary to unitize fixed overheads for stock valuation purposes.
Standard fixed overhead rates are established for each production department by
estimating the fixed departmental overheads for a period, usually a year.
The budgeted fixed annual overhead is divided by the budgeted level of activity to
derive a standard fixed overhead rate per unit of activity.
The most frequently used activity bases are machine hours for machine-related
overheads and direct labour hours for non-machine-related overheads.
The standard machine or direct labour hour rate is applied to the standard labour or
machine usage per unit of output to derive the standard fixed overhead cost for a
product.
Example: if the budgeted fixed overheads and direct labour hours for a department are
respectively Tk.500 000 and 50 000 direct labour hours, the standard fixed overhead
rate would be Tk.10 per direct labour hour. The standard fixed overhead cost for a
product with a standard usage of two standard direct labour hours would be Tk.20.
Page 8 of 76
Control over costs is best affected through action at the point where they are incurred.
Standards should be set for labour, materials and variable overheads consumed in
performing an operation. For stock valuation purposes it is necessary to establish
product cost standards.
10.10. STANDARD PRODUCT COSTS

The standard cost sheet for one unit of product might appear as follows:
STANDARD COST SHEET
Production Costs for One Unit of Product
Direct materials
(Standard quantity of materials Standard price for materials)
Direct labor
(Standard direct labor hours Standard direct labor rate)
Variable manufacturing overhead
(Standard direct labor hours Standard variable overhead rate)
Fixed manufacturing overhead
(Standard direct labor hours Standard fixed overhead rate)
Total standard cost per unit of product
The standard cost for direct materials is calculated as follows:

Standard cost for direct materials =
Standard quantity of materials Standard price for the materials
Standard quantity of materials allowed (SQ) is calculated:
SQ = Unit quantity standard Actual output
The standard direct labor cost for a unit of product would be calculated as follows:
Standard direct labor cost =
Standard quantity of direct labor Standard rate per direct labor hour
Standard hours allowed (SH ) is calculated:
SH = Unit labor standard Actual output
10.11. VARIANCE ANALYSIS:GENERAL DESCRIPTION
Price and Efficiency Variances
The total budget variance is the difference between actual cost of inputs and the standard (or
planned) cost of inputs.
There are two variances for variable production costs:
h. price or rate variances
Page 9 of 76
i. usage or efficiency variances

Price (rate) variances focus on the difference between actual costs of inputs and what the inputs
should have cost (standard prices).
Usage (efficiency) variances focus on the difference between the actual quantity used and the
standard quantity allowed for units produced.
The general model for calculating variable cost variances appears below:
Actual quantity of
input at actual price
(AP AQ)
Actual quantity of
input at standard price
(SP AQ)
Standard quantity of
input at standard price
(SP SQ)
(AP SP)AQ
(AQ SQ)SP
Price variance
Usage or efficiency variance
Total variance = (AP AQ) (SP SQ)

If the actual price or quantity is less than the standard, the variance is considered favorable.
If the actual price or quantity exceeds the standard, the variance is considered unfavorable.
10.12. VARIANCE ANALYSIS:MATERIALS AND LABOR
Direct Materials Variances
Materials Price Variance
The materials price variance (MPV ) for materials is calculated as follows:
Actual quantity purchased
at actual price
(AP AQ)

at standard price
(SP AQ)
(AP SP)AQ
Direct materials price variance
The materials price variance can be computed at one of two points:
1. When the raw materials are issued for use in production
2. When the raw materials are purchased
Variances should be calculated at the earliest point possible so management can take any
necessary corrective action. Thus, the price variance for materials should be calculated at the time
of purchase.
Responsibility for the materials price variance is usually assigned to the purchasing agent.
Using the materials price variance to evaluate performance can produce undesirable behavior. For
example, if the purchasing agent feels pressured to produce favorable price variances:
j. materials of lower quality might be purchased (perhaps resulting in unfavorable usage variances), or
k. In order to take advantage of quantity discounts, large amounts of inventory might be purchased (eliminating some of the benefits of JIT).
Page 10 of 76
Variance analysis involves the following process:

l. Decide whether the variance is significant.
m. If insignificant, no further investigation is needed.
n. If significant, investigate the cause of the variance and take corrective action if necessary.
10.13. Direct Materials Usage Variance
The materials usage variance (MUV ) is calculated as follows:
Actual quantity used
at standard price
(SP AQ)
Standard quantity allowed

at standard price
(SP SQ)
(AQ SQ)SP
Direct materials usage variance

The production manager is usually responsible for materials usage because the production
manager can minimize scrap, waste, and rework in order to meet the standard.
Using the usage variance to evaluate performance can lead to undesirable behavior. For example, a
production manager that is pressured to produce favorable materials usage variance might allow
defective units to be transferred to finished goods. Although this avoids the problem of wasted
materials, it creates customer-relation problems.
The materials usage variance is calculated at the time materials are issued or used in the manufacturing process.
10.14. Direct Labor Variances
Labor Rate Variance
The labor rate variance (LRV ) is calculated as follows:
Actual labor hours
at actual rate
(AR AH)
Actual labor hours

at standard rate
(SR AH)
(AR SR)AH
Direct labor rate variance

Labor rates are largely determined by external factors, such as labor markets and union contracts.
When labor rate variances occur, it is usually due to:
o. using the average wage rate as the standard rate, or
p. Using more skilled and higher paid laborers for less skilled tasks.
Responsibility for the labor rate variance is often assigned to the individual, such as the production
manager, who decides how labor will be used.
Labor Efficiency Variance
The labor efficiency variance (LEV ) is calculated as follows:
Actual labor hours
Standard labor hours

Page 11 of 76
at standard rate
(AH SR)
allowed at standard rate

(SH SR)
(AH SH)SR
Direct labor efficiency variance

Usually production managers are responsible for the direct labor efficiency variance; however,
once the cause of the variance is discovered, responsibility may be assigned elsewhere.
The total variance for direct labor would be the sum of the rate variance and the efficiency vari ance. The total variance can also be calculated as follows:
Total direct labor variance =
(Actual quantity Actual price) (Standard quantity Standard price)
10.15. VARIANCE ANALYSIS: OVERHEAD COSTS
One method of analyzing overhead variances is as follows:

1. Divide manufacturing overhead costs into two categories:
a. variable costs
b. fixed costs
2. Determine separate overhead rates for variable and fixed overhead because the two costs react
differently to changes in activity.
The variable overhead rate is determined by analyzing how variable overhead costs react to
changes in activity. For example, if a firm determines that $10 of variable manufacturing
overhead is incurred for each direct labor hour worked, then the standard variable overhead
rate (SVOR) would be $10 per direct labor hour.
The standard fixed overhead rate (SFOR) is calculated as follows:
Standard fixed overhead rate =
Budgeted fixed overhead costs

Standard hours allowed for denominator volume
Denominator volume is the expected production volume selected at the beginning of the
year when the standard fixed overhead rate is established. The standard fixed overhead rate
is determined on an annual basis.
3. Apply manufacturing overhead using the standard variable overhead rate (SVOR) and the
standard fixed overhead rate (SFOR).
Manufacturing overhead in a standard costing system is applied based on the standard hours
allowed for production achieved rather than on the actual hours worked.
The Manufacturing Overhead Control account would include the following items:
Manufacturing Overhead Control
Actual overhead costs
Applied overhead costs

(based on standard hours
allowed for production)
Page 12 of 76
4. Calculate the two variable overhead variances:

c. variable overhead spending variance
d. variable overhead efficiency variance
5. Calculate the two fixed overhead variances:
e. fixed overhead spending variance
f.
fixed overhead volume variance
10.16. Variable Overhead Variances

Variable Overhead Spending Variance
The variable overhead spending variance indicates if a firm is paying the budgeted price for the
variable manufacturing overhead used.
The variable overhead spending variance is calculated as follows:
Actual variable overhead rate Actual hours Standard variable overhead rate Actual hours
(AVOR AH)
(SVOR AH)
(AVOR SVOR)AH
Variable overhead spending variance
Price changes of variable overhead items are essentially beyond the control of supervisors;
therefore, the variable overhead spending variance is usually assigned to the production
departments.
In order to determine how well costs of individual variable overhead items were controlled, a lineby-line analysis of each variable overhead item is essential.
10.17. Variable Overhead Efficiency Variance
The variable overhead efficiency variance results from the efficient or inefficient use of the base used
to apply variable manufacturing overhead.
For example, if variable manufacturing overhead is applied using direct labor hours as the base
and there is an unfavorable labor efficiency variance, there will also be an unfavorable variable
overhead efficiency variance.
The variable overhead efficiency variance is calculated as follows:
Standard variable overhead rate
Actual hours
(AH SVOR)
Standard variable overhead rate

Standard hours
(SH SVOR)
(AH SH)SVOR
Variable overhead efficiency variance
If variable overhead costs change in proportion to changes in the base, such as direct labor
hours, then responsibility for the variable overhead efficiency variance should be assigned to
the production manager because the production manager has responsibility for the use of direct
labor.
Page 13 of 76
10.18. Total Variable Overhead Variance

The total variable overhead variance is calculated as follows:
Actual variable
overhead
Variable overhead
rate Actual hours
(SVOR AH)
Applied variable overhead

Variable overhead
rate Standard hours
(SVOR SH)

Total variable overhead variance
10.19. Fixed Overhead Variances
Variance analysis for fixed manufacturing overhead differs from variance analysis for variable
manufacturing costs because fixed costs react differently to changes in activity.
Two variances calculated for fixed manufacturing overhead are:
1. the fixed overhead spending or budget variance, and
2. the fixed overhead volume variance.
10.20. Fixed Overhead Spending Variance
The fixed overhead spending variance compares actual fixed overhead to the fixed overhead
budgeted for the production level achieved.
The fixed overhead spending variance is calculated as follows:
Actual fixed overhead
Budgeted fixed overhead
Fixed overhead spending variance

Because many fixed overhead items are not subject to change in the short run, fixed overhead costs
are often beyond the immediate control of management.
In addition, because fixed overhead consists of a number of items, such as salaries, depreciation,
property taxes, and insurance, a line-by-line comparison of actual costs and budgeted costs
provides more information about the causes of budget variances.
10.21. Fixed Overhead Volume Variance
The fixed overhead volume variance is the difference between budgeted fixed overhead and
applied fixed overhead. It is a measure of the utilization of plant facilities.
The standard fixed overhead rate (SFOR) used to apply fixed overhead is calculated as follows:
Standard fixed overhead rate =
Budgeted fixed overhead costs

Standard hours allowed for expected capacity
Page 14 of 76
The expected production volume is selected at the beginning of the year when the standard fixed
overhead rate is established.
Page 15 of 76
The output used to calculate the fixed overhead rate can be viewed as the activity capacity
acquired. Actual output can be viewed as the activity capacity used.
The fixed overhead volume variance is calculated as follows:
Applied fixed overhead

(Standard hours allowed SFOR)
Fixed overhead volume variance

The volume variance tells management if they operated at the expected production volume used
to calculate the standard fixed overhead rate.
The volume variance can also be calculated as follows:
Fixed overhead volume variance =
SFOR [Expected activity used in SFOR Standard allowed for actual production]
A volume variance occurs when actual production differs from the expected production volume
used to calculate the standard fixed overhead rate.
There will be no volume variance if actual output equals expected output.
If actual production exceeds expected production, the volume variance is labeled favorable. If
actual production is less than expected, the volume variance is labeled unfavorable.
When a volume variance occurs, it might indicate that:
q. management did not use the correct expected production level when calculating the standard
fixed overhead rate, or
r. if the expected output is correct and the volume variance is unfavorable, production facilities
were not fully utilized.
10.22. Total Fixed Overhead Variance
The total fixed overhead variance is the sum of the fixed overhead spending and volume variances
and is calculated as follows:
Budgeted fixed
overhead

(SH SFOR)

Total fixed overhead variance
10.23. The Decision to Investigate
Variances indicate that actual performance is not going according to plan.
Variances do not indicate the cause of the variance or responsibility.
Usually the cause of a variance can be determined only by an investigation. For example, an
unfavorable materials quantity variance may not be the fault of the production supervisor.
Instead, it may be the result of the purchasing agent buying inferior-quality material.
Page 16 of 76
As a general principle, variances should be investigated if the anticipated benefits of the investigation exceed the expected costs of investigating.
Most firms adopt the general guideline of investigating variances only if they fall outside an
acceptable range.
Lower control limit
Upper control limit

Acceptable range
The control limits of the acceptable range are calculated as follows:

Upper control limit = Standard + Allowable deviation
Lower control limit = Standard Allowable deviation
The control limits are often expressed as:
s. a specified amount, and/or
t. a specified percentage of the variance.
For example, management may investigate any variance that exceeds $1,000 or 5% of the
standard amount to which the variance relates.
SUMMARY
The following summarizes variances:
Variances
Direct
materials
variance
Direct
labor
variance
Variable
overhead
variances
Fixed
Actual cost
AP AQ
SP AQ

AR AH
SH SR
AH SVOR
Actual fixed
overhead
Direct materials efficiency variance
SR AH

Actual variable
overhead
Standard cost
SP SQ
Budgeted fixed
overhead
overhead
Page 17 of 76
SH SVOR
Applied fixed
overhead
SH SFOR
variances
Variance analysis for a variable costing system
Summary of Actual Costing, Normal Costing and Standard Costing:

The following table summarizes and compares three commonly-used costing systems.
Actual Costing System
Normal Costing System
Standard Costing System
Direct
Costs:
(Actual prices or rates x

actual quantity of inputs
per output) x actual
outputs
(Actual prices or rates x

actual quantity of inputs
per output) x actual
outputs
(Budgeted prices or rates x

standard inputs allowed for
each output) x actual outputs
Overhead
Costs:
Actual overhead rates x

actual quantity of the
allocation base incurred.
Budgeted overhead rates x

actual quantity of the
allocation base incurred.
Budgeted overhead rates x

(standard inputs allowed for
actual outputs achieved)
The following points are worth noting:

1
All three costing systems record the cost of inventory based on actual output units
produced. The static budget level of production does not appear anywhere in this table.
Actual costing and normal costing are identical with respect to how direct costs are
treated.
With respect to overhead costs, actual costing and normal costing use different
overhead rates, but both costing systems multiply the overhead rate by the same
amount: the actual quantity of the allocation base incurred.
Normal costing and standard costing use the same overhead rate.
Standard costing records the cost of inventory using a flexible budget concept: the
inputs that should have been used for the output achieved.
There are costing systems other than these three. For example, some service sector companies
apply direct costs using budgeted prices multiplied by actual quantities of inputs. For example,
many accounting firms track professional labor costs using budgeted professional staff hourly
rates multiplied by actual staff time incurred on each job.
Page 18 of 76
Problem and Solution

PROBLEM 1
The standard cost card shows the following details relating to material needed to produce 1 kg of
ground nut oil:
Quantity of ground nut required
3 kg
Price of groundnut Tk.2.50 per kg.

Actual production data:
Production during the week 1,000 kg.
Quantity used
3,500 kg
Price of groundnut Tk.3.00 per kg.

Required:
(a) Calculate the Materials price variance;
(b) Calculate the materials usage variance;
(c) Calculate the total material cost variance
Solution:
(a) Materials price variance = (AP-SP)* AQ
=3,500(Tk.2.50 3.00)
= Tk.1, 750 favorable
(b) Materials usage variance = (AQ- SQ) *SP
=Tk.2.50 [3,000 3,500)]
= Tk.1, 250 favorable
Total material cost variance= Materials price variance+ Materials usage variance
= Tk.1, 750 favorable + Tk.1, 250 favorable
=Tk.3, 000 favorable
PROBLEM 2
ABC Ltd. Manufacturers simple product the standard mix of which is :
Material A: 60%@Tk.20 per kg.
Material B: 40%@Tk.10 per kg.
Page 19 of 76
Normal loss in production is 20% of input. Due to shortage of material A, the standard mix was
charged.
Actual results for April 2008 were:
Material A: 105 kg @Tk.20 per kg.
Material B: 95 kg @Tk.9 per kg.
Input
200 kg
Output
165 kg.
Loss
35 kg
Required:
(a)
(b)
(c)
(d)
Calculate the Materials price variance.

Calculate the materials usage variance.
Material mix variance
Material yield variance
PROBLEM 3
For the following information of Middle Company Ltd. are: To produce one unit of a product
requires:
Direct Material
2lbs @ Tk. 10.00
Direct labor
3 hrs@ Tk. 7.00
Variable overhead 3 hrs @ Tk.5.00
Fixed overhead
3 hrs @ Tk. $4.00
During a month 12,400 units were produced at costs of Tk. 8, 45,900.Actual Costs: Material
purchased & used Tk. 2, 48,000; 25,000 lbs. @ Tk. 9.92. Labor used 37,000 hrs @ Tk.7.10 Tk.2, 62,700
Factory overhead Fixed Tk.1, 52,000; Variable overhead Tk. 1, 83,200. Normal & Budgeted
Capacity 37,500 direct labor hour. There is no beginning & ending inventory & only one type of
material & labor has been used. Direct Material 25,000 lbs @ Tk.10.00 Tk. 2,50,000; Direct labor
37,500hrs@ Tk.7.00 ; Tk.2,62,500; Variable OH 37,500 Hrs @ Tk.5.00 Tk. 1,87,500 ; Fixed FOH
37,500 hrs @ Tk.4.00 Tk. 1, 50,000
Required:
(a) Calculate the Material Price variance;
(b) Calculate the Material Quantity Variance;
(c) Journalize these variances.
(d) Calculate the Labor Rate Variance;
(e) Calculate the labor Efficiency Variance;
(f) Variable Spending Variance;
(g) Variable Efficiency Variance;
(h) Fixed Spending Variance;
(i) Fixed Efficiency Variance;
Solution:
a. Material price variance= (Actual Price Standard price) * Actual Quantity
= ($9.92- 10.00) *25,000
Page 20 of 76
= $2,000 (F)
b. Material Quantity Variance = (Actual Quantity Standard Quantity) * Standard price
per unit = (25,000- 12,400) *$10.00 = $2,000 (UF)
c. Journal entries:
a. Material Inventory --------------------------Dr.
$2, 48,000
Accounts Payable ----------------------------------------------------$2, 48,000
(At the time of purchase recorded at actual price )
b. Work in Process ----------------------------Dr.
2, 48,000
Material Quantity Variance ------------------ Dr
2,000
Material Inventory ---------------------------------------------2,48,000
Material Price variance---------------------------------------- 2,000
( standard price)
If variances are recorded at the time of purchases:
a. Material Inventory --------------------------Dr.
$2, 50,000
Accounts Payable ----------------------------------$2, 48,000
Material Price Variance------------------------------ 2,000
(Material purchase price variance)
b. . Work in Process ----------------------------Dr.
2,48,000
Material Quantity Variance ------------------ Dr
2,000
Material Inventory ---------------------------------------------2,50,000
4. Labor Rate Variance = (Actual Rate- Standard Rate) * Actual Hours
= ( Tk.7.10- 7.00) *37,000
=Tk.3,700 (U)
d. Labor Efficiency Variance == (Actual Hr.- Standard hr ) * Actual Rate
= (37,000- 12,400) * $ 7.00
=$1,400 (F)
e. Variable spending variance = (1,85,000- 1,83,200) = $1,800 (F)
f. Variable Efficiency Variance = Flexible budget based on Actual hrs Flexible budget
based on Standard hrs = (1,50,000+$5.00*37,000) (1,50,000+$5.00*37,200) = $1,000 (F)
g. Volume Variance = Flexible budget based on Standard hrs (SH*SR) = (1,50,000+
$5.00*37,200) ( 37,200* $9.00) = $1,200 (F)
h. Fixed Spending Variance = Budgeted Fixed Overhead- Actual Fixed Factory
Overhead
= $1, 50,000--- 1, 52,000
= 2,000 (UF)
9. Fixed Efficiency Variance = $37,20037,000 = $200(F)
PROBLEM 4:
The standard cost sheet for one of the Carver Companys products is presented below:
Direct materials (4 feet @ $6.00)................
Direct labor (1 hour @ $12.00)...................
Variable overhead (1 hour @ $5.00)...........
Fixed overhead (1 hour @ $3.00a)..............
$24.00
12.00
5.00
3.00
Page 21 of 76
Standard unit cost.........................................
$44.00
Rate based on expected activity of 12,000 hours
The following results for last year were recorded:

Production...............................................................................
Direct materials (39,000 feet purchased and used)...........
Direct labor (10,500 hours)..................................................
Variable overhead...................................................................
Fixed overhead........................................................................
10,000 units
$241,800
$131,250
$48,000
$40,000
Required:
(d) Calculate the Materials price variance;
(e) Calculate the materials usage variance;
(f) Calculate the total material cost variance
(g) Calculate the labor rate variance
(h) Calculate the labor efficiency variance
(i) Calculate the total labor cost variance
(j) Calculate the variable overhead spending variance
(k) Calculate the variable overhead efficiency variance
(l) Calculate the fixed overhead spending variance
(m)Calculate the fixed overhead volume variance
Solution:
(a) Materials price variance = (AP-SP)* AQ
=39,000($6.20 $6.00)
= $7,800 unfavorable
(b) Materials usage variance = (AQ- SQ) *SP
=$6.00[39,000 (4 feet 10,000)]
= $6,000 favorable
Total material cost variance= Materials price variance+ Materials usage variance
=$7,800 unfavorable+$6,000 favorable
=$1,800 unfavorable
(d) Labor rate variance =10,500 hours ($12.50 $12.00)
(e) Labor efficiency variance =$12(10,500 10,000)
(f) Total labor cost variance= Labor rate variance+ Labor efficiency variance
=$5,250 unfavorable+$6,000 unfavorable
=$11250 unfavorable
(g) Variable overhead spending variance= $48,000 (10,500 $5)
= $4,500 favorable
Page 22 of 76
(h) Variable overhead efficiency variance= $5(10,500 10,000)

(i) Fixed overhead spending variance =$40,000 ($3 12,000)
(n) fixed overhead volume variance= $36,000 budgeted ($3 10,000) applied
PROBLEM 5
The Carver Manufacturing Company has developed the following standards for one of their products, a walnut fern stand:
STANDARD VARIABLE COST SHEET
One Walnut Fern Stand
Materials:5 square feet $8 per square foot............................
$40.00
Direct labor:2 hours $10/DLH...............................................
20.00
Variable manufacturing overhead:2 hours $5/DLH...........
10.00
Total standard variable cost per unit..........................................
$70.00
The company records materials price variances at the time of purchase. The following activity
occurred during the month of April:
Materials purchased....................................................
Materials used..............................................................
Units produced............................................................
Direct labor...................................................................
Actual variable manufacturing overhead.................
5,000 square feet costing $46,000

4,250 square feet
900 units
2,200 hours costing $19,800
$10,500
Instructions:
2. Calculate the direct materials price and usage variances.
3. Calculate the direct labor rate variance, the direct labor efficiency variance, and the
total direct labor variance.
4. Compute the variable manufacturing overhead spending and efficiency variances.
PROBLEM 3
1. Direct materials price variance:
at Actual price
Actual quantity
purchased
at Standard price
5,000 sq. ft. $8/sq. ft.
$40,000
5,000 sq. ft. $9.20/sq. ft.

$46,000
$6,000 Unfavorable
5,000($9.20 $8.00) = $6,000 Unfavorable
Direct materials usage variance:
Standard quantity allowed
Page 23 of 76
at Standard price
4,250 sq. ft. $8/sq. ft.
$34,000
at Standard price
900 units 5 sq. ft. $8/sq.
ft.
$36,000
$2,000 Favorable
Direct materials usage variance

$8(4,250 4,500) = $2,000 Favorable
Page 24 of 76
2. Direct labor rate variance:

Actual labor hours
at Actual rate
2,200 hours $9/hour
$19,800
Actual labor hours

at Standard rate
2,200 hours $10/hour
$22,000
$2,200 Favorable

2,200($9 $10) = $2,200 Favorable
Direct labor efficiency variance:
Actual labor hours
at Standard rate
2,200 hours $10/hour
$22,000
Standard labor hours allowed

at Standard rate
(900 units 2 hours)
$10/hour
$18,000
$4,000 Unfavorable

$10(2,200 1,800) = $4,000 Unfavorable
Total direct labor variance:
Actual hours at actual price................................................ $19,800
Standard hours allowed for production [(900 2) $10]
18,000
Total direct labor variance................................................... $1,800 U
The total direct labor variance can be broken down as follows:
Direct labor rate variance....................................................
Direct labor efficiency variance..........................................
Total direct labor variance...................................................
$2,200 F
4,000 U
$1,800 U
3. Variable manufacturing overhead spending variance:

Standard variable overhead
rate Actual hours
(AQ SVOR)
2,200 hours $5/hour
$11,000
Actual variable overhead
$10,500
$500 Favorable
Variable manufacturing overhead efficiency variance:
Standard variable overhead rate Actual hours
(AQ SVOR)
2,200 hours $5/hour
Page 25 of 76

rate Standard hours
(SQ SVOR)
(900 units 2 hours)
$11,000
$5/hour
$9,000
$2,000 Unfavorable
Page 26 of 76
Page 27 of 76
PROBLEM 6
The Mills Company manufactures roofing shingles. The production process involves heating and
compressing asphalt into sheets and then rolling coarse sand into the hot asphalt. The sheets are then
cooled, cut into shingles, and packaged.
The following standard costs were developed:
STANDARD COST SHEET PER SHINGLE
Direct materials:
Asphalt...........................................................
Sand................................................................
Direct labor..........................................................
Variable manufacturing overhead.....................
Fixed manufacturing overhead.........................
Total standard cost per shingle...................
2 lbs. $0.08/lb.
2 lbs. $0.02/lb.
.01 hrs. $7/hr.
.01 hrs. $3/hr.
$0.16
0.04
0.07
0.03
?
?
The following information is available regarding the companys operations for the period:
Shingles produced.......................................................
500,000
Materials purchased:
Asphalt...................................................................
Sand........................................................................
800,000 pounds @ $0.07 per pound

Materials used:
Asphalt...................................................................
Sand........................................................................
775,000 pounds
850,000 pounds
Direct labor...................................................................
Manufacturing overhead incurred:

Variable...................................................................
Fixed.......................................................................
$16,500
$48,000
Budgeted fixed manufacturing overhead for the period is $60,000, and the standard fixed overhead rate
is based on expected capacity of 6,000 direct labor hours.
Instructions:
1. Calculate the standard fixed manufacturing overhead rate.
2. Complete the standard cost card for roofing shingles.
3. Calculate the following variances:
4. Materials price and usage variances for asphalt and sand
5. Direct labor rate and efficiency variances
6. Variable manufacturing overhead spending and efficiency variances
7. Fixed manufacturing overhead spending and volume variances
Page 28 of 76
PROBLEM 4
Standard fixed manufacturing overhead rate =
1.
=
Estimated fixed overhead

Estimated direct labor hours
$60,000
6,000 direct labor hours
= $10 per direct labor hour
2.

Direct materials:
Asphalt................................................................... $0.16
Sand........................................................................
0.04
Direct labor.................................................................
0.07
Variable manufacturing overhead...........................
0.03
Fixed manufacturing overhead(.01 hrs. $10/hr.)
Total standard cost per shingle................................ $0.40
0.10
3. a. Materials price varianceAsphalt:

Actual price
Actual quantity
purchased
Standard price
800,000 lbs. $0.08/lb.
$64,000
800,000 lbs. $0.07/lb.

$56,000
$8,000 Favorable
Materials price varianceAsphalt
Materials price varianceSand:
Actual price
Actual quantity
purchased
Standard price
900,000 lbs. $0.02/lb.
$18,000
900,000 lbs. $0.03/lb.

$27,000
$9,000 Unfavorable
Materials price varianceSand
Materials usage varianceAsphalt:
Standard price
775,000 lbs. $0.08/lb.
$62,000
Standard quantity
Standard price
500,000 2 lbs. $0.08/lb.
$80,000
$18,000 Favorable
Materials usage varianceAsphalt

Materials usage varianceSand:
Page 29 of 76

Standard price
850,000 lbs. $0.02/lb.
$17,000
Standard quantity
Standard price
500,000 2 lbs. $0.02/lb.
$20,000
$3,000 Favorable
Materials usage varianceSand
Page 30 of 76
b. Direct labor rate variance:

Actual labor hours
Actual rate
5,100 DLH $7.06*/hr.
$36,000
Actual labor hours

Standard rate
5,100 DLH $7/hr.
$35,700
$300 Unfavorable

*rounded
Direct labor efficiency variance:
Actual labor hours
Standard rate
5,100 DLH $7/hr.
$35,700
Standard labor hours

Standard rate
500,000 units .01 DLH
$7/hr.
$35,000
$700 Unfavorable

c. Variable manufacturing overhead spending variance:
rate Actual hours
(SVOR AH)
5,100 DLH $3/hr.
$15,300
$16,500
$1,200 Unfavorable
Variable manufacturing overhead efficiency variance:
rate Actual hours
(SVOR AH)
5,100 DLH $3/hr.
$15,300

rate Standard hours
(SVOR SH)
500,000 units .01 DLH
$3/hr.
$15,000
$300 Unfavorable

d. Fixed manufacturing overhead spending variance:
$48,000

$60,000
$12,000 Favorable
Page 31 of 76
Fixed manufacturing overhead volume variance:

(Standard activity SFOR)
500,000 units .01 DLH
$10/hr.
$50,000

$60,000
$10,000 Unfavorable
The volume variance could also be calculated as follows:
FMO volume variance = SFOR [Expected capacity Standard hours allowed for production
level achieved]
= ($10)(6,000 DLH 5,000 DLH allowed)
= ($10)(1,000 DLH)
= $10,000
The Mills Company produced 500,000 shingles, a level for which 5,000 direct labor hours are
allowed.
The Mills Company budgeted 6,000 direct labor hours. The volume variance resulted from the
company operating at a level other than the budgeted level of 6,000 direct labor hours.
Page 32 of 76
PROBLEM 7
The Commodore Company uses standard costing for direct materials and direct labor. Management
would like to use standard costing for variable and fixed overhead also.
The following monthly cost functions were developed for manufacturing overhead items:
Overhead Item
Cost Function
Indirect materials.................................
Indirect labor........................................
Repairs and maintenance....................
Utilities..................................................
Insurance...............................................
Rent........................................................
Depreciation.........................................
$0.10 per DLH

$0.40 per DLH
$0.20 per DLH
$0.25 per DLH
$2,000
$4,000
$20,000
The cost functions are considered reliable within a relevant range of 30,000 to 55,000 direct labor
hours.
Commodore expects to operate at 40,000 direct labor hours per month.
Information for the month of September is as follows:
Actual overhead costs incurred:
Indirect materials..............................................
Indirect labor.....................................................
Repairs and maintenance.................................
Utilities...............................................................
Insurance............................................................
Rent.....................................................................
Depreciation......................................................
Total................................................................
Actual direct labor hours worked.......................
Standard direct labor hours allowed for
production achieved.........................................
$4,500
17,000
8,000
10,000
2,100
4,000
20,000
$65,600
42,000
44,000
Instructions:
1. Calculate the standard manufacturing overhead rate based upon expected capacity, showing the
breakdown between the fixed overhead rate and the variable overhead rate.
2. Calculate the variable manufacturing overhead spending variance.
3. Calculate the variable manufacturing overhead efficiency variance.
4.
Calculate the fixed manufacturing overhead spending variance.
5. Calculate the fixed manufacturing overhead volume variance.

PROBLEM 8
1. Standard manufacturing overhead rate:
Manufacturing overhead items:
Indirect materials.............................
Indirect labor....................................
Repairs and maintenance................
$0.10 per DLH

0.40 per DLH
0.20 per DLH
Page 33 of 76
Utilities..............................................
Insurance..........................................
Rent....................................................
Depreciation.....................................
Variable manufacturing overhead......
Fixed manufacturing overhead..........
0.25 per DLH

$2,000
4,000
20,000
$0.95 per DLH
$26,000
SVOR = $0.95 per direct labor hour
SFOR =
Estimated fixed manufacturing overhead

Estimated direct labor hours
$26,000
40,000 direct labor hours
= $0.65 per direct labor hour
Total manufacturing overhead rate
= SFOR + SVOR
= $0.65 + $0.95
= $1.60 per direct labor hour
2. Variable manufacturing overhead spending variance:
($4,500 + $17,000 + $8,000 + $10,000)
$39,500
$400 Favorable

rate Actual hours
(SVOR AH)
42,000 DLH $0.95/hr.
$39,900

3. Variable manufacturing overhead efficiency variance:
rate Actual hours
(SVOR AH)
42,000 DLH $0.95/hr.
$39,900

rate Standard hours
(SVOR SH)
44,000 DLH $0.95/hr.
$41,800
$1,900 Favorable

4. Fixed manufacturing overhead spending variance:
$26,100

$26,000
$100 Unfavorable

5. Fixed manufacturing overhead volume variance:
Page 34 of 76
(Standard activity
SFOR)
44,000 DLH $0.65/hr.
$28,600
$26,000
$2,600 Favorable
The volume variance could also be calculated as follows:
FMO volume variance
level achieved]
= SFOR [Expected capacity Standard hours allowed for production
= ($0.65)(40,000 DLH 44,000 DLH allowed)

= ($0.65)(4,000 DLH)
= $2,600 Favorable
Problem 9
Penobscot Company employs a standard cost system in which direct materials inventory is carried
at standard cost. The company has established the following standards for the prime costs of one
unit of product:
Direct labor
Direct materials
Standard
Quantity
Standard
Price
2.6 hours
12.0 pounds
$44.00/hour
$14.00/pound
Standar
d
Cost
$114.40
168.00
During April, the company purchased 330,000 pounds of direct material at a total cost of
$4,686,000. The total factory wages for June were $3,200,000, of which 90% was for direct labor.
The company manufactured 25,000 units of product during April using 302,000 pounds of
direct material and 64,000 direct labor hours.
Required:
aWhat is the price variance for the direct material acquired by the company during April?
bWhat is the direct material quantity variance for April?
cWhat is the direct labor rate variance for April?
d What is the direct labor efficiency variance for April?
(a) Solution
First, calculate the actual price per unit of materials as follows.
Total cost of $4,686,000 330,000 lbs. = $14.20 per pound
Then calculate the materials price variance as follows.
Materials price variance = AQ x (AP SP) = 330,000 x ($14.20 $14.00) = $66,000 (U)
Part (b) Solution:
First, calculate the standard quantity as follows.
25,000 units x 12.0 pounds per unit = 300,000 pounds
Page 35 of 76
Then calculate the material quantity variance as follows.

Materials quantity variance = SP x (AQ SQ) = $14.00 x (302,000 300,000) = $28,000(U)
Part (c) Solution:
First, calculate the actual rate per hour of direct labor as follows:
($3,200,000 x .90) 64,000 hours = $45.00 per hour
Then calculate the labor rate price variance as follows:
Labor rate variance = AH x (AR SR)
Labor rate variance = 64,000 x ($45.00 $44.00) = $64,000 (U)
Part (d) Solution:
First, calculate the standard hours as follows.
25,000 units x 2.6 hours per unit = 65,000 hours
Then calculate the direct labor efficiency variance as follows:
Direct labor efficiency variance = SR x (AH SH) = $44.00 x (64,000 65,000) = $44,000 (F)
Problem 10
Phoenix Company maintains warehouses that stock items carried by its e-retailer clients. When
one of Phoenix clients receives an order from an online customer, the order is forwarded to
Phoenix. Phoenix then pulls the item from the warehouse, packs it and ships it to the customer.
Phoenix uses a predetermined variable overhead rate based on direct labor-hours. According to
the companys records, 0.04 direct labor-hours are required to fulfill an order for one item and the
variable overhead rate is $3.25 per direct-labor hour. During December, Phoenix shipped 120,000
orders using 4,600 direct labor-hours. The company incurred a total of $14,720 in variable overhead
costs.
Required:
aWhat is the variable overhead rate variance during December?
(b) What is the variable overhead efficiency variance during December?
Part (a) Solution

The variable overhead rate variance during December is determined as follows:
Actual Hours of Input, at
the Actual Rate
the Standard Rate
(AH AR)
(AH SR)
4,600 hours (given)
4,600 hours (given)
$3.20 per hour
$3.25 per hour
(or $14,720 4,600 hours)
(given)
= $14,720 (given)
= $14,950
Variable overhead rate variance, $230 F
Alternatively, the variable overhead rate variance is determined as follows:
AH x (AR SR) = 4,600 hours ($3.20 per hour $3.25 per hour) = $230 F
Part (b) Solution
Page 36 of 76
The variable overhead rate variance during December is determined as follows:

the Standard Rate
Standard Hours Allowed

for Output, at the Standard
Rate
(AH SR)
(SH SR)
4,600 hours (given)
4,800 hours
$3.25 per hour
(or 120,000 x 0.04 DLH)
(given)
$3.25 per hour (given)
= $14,950
= $15,600
Variable overhead efficiency variance, $650 F
Alternatively, the variable overhead efficiency variance is determined as follows:

SR x (AH SH) = $3.25 per hour (4,600 hours 4,800 hours) = $650 F
Problem 11
The Duvall Company applies manufacturing overhead costs to products on the basis of direct
labor-hours. The standard cost card shows that 6 direct labor-hours are required per unit of
product. The company estimated that it would work 180,000 direct labor-hours and incur the
following manufacturing overhead costs for the month of March:
Total fixed overhead costs
Total variable overhead costs
$237,600
$198,000
During March, the company completed 28,000 units of product, worked 172,000 direct laborhours, and incurred the following total manufacturing overhead costs:
Total fixed overhead costs
Total variable overhead costs
$230,600
$197,800
The denominator activity used to calculate its predetermined overhead rate was 180,000 direct
labor-hours.
Required:
aWhat is the variable overhead (VOH) spending variance for March?
bWhat is the variable overhead (VOH) efficiency variance for March?
cWhat is the fixed overhead budget variance for March?
dWhat is the fixed overhead volume variance for March?
Page 37 of 76
Page 38 of 76
Part (a) Solution

First, compute the variable overhead (VOH) rate as follows:
VOH rate = Budgeted variable overhead costs budgeted direct labor hours
VOH rate = $198,000 180,000 direct labor hours = $1.10 per direct labor hour
Then, compute the variable overhead (VOH) spending variance as follows:
VOH spending variance = Actual VOH incurred (Actual direct labor hours x VOH rate per
direct labor hour) = $197,800 (172,000 hours x $1.10 per hour) = $8,600 U
The variance is unfavorable because the actual overhead costs were more than the benchmark
(that is, how much should have been spent in total on variable overhead items during the
period).
Part (b) Solution
First, compute the variable overhead (VOH) rate as follows:
VOH rate = Budgeted variable overhead costs budgeted direct labor hours
VOH rate = $198,000 180,000 direct labor hours = $1.10 per direct labor hour
Then, compute the efficiency variance as follows:
VOH efficiency variance = (AH hours x VOH rate) - (SH hours x VOH rate) = (172,000 hours x
$1.10/DL hour) ((28,000 units x 6 DL hours/unit) x $1.10/hour) = $4,400 U
More direct labor hours (172,000) were worked than were allowed at standard (168,000); as
such, the overhead efficiency variance is unfavorable.
Part (c) Solution
The fixed overhead (FOH) budget variance is determined as follows:
FOH budget variance = Actual fixed overhead Budgeted fixed overhead = $230,600 $237,600
= $7,000 F
Since actual fixed overhead was less than the amount budgeted for the period, the budget
variance is favorable.
Page 39 of 76
Part (d) Solution

First, compute the fixed overhead (FOH) rate as follows:
FOH rate = Budgeted fixed overhead costs budgeted direct labor hours = $237,600 180,000
direct labor hours = $1.32 per direct labor hour
Then, the FOH volume variance is determined as follows:
FOH Volume variance = Budgeted fixed overhead (Standard hours allowed x FOH rate) =
$237,600 (((28,000 units x 6 DL hrs./unit) x $1.32 per DL hour) = $15,840 U
Since budgeted fixed overhead was more than the amount applied to work in process during
the period, the volume variance is unfavorable.
Standard Costing-Exercise
Q. No. 1.
Reebok Products Incorporation produces a broad line of sports equipment and uses a standard cost
system for control purposes. Last year the company produced 8,000 varsity footballs. The standard
costs associated with this football, along with the actual costs incurred last year, are given below (per
football)
Particulars
Standard cost
Actual cost
Direct Materials:
Standard: 3.70 feet at $5.00 per foot
$18.50
Actual: 4.00 feet at $4.80 per foot
$19.20
Direct labor:
Standard: 0.90 hour at $7.50 per foot
Actual: 0.80 hour at $8.00 per foot
6.75
Variable Manufacturing Overhead:

Standard: 0.90 hour at $2.50 per foot
Actual: 0.80 hour at $2.75 per foot
2.25
Total cost per football
6.40
$27.50
2.20
$27.80
The president was elated when he saw that actual costs exceeded standard cost by only $.30 per
football. He stated, I was afraid that our unit cost might get out of hand when we gave out those
raises last year in order to stimulate output. But it was obvious our costs are well under control.
There is no inventory of material on hand to start the year. During the year, 32,000 feet of materials
were purchased and used in production.
Required:
1.
(j) Calculate the material price variance, material quantity variance and material cost variance for
the year.
(k) Prepare the journal entries to record all activity relating to direct materials for the year.
2.
(a) Calculate the labor rate variance, labor efficiency variance; labor cost variance for the year.
(b) Prepare the journal entries to record all activity relating to direct labor cost for the year.
Page 40 of 76
3. Calculate Variable Spending Variance, variable efficiency variance and total variable Overhead
Variance for the year.
4. Was the president correct in his statement that our costs are well under control ? Explain.
5. State possible causes of each variance that you have computed.
Q. No. 2.
Miller Toy Company manufacturers a plastic swimming pool at its Westwood Plant. The plant has
been experiencing problems as shown by its June contribution format income statement below:
Particulars
Budget
Actual
Sales (15,000 pools)
$4,50,000
$4,50,000
Less: Variable expenses:
Variable cost of goods sold
1,80,000
1,96,290
Variable selling expenses
20,000
20,000
Total variable expenses
Contribution Margin
Less: Fixed expenses:
Manufacturing overhead
Selling and administrative
Total fixed expenses
Net operating income
2,00,000
2,50,000
2,16,290
2,33,710
1,30,000
84,000
2,14,000
36,000
1,30,000
84,000
2,14,000
19,710
Contains direct materials, direct labor and variable manufacturing overhead.

Mr. Janet Dunn, who has just been appointed general manager of the Westwood Plant, has been
instructions to get things under control. Upon reviewing the plants income statement, Ms.
Dunn has concluded that the major problem lies in the variable cost of goods sold. She has been
provided with the following standard cost per swimming pool:
Particulars
Standard QuantityStandard price Standard cost
of hours
or rate
Direct Materials
3.00 pounds
$2.00 per pound$6.00
Direct labor
0.80 hour
$6.00
4.80
Variable
Manufacturing0.40 hour
$3.00
1.20
Overhead
Total standard costs
$12.00
* Based on machine hour
Mr. Janet Dunn has determined that during June the plant produced 15,000 pools and incurred the
following costs:
(a) Purchased 60,000 pounds of materials at a costs of $1.95 per pound.
(b) Used 49,200 pounds of materials in production. [Finished goods and work in process
inventories are insignificant and can be ignored.]
(c) Worked 11,800 direct labor hours at a cost of $7.00 per hour.
(d) Incurred variable manufacturing overhead costs totaling $18,290 for the month. A total of
5,900 machine hour was recorded.
If the companys policy to close all variances to cost of goods sold on a monthly basis.
Required:
1. Compute the following variances for June:
Page 41 of 76
(a) Calculate the material price variance, material quantity variance and material cost variance for
the year.
(b) Calculate the labor rate variance, labor efficiency variance; labor cost variance for the year.
(c) Calculate Variable Spending Variance, variable efficiency variance and total variable Overhead
Variance for the year.
2. Summarize the variances that you computed in (1) above by showing the net overall favorable or
unfavorable variance for the month. What impact did this figure have on the companys income
statement? Show computations.
3. Pick out the two most significant variances that you computed in (1) above. Explain to Ms. Dunn
possible causes of these variances.
Q. No. 3.
Hiller Company manufacturers a plastic swimming pool at its Westwood Plant. The plant has been
experiencing problems as shown by its June contribution format income statement below:
Particulars
Sales (30,000 pools)
Less: Variable expenses:
Variable cost of goods sold
Variable selling expenses
Total variable expenses
Contribution Margin
Less: Fixed expenses:
Selling and administrative
Total fixed expenses
Net operating income
Budget
$9,00,000
Actual
$9,00,000
3,60,000
40,000
4,00,000
5,00,000
3,92,580
40,000
4,32,580
4,67,420
2,60,000
1,68,000
4,28,000
72,000
2,60,000
1,68,000
4,28,000
39,420
Contains direct materials, direct labor and variable manufacturing overhead.

Mr. Jane, who has just been appointed general manager of the Westwood Plant, has been
instructions to get things under control. Upon reviewing the plants income statement, Ms.
Jane has concluded that the major problem lies in the variable cost of goods sold. She has been
provided with the following standard cost per swimming pool:
Particulars
of hours
or rate
Direct Materials
3.00 pounds
$4.00 per pound
$12.00
Direct labor
0.80 hour
$12.00
9.60
Variable
Manufacturing0.40 hour
$6.00
2.40
Overhead
$24.00
* Based on machine hour
Mr. Jane has determined that during June the plant produced 30,000 pools and incurred the following
costs:
(i)
Purchased 1,20,000 pounds of materials at a costs of $1.95 per pound.
Page 42 of 76
(ii)
Used 98,400 pounds of materials in production. [Finished goods and work in process
inventories are insignificant and can be ignored.]
(iii)
Worked 23,600 direct labor hours at a cost of $7.00 per hour.
(iv)
Incurred variable manufacturing overhead costs totaling $36,580 for the month. A total of
11,800 machine hour was recorded.
If the companys policy to close all variances to cost of goods sold on a monthly basis.
Required:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Calculate the material price variance,

Calculate the material quantity variance
Calculate the material cost variance for the year.
Prepare the journal entries to record all activity relating to direct materials for the year.
Calculate the labor rate variance,
Calculate the labor efficiency variance;
Calculate the labor cost variance for the year.
Prepare the journal entries to record all activity relating to direct labor cost for the year.
Calculate Variable Spending Variance,
Calculate the variable efficiency variance
Calculate the total variable Overhead Variance for the year.
Summarize the variances that you computed in (1, 2, 3, 5, 6, 7, 9 &10) above by showing
the net overall favorable or unfavorable variance for the month.
13. What impact did this figure have on the companys income statement? Show
computations.
14. Pick out the two most significant variances that you computed in (1, 2, 3, 5, 6, 7, 9 &10)
above.
15. Explain to Ms. Jane possible causes of these variances.
Q. No. 4.
The ABC Company employs a Standard costing system. The overhead standards were set using an
activity level of 3,800 standards direct labor hour.
Particulars

of hours
or rate
Direct Materials
10.00 pounds
$2.00 per pound
$20.00
Direct labor
0.25 hour
$20.00
5.00
Variable Manufacturing Overhead0.25 hour
$8.00
2.00
Fixed Manufacturing Overhead 0.25 hour
$12.00
3.00
$30.00
During November, the ABC Company produced 16,000 units.
(i) 1,40,000 pounds of direct material were purchased used.
(ii) The actual cost of direct material was $2.20 per pound ;
(iii)Direct labor incurred was 5,000 hours at $16.00 per hour.
(iv) Actual variable overhead was $14,000 ;
(v) Actual Fixed overhead was $24,000.
Required :
Page 43 of 76

(c) Calculate Material cost variance
(f) Calculate labor cost variance;
(g) Calculate Variable Spending Variance;
(h) Calculate Fixed Spending Variance;
(i) Calculate Total Spending Variance;
(j) Calculate Variable Efficiency Variance;
(k) Calculate Fixed Efficiency Variance;
(l) Calculate Total Efficiency Variance;
(m)Calculate Variable Volume Variance;
(n) Calculate Fixed Volume Variance;
(o) Calculate Volume Variance;
(p) Calculate Overhead Variance;
(q) Journalize the above for the month of November, 2010.
(r) Prepare an Income Statement assume 16,000 units are sold for $100.00 per unit and
that selling & distribution expenses are $2,00,000 ; Interest paid $5,000 ; Income
Tax@25%.
Q. No. 5.
Sharp Company manufactures a product for which the following standards have been set:
Particulars
of hours
or rate
Direct Materials
3.00 feet
$5.00 per feet
$15.00
Direct labor
? hours
$ per hour
?
During March, the company purchased direct materials at a cost of $55,650, all of which were used in
the production of 3,200 units of product. In addition, 4,900 hours of direct labor time were worked on
the product during the month. The cost of this labor time was $36,750. The following variances have
been computed for the month:
Material Quantity Variance $4,500 U
Total Labor cost variance $1,650 F
Labor Efficiency Variance $800 U
Required:
1. For direct materials:
(a) Compute the actual cost per foot for materials
(b) Compute the materials price variance and a total variance for materials
2. For direct labor:
(a) Compute the standard direct labor rate per hour.
(b) Compute the standard hours allowed for the months production.
(c) Compute the standard hours allowed per unit of product.
Q. No. 6.
Page 44 of 76
The Mills Company manufactures roofing shingles. The production process involves heating and
compressing asphalt into sheets and then rolling coarse sand into the hot asphalt. The sheets are then
cooled, cut into shingles, and packaged.
The following standard costs were developed:
Direct materials:
Asphalt...........................................................
Sand................................................................
Direct labor..........................................................
Variable manufacturing overhead.....................
Fixed manufacturing overhead.........................
Total standard cost per shingle...................
2 lbs. $0.08/lb.
2 lbs. $0.02/lb.
.01 hrs. $7/hr.
.01 hrs. $3/hr.
$0.16
0.04
0.07
0.03
?
?
The following information is available regarding the companys operations for the period:
Shingles produced.......................................................
500,000
Materials purchased:
Asphalt...................................................................
Sand........................................................................

Materials used:
Asphalt...................................................................
Sand........................................................................
775,000 pounds
850,000 pounds
Direct labor...................................................................
Manufacturing overhead incurred:

Variable...................................................................
Fixed.......................................................................
$16,500
$48,000
Budgeted fixed manufacturing overhead for the period is $60,000, and the standard fixed overhead rate
is based on expected capacity of 6,000 direct labor hours.
Instructions:
(f) Calculate labor variance;
(p) Calculate Overhead Variance;
Page 45 of 76
Q. No. 7.
Xavier Company produces a single product. Variable Manufacturing Overhead is applied to products
on the basis of direct labour hours. The standard costs for one unit of product are as follows:
Direct material: 6 ounces at $0.50 per ounce ................$3
Direct Labour: 1.8 hrs at $10 per hrs.....................
18
Variable manufacturing OH: 1.8 hrs at $5 per frs........... 9
Total standard variable cost.............................. .
$30
During June, 2,000 units were produced. The cost associated with Junes operations was as follows:
Material purchases: 18,000 Ounces at $0.60 per ounce......$10,800
Material used in production: 14,000 ounces................ ---Direct Labour 4,000 hrs at $9.75 per hrs................. 39,000
Variable manufacturing overhead costs incurred ...........20,800
Required:
a. Calculate the Material Price variance.
b. Calculate the Material Quantity variance.
c. Calculate the Labour rate variance.
d. Calculate the Labour Efficiency variance.
e. Calculate labor cost variance;
e. Variable spending Variance.
f. Variable Efficiency Variance.
Q. No. 8.
The standard cost sheet for one of the Carver Companys products is presented below:
Direct materials (4 feet @ $6.00)................
Direct labor (1 hour @ $12.00)...................
Variable overhead (1 hour @ $5.00)...........
Fixed overhead (1 hour @ $3.00a)..............
Standard unit cost.........................................
$24.00
12.00
5.00
3.00
$44.00
Rate based on expected activity of 12,000 hours
The following results for last year were recorded:

Production...............................................................................
Direct materials (39,000 feet purchased and used)...........
Direct labor (10,500 hours)..................................................
Variable overhead...................................................................
Fixed overhead........................................................................
Required:
(o) Calculate the Materials price variance;
(p) Calculate the materials usage variance;
(q) Calculate the total material cost variance
Page 46 of 76
10,000 units
$241,800
$131,250
$48,000
$40,000
(r) Calculate the labor rate variance

(s) Calculate the labor efficiency variance
(t) Calculate the total labor cost variance
(u) Calculate the variable overhead spending variance
(v) Calculate the variable overhead efficiency variance
(w) Calculate the fixed overhead spending variance
(x) Calculate the fixed overhead volume variance
Q. No. 9.
Bestway Pharmaceutical Company produces two products, Milex and Silex, in Department 4.
Materials and other inputs into each product are shown below:
___________________________________________________________
_____Per batch______ Standard price
Milex
Silex
or rate
Direct materials;
Material A
2 lbs.
1 lb.
$4 per pound
Material B
-3 lbs.
3 per pound
Material C
1 gal.
1 gallon
5 per gallon
Direct labor
0.8 hrs. 1.5 hrs.
8 per hour
Variable overhead
0.8 hrs. 1.5 hrs.
3 per hour
___________________________________________________________
During the month of March, the company produced 900 batches of Milex and 1200 batches of Silex.
The following additional information is available:
a. Materials purchased during the month:
_________________________________________________
Amount
(pounds)
Purchase
cost
Material A
3,600
$14,940
Material B
3,800
10,830
Material C
--_________________________________________________
b. Inventories on hand at the start of the month:
_________________________________________________
Inventory
Amount
cost
Material A
Material B
Material C
500 pounds
400 pounds
2,500 gallons
Page 47 of 76
$ 2,000
1,200
12,500
_________________________________________________
c. Materials issued into production during the month:
_________________________________________________
Amount
Cost
Material A
3,450 pounds
?
Material B
3,500 pounds
?
Material C
2,400 gallons
?
_________________________________________________
d.
e.
f.
Required:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
A total of 2,700 hours of direct labor time were recorded for the month; direct labor
cost for the month was $20,250.
Variable overhead cost is allocated to production on a basis of direct labor-hours.
There was no work in process at the beginning or end of the month.
Determine the standard variable cost of one batch of each product.
For direct materials: Compute the price variance for each material purchased.
Prepare a journal entry to record each purchase.
Compute the quantity variance for the month for each material.
Prepare journal entries to record the placing of materials into production.
For direct labor: Compute the rate and efficiency variances for the month.
Prepare a journal entry to record the direct labor cost for the month.
State the possible causes of each variance that you have computed.
Q. No. 10.
The Alpha company produces Toys for national distribution. The management has recently
established a standard costing system to control cost. Estimated standard costs are :
Material : 12 pieces per unit @Tk0.56 per piece.
Labour : 2 hours per unit @Tk.2.75 per hour.
During the month of December , 2002 the Alpha Company produced 1,000 units of finished goods.
Production information for December is as follows :
14,000 pieces of direct material were purchased used. The actual cost of direct material was Tk.7,140 ;
Direct labor cost incurred was 2,500 hours and cost Tk.8,000.
Required :
a. Computation of Material price and Efficiency and Labor rate and Efficiency variances.
b. A brief Explanation to management giving significance of each variance.
Q. No. 11.
The Porter Company employs a Standard costing system. The overhead standards were set using an
activity level of 5,700 standards direct labor hour.
Standard Quantity
Standard Cost
Total
Direct Materials
10 pounds
$2.00 per pound
$20.00
Page 48 of 76
Direct Labor
.25 hours
$20.00 per hour
5.00
Variable Overhead
$8.00 per hour
2.00
Fixed Overhead
$12.00 per hour
3.00
---------------
Standard Cost per Unit
$30.00
========
During November , the Porter Company produced 24,000 units. 2,10,000 pounds of direct material
were purchased used. The actual cost of direct material was $2.20 per pound ; Direct labor incurred
was 7,500 hours at $16.00 per hour. Actual variable overhead was $21,000 ; Actual Fixed overhead was
$36,000.
Required :
(l) Calculate total Manufacturing Cost Variance
(m)Journalize the above for the month of November, 2002.
c. Prepare an Income Statement assume 30,000 units are sold for $60.00 per unit and that selling
& distribution expenses are $1,00,000.
Q. No. 12.
Superior Door Company produces a single product. Variable manufacturing overhead is applied t
products on the basis of direct labor hours. The standard costs for one unit of product are as
follows:
Direct Material : 6 ounces @ $0.50 per ounces
= $3.00
Direct Labor:
1.80 hours @ $10.00 per hour
= 18.00
Variable Factory Overhead: 1.80 hours @ $5.00 per Hr.
=9.00
-------------------------Standard cost per unit
$30.00
=========
During March, 2000 units were produced. The costs associated with marchs operations were as
follows:
Material Purchased: 18,000 ounces @ $0.60 per ounces
=$10,800
Material Used in production: 14,000 ounces
Direct labor: 4,000 hrs @ $9.75 per hour
= 39,000
Variable cost incurred
= 20,800
Q. No. 13.
The Memo fax company produces Toys for national distribution. The management has recently
established a standard costing system to control cost. Estimated standard costs are :
Material: 24 pieces per unit @Tk0.56 per piece.
Labour: 4 hours per unit @Tk.2.75 per hour.
Page 49 of 76
During the month of December, 2000 the Alpha Company produced 2,000 units of finished goods.
Production information for December is as follows:
28,000 pieces of direct material were purchased used. The actual cost of direct material was Tk.14,
280; Direct labor cost incurred was 5,000 hours and cost Tk.16, 000.
Required :
c. Computation of Material price and Efficiency and Labor rate and Efficiency variances.
d. A brief Explanation to management giving significance of each variance.
Q. No. 14.
The XYZ Company Ltd. employs a Standard costing system. The overhead standards were set using
an activity level of 1,900 standards direct labor hour.
Standard Quantity
Direct Materials
10 pounds
Direct labor
.25 hours
Standard Cost
$1.00 per pound
Total
$10.00
$10.00 per hour
2.50
Variable Overhead
$4.00 per hour
1.00
Fixed Overhead
$6.00 per hour
1.50
---------------
Total--------------- $15.00
========
During November, the XYZ Company produced 8,000 units. 70,000 pounds of direct material were
purchased used. The actual cost of direct material was $1.10 per pound; direct labor incurred was
2,500 hours at $8.00 per hour. Actual variable overhead was $7,000; Actual Fixed overhead was
$12,000.
Required :
Page 50 of 76
(p) Calculate Manufacturing Overhead Variance;

(q) Total Manufacturing Cost Variance
(r) Journalize the above for the month of November, 2001.
P. Prepare an Income Statement assume 8,000 units are sold for $50.00 per unit and that selling &
distribution expenses are $1, 00,000.
Q. No. 15.
The Machine shop of a factory using flexible budgetary control has a budget for April ,2002 of :
Budget Machine hours
10,000 hours.
Budgeted Overheads:
Variable with machine overtime
Tk.12,000
Variable with output
Tk.8,000
Fixed
Tk.10,000
The actual performance and cost details for the month are:
Machine hours worked
19,000 hours.
Standards hours produced
20,400
Overhead varying with time
Tk.12,800
Overhead varying with output
Tk.8,600
Fixed Overhead
Tk.10,400
Required:
Present the above details analyzing the variances for information of the top management.
Q. No. 16.
Bush Company produces a single product. Variable manufacturing overhead is applied to products
on the basis of direct labor hours. The standard costs for one unit of product are as follows:
Direct Material : 12ounces @ $0.50 per ounces
= $6.00
Direct Labor:
= 36.00
Variable Factory Overhead: 3.60 hours @ $5.00 per Hr. =18.00
$60.00
=========
During March , 4,000 units were produced. The costs associated with March s operations were as
follows :
=$21,600
Material Used in production: 28,000 ounces
Direct labor : 8,000 hrs @ $9.75 per hour
= 78,000
= 41,600
Required:
(b) Calculate the material Usage Variance;
(c) Calculate the Material Quantity Variance;
Page 51 of 76

Q. No. 17.
Minnie Soda Pop Inc. has set up the following standards for material & Direct Labor for a vat of
syrup:
Materials : 10 lbs @ $3.00 = $30.00;
Direct labor: 4 hours @ $2.50 = 10.00
10,000 vats were budgeted for the period & 9,810 vats were actually produced. Actually costs were:
Material : 98,073 lbs
$2, 94,430
Direct Labor: 39,399 hours
98,240
During the period, purchased amounted to 1, 00,000 pounds at a total costs of $3, 01,193.
Required:
u. Calculate the Material Price variance;
v. Calculate the Material Quantity Variance;
w. Calculate the Labor Rate Variance;
x. Calculate the Labor Efficiency Variance;
y. Comment on each of the variances as to the most probable causes.
Q. No. 18.
Remix Company produces a single product. Variable manufacturing overhead is applied to products
on the basis of direct labor hours. The standard costs for one unit of product are as follows:
Direct Material : 6 ounces @ $0.50 per ounces
= $3.00
Direct Labor:
= 18.00
Variable Factory Overhead: 1.80 hours @ $5.00 per Hr. =9.00
$30.00
=========
During March, 2000 units were produced. The costs associated with marchs operations were as
follows:
=$10,800
Material Used in production : 14,000 ounces
Direct labor: 4,000 hrs @ $9.75 per hour
= 39,000
= 20,800
Required :
(b) Calculate the material Usage Variance;
(c) Calculate the Material Quantity Variance;
Page 52 of 76
Q. No. 19.
Chackroback Company uses a standard cost system & sets predetermined overhead rates on a basis of
direct labor hours . The following data are taken from the company flexible budget for 2010;
Denominator activity ( direct labor hours)
10,000
Variable Overhead costs
$25,000
Fixed Overhead Costs
$59,000
A standard cost card showing the standard cost to produce one unit of the company s product is
given below :
Direct Material : 3 Yards @ $4.40
$13.20
Direct Labor :
2 hours @ $6.00
12.00
Overhead Costs 140% of Direct labor costs
16.80
$42.00
=========
During 2010 the company produced 6,000 units of the product & incurred the following costs :
Material Purchased , 24,000 yards @4.80
Material used in production (in yards)
Direct labor cots incurred , 11,600 hours @6.50
Variable overhead costs incurred
Fixed overhead costs incurred
=$1,15,200;
18,500
75,400;
29,500;
60,000
The company records the material at actual costs when received, & determine the price variance
when the materials are requisition for production .
Required :
g. Calculate the Material Price variance;
h. Calculate the Material Quantity Variance;
i. Calculate the Labor Rate Variance;
j. Calculate the labor Efficiency Variance;
k. Variable Spending Variance;
l. Variable Efficiency Variance;
m. Fixed Spending Variance;
n. Fixed Efficiency Variance;
Q. No. 20.
Ms. Naming Incorporation manages the marketing department at Swatch lighting Company. Naming
is evaluated based on her ability to meet budgeted revenues . For May ,2010 Naming Revenues
Budget was as follows :
Price Per unit
Unit sales
Floor Lamps
Hanging Lamps
Ceiling Lamps
$120
65
80
Page 53 of 76
$1,600
2,150
4,200
The actual sales generated by Ms. Incorporation s marketing department in May are as follows :
Price Per Unit

Floor Lamps
Hanging Lamps
Ceiling Lamps
$115
70
75
Units Sales
$1,95,500
1,41,400
3,11,250
Required :
a. Compute the revenue price variance ;
b. Compute the revenue mix variance;
c. Compute the revenue volume variance;
d. Based on your answer (a) , (b) & (c) evaluate the performance of Ms. Incorporation
Q. No. 21.
Jana corporation sells the two brands of glasses plain & chic. Jana provides the following
information for sales in the month of June 2010;
Static Budget Total contribution margin
$5,600
Budgeted units to be sold of all glasses in June 2001 2,000 units;
Budgeted Contribution Margin per unit of Plain $2.00
Budgeted Contribution Margin per unit of chic $6.00
Total sales quantity variance
$1,400 U
Actual sales mix percentage of Plain
60%
Required :
a. Compute the sales quantity variances for each of the product for June 2010;
b Compute the individual product and total sales mix variance for June 2010;
c. Compute the individual product and total sales volume variance for June 2010;
e. Briefly describe the conclusions you would draw from the variances.
Q. No. 22.
For the following information of Middle Company Ltd. are : To produce one unit of a product
requires :
Direct Material 2lbs @$10.00
Direct labor 3 hrs@ $7.00
Variable OH 3 Hrs @ $5.00
Fixed FOH
3 hrs @ $4.00
During a month 12,400 units were produced at a costs of $8,45,900.
Actual Costs :
Material purchased & used
$2,48,000;
Labor used 37,000 hrs @ $7.10
2,62,700
Factory OH:
Fixed
$1,52,000
Variable
1,83,200
Page 54 of 76
Normal & Budgeted Capacity 37,500 direct labor hour. There is no beginning & ending inventory
& only one type of material & labor has been used.
Direct Material 25,000 lbs @ $10.00
Direct labor 3,750hrs@ $7.00
Variable OH 3,750 Hrs @ $5.00
Fixed FOH
3,750 hrs @ $4.00
= $2,50,000
= 2,62,500
= 1,87,500
= 1,50,000
Required :
o. Calculate the Material Price variance;
p. Calculate the Material Quantity Variance;
q. Calculate the Labor Rate Variance;
r. Calculate the labor Efficiency Variance;
s. Variable Spending Variance;
t. Variable Efficiency Variance;
u. Fixed Spending Variance;
v. Fixed Efficiency Variance;
Q. No. 23.
Mr. Santiago was shocked to see the loss for the month, particularly since sales were exactly as
budgeted. He stated. " I sure hope the plant has a standard cost system in operation. If it doesn't. I
won't have the slightest idea of where to start looking for the problem." The plant does use a standard
cost system with the following standard variable cost per ingot:
Standard Quantity
Standard Price
Standard
or Hours
or Rate
Cost
4.0 pounds
$2.50 per pound
$10.00
Direct labor
0.6 hours
$9.00 per hour
5.40
Variable overhead
0.3 hours*
$2.00 per hour
0.60
Direct materials
Total standard variable cost
$16.00
Base on machine - hours.
Mr. Santiago has determined that during the month of October the plant produced 5,000 units and
incurred the following costs:
Page 55 of 76
a. Purchased 25,000 pounds of materials at a cost of $2.95 per pound. There were no raw
materials in inventory at the beginning of the month.
b. Used 19,800 pounds of materials in production. ( Finished goods and work in process
inventories are nominal and can be ignored. )
c. Worked 3,600 direct labor-hours at a cost of $8.70 per hour.
d. Incurred a total variable overhead cost of $4,320 for the month. A total of 1,800 machine hours was recorded.
It is the company's policy to close all variances to cost of goods sold on a monthly basis.
Required:
1. Compute the following variances for the month:
a. Direct materials price and quantity variances.
b. Direct labor rate and efficiency variances.
c. Variable overhead spending and efficiency variances.
2. Summarize the variances that you computed in (1) above by showing the net overall favorable
or unfavorable variance for the month. What impact did this figure have on the company's net
income?
Basic Q. No. 24.
High-Tech. Inc. produces a single product and uses a standard cost system to help in the control of
costs. Overhead is applied to production on a basis of machine-hours. According to the company's
flexible budget, the following denominator activity level chosen for 2010):
Variable overhead costs
$31,500
Fixed overhead costs
72,000
Total overhead costs
$103,500
During 2010, the following operating results were recorded:

Actual machine-hours worked
15,000
Standard machine-hours allowed
16,000
Page 56 of 76
Actual variable overhead cost incurred

Actual fixed overhead cost incurred
$26,500
70,000
At the end of the year, the company's Manufacturing Overhead account contained the
following data:
Actual Cost
96,500
92,000
Applied costs
4,500
Management would like to determine the cause of the $4,500 under-applied overhead before closing
the amount to cost of goods sold.
Required:
1. Compute the predetermined overhead rate that would have been used during 19x8. Break it
down into variable and fixed cost elements.
2. Show how the $92,000 "Applied Costs" figure in the Manufacturing overhead account was
computed.
3. Analyze the $4,500 under-applied overhead figure in term of the variable overhead spending
and efficiency variances and the fixed overhead budget and volume variances.
4. Explain the meaning of each variances and the fixed overhead budget and volume variances.
5. Explain the meaning of each variance that you computed in (3) above, and indicate how each
variance is controlled.
Q. No. 25.
At the beginning of 2010, Little man Company had the following standard cost sheet for one of its
products:
Direct materials (5 lbs @ 1.60)
$8.00
Direct labor (1.5 hours @ $9.00)
13.50
Fixed overhead (1.5 hrs @ $2.00)
3.00
Variable overhead 91.5 hrs @ $1.50)
2.25
Page 57 of 76
Standard cost per unit
$26.75
Little man computes its overhead rates using practical volume, which is 72,000 units. The actual
results for 2010 are
a. Units produced: 70,000
b. Materials purchased: 372,000 pounds at $1,50
c. Materials used: 368,000 pounds
d. Direct labor: 112,000 hours at $8.95
e. Fixed overhead: $214,000
f.
Variable overhead: $175,400
Required:
1. Compute once and usage variances for materials.
2. Compute the labor rate and labor efficiency variances.
3. Compute the fixed overhead spending and volume variances.
4. Compute the variable overhead spending and efficiency variances.
Q. No. 26.
Riche Company produces a popular frozen dessert, which is sold in half gallons. Recently the
company adopted the following standards for one half gallon of the frozen dessert:
Direct materials (70 oz @ $0.008)
$0.56
Dirct labor (0.1 hrs @$8.60)
0.86
Standard prime cost
$1.42
During the first week of operation, the company experienced the following actual results:
a. Half gallon units produced: 5,000.
b. Ounces of materials purchased: 370,000 ounces at @0.0085.
Page 58 of 76
c. There are no beginning or ending inventories of raw materials.

Required:
1. Compute price and usage variances for direct materials.
2. Compute the rate variance and the efficiency variance for direct labor.
Q. No. 27.
Topaz Company produces a single product. The company has set standards as follows for materials
and labor:
Direct Materials
Direct Labor
? pounds
2.5 hours
Standard price or rate
? per pound
$9 per hour
Standard cost per unit
$22.50
Standard quantity or hours per unit
During the past month, the company purchased 6,000 pounds of direct materials costs of $16,500. All
of this material was used in the production of 1,400 units product. Direct labor cost totaled $28,500 for
the month. The following variances have been computed:
Materials quantity variance
$1,200 U
Total materials variance
300 F
Labor efficiency variance
4,500 F
Required:
1. For direct materials:
a. Compute the standard price per pound for materials.
b. Compute the standard quantity allowed for materials for the month's production.
c. Compute the standard quantity of materials allowed per unit of production.
a. For direct labor:
Page 59 of 76
a. Compute the actual direct labor cost per hour for the month.
b. Compute the labor rate variance.
Q. No. 28.
Cycle. Inc. assembles a physical fitness product known as aero cycle, which exercises both the upper
and lower body simultaneously. The company purchases all row materials in sets prepackaged by a
subcontractor. Cycle. Inc. established a standard costing system in its first month of existence (June
2010). The standard costs are as follows:
1 package raw materials @ $700
$700
6 hours direct labor assembly @ $11
66
1 hour direct labor inspection and testing @ $15
15
Overhead per unit (2/3 of assembly cost)
44
The following data were obtained from Cycle. Inc.'s accounting records for June 2010, when 2,000
aero cycles were assembled:
Debit
Credit
Purchases pouf prepackaged sets of raw materials $1,957,500

Materials price variance
67,500
Materials quantity variance
7,000
Assembly DL rate variance
$6,750
Assembly DL efficiency variance
16,500
There were no variances related to inspection direct labor or to overhead.

Required:
Compute each of the following for Cycle. Inc. for June. Show computations in good form.
a. Standard quantity of raw materials allowed and actual quantity used.
Page 60 of 76
b. Actual quantity of raw materials purchased.

c. Actual price paid per kit for raw materials.
d. Standard assembly hours allowed.
e. Actual assembly direct labor hours.
f.
Actual assembly direct labor rate.
Q. No. 29.
The Commodore Company uses standard costing for direct materials and direct labor. Management
would like to use standard costing for variable and fixed overhead also. The following monthly cost
functions were developed for manufacturing overhead items:
Overhead Item
Indirect materials.................................
Indirect labor........................................
Repairs and maintenance....................
Utilities..................................................
Insurance...............................................
Rent........................................................
Depreciation.........................................
Cost Function
$0.10 per DLH
$0.40 per DLH
$0.20 per DLH
$0.25 per DLH
$2,000
$4,000
$20,000
The cost functions are considered reliable within a relevant range of 30,000 to 55,000 direct labor
hours. Commodore expects to operate at 40,000 direct labor hours per month.
Information for the month of September is as follows:
Actual overhead costs incurred:
Indirect materials..............................................
Indirect labor.....................................................
Repairs and maintenance.................................
Utilities...............................................................
Insurance............................................................
Rent.....................................................................
Depreciation......................................................
Total................................................................
Actual direct labor hours worked.......................
Standard direct labor hours allowed for
production achieved.........................................
$4,500
17,000
8,000
10,000
2,100
4,000
20,000
$65,600
42,000
44,000
Instructions:
1.
Calculate the standard manufacturing overhead rate based upon expected capacity,
showing the breakdown between the fixed overhead rate and the variable overhead rate.
2. Calculate the variable manufacturing overhead spending variance.

3. Calculate the variable manufacturing overhead efficiency variance.
Page 61 of 76
4. Calculate the fixed manufacturing overhead spending variance.

5. Calculate the fixed manufacturing overhead volume variance.
Q. No. 30.
Apex Company produces a single product. Variable Manufacturing Overhead is applied to products
on the basis of direct labour hours. The standard costs for one unit of product are as follows:
Direct material: 6 ounces at Tk.0.50 per ounce............... .Tk.3
Direct Labour: 1.8 hrs at Tk.10 per hrs.....................
18
Variable manufacturing OH: 1.8 hrs at Tk.5 per frs........... 9
Total standard variable cost.............................. .
Tk.30
During June, 2,000 units were produced. The cost associated with Junes operations was as follows:
Material purchases: 18,000 Ounces at Tk.0.60 per ounce......Tk.10, 800
Material used in production: 14,000 ounces................ ---Direct Labour 4,000 hrs at Tk.9.75 per hrs................. 39,000
Variable manufacturing overhead costs incurred ...........20,800
Required:
(i) Calculate the Material Price variance.
(ii) Calculate the Material Quantity variance.
(iii)Calculate the Labour rate variance.
(iv) Calculate the Labour Efficiency variance.
(v) Calculate labor cost variance;
(vi) Calculate the Variable spending Variance.
(vii) Calculate the Variable Efficiency Variance.
Q. No. 31.
The XYZ Company Ltd. employs a Standard costing system. The overhead standards were set using
Standard Quantity
Standard Cost
Total
Direct Materials
10 pounds
Tk. 2.00 per pound
$20.00
Page 62 of 76
Direct labor
.25 hours
Variable Overhead
Fixed Overhead
Tk. .20.00 Per hour
5.00
Tk. 8.00 per hour
2.00
Tk. 12.00 per hour
?
---------------
Total Standard cost per unit
---------------
During November, the XYZ Company produced 16,000 units. 1, 40,000 pounds of direct material were
purchased used. The actual cost of direct material was Tk. 2.50 per pound; direct labor incurred was
5,500 hours at Tk.16.00 per hour. Actual variable overhead was Tk.15, 000; Actual Fixed overhead was
Tk.25,000.
Required:
(a) Calculate the fixed overhead per unit.
(b) Calculate the standard cost per unit.
(c) Calculate the Material Price variance.
(d) Calculate the Material Quantity Variance.
(e) Calculate Material cost variance
(f) Calculate the Labor Rate Variance.
(g) Calculate the labor Efficiency Variance.
(h) Calculate labor variance;
(i) Calculate Variable Spending Variance;
(j) Calculate Fixed Spending Variance;
(k) Calculate Total Spending Variance;
(l) Calculate Variable Efficiency Variance;
(m)Calculate Fixed Efficiency Variance;
(n) Calculate Total Efficiency Variance;
(o) Calculate Variable Volume Variance;
(p) Calculate Fixed Volume Variance;
(q) Calculate Volume Variance;
(r) Calculate Manufacturing Overhead Variance;
(s) Total Manufacturing Cost Variance
Q. No. 32.
The ABC Company Ltd. employs a Standard costing system. The overhead standards were set using
Standard Quantity
Standard Cost
Total
Direct Materials
10 pounds
$1.00 per pound
$10.00
Direct labor
.25 hours
$10.00 per hour
2.50
Variable Overhead
$4.00 per hour
1.00
Fixed Overhead
$6.00 per hour
?
---------------
Total---------------
Page 63 of 76
========
During November, the ABC Company produced 8,000 units. 70,000 pounds of direct material were
purchased used. The actual cost of direct material was $1.10 per pound; direct labor incurred was
2,500 hours at $8.00 per hour. Actual variable overhead was $7,000; Actual Fixed overhead was
$12,000.
Required:
(p) Calculate Manufacturing Overhead Variance;
(q) Total Manufacturing Cost Variance
Sales Variances Analysis

Companies regularly analyze sales variances to explain revenue performance over a monthly, quarterly or
yearly accounting cycle. The resulting sales variance explanations help firms isolate problems and gear their
future sales and marketing efforts towards increased sales growth. The sales variance analysis relies on a
comparison benchmark -- usually a firm's sales budget. Fluctuations in actual versus budgeted sales may
have several explanations, requiring diligent analytical work to reveal the underlying causes.
Sales Price and Production Variances
When reviewing past sales results, an analyst compares them to budgeted, or estimated, sales performance
for the company. When results do not line up, the analyst must find a plausible and meaningful explanation.
Differences in the volume of products sold, for example, may cause sales variances between budget and
actual results. Variance in sales prices may also cause or contribute to variances, such as when a company
needs to drop prices to sell enough volume to meet its budget goals. Additionally, the budget may have a
planned output of 10,000 units, while in reality the company exceeded production expectations by
producing 15,000 units.
Product Mix
Companies selling more than one type or style of product may experience sales variances stemming from an
inaccurately projected product mix. Companies assemble budgets using different methods; if a revenue
Page 64 of 76

budget uses percentages to allocate budget expectations for revenue expected from various products,
variances can occur if the business did not allocate the product mix effectively. Consumer trends or changing
preferences are two external factors that may drive product sales variances against the company's budget.
Marketing Programs
When companies invest money and effort in marketing programs, they have no guarantee of increased sales.
As consumer preferences change, a previous year's marketing campaign may not bring the same product
sales results, causing variances from a budget based on historical results. Conversely, a new or especially
effective marketing program may outperform budgeted expectations, causing a sales variance.
Market Share
Firms have no control over the competition, and may experience an unplanned decline in sales market share
if competitors introduce strong marketing campaigns or new products. New competitors may also reduce an
existing company's market share more the company anticipates, reducing the firm's sales and causing a
budget variance.
Economic Conditions
Even when firms tailor budgets to account for changes in the economy, no business can accurately predict
the effects of these changes all of the time. Economic unrest, especially for companies selling products or
services that consumers do not consider a basic need, can cause volatile sales and larger-than-expected
changes in sales performance. This may lead to sales variances against the company's budget
Meaning Sales Price Variance
Sales price variance is variance due the difference between actual sales price and standard sales price. If
actual sales price is more than standard sales price, this variance will be favorable or positive. If actual sales
price is less than standard sales price, this variance will be unfavorable or negative. To calculate the sales
price variance is important for checking the reasons of this variance. Following may be the main reasons of
sales price variance.
Sales Price Variance's Reasons
1. Changing in the Market Trend
Main reason of sales price variance is to change the market conditions or trend. Suppose, we have planned
our price as Rs. 100 of our product but actual price decreased due to recession in the market and it reached
Rs. 50. Due to this, our unfavorable variance reached at Rs. 50 per product. If we have sold 1000 unit at Rs.
50, it means, we are adverse sales variance is Rs. 50,000
2. Mistake in Estimation of Price
Page 65 of 76

To estimation of price is not very easy. When prices goes up and down, at that time, we can do mistake for
calculation of correct future price. Except of this, we have to estimate our different costs, if any cost is not
estimated correctly, our price may be estimated wrongly.
3. Bargaining in the Market
When salesman goes to the market, it has to face bargaining problem, salesman has to sell his product. So,
due to bargaining, it is not possible to calculate the correct price which will be in the future.
sales price variance formula
SPV = Actual Quantity of Sales X ( Actual Price - Standard Price )
Sales Price Variance Example
If actual sales price of pen is $ 10 and standard sales price is $ 13, we have sold 1000 units of pen, then sales
price variance will be
SPV = 1000 X ( $ 10 - $ 13 ) = 1000 X 3 = $ 3000 ( Unfavorable or adverse )
Sales mix
Sales mix is an important consideration in the world of product and financial management. Changes in sales
mix can signify changes in consumer demand, which is helpful for new product development. Finding the
sales mix variance can help to both track changes in the sales mix over time as well as identify growth areas.
It can also help to explain away declines and increases in product revenue, which is very important when
trying to diagnose budgeting problems.
How to calculate the Sales Mix Variance
1.
Determine the current sales mix. You will need to know the sales for all major product groups. For
instance, for XYZ comnpany let's say there are 2 different products. Product 1 is selling $4,000 in
sales and Product 2 is selling $6,000 in sales per month.
2.
Calculate the percentage mix. Divide the sales for each product by the total. In this example Product
1 represents 40 percent ($4,000/$10,000) and Product 2 represents 60 percent ($6,000/$10,000).
3.
Track the change from month to month. Let's say in the following month, sales of Product 1
increased to $10,000, and Product 2 sales increased to $20,000.
4.
Calculate the new percentage. The new sales mix of Product 1 is 33 percent ($10,000/$30,000) and 66
percent for Product 2 ($20,000/$30,000).
5.
Calculate the variance in sales mix. Product 1 percentage of total sales changed from 40 to 33
percent. Divide the change by the previous month. The calculation is 7 divided by 40 equals 17.5
Page 66 of 76

percent. This is the one-month variance for Product 1. Product 2 sales went from 60 percent of sales
to 66 percent of sales. The calculation is 6 divided by 60, or 10 percent sales variance.
Revenue Variance Analysisanother example
Bozotronics produces three handheld games: GamePro (for advanced players), GameSmo (for losers), and
GameKid (for kids under 8). The CEO has discovered that the total Contribution Margin (CM) for the 4 th
quarter of 2002 came in lower than expected (budget).
It is your job, as the senior vice president of marketing, to explain why the actual results were different from
the budgeted. When you prepared the budget at the beginning of the 4 th quarter, you assumed a 25% market
share of the handheld game market. Foolsnumbers Research estimated 4 th quarter sales of handheld games
worldwide to be 400,000 units, however, actual 4th quarter sales were 500,000 units.
BUDGETED OPERATING DATA, 4th quarter 2003:
Selling
VC / unit
CM / unit
Sales volume (units)
Price
GamePro
$379
$182
$197
12,500
GameSmo
269
98
171
37,500
GameKid
149
65
84
50,000
Total =
100,000
ACTUAL OPERATING DATA, 4th quarter 2003:
Selling
VC / unit
CM / unit
Sales volume
Price
(units)
GamePro
$349
$178
$171
11,000
GameSmo
285
92
193
44,000
GameKid
102
73
29
55,000
Total =
110,000
Calculate all of the CM variances for the 4th quarter and explain what happened.
Solution:
BUDGETED OPERATING DATA, 4th quarter 2003:
CM / unit
Sales volume
Total CM
CM%
Sales Mix
(units)
GamePro
$197
12,500
2,462,500
18.8%
12.5%
GameSmo
171
37,500
6,412,500
49.0%
37.5%
GameKid
84
50,000
4,200,000
32.1%
50.0%
Total =
100,000
13,075,000
100%
100%
th
ACTUAL OPERATING DATA, 4 quarter 2003:
CM / unit
Sales volume
Total CM
CM%
Sales Mix
(units)
GamePro
$171
11,000
1,881,000
15.7%
10.0%
GameSmo
193
44,000
8,492,000
80.0%
40.0%
GameKid
29
55,000
1,595,000
13.3%
50.0%
Total =
110,000
11,968,000
100%
100%
Budgeted average UCM = $13,075,000 / 100,000 units = $130.75 / unit
Actual average UCM = $11,968,000 / 110,000 units = $108.80 / unit
Static-Budget Variance = $11,968,000 - $13,075,000 = $1,107,000.
Flexible budget = Actual total units sold * actual sales mix * budget UCM
FB = (110,000 * 0.10 * $197) + (110,000 * 0.40 * $171) + (110,000 * 0.50 * 84) = $14,311,000.
Therefore, the Sales-volume variance =
$14,311,000 13,075,000 = $1,236,000 F
Page 67 of 76

AND
Flex-budget variance = $11,968,000 - $14,311,000 = $2,343,000 U
No-name budget to get the Sales-mix and Sales-quantity variances:
= Actual total units sold * budget sales mix * budget UCM
Do for each product and add OR--= Actual total units sold * budget average UCM
= 110,000 * $130.75 = $14,382,500.
Flex.
No-name
Static
$14,311,000
$14,382,500
$13,075,000
|----------------------------------------|---------------------------------------|
S-mixV = $71,500 U
S-quantV = $1,307,500F
No-name budget to get the market-share and market-size variances:
= Actual mkt. Size * budget mkt. Share * budget average UCM
= 500,000 * 0.25 * $130.75 = $16,343,750.
No-name
No-name
Static
$14,382,500
$16,343,750
$13,075,000
|----------------------------------------|---------------------------------------|
Mkt-shareV = $1,961,250 U
Mkt-sizeV = $3,268,750 F
Page 68 of 76

*actual market share = 22%, budget = 25%What happened?
(1) Total CM was $1,107,000 less than expected. GameSmo CM exceeded budget by over $2M but the CM of
other two games were lower than expected and offset. Lower unit sales of GamePro and lower CM of
GameKid.
(2) Sales mix, sold less of the highest CM product.
(3) GameSmo gained both from an increase in sales mix and increase in number of units sold.
(4) large drop in GameKids UCM, overall drop in the average UCM.
(5) GameKid, selling price severe drop, VC increases? Marketing push that failed?
(6) market share lower by 3% unfavorable variance
(7) total market size increased favorable mkt.-size variance
(8) significant decrease in the average UCM explains the Flex-budget var. Combination of sales pric
Sales mix is an important consideration in the world of product and financial management. Changes in sales
mix can signify changes in consumer demand, which is helpful for new product development. Finding the
sales mix variance can help to both track changes in the sales mix over time as well as identify growth areas.
It can also help to explain away declines and increases in product revenue, which is very important when
trying to diagnose budgeting problems.
Instructions
Determine the current sales mix. You will need to know the sales for all major product
groups. For instance, for XYZ comnpany let's say there are 2 different products. Product 1 is selling
$4,000 in sales and Product 2 is selling $6,000 in sales per month.
Calculate the percentage mix. Divide the sales for each product by the total. In this example Product
1 represents 40 percent ($4,000/$10,000) and Product 2 represents 60 percent ($6,000/$10,000).
Sponsored Links
Start Download
Download Free Software: Converter Free Download!
Track the change from month to month. Let's say in the following month, sales of Product 1
increased to $10,000, and Product 2 sales increased to $20,000.
Calculate the new percentage. The new sales mix of Product 1 is 33 percent ($10,000/$30,000) and 66
percent for Product 2 ($20,000/$30,000).
Calculate the variance in sales mix. Product 1 percentage of total sales changed from 40 to 33
percent. Divide the change by the previous month. The calculation is 7 divided by 40 equals 17.5
percent. This is the one-month variance for Product 1. Product 2 sales went from 60 percent of sales
to 66 percent of sales. The calculation is 6 divided by 60, or 10 percent sales variance.
Page 69 of 76
Sales Variance Analysis

Q.No.27.
Himachal Foods manufactures apple products such as apple jelly and apple sauce. It makes apple sauce by
blending Tolman, Golden Delicious and Ribston. Budgeted costs to produce 1,00,000 kg of applesauce in
November are as follows:
45,000 kg of Tolman apples at $30 per kg------------------------------$13, 50,000.
1, 80,000 kg of Golden Delicious apples at $26 per kag---------------$46, 80,000
75,000 kg of Ribston apples at $22 per kg--------------------------------$16, 50,000
Actual costs in November are:
62,000 kg of Tolman apples at $28 per kg------------------------------$17, 36,000.
1, 55,000 kg of Golden Delicious apples at $26 per kag---------------$40, 30,000
93,000 kg of Ribston apples at $20 per kg--------------------------------$18, 60,000
Required:
(a) Calculate the direct material price and efficiency variance for November.
(b) Calculate the direct material mix and yield variance for November.
(c) Comment on your results in requirement 1 and 2.
Solution:
Requirement: (1)
Total direct material price variance can be computed as:
Direct Material price variance for each input= [Actual price-Budgeted price] X Actual input
Totalman= [$28-30] X 62,000
= $1, 24,000 F
Golden Delicious= [$26-26] X 1, 55,000 = $0
Ribston apples= [$20-22] X 93,000
= $1, 86,000F
Total direct material price variance
=$3, 10,000 F
Total direct material efficiency variance can be computed as:
Direct material efficiency variance for each input
= [Actual inputs-Budgeted input allowed for actual output achieved] X budgeted Price
Totalman
= [$62,00045,000] X $30
= $5, 10,000 UF
Golden Delicious= [$1, 55,0001, 80,000] X $26
=$6, 50,000F
Ribston apples= [$93,000-75,000] X $22
= $3, 96,000UF
Total direct material efficiency variance
=$2,56,000 UF
Requirement: (2)
Total direct materials mix and yield variances for each input for Himachal Foods for November:
Direct materials mix variances for each input=[Actual direct material input mix percentage--- Budgeted
direct material input mix percentage] X Actual total quantity of all direct materials input X Budgeted price of
direct materials inputs.
Totalman
= [0.200.15] X3, 10,000 X $30
= $4, 65,000 UF
Golden Delicious = [.50.60] X 3, 10,000 X $26
=$8, 06,000F
Ribston apples= [.300.25] X3, 10,000 X $22
= $3, 41,000UF
Total direct material Mix variance
=$0 U
Direct materials yield variances for each input=[Actual total quantity of all direct materials input used--Budgeted total quantity of all direct material input allowed for actual output achieved] X Budgeted direct
materials input mix percentage X Budgeted price of direct materials inputs.
Totalman
= [3, 10,0003, 00,000] X0.15 X $30
= $45,000 UF
Golden Delicious = [3, 10,0003, 00,000] X.60 X $26
=$1, 56,000UF
Ribston apples= [3, 10,0003, 00,000] X.25 X $22
= $55,000 UF
Total direct material yield variance
Requirement: (3)
=$2, 56,000 UF
Page 70 of 76

Himachal foods paid less for Tolman and Ribston apples and so had a favorable direct materials price
variance of $3,10,000. It also had an unfavorable efficiency variance of $2, 56,000. Himachal foods would
need to evaluate if these were unrelated events or if the lower price resulted from the purchase of apples of
poorer quality that affected efficiency. The net effect in this case from the cost standpoint was favorable-the
saving in price being greater than the loss in efficiency. Of course, if the applesauce is of poorer quality.
Himachal foods must also evaluate the potential effects on current and future revenues that have not been
considered in the variance described in requirements 1 and 2.The unfavorable efficiency variance is entirely
attributable to an unfavorable yield. The actual mix does deviate from the budgeted mix but at the budgeted
price, the greater quality of Tolman and Ribston apples used in the actual mix exactly offset the fewer
Golden delicious apples used.
Q.No.28.
Coca Cola manufactures and sells three soft drinks: Kola, Soda and Limca. Budgeted and actual sales for
2012 are as follows:
Budget for 2012
Actual for 2012
Product
Selling price Variable cost Cartons sold Selling per
Variable cost Cartons sold
per carton
per carton
carton
per carton
Kola
$60
$40
4,00,000
$62
$45
4,80,000
Soda
$40
$28
6,00,000
$42.50
$27.50
9,00,000
Limca
$70
$45
15,00,000
$68
$46
16,20,000
Coca cola prepared the budget for 2012 assuming a 10% market share based on total sales in the Western
region of USA. The total soft drinks market was estimated to reach sales of 250 lakh cartons in the region.
However, actual total sales volume in the Western region was 240 lakh cartons.
Required:
1. Compute the total sales-volume variance, total sales-mix variance and the total sales-quantity
variance. [Calculate all variances in terms of contribution margin]. Show results for each product in
your computations.
2.
What interferences can you draw from the variances computed in requirement 1?
3.
Compute the market share variance and market size variances for Coca-Cola in 2012. [Report all
variances in terms of contribution margin].
4.
Comment on the results.
Solution:
Requirement: (1)
Budget for 2012
Product
Selling per
carton
(1)
Kola
Soda
Limca
$60
$40
$70
Actual for 2012

Product
Selling per
carton
(1)
Kola
$62
Soda
$42.50
Variable cost per

carton
(2)
Units sold
(4)
$40
$28
$45
Contribution
Margin per
unit (3)=(1)
(2)
20
12
35
Variable cost per

carton
(2)
$45
$27.50
Contribution
Margin per
unit (3)=1-2
17
15
Units sold
(4)
Page 71 of 76
4,00,000
6,00,000
15,00,000
25,00,000
4,80,000
9,00,000
Sales mix
(5)
Contribution
margin
(6)= (3) X (4)
16%
24%
60%
100%
80,00,000
72,00,000
3,75,00,000
5,27,00,000
Sales mix
(5)
Contribution
margin
(6)= (3) X (4)
81,60,000
1,35,00,000
16%
30%

Limca
$68
$46
22
16,20,000
54%
3,56,40,000
30,00,000
100%
5,73,00,000
Total sales-volume variance, the total sales-quantity variance and total sales-mix variance for each product
and in total for 2012.
Sales volume variance= [Actual sales quantity in units -budgeted sales quantity in units] X budgeted
margin per unit.
Kola
[4, 80,000-4,00,000] X $20.
$16,00,000 F
Soda
Limca
[9, 00,000-6,00,000] X $12.

[16, 20,000-15,00,000] X $25.
$36,00,000 F
$30,00,000 F
$82,00,000 F
Sales quantity variance= [Actual units of all products sold---Budgeted units of all products sold] X
Budgeted sales mix percentage X Budgeted contribution margin per unit.
Kola
[30, 00,000-25,00,000] X .16 X $20.
$16,00,000 F
Soda
Limca
[30, 00,000-25,00,000] X .24 X $12.

[30, 00,000-25,00,000] X .60 X $25.
Soda
Limca
30, 00,000 X [.30-0.24] X $12.

30, 00,000 X [0.54-0.60] X $25.
$14,40,000 F
$75,00,000 F
$1,05,40,000 F
Sales-mix variance= Actual units of all products sold X [ Actual sales mix percentage--[ Budgeted sales mix
percentage] X Budgeted contribution margin per unit.
Kola
30, 00,000 X [0.16-0.16] X $20.
$0
$21,60,000 F
$45,00,000 UF
$23,40,000 UF
Flexible Budget:
Static Budget
Actual units of all products sold
Actual units of all products sold Budgeted units of all products sold
X Actual sales mix
X Budgeted sales mix
X Budgeted contribution Margin per unit.

contribution margin per unit.
X Budgeted sales mix
X Budgeted contribution margin per unit.
Kola = 30, 00,000 X .16 X $20=$96, 00,000

$20=$80, 00,000
30, 00,000 X .16 X $20=$96, 00,000
Soda= 30, 00,000 X .30X $12=$1,08, 00,000

$12=$72, 00,000
30, 00,000 X .24X $12=$86,40,000
Limca=30, 00,000 X .54 X $25=$4, 05, 00,000

$25=$3, 75, 00,000
$5, 27, 00,000
30, 00,000 X .54 X $25=$4, 50, 00,000
$6, 09, 00,000
X Budgeted
25, 00,000 X .16 X
25, 00,000 X .24 X
25, 00,000 X .60X
$6, 32, 40,000
Sales mix Var. $23,40,000 UF
Page 72 of 76
Sales Quantity Var $1,05,40,000 F

Sales Volume Variance=$82, 00,000 F
Requirement: (2)
The breakdown of sales volume variance of $82,00,000 shows that the biggest contributor is the 5,00,000 units in
case of sales resulting in a sales favorable sales quantity variance of $1,05,00,000. There is a partially offsetting
unfavorable sales mix variance of $23, 40,000 in contribution margin. Favorable or unfavorable effect the net
operating income.
Requirement: (3)
Market share variance and Market size variances:
Actual
Budget
Western region
240 Lakh
250
Coca-Cola
30 lakh
25
Market Share
12.50%
10%
Actual market share=30, 00,000 units/2, 40, 00,000=12.50%
Budgeted market share=25, 00,000units/2, 50, 00,000=10.00%
Budgeted contribution margin per composite unit for budgeted mix=Budgeted CM/ Budgeted units
sold=$5, 27, 00,000/25, 00,000= $21.08
Market share variance=
Actual market size in units X [Actual market share-- Budgeted market share] X Budgeted contribution
margin per composite unit for budgeted mix
= 2, 40, 00,000 X [0.125- 0.10] X 21.08
=$1, 26, 48,000 F
Market size variance=
[Actual market size in units- Budgeted market size in units] X Budgeted market share X Budgeted cm
per composite unit for budgeted mix.
= [2, 40, 00,000-2, 50, 00,000] X0.10 X 21.08
=-10, 00,000 X0.10 X 21.08
=$21, 08,000 UF
Requirement: (4)
Market share variance is favorable because the actual 12.50% market share was higher the budgeted 10%
market share. The market size variance is unfavorable because the market size decreased 4% [(2, 50, 00,000-2,
40, 00,000) /2, 50, 00,000].
While the overall total market size declined from 250 lakh to 240 lakh, the increase in market share meant a
favorable sales-quantity variance.
Market share Var. $1,26,48,000 F
Market size Var $21,08,000 U
Sales quantity- Variance=$1, 05, 40,000 F
Actual market size
Budgeted market size
Static Budget: Budgeted market size
X Actual market share

X Budgeted market share
X Budgeted average contribution Margin per unit.
X Budgeted contribution margin per unit, X Budgeted
24, 00,000 X .125 X $21.08
=$6, 32, 40,000
24, 00,000 X .10 X $21.08
25, 00,000 X .10 X $21.08
=$5, 05, 92,000

Page 73 of 76
Market size Var $21,08,000 U
$5, 27, 00,000

Sales quantity- Variance=$1, 05, 40,000 F
Q.No.29.
Parle operates a chain of cookie stores; Budgeted and actual operating data of its three stores for August are
as follows:
Budget for August:
Product
Selling price per
Variable cost per
Contribution
Sales volume in
pound
pound
Margin per pound pounds
Chocolate chip
$45
$25.00
20.00
45,000
Oatmeal
50
27.00
23.00
25,000
Coconut
55
29.00
26.00
10,000
White Chocolate
60
30.00
30.00
5,000
Macadamia Nut
65
34.00
31.00
15,000
1,00,000
Actual for August:
Product
Selling price per
Variable cost per
Contribution
Sales volume in
pound
pound
Margin per pound pounds
Chocolate chip
$45.00
$26.00
19.00
57,600
Oatmeal
52.00
29.00
23.00
18,000
Coconut
55.00
28.00
27.00
9,600
White Chocolate
60.00
34.00
26.00
13,200
Macadamia Nut
70.00
40.00
30.00
21,600
1,20,000
Parle attains a 10% market share based on total sales of the market. The total market is expected to be
10,00,000 pounds in sales volume for August. However, actual total market for August was 9, 60,000 pounds
in sales value.. Parles focuses on contribution margin in its variance analysis:
Required:
1. Compute the total sales-volume variance for August.
2.
Compute the total sales-mix variance for August.
3.
Compute the total sales-quantity variance for August.
4.
Comment on your results on requirement 1, 2 and 3.
5.
Compute the market share variance
6.
Compute the market size variances for August. [Report all variances in terms of contribution
margin].
7.
Comment on the results.
Solution:
Requirement: (1)
Total sales-volume variance for August= [Actual sales quantity in pounds- Budgeted sales quantity in
pounds] X budgeted contribution margin per pound
The total sales volume variances are:
Chocolate chip
=[57,600-45,000] X $20
=$2,52,000 F
Oatmeal
=[18,000-25,000] X $23
=$1,61,000 U
Coconut
=[9,600-10,000] X $26
=$10,400 UF
White Chocolate
=[13,200-5,000] X $30
=$2,46,000 F
Page 74 of 76

Macadamia Nut
=[21,600-15,000] X $31
=$2,04,600 F
All Cookies
$5,31,200
Requirement: (2)
Sales quantity variance= [Actual pounds of all cookies sold---Budgeted pounds of all cookies sold] X
Budgeted sales mix percentage X Budgeted contribution margin per pound.
Chocolate chip
=[1,20,000-1,00,000] X 0.45 X $20
=$1,80,000 F
Oatmeal
=[1,20,000-1,00,000] X 0.25 X $23
=$1,15,000 F
Coconut
=[ 1,20,000-1,00,000] X 0.10 X $26
=$52,000 F
White Chocolate
=[1,20,000-1,00,000] X 0.05 X $30
=$30,000 F
Macadamia Nut
=[1,20,000-1,00,000] X 0.15 X $31
=$93,000 F
All Cookies
$4,70,000F
Requirement: (3)
Sales-mix variance= Actual pounds of all cookies sold X [Actual sales mix percentage-- Budgeted sales mix
percentage] X Budgeted contribution margin per pound.
The Sales-mix variances are:
Chocolate chip
=[0.48-0.45] X 1,20,000 X $20
=$72,000 F
Oatmeal
=[0.15-0.25] X 1,20,000 X $23
=$2,76,000UF
Coconut
=[ 0.08-0.10] X 1,20,000 X $26
=$62,400 UF
White Chocolate
=[0.110.05] X 1,20,000 X $30
=$2,16,000 F
Macadamia Nut
=[0.18-0.15] X 1,20,000 X $31
=$1,11,600 F
All Cookies
$61,200F
Actual Sales Mix:
Chocolate chip
57,600/1,20,000
48%
Oatmeal
18,000/1,20,000
15%
Coconut
9,600/1,20,000
8%
Budgeted Sales Mix:
Chocolate chip
45,000/1,00,000
45%
Oatmeal
25,000/1,00,000
25%
Coconut
10,000/1,00,000
10%
Requirement: (4)
Parle shows a favorable sales quantity variance because it sold more cookies in total than budgeted. Together
with the higher quantities, Parle also sold more of the high margin White Choc olate and Macadamia Nut
cookies relative to the budgeted mix- hence, Parle also showed a favorable total sales mix variance.
Requirement: (5)
Budgeted CM per
Budgeted Sales
Budgeted
pound
Volume in
Contribution
pounds
Margin
Chocolate chip
$20
45,000
$9,00,000
Oatmeal
23
25,000
5,75,000
Coconut
26
10,000
2,60,000
White Chocolate
30
5,000
1,50,000
Macadamia Nut
31
15,000
4,65,000
All Cookies
1,00,000
$23,50,000
Contribution Margin per unit= $23,50,000/1,00,000= $23,50
Market share variance=
Actual market size in units X [Actual market share-- Budgeted market share] X Budgeted contribution
margin per composite unit for budgeted mix
= 9, 60,000 X [0.125- 0.10] X 23.05
Page 75 of 76

=$5, 64,000 F
Market size variance=
[Actual market size in units- Budgeted market size in units] X Budgeted market share X Budgeted cm
per composite unit for budgeted mix.
= [9,60,000-10,00,000] X0.10 X 23.05
=$94,000 UF
Actual Market share: 1,20,000/9,60,000 units = 0.125
Budgeted market share: 1,00,000 units/ 10,00,000 units =0.10
Actual market size
Budgeted market size
Static Budget: Budgeted market size
X Actual market share

X Budgeted average contribution Margin per unit.
X Budgeted contribution margin per unit, X Budgeted
9, 60,000 X .125 X $23.05
=$28, 20, 000
9, 60,000 X .10 X $23.05

=$22, 56,000
10, 00,000 X .10 X $23.05

$23, 50,000
Market size Var $94,000 U
Sales quantity- Variance=$4, 0,000 F
Requirement: (6)
By increasing its actual market share from the 10% budgeted to the actual 12.50%, Parle has a favorable
market share variance of $5, 64,000. There is a smaller offsetting unfavorable market size variance of $94,000
due to the 40,000 units decline in the total market from 10, 00,000 budgeted to an actual 9,60,000.
Page 76 of 76

Standard Costing and The Balance Scorecard

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Standard Costing and The Balance Scorecard

Uploaded by

Copyright:

Available Formats

Standard Costing

Standard costing and the Balance Scorecard

DEPARTMENT OF ACCOUNTING & INFORMATION SYSTEM

STANDARD COSTING AND THE BALANCE SCORECARD

10.4. Standard Costing Systems and Flexible Budgeting:

Standard costing and the Balance Scorecard

Standard costing and the Balance Scorecard

Standard costing and the Balance Scorecard

Standard costing and the Balance Scorecard

Standard costing and the Balance Scorecard

10.9.ESTABLISHING COST STANDARDS

Standard prices, which are obtained from the purchasing department.

10.9.2. Direct labour standards

Each operation is studied and an allowed time computed

10.9.3. Overhead standards

Standard costing and the Balance Scorecard

Variable overhead rates are estimated by examining past relationships between

SSAP requires fixed manufacturing overheads be traced to products.

Necessary to unitize fixed overheads for stock valuation purposes.

Standard costing and the Balance Scorecard

10.10. STANDARD PRODUCT COSTS

The standard cost for direct materials is calculated as follows:

Standard costing and the Balance Scorecard

i. usage or efficiency variances

Usage or efficiency variance

Total variance = (AP AQ) (SP SQ)

Actual quantity purchased

Standard costing and the Balance Scorecard

Variance analysis involves the following process:

Standard quantity allowed

Direct materials usage variance

Actual labor hours

Direct labor rate variance

Standard labor hours

Standard costing and the Balance Scorecard

allowed at standard rate

Direct labor efficiency variance

One method of analyzing overhead variances is as follows:

Budgeted fixed overhead costs

Applied overhead costs

Standard costing and the Balance Scorecard

4. Calculate the two variable overhead variances:

fixed overhead volume variance

10.16. Variable Overhead Variances

Standard variable overhead rate

Standard costing and the Balance Scorecard

10.18. Total Variable Overhead Variance

Applied variable overhead

Variable overhead spending variance

Budgeted fixed overhead

Fixed overhead spending variance

Budgeted fixed overhead costs

Standard costing and the Balance Scorecard

Standard costing and the Balance Scorecard

Applied fixed overhead

Fixed overhead volume variance

Applied fixed overhead

Fixed overhead spending variance

Standard costing and the Balance Scorecard

Upper control limit

The control limits of the acceptable range are calculated as follows:

Direct materials price variance

Variable overhead spending variance