1. Chapter Eleven VARIANCE ANALYSIS AND STANDARD COSTING

3. Standard Costing  The cost that has been pre-determined after considering other factors.  Those are estimated costs which are considered to be ideal for each of the cost component ( direct material, direct labor and factory overhead ).  The standard cost system enable the management to determine how much a product should cost.

7. Variance Analysis  Variances are the difference between the actual manufacturing cost and the standard cost at the actual level of production.  The significance of the variance for each element in manufacturing cost needs further analysis to determine the corrective actions.

8. Calculation of variance  Direct material  Direct labor  Factory overhead

9. Standard Cost  The expected cost per unit product Illustration 1: The followings are the standard cost for each unit (bottle) of peanut butter produced by Syarikat Sedap Selalu :

10. Standard Standard Standard Cost Price Usage RM Direct material: Peanut Butter Sugar Direct labor: Machine operator Packaging Factory OH: Variable costs Fixed costs Standard cost per unit 2.80/kg 0.15kg 0.42 2.70/kg 0.10kg 0.27 1.20/kg 0.25kg 0.30 0.99 4.00/hour 0.02hour 3.00/hour 0.01hour 0.08 0.03 0.11 5.00/hour 0.01hour 12.00/hour 0.01hour 0.05 0.12 0.17 1.27

11. If Syarikat Sedap Selalu produces 10,000 bottles of peanut butter, the expected total cost would be: Direct material Direct labor Factory overhead Total cost 10,000 x 0.99 9,900 10,000 x 0.11 10,000 x 0.17 1,100 1,700 12,700

12. Calculation of variance Cost element Actual cost Standard cost Variance Direct material Direct labor Factory overhead 9,900 1,100 1,700 9,500 400 (F) 1,050 50 (F) 2,000 300 (U) F = (Favorable) U = (Unfavorable)

13. Direct Material Variance Direct Material Price Variance Direct Material Usage (Quantity) Variance  To measure the difference between the actual cost and the standard cost of direct materials.

14. 1. Direct material price variance (Actual Price x Actual Quantity) - (Standard Price x Actual Quantity) Simplified to be: Actual Quantity (Actual Price – Standard Price) AQ ( AP – SP )

15. 2. Direct material usage (quantity) variance (Standard Price x Actual Quantity) - (Standard Price x Standard Quantity) Simplified to be: Standard Price (Actual Quantity – Standard Quantity) SP ( AQ – SQ )

16. Actual Price x Actual Qty Std Price x Actual Qty Std Price x Std Qty Price Variance Usage Variance Direct material variance

17. Illustration 2 The followings are the actual price and quantity for direct material used by the company in producing 10,000 bottles of peanut butter: Actual Price Actual Quantity Peanut RM2.70/kg 1,400kg Butter RM2.505/kg 1,200kg Sugar RM1.18/kg 2,300kg

18. Direct material price variance: Peanut: 1,400 (2.70 – 2.80) = 140 (F) Butter: 1,200 (2.505 – 2.70) = 234 (F) Sugar: 2,300 (1.18 – 1.20) = 46 (F) 420 (F) AQ ( AP – SP )

19. Direct material usage variance: Peanut: 2.80 (1,400 – 1,500) = 280 (F) Butter: 2.70 (1,200 – 1,000) = 540 (U) Sugar: 1.20 (2,300 – 2,500) = 240 (F) 20 (U) Therefore , Total direct material variance = 420 (F) + 20 (U) = 400 (F) SP ( AQ – SQ )

20. Direct Labor Variance Direct Labor Rate Variance Direct Labor Efficiency Variance  Measures the differences between the actual cost and the cost that suppose to be paid to the labor.

21. 1. Direct Labor Rate Variance (Actual Hour x Actual Rate) - (Actual Hour x Standard Rate) Simplified to be: Actual Hour ( Actual Rate – Standard Rate ) AH ( AR – SR )

22. 2. Direct Labor Efficiency Variance (Standard Rate x Actual Hour) - (Standard Rate x Standard Hour) Simplified to be: Standard Rate ( Actual Hour – Standard Hour ) SR ( AH – SH )

23. Actual Hour x Actual Rate Std Hour x Actual Rate Std Hour x Std Rate Rate Variance Efficiency Variance Direct Labor Variance

24. Illustration 3: The followings are actual rate and labor hour in the production of 10,000 bottles of peanut butter: Actual labor rate Actual labor hour Machine operator RM3.90/hour 190 hours Packaging RM2.81/hour 110 hours

25. Direct Labor Rate Variance: Machine Operator: 190 (3.90 – 4.00 ) = 19 (F) Packaging: 110 (2.81 – 3.00) = 21 (F) 40 (F) AH ( AR – SR )

26. Direct Labor Efficiency Variance: Machine Operator: 4.00 (190 – 200) = 40 (F) Packaging: 3.00 (110 – 100) = 30 (U) 10 (F) SR ( AH – SH ) Therefore, total direct labor variance: = 40 (M) + 10 (M) = 50 (M)

27. Factory Overhead Variance Variable Factory Overhead Controllable Variance Fixed Factory Overhead Volume Variance  Measures the differences between the actual cost and the supposed related cost of factory overhead.

34. End of The Syllabus Good Luck For Your Final Exam