Standard Costs and Variances
Chapter 10
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
10-2
Standard Costs
Standards are benchmarks or “norms” for
measuring performance. In managerial accounting,
two types of standards are commonly used.
Quantity standards
specify how much of an
input should be used to
make a product or
provide a service.
Price standards
specify how much
should be paid for
each unit of the
input.
10-3
Standard Costs
Amount
Deviations from standards deemed significant
are brought to the attention of management, a
practice known as management by exception.
Standard
Direct
Labor
Direct
Material
Manufacturing
Overhead
Type of Product Cost
10-4
Variance Analysis Cycle
10-5
Setting Standard Costs
Should we use
ideal standards that
require employees to
work at 100 percent
peak efficiency?
Engineer
I recommend using practical
standards that are currently
attainable with reasonable
and efficient effort.
Managerial Accountant
10-6
Using Standards in Flexible Budgets
Standard costs per unit for direct materials, direct
labor, and variable manufacturing overhead can be
used to compute activity and spending variances.
Spending variances become more
useful by breaking them down into
quantity and price variances.
10-7
A General Model for Variance Analysis
Variance Analysis
Quantity Variance
Price Variance
Difference between
actual quantity and
standard quantity
Difference between
actual price and
standard price
10-8
A General Model for Variance Analysis
Variance Analysis
Quantity Variance
Price Variance
Materials quantity variance
Labor efficiency variance
VOH efficiency variance
Materials price variance
Labor rate variance
VOH rate variance
10-9
A General Model for Variance Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Standard Quantity
×
Standard Price
Quantity Variance
10-10
A General Model for Variance Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Standard Quantity
×
Standard Price
Quantity Variance
Actual quantity is the amount of direct
materials, direct labor, and variable
manufacturing overhead actually used.
10-11
A General Model for Variance Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Standard Quantity
×
Standard Price
Quantity Variance
Standard quantity is the standard quantity
allowed for the actual output of the period.
10-12
A General Model for Variance Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Standard Quantity
×
Standard Price
Quantity Variance
Actual price is the amount actually
paid for the input used.
10-13
A General Model for Variance Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Standard Quantity
×
Standard Price
Quantity Variance
Standard price is the amount that should
have been paid for the input used.
10-14
A General Model for Variance Analysis
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Price Variance
Standard Quantity
×
Standard Price
Quantity Variance
(AQ × AP) – (AQ × SP)
(AQ × SP) – (SQ × SP)
AQ = Actual Quantity
AP = Actual Price
SP = Standard Price
SQ = Standard Quantity
10-15
Material Variances Example
Glacier Peak Outfitters has the following direct
material standard for the fiberfill in its mountain
parka.
0.1 kg. of fiberfill per parka at $5.00 per kg.
Last month 210 kgs of fiberfill were purchased and
used to make 2,000 parkas. The material cost a
total of $1,029.
10-16
Material Variances Summary
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
210 kgs.
×
$4.90 per kg.
210 kgs.
×
$5.00 per kg.
= $1,029
Price variance
$21 favorable
= $1,050
Standard Quantity
×
Standard Price
200 kgs.
×
$5.00 per kg.
= $1,000
Quantity variance
$50 unfavorable
10-17
Material Variances Summary
Actual Quantity
×
Actual Price
210 kgs.
×
$4.90 per kg.
Actual Quantity
×
Standard Price
210 kgs.
$1,029  ×
210 kgs
$5.00per
perkg
kg.
= $4.90
= $1,029
Price variance
$21 favorable
= $1,050
Standard Quantity
×
Standard Price
200 kgs.
×
$5.00 per kg.
= $1,000
Quantity variance
$50 unfavorable
10-18
Material Variances Summary
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Standard Quantity
×
Standard Price
210 kgs.
210 kgs.
200 kgs.
×
×
0.1 kg per parka× 2,000 parkas
$4.90 per kg.
$5.00
$5.00 per kg.
= 200 per
kgs kg.
= $1,029
Price variance
$21 favorable
= $1,050
= $1,000
Quantity variance
$50 unfavorable
10-19
Material Variances:
Using the Factored Equations
Materials price variance
MPV = AQ (AP - SP)
= 210 kgs ($4.90/kg - $5.00/kg)
= 210 kgs (-$0.10/kg)
= $21 F
Materials quantity variance
MQV = SP (AQ - SQ)
= $5.00/kg (210 kgs-(0.1 kg/parka 2,000 parkas))
= $5.00/kg (210 kgs - 200 kgs)
= $5.00/kg (10 kgs)
= $50 U
10-20
Quick Check 
Zippy
Hanson Inc. has the following direct material
standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week, 1,700 pounds of material were
purchased and used to make 1,000 Zippies. The
material cost a total of $6,630.
10-21
Zippy
Quick Check 
Actual Quantity
×
Actual Price
Actual Quantity
×
Standard Price
Standard Quantity
×
Standard Price
1,700 lbs.
×
$3.90 per lb.
1,700 lbs.
×
$4.00 per lb.
1,500 lbs.
×
$4.00 per lb.
= $6,630
= $ 6,800
= $6,000
Price variance
$170 favorable
Quantity variance
$800 unfavorable
10-22
Labor Variances Example
Glacier Peak Outfitters has the following direct
labor standard for its mountain parka.
1.2 standard hours per parka at $10.00 per hour
Last month, employees actually worked 2,500
hours at a total labor cost of $26,250 to make
2,000 parkas.
10-23
Labor Variances Summary
Actual Hours
×
Actual Rate
Actual Hours
×
Standard Rate
2,500 hours
×
$10.50 per hour
2,500 hours
×
$10.00 per hour.
= $26,250
= $25,000
Rate variance
$1,250 unfavorable
Standard Hours
×
Standard Rate
2,400 hours
×
$10.00 per hour
= $24,000
Efficiency variance
$1,000 unfavorable
10-24
Labor Variances Summary
Actual Hours
×
Actual Rate
2,500 hours
×
$10.50 per hour
= $26,250
Actual Hours
×
Standard Rate
Standard Hours
×
Standard Rate
2,500 hours
2,400 hours
×  2,500 hours
×
$26,250
$10.00
per hour.
= $10.50
per hour $10.00 per hour
= $25,000
Rate variance
$1,250 unfavorable
= $24,000
Efficiency variance
$1,000 unfavorable
10-25
Labor Variances Summary
Actual Hours
×
Actual Rate
Actual Hours
×
Standard Rate
Standard Hours
×
Standard Rate
2,500 hours
2,500 hours
2,400 hours
×
×
1.2 hours per ×parka  2,000
$10.50 per hour parkas
$10.00
per hour.
$10.00 per hour
= 2,400
hours
= $26,250
= $25,000
Rate variance
$1,250 unfavorable
= $24,000
Efficiency variance
$1,000 unfavorable
10-26
Labor Variances:
Using the Factored Equations
Labor rate variance
LRV = AH (AR - SR)
= 2,500 hours ($10.50 per hour – $10.00 per hour)
= 2,500 hours ($0.50 per hour)
= $1,250 unfavorable
Labor efficiency variance
LEV = SR (AH - SH)
= $10.00 per hour (2,500 hours – 2,400 hours)
= $10.00 per hour (100 hours)
= $1,000 unfavorable
10-27
Quick Check 
Zippy
Hanson Inc. has the following direct labor
standard to manufacture one Zippy:
1.5 standard hours per Zippy at $12.00 per
direct labor hour
Last week, 1,550 direct labor hours were
worked at a total labor cost of $18,910
to make 1,000 Zippies.
10-28
Zippy
Quick Check 
Actual Hours
×
Actual Rate
Actual Hours
×
Standard Rate
1,550 hours
×
$12.20 per hour
1,550 hours
×
$12.00 per hour
= $18,910
= $18,600
Rate variance
$310 unfavorable
Standard Hours
×
Standard Rate
1,500 hours
×
$12.00 per hour
= $18,000
Efficiency variance
$600 unfavorable
10-29
Variance Analysis and Management
by Exception
How do I know
which variances to
investigate?
Larger variances, in
dollar amount or as
a percentage of the
standard, are
investigated first.
10-30
A Statistical Control Chart
Warning signals for investigation
Favorable Limit
•
Desired Value
•
•
•
•
•
•
Unfavorable Limit
1
2
3
4
5
6
7
Variance Measurements
•
8
•
9
10-31
Advantages of Standard Costs
Management by
exception
Promotes economy
and efficiency
Advantages
Simplified
bookkeeping
Enhances
responsibility
accounting
10-32
Potential Problems with Standard Costs
Emphasizing standards
may exclude other
important objectives.
Standard cost
reports may
not be timely.
Invalid assumptions
about the relationship
between labor
cost and output.
Potential
Problems
Favorable
variances may
be misinterpreted.
Emphasis on
negative may
impact morale.
Continuous
improvement may
be more important
than meeting standards.