Management Advisory Services: Standard Costing and Variance Analysis

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Standards
Standard is a measure of acceptable performance established by a management as a guide in making
economic decisions.

Standards and Budgets

In concept, standards and budgets are essentially the same. Both are predetermined costs and both
contribute significantly to management planning and control.
 A standard is a unit amount, whereas a budget is a total amount.
 Standard costs may be incorporated into a cost accounting system.

Standard costs offer the following advantages to an organization:

 They facilitate management planning.
 They promote greater economy by making employees more “cost conscious.”
 They are useful in setting selling prices.
 They contribute to management control by providing a basis for the evaluation of cost control.
 They are useful in highlighting variances in management by exception.
 They simplify the costing of inventories and reduce clerical costs.

Standard Costing Control Loop

1. Establish standards
2. Measure actual performance
3. Compare actual performance with standards
4. Analyze the variance
5. Investigate the variances that must be investigated
6. Take corrective action when needed.

Management by Exception
Only those variances that are material or significant in amount whether favorable or unfavorable should be
investigated.

Setting Standard Costs

Setting standards requires input from all persons who have responsibility for costs and quantities. Standards
may be set at one of two levels.
 Ideal standards represent optimum levels of performance under perfect operating conditions.
 Normal standards represent efficient levels of performance that are attainable under expected
operating conditions.

To establish the standard cost of producing a product, it is necessary to establish standards for each
manufacturing cost element—direct materials, direct labor, and manufacturing overhead. The standard for
each element is derived from a consideration of the standard price to be paid and the standard quantity to be
used.

Standard costing can be used by

1. Manufacturing firms
2. Service firms
3. Non-for-profit organization

Direct Materials
The direct materials price standard is the cost per unit of direct materials that should be incurred.
 This standard is based on the purchasing department’s best estimate of the cost of raw materials.
 This standard should include an amount for related costs such as receiving, storing, and handling.

The direct materials quantity standard is the quantity of direct materials that should be used per unit of
finished goods.
 This standard is expressed as a physical measure, such as pounds, barrels, or board feet.
 This standard should include allowances of unavoidable waste and normal storage.
 The standard direct materials cost per unit is the standard direct materials price times the standard
direct materials quantity.

Direct Labor
The direct labor price standard is the rate per hour that should be incurred for direct labor.
 This standard is based on current wage rates adjusted for anticipated changes, such as cost of living
adjustments included in many union contracts.
 This standard generally includes employer payroll taxes and fringe benefits.

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The direct labor quantity standard is the time that should be required to make one unit of the product.
 This standard is especially critical in labor-intensive companies.
 In setting this standard, allowances should be made for rest periods, cleanup, machine setup and
machine downtime.

The standard direct labor cost per unit is the standard direct labor rate times the standard direct labor
hours.

Manufacturing Overhead
The manufacturing overhead standard is based on a standard predetermined overhead rate.
 This overhead rate is determined by dividing budgeted overhead costs by an expected standard
activity index.
 The standard manufacturing overhead rate per unit is the predetermined overhead rate times the
activity index quantity standard.

Variances
A variance is the difference between total actual costs and total standard costs. An unfavorable variance
suggests that too much was paid for materials, labor, and manufacturing overhead or that there were
inefficiencies in using materials, labor, and manufacturing overhead. Favorable variances indicate efficiencies
in incurring costs and in using materials, labor, and manufacturing overhead.

Analyzing variances begins with a determination of the cost elements that comprise the variance. For each
manufacturing cost element, a total peso variance is computed. Then this variance is analyzed into a price
variance and a quantity variance.

Direct Materials Variances

The formulas for the direct materials variances are:

Total Materials = Actual Quantity Standard Quantity

Variance x Actual Price – x Standard Price
(TMV) (AQ) x (AP) (SQ) x (SP)

Materials Price = Actual Quantity Actual Quantity

Variance x Actual Price – x Standard Price
(MPV) (AQ) x (AP) (AQ) x (SP)

Materials = Actual Quantity Standard Quantity

Quantity Variance x Standard Price – x Standard Price
(MQV) (AQ) x (SP) (SQ) x (SP)

A variance matrix can be used in analyzing variances. In such cases, the formulas for each cost element are
computed first and then the variances.

Materials price variances are usually the responsibility of the purchasing department, whereas materials
quantity variances are usually attributable to the production department.

Direct Labor Variances

The formulas for the direct labor variances are:

Total Labor = Actual Hours Standard Hours

Variance x Actual Rate – x Standard Rate
(TLV) (AH) x (AR) (SH) x (SR)

Labor Price = Actual Hours Actual Hours

Variance x Actual Rate – x Standard Rate
(LPV) (AH) x (AR) (AH) x (SR)

Labor Quantity = Actual Hours Standard Hours

Variance x Standard Rate – x Standard Rate
(LQV) (AH) x (SR) (SH) x (SR)

Labor price variances usually result from paying workers higher wages than expected and/or misallocation of
workers. Labor quantity variances relate to the efficiency of the workers and are the responsibility of the
production department.

Manufacturing Overhead Variances

The total overhead variance is the difference between the actual overhead costs and overhead costs applied
based on standard hours allowed. To find the total overhead variance in a standard costing system, we
determine the overhead costs applied based on standard hours allowed.

Standard hours allowed are the hours that should have been worked for the units produced. The total
overhead variance formula is as follows:
Total Overhead = Actual Overhead

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Variance Overhead – Applied

One reason for an overhead variance relates to over- or under-spending on overhead items. Generally the
responsibility for these variances rests with the production department. The overhead variance can also result
from inefficient use of overhead. The responsibility for these variances rests on either the production or sales
departments.

Reporting of Variances
All variances should be reported to appropriate levels of management as soon as possible. Variance reports
facilitate the principle of “management by exception.” Rather than analyze every variance, top management
will normally look for significant variances.

Statement Presentation of Variances

In income statements prepared for management under a standard cost accounting system, cost of goods sold
is stated at standard cost and the variances are separately disclosed. In financial statements prepared for
stockholders and other external users, standard costs may be used.

Overhead Variances
Analysis of Overhead Variance

2-way Analysis
Controllable variance
Actual Factory Overhead xx
Less: Budget allowed for standard hours
Budgeted fixed overhead xx
Variable overhead (SH x SVR) xx xx xx

Volume variance
Budget allowed for standard hours xx
Less: Standard factory overhead xx xx
Total overhead variance xx

3-way Analysis
Spending variance
Actual factory overhead xx
Less: Budget allowed for actual hours
Budgeted fixed overhead xx
Variable overhead (AH x SVR) xx xx xx

Efficiency variance
Budget allowed for actual hours
Less: Budget allowed for standard hours
Budgeted fixed overhead xx
Variable overhead (SH x SVR) xx xx xx

Volume variance
Budget allowed for standard hours xx
Less: Standard factory overhead xx xx
Total overhead variance xx

4-way Analysis
Variable spending or rate variance xx
Variable efficiency or time variance xx
Fixed spending or budget variance xx
Volume or capacity variance xx
Total overhead variance xx

Materials Price, Mix and Yield Variance Analysis

When the production process involves combining or mixing several materials in varying proportions, the 3-way
analysis of Price, Mix and Yield variances is used.

Material Cost Variance = Actual Material Cost - Standard Materials Cost

Actual materials cost is the total actual cost of the several materials used.
Standard material costs is actual production x average standard output cost

Analysis:
Price variance = (AP – SP) x Actual quantity
Mix variance = Total actual quantities at standard prices
– Total actual input at average standard input cost
Yield variance = Total actual input at average standard input cost
– Standard cost (actual output x ave. std output cost)

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KAISEN COSTING AND TARGET COSTING

Kaizen costing is concerned with reducing costs of existing products and processes by reducing non-value-
added costs.

A kaizen standard reflects the planned improvement for the upcoming period and is a currently attainable
standard.

Target Costing
A target cost is the difference between the sales price needed to capture a predetermined market share and
the desired per-unit profit. When the target cost is less than what is currently achievable, management
typically uses three cost reduction methods to move the actual cost toward the target cost.

Target costing is often referred to as a profit planning technique.

Target costing is more of a long-term approach to cost reduction whereas kaizen costing is a more continuous,
short-term approach to cost reduction.

LET’S REVIEW
Theory
1. What is a standard cost?
a. The total number of units times the budgeted amount expected
b. Any amount that appears on a budget
c. The total amount that appears on the budget for product costs
d. The amount management thinks should be incurred to produce a good or service

2. The difference between a budget and a standard is that

a. a budget expresses what costs were, while a standard expresses what costs should be.
b. a budget expresses management's plans, while a standard reflects what actually happened.
c. a budget expresses a total amount, while a standard expresses a unit amount.
d. standards are excluded from the cost accounting system, whereas budgets are generally
incorporated into the cost accounting system.

3. Which of the following statements is false?

a. A standard cost is more accurate than a budgeted cost.
b. A standard is a unit amount.
c. In concept, standards and budgets are essentially the same.
d. The standard cost of a product is equivalent to the budgeted cost per unit of product.

4. Budget data are not journalized in cost accounting systems with the exception of
a. the application of manufacturing overhead.
b. direct labor budgets.
c. direct materials budgets.
d. cash budget data.

5. It is possible that a company's financial statements may report inventories at

a. budgeted costs.
b. standard costs.
c. both budgeted and standard costs.
d. none of these.

6. Using standard costs

a. makes employees less “cost-conscious.”
b. provides a basis for evaluating cost control.
c. makes management by exception more difficult.
d. increases clerical costs.

7. If standard costs are incorporated into the accounting system,

a. it may simplify the costing of inventories and reduce clerical costs.
b. it can eliminate the need for the budgeting process.
c. the accounting system will produce information that is less relevant than the historical cost
accounting system.
d. approval of the stockholders is required.

8. Standard costs
a. may show past cost experience.
b. help establish expected future costs.
c. are the budgeted cost per unit in the present.
d. all of these.

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9. Which of the following statements about standard costs is false?

a. Properly set standards should promote efficiency.
b. Standard costs facilitate management planning.
c. Standards should not be used in "management by exception."
d. Standard costs can simplify the costing of inventories.

10. Which of the following is not considered an advantage of using standard costs?
a. Standard costs can reduce clerical costs.
b. Standard costs can be useful in setting prices for finished goods.
c. Standard costs can be used as a means of finding fault with performance.
d. Standard costs can make employees "cost-conscious."

11. If a company is concerned with the potential negative effects of establishing standards, it should
a. set loose standards that are easy to fulfill.
b. offer wage incentives to those meeting standards.
c. not employ any standards.
d. set tight standards in order to motivate people.

12. The two levels that standards may be set at are

a. normal and fully efficient.
b. normal and ideal.
c. ideal and less efficient.
d. fully efficient and fully effective.

13. The most rigorous of all standards is the

a. normal standard.
b. realistic standard.
c. ideal standard.
d. conceivable standard.

14. Most companies that use standards set them at

a. the normal level.
b. a conceivable level.
c. the ideal level.
d. last year's level.

15. A managerial accountant

1. does not participate in the standard setting process.
2. provides knowledge of cost behaviors in the standard setting process.
3. provides input of historical costs to the standard setting process.
a. 1
b. 2
c. 3
d. 2 and 3

16. The cost of freight-in

a. is to be included in the standard cost of direct materials.
b. is considered a selling expense.
c. should have a separate standard apart from direct materials.
d. should not be included in a standard cost system.

17. The direct materials quantity standard should

a. exclude unavoidable waste.
b. exclude quality considerations.
c. allow for normal spoilage.
d. always be expressed as an ideal standard.

18. The direct labor quantity standard is sometimes called the direct labor
a. volume standard.
b. effectiveness standard.
c. efficiency standard.
d. quality standard.

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Problems
1. OCTOBER 2017 CPA PASSER Company uses a standard cost system and sets predetermined overhead
rates on the basis of direct labor-hours. The following data are taken from the Company’s budget for
the current year.

Denominator activity (direct labor-hours) 30,000

Variable manufacturing overhead cost P63,000
Fixed manufacturing overhead cost P174,000

The standard cost card for the company’s only product is given below;

Direct materials, 5 yards @ P3.25 per yard P16.25

Direct labor, 2 DLHs @ P9.25 per DLH 18.50
Manufacturing overhead 15.80
Standard cost per unit P50.55

During the year, the Company produced 15,700 units of product is given below:

Materials purchased 79,000 yards @ P3.30 per yard P260,700

Materials used in production (in yards) 78,600
Direct labor cost incurred 31,100 DLHs @ 9:30 per DLH P289,230
Variable manufacturing overhead cost incurred P68,500
Fixed manufacturing overhead cost incurred P177,500

Required:
a. Redo the standard cost card in a clearer, more usable format by detailing the variable and fixed
overhead cost elements.
b. Prepare an analysis of the variances for materials and labor for the year.
c. Prepare an analysis of the variances for variable and fixed overhead for the year.

Materials and Labor Variance

1. TIWALA LANG Company manufactures tables with vinyl tops. For each table, 6 square feet of vinyl at
a standard cost of P1.30/sq.ft are required. A production run of 1,000 tables in January, resulted in
usage of 6,400 square feet of vinyl at a cost of P7,680.
a. The total material cost variance is
b. The material usage(quantity) variance is
c. The materials price (on usage) variance is

2. DASAL LANG TALAGA Company uses 5 pieces of “72 x 36” metal at P12 per piece as standard for the
production of non-rust vats. During one month’s operations, 4,800 vats were produced at a cost of
P11.50 per piece for 25,000 actual pieces of materials. What is the total materials cost variance?

3. Component DC-10 is manufacturing in batches of 100 cylinders by NAKUHA SA TIYAGA Company, the
standard material input being 250 gallons (per batch) of material X at P1.20 per gallon. During
November, 30 batches of DC-10 were produced from an input of 7,450 gallons of material X which
cost P9,089.
a. The materials quantity variance is
b. The materials price variance is

4. PARA SA PANGARAP Company installs single roofs on residential houses. The standard material cost
for a type of R-house is P1,250 based on 1,000 units of materials. During April, the company installed
20 type-R houses using 22,000 units of materials at a cost of P1.20 per unit of material
a. The materials quantity variance is
b. The materials price variance is

5. During the month of June, UMAASA SI NANAY AT TATAY Manufacturers produced 1,500 units. Actual
direct labor hour require 4,580 hours at an actual total cost of P34,808. According to the standard cost
card, 3 hours of direct labor are required per unit of product at a standard cost of P8 per labor hour.
a. What is the total labor cost variance for June?
b. What is the labor efficiency variance for June
c. What is the labor rate variance for June?
d. What is the standard cost of labor per unit of product?

6. MAY PAAARALING KAPATID Company uses a standard cost system. According to the standards, 4
units must be produced in an hour of direct labor, with a standard labor rate of P14.70 per hour.
During a given month, 1,600 units were produced requiring 360 hours at a total cost of P5,400.
a. How much is the labor efficiency variance?
b. How much is the labor rate variance?

7. Actual production 12,000

Standard labor cost per unit of product P6.25
Actual wages paid, 29,800 DLH @ P2.55 per hour (this is 102% of the standard labor rate per hour)
a. The labor efficiency variance

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b. The labor rate variance

8. PANGARAP KO TALAGA ITO Company makes one product and uses a standards cost system. The
following data are accumulated for the month of July:
Standard Actual Budget
Direct labor hours 98,000 95,000 100,000
Direct labor cost P294,000 P284,500 P300,000
Production (units) 38,000 38,000 40,000
What is the labor rate variance for July?

9. Actual quantity of materials used 20,000

Actual cost of materials used P40,000
Standard cost per unit of materials used P 2.10
Materials quantity variance P420U
a. The total materials cost variance is
b. What is the materials price variance?

10. Standard cost of materials per gallon P3.00

Standard cost of materials for the actual production P15,000
Actual gallons consumed 4,800
Materials price variance P2,400U
a. The total materials cost variance is
b. The materials usage variance is

11. The following information concerning material 088 is available:

Actual cost of materials for actual production P26,400
Standard cost of materials per unit of product P15.75
Materials quantity variance P1,260U
Materials price variance P1,320U
1.5 pounds of material 088 are required for each unit of product. How many units of product were
actually produced?

12. Materials used during April 6,000 lbs

Materials inventory, April 1 2,000 lbs
Materials inventory, April 30 1,500 lbs
Standard price of materials P1.10/lb
Actual purchase price of materials P1.20/lb
a. What is the material price variance (based on purchases)?
b. What is the material price variance (based on usage)?

13. The standard cost of material VX is P13.50 per pound. During the month of August, 4,500 pounds of
material VX were purchased at a total cost of P60,975. In addition, 3,900 pounds of VX were used
during the month; however, the standard quantity allowed for the actual production is 3,800 pounds.
a. How much is the material price (on purchases) variance?
b. How much is the material price (on usage) variance?
c. What is the material usage (quantity) variance?

14. The management of MAGSUMIKAP KA Company set a standard on material “XOX” at P25 per unit.
Actual cost of this material fluctuated during the period. Of the 10,000 units purchased, 50% had a
cost of P24.70/unit, 20% were purchased at a price of P24.90/unit and the remainder had a cost of
P25.60/unit. What is the materials purchase price variance?

15. MAY AWA ANG DIYOS Company has determined that when Ditch Digging equipment is used, the labor
time per foot of underground line installed should be five minutes and that the standard hourly rate
should be P4. In June, two ditch digging equipment units installed 4,800 feet of line in 350 hours at a
total labor cost of P1,435. The labor cost variance is

OVERHEAD VARIANCE ANALYSIS

Problem 1
Standard Actual Budget
Direct labor hours 4,200 4,000 4,500
Variable factory overhead P1,680 P1,600 P1,800
Fixed factory overhead 840 900 900

1. The total overhead variance is

2. The variable overhead controllable variance is
3. The fixed overhead volume variance is

Problem 2
Budgeted overhead at normal capacity P156,000
Budgeted overhead based on standard hours 150,000
Standard overhead applied for the actual production 136,500

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Actual overhead for the actual production 147,000

1. The total overhead variance is

2. The overhead controllable variance is
3. The overhead volume variance is

Problem 3
Normal capacity 150,000 DL hours
Actual capacity 125,000 DL hours
Standard hours allowed 122,500 DL hours
Standard fixed rate P0.70/DL hour
Standard variable rate P0.40/DL hour
Actual overhead rate P1.11/DL hour

1. The total overhead variance is

2. The overhead controllable variance is
3. the overhead volume variance is

Problem 4
Standard fixed overhead rate per hour P1.00
Standard variable overhead rate per hour P4.00
Budgeted direct labor hours per month 40,000
Actual direct labor hours during August 39,500
Standard direct labor hours for the actual production 39,000
Total actual overhead for August P193,000

1. The total overhead variance for August is

2. The overhead controllable variance is
3. The overhead volume variance is

Problem 5
Total actual overhead P12,600
Budgeted fixed overhead P 3,300
Standard variable overhead rate P3/DLH
Standard hours allowed 3,500
Normal capacity (in DLH) 3,300

1. What is the variable overhead controllable variance?

2. What is the fixed overhead volume variance?

EXERCISES

Problem 1
Amakin Company uses both standards and budgets. The company estimates that production for the year will
be 250,000 units of Product Fast. To produce these units of Product Fast, the company expects to spend
P600,000 for materials and P800,000 for labor.

Compute the estimates for (a) a standard cost and (b) a budgeted cost.

Problem 2
Labor data for making one pound of finished product in Montecillo Company are as follows: (1) Price—hourly
wage rate P10.00, payroll taxes P0.80, and fringe benefits P1.20. (2) Quantity—actual production time 1.1
hours, rest periods and clean up 0.25 hours, and setup and downtime 0.15 hours.

Compute the following.

(a) Standard direct labor rate per hour.
(b) Standard direct labor hours per pound.
(c) Standard cost per pound.

Problem 3
During March, Estrada Company purchases and uses 6,600 pounds of materials costing P26,730 to make
3,000 Estradas. Estrada Company’s standard material cost per Estrada is P8 (2 pounds of material × P4.00).
Compute the total, price, and quantity materials variances for Estrada Company for March.

Problem 4
Fameronag Co. incurred direct labor costs of P48,000 for 6,000 hours. The standard labor cost was P48,600.
During the month, Fameronag assigned 6,000 direct labor hours costing P48,600 to production. The standard
hours were 6,200. Journalize the transactions for Fameronag Co. to account for this activity.

Problem 5
Overhead data for Halo Inc. are given in BE 193. In addition, the flexible manufacturing overhead budget
shows that budgeted costs are P3.50 variable per direct labor hour and P75,000 fixed. Compute the
manufacturing overhead controllable variance.

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Problem 6
Hipolito, Inc. manufactures one product called tybos. The company uses a standard cost system and sells each
tybo for P8. At the start of monthly production, Hipolito estimated 8,000 tybos would be produced in March.
Hipolito has established the following material and labor standards to produce one tybo:
Standard Quantity Standard Price
Direct materials 2.5 pounds P3 per pound
Direct labor 0.6 hours P10 per hour

During March 2009, the following activity was recorded by the company relating to the production of tybos:

1. The company produced 7,500 units during the month.

2. A total of 20,000 pounds of materials were purchased at a cost of P55,000.
3. A total of 20,000 pounds of materials were used in production.
4. 4,000 hours of labor were incurred during the month at a total wage cost of P44,000.

Calculate the following variances for March for Hipolito, Inc.

(a) Materials price variance
(b) Materials quantity variance
(c) Labor price variance
(d) Labor quantity variance

Problem 7
Malabuyoc Company has developed the following standard costs for its product for 2009:
MALABUYOC COMPANY
Standard Cost Card
Product A
Cost Element Standard Quantity × Standard Price = Standard Cost
Direct materials 4 pounds P3 P12
Direct labor 3 hours 8 24
Manufacturing overhead 3 hours 4 12
P48
The company expected to produce 25,000 units of Product A in 2009 and work 75,000 direct labor hours.

Actual results for 2009 are as follows:

 26,000 units of Product A were produced.
 Actual direct labor costs were P630,800 for 76,000 direct labor hours worked.
 Actual direct materials purchased and used during the year cost P283,500 for 105,000 pounds.
 Actual variable overhead incurred was P130,000 and actual fixed overhead incurred was P170,000.

Compute the following variances showing all computations to support your answers. Indicate whether the
variances are favorable or unfavorable.
(a) Materials quantity variance.
(b) Total direct labor variance.
(c) Direct labor quantity variance.
(d) Direct materials price variance.
(e) Total overhead variance.

Problem 8
Kamus Company developed the following standard costs for its product for 2009:
KAMUS COMPANY
Standard Cost Card

Cost Elements Standard Quantity × Standard Price = Standard Cost

Direct materials 4 pounds P 5 P20
Direct labor 2 hours 10 20
Variable overhead 2 hours 4 8
Fixed overhead 2 hours 2 4
P52
The company expected to work at the 60,000 direct labor hours level of activity and produce 30,000 units of
product.

Actual results for 2009 were as follows:

 28,400 units of product were actually produced.
 Direct labor costs were P546,000 for 56,000 direct labor hours actually worked.
 Actual direct materials purchased and used during the year cost P554,400 for 115,500 pounds.
 Total actual manufacturing overhead costs were P340,000.

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Compute the following variances for Kamus Company for 2009 and indicate whether the variance is favorable
or unfavorable.
1. Direct materials price variance.
2. Direct materials quantity variance.
3. Direct labor price variance.
4. Direct labor quantity variance.
5. Overhead controllable variance.
6. Overhead volume variance.
7. Variable spending variance.
8. Variable efficiency variance.

Problem 9
Colendra, Inc. manufactures widgets for distribution. The standard costs for the manufacture of widgets
follow:
Standard Costs Actual Costs
Direct materials 3 lbs. per widget at 15,500 lbs. at P34
P35 per pound per pound

Direct labor 2.5 hours per widget 11,250 hours at

at P11 per hour P11.80 per hour

Factory overhead Variable cost, P24/widget P120,750 variable cost

Fixed cost, P40/widget P190,625 fixed cost

Budgeted factory overhead was P320,000. Overhead applied is based on widgets produced. The company
estimated that 5,000 widgets would be produced; however, only 4,800 were produced.

Calculate the following amounts.

1. Rate at which total factory overhead is applied
2. Materials price variance
3. Total materials variance
4. Overhead volume variance
5. Overhead controllable variance

Problem 10
Zarah Company manufactures aluminum baseball bats that it sells to university athletic departments. It has
developed the following per unit standard costs for 2009 for each baseball bat:
Manufacturing
Direct Materials Direct Labor Overhead
Standard Quantity 2 Pounds (Aluminum) 1/2 hour 1/2 hour
Standard Price P4.00 P10.00 P6.00
Unit Standard Cost P8.00 P5.00 P3.00

In 2009, the company planned to produce 80,000 baseball bats at a level of 40,000 hours of direct labor.

Actual results for 2009 are presented below:

1. Direct materials purchases were 164,000 pounds of aluminum which cost P688,800.
2. Direct materials used were 145,000 pounds of aluminum.
3. Direct labor costs were P379,270 for 39,100 direct labor hours actually worked.
4. Total manufacturing overhead was P235,000.
5. Actual production was 76,000 baseball bats.

Instructions
(a) Compute the following variances:
1. Direct materials price.
2. Direct materials quantity.
3. Direct labor price.
4. Direct labor quantity.
5. Total overhead variance.
(b) Prepare the journal entries to record the transactions and events in 2009.

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MATERIAL MIX, PRICE AND YIELD VARIANCE ANALYSIS

1. Energy Products produces a gasoline additive, Gas Gain. This product increases engine efficiency and
improves gasoline mileage by creating a more complete burn in the combustion process. Careful
controls are required during the production process to ensure that the proper mix of input chemicals
and that evaporation is controlled. If the controls are not effective, there can be loss of output and
efficiency. The standard cost of producing a 500-liter batch of Gas Gain is P135. The standard material
mix and related standard cost of each chemical used in a 500-liter batch are as follows:

Chemicals Mix SP Standard Cost

Echol 200 liters P20.00 P4,000
Protex 100 liters 42.50 4,250
Benz 250 liters 15.00 3,750
CT-40 50 liters 30.00 1,500

The quantities of chemicals purchased and used during the current production period are shown in the
schedule below. A total of 140 batches of Gas Gain were manufactured during the current production
period. Energy Products determines its cost and chemical usage variations at the end of each
production period.

Chemical Quantity Used

Echol 26,600 liters
Protex 12,880 liters
Benz 37,800 liters
CT-40 7,140 liters

Required: Compute the total materials usage variance and then break down this variance into its mix
and yield components.

2. Banal Candle Co. manufactures candles in various shapes, sizes, colors and scents. Depending on the
orders received, not all candles require the same amount of color, dye, or scent materials. Yields also
vary, depending upon the usage of beeswax or synthetic wax. Standards ingredient for 1,000 pounds
of candles are:
Standard Mix Standard Cost per Pound
Input:
Beeswax 200 lbs 1.00
Synthetic 840 lbs 0.20
Colors 7 lbs 2.00
Scents 3 lbs 6.00
Totals 1,050 lbs 9.20
Standards 1,000 lbs
Price variances are charged off at the time of purchase. During January, the company was busy
manufacturing red candles for Valentine’s Day. Actual production then was:
Input In pounds
Beeswax 4,100
Synthetic 13,800
Colors 2,200
Scents 60
Total 20,160
Actual output 18,500

Prepare a schedule to compute materials mix and yield variance.

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