Q. 8. Standard Costing: Practical Problems and Solutions

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on August 16, 2021

This article presents three practical problems, along with solutions, for standard costing.

Problem 1

The standard cost card shows the following details relating to the materials needed to produce 1 kg of groundnut oil:

  • Quantity of groundnut oil required: 3 kg
  • Price of groundnut oil: $2.5/kg

Actual production data are given as follows:

  • Production during the month: 1,000 kg
  • Quantity of material used: 3,500 kg
  • Price of groundnut oil: $3/kg

Required:

  1. Calculate the material cost variance
  2. Calculate the material price variance
  3. Material usage variance

Solution

First, note the following:

  • Standard Quantity (SQ) = 1,000 kg of production x 3kg = 3,000 kg
  • Standard Price (SP) = $2.5/kg
  • Actual Quantity = 3,500 kg
  • Actual Price (AP) = $3/kg

Now, the variances can be calculated as follows:

(1) Material Cost Variance = SC – AC
= (SQ x SP) – (AQ x AP)
= (3,000 x 2.50) – (3,500 x 3)
= $3,000 (A)

(2) Material Price Variance = (SP-AP) x AQ
= (2.50 – 3) x 3,500
= $1,750 (A)

(3) Material Usage Variance = (SQ – AQ) x SP
= (3,000 – 3,500) x 2.50 = 1,250 (A)

Problem 2

Using the information provided, calculate:

  1. Material cost variance 
  2. Material price variance
  3. Material usage variance

A summary of the information needed to complete this task is given as follows:

  • Quantity of material purchased = 3,000 units
  • Value of material purchased = $9,000
  • Standard quantity of material required per tonne of output = 30 units
  • Standard rate of material = $2.50 per unit
  • Opening stock of materials = Nil
  • Closing stock of material = 500 units
  • Output during the period = 80 tons

Solution

As an initial step, note the following:

  • Actual quantity of material purchased = 3,000 units
  • Value of material purchased = $9,000
  • Actual price per unit = $9,000 / 3,000 units = $3
  • Standard price per unit = $2.50
  • Standard quantity = 80 tons x 30 units = 2,400 tons
  • Actual quantity = Opening stock + Purchase – Closing stock = Nil + 3,000 – 500 = 2,500 units

Now, the variances can be calculated as follows:

(1) Material Cost Variance = (SC – AC)
= (SQ x SP) – (AQ x AP)
= (2,400 x 2.5) – (2,500 x 3) = $1,500 (A)

(2) Material Price variance = (SP – AP) x AQ
= (SP – AP) x AQ
= (2.5 -3) x 2,500 = $1,250 (A)

(3) Material Usage Variance = (SQ – AQ) x SP
= (2,400 – 2,500) x 2.5 = $250 (A)

Problem 3

Calculate different labor cost variances from the following data, which cover the month of January 2019.

Budgeted Data Actual Data
Production (units) 1,000 1,200
Units Produced (per hr.) 8 6
Rate of Wages (per hr.) $8 $10
Hrs. of Unbudgeted Holidays 15
Idle Time (hrs.) 5 8

Solution

(1) Labor rate variance
= (SR – AR) – AH
= (8 – 10) x 223
= $446 (A)

(2) Labor time (or efficiency variance)
= (Standard hours of production – Actual hours of production) x Standard rate of wages
= (5 – 8) x 8
= $24 (A)

(3) Labor calendar variance
= (Unbudgeted holiday hours x Standard rate of wages)
= 15 x 8
= $120 (A)
Total Labor Cost Variance = $1,190 (A)

Verification

Labor cost variance
= (SH x SR) – (AH x AR)
= (130 x 8) – (223 x 10)
= $1,990 (A)

Notes

1. Standard hours is calculated as follows:
= (Budget units / Budgeted unit per hr.) + Budgeted idle time
= (1000 / 8) + 5 = 125 + 5 = 130 hrs.

2. Actual hours are calculated as follows:
(Actual units produced / Actual units per hour) + Actual idle time + Unbudgeted holidays per hour
= (1,200 / 6) + 8 + 15 = 200 + 8 + 5 = 223 hours

3. Standard hours for production are calculated as follows:
Standard units / Standard units per hour
= 1,000 / 8 = 125 hours

4. Actual hours for actual production are calculated as follows:
Actual units produced / Actual units per hour
= 1,200 / 6 = 200 hours

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.

1 thought on “Q. 8. Standard Costing: Practical Problems and Solutions”

  1. Thanks but I have a situation that I still don’t seem to understand.
    If there are 2,000 units expected to produce with each unit requiring; 1 hr [email protected]$5, 1kg [email protected]$10 per kg
    5,000 kg of materials purchased for $9.75
    However, only 1,950 units were produced during the period requiring; 1,900 hrs of labour totalling $10,000,
    1,875 kg of materials.
    Question is;
    How do I derive the Material Usage Variance, material price Variance and labour efficiency variance?
    Thank you and appreciate your favourable response.

    Reply

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