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:
- Calculate the material cost variance
- Calculate the material price variance
- 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:
- Material cost variance
- Material price variance
- 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