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

Frequently Asked Questions

What is standard costing?

Standard costing is a process of costing whereby the standards of output and inputs are set in advance and actual results are compared with these standards in order to ascertain whether there has been any over or under absorption of costs.

How is standard costing used?

Standard costing is used as a tool for performance assessment, decision making, and planning. It can help identify areas where improvements need to be made, and it can also help to assess the financial impact of changes in production levels.

What are the benefits of using standard costing?

The main benefits of using standard costing are that it can help to improve operational efficiency, it can provide a basis for budgetary control, and it can help to ensure that products are being produced at the most cost-effective rate.

What are the drawbacks of using standard costing?

One of the main drawbacks of using standard costing is that it can be time-consuming and resource-intensive to set up and maintain. In addition, it can be difficult to accurately estimate standards, which can lead to inaccurate costing information.

What are some common mistakes made when implementing standard costing?

One of the most common mistakes made when implementing standard costing is failing to accurately estimate the standards. This can lead to inaccurate costing information which can, in turn, lead to poor decision making. Additionally, another common mistake is failing to involve all relevant stakeholders in the process, which can lead to a lack of understanding and buy-in. Finally, another mistake that is often made is failing to allocate adequate resources to the process, which can lead to it being time-consuming and resource-intensive.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, 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.

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