Q. 8. Standard Costing practical problems and solutions

In this article, we are going to discuss some practical problems of standards costing with solutions which will help students to get their concepts cleared that how to standards can be used to different variances.

Problem 1

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


Quantity of groundnut oil required: 3kg

Price of groundnut oil: $2.5/kg

Actual production data:

Production during the month: 1,000 kg

Quantity of material used: 3,500 kg

Price of groundnut oil: $3/kg

Required:

(i). Calculate the material cost variance

(ii). Calculate the material price variance

(iii). Material usage variance

Solution

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

Calculation of Variances

(a) Material Cost Variance = SC – AC

= (SQ x SP) – (AQ x AP)

= (3,000 x 2.50) – (3,500 x 3)

= $3,000 (A)

(b) Material Price Variance = (SP-AP) x AQ

= (2.50 – 3) x 3,500

= $1,750 (A)

(c) Material Usage Variance = (SQ – AQ) x SP

= (3,000 – 3,500) x 2.50 = 1,250 (A)

Problem 2

From the following particulars, compute (a) Material Cost Variances, (b) Material Price Variances and (c) Material Usage Variance:

Quantity of material purchased = 3,000 units

Value of material purchased = $9,000

Also Check:  Q. 10. How to compute sales variances?

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

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

Calculation of variances

(a) Material Cost Variance = (SC – AC)

= (SQ x SP) – (AQ x AP)

= (2,400 x 2.5) – (2,500 x 3) = $1,500 (A)

(b) Material Price variance = (SP – AP) x AQ

= (SP – AP) x AQ

= (2.5 -3) x 2,500 = $1,250 (A)

(c) Material Usage Variance = (SQ – AQ) x SP

= (2,400 – 2,500) x 2.5 = $250 (A)

Problem 3

Calculate various labor cost variances from the following data which are related to the month of january 2019:

Budgeted dataActual data
Production (units)1,0001,200
Units produce per hr.86
Rate of wages per hr.$8$10
Hrs. of unbudgeted holidays15
Idle time (hrs.)58

Solution

(i) Labor Rate Variance

= (SR – AR) – AH

= (8 – 10) x 223

= $446 (A)

(ii) Labor Time or Efficiency Variance

Also Check:  Q. 6. What are the characteristics of Standard Costing?

= (Standard hours of production – Actual hrs for production) x Standard Rate of Wages

= (5 – 8) x 8

= $24 (A)

(iv) Labor calendar variance

= (Unbudgeted holidays hrs. 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 hrs. is calculated as under:

= (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

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 labour@$5, 1kg material@$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.

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