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

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 data | Actual data | |

Production (units) | 1,000 | 1,200 |

Units produce per hr. | 8 | 6 |

Rate of wages per hr. | $8 | $10 |

Hrs. of unbudgeted holidays | – | 15 |

Idle time (hrs.) | 5 | 8 |

## Solution

(i) Labor Rate Variance

= (SR – AR) – AH

= (8 – 10) x 223

= $446 (A)

(ii) Labor Time or Efficiency Variance

= (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

Jonathan P TaluThanks 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.