Material, Labour,

Overhead Cost
Variance
Difference between Cost Control & Cost Reduction
STANDARD COSTING
Standard Cost: Standard Cost is defined as “the
predetermined cost that is calculated by considering past
cost & incorporating some future adjustment.
Essence of standard costing is to set targets of cost & try
to achieve those targets, to compare the actual cost with
the targets. The objective is to ascertain the reasons and
to record the reasons in the books of account; thus
standard costing is an excellent system of control of costs
and of measuring efficiency, and of improving upon it.
After calculation of Standard Cost, it is to be compare with
actual cost to calculate the variance.
VARIOUS TYPES OF STANDARDS
Basic Standard: This is a “standard” which is established
for use over a long period of time without making any
changes as quality requirements are constant.
Current Standard: IA current standard is a standard for a
certain period, for certain condition and for certain
circumstances. Most companies use current and not basic
standards.
Expected or Attainable Standard: If targets are fixed for a
certain budgeted period, taking into account the expected
conditions, it can be known as “expected standard” or
“attainable standard”. Adjustment are to be made for
normal losses, waste and machine downtime.”
Normal Standard: This is defined as “the average standard
which it is can be achieved over a future period of time in
one trade cycle”.
Ideal Standard: This standard refers to the target which
can be attained under most ideal conditions with no
adjustment for normal losses waste and machine down
time”.
Favorable and Unfavorable Variance
If the standard cost is more than actual cost, the
difference is known as a Favorable variance, credit
variance or positive variance denoted by (F) or Cr. as it
increases the profit however if actual cost exceeds
standard costs the difference is known as an unfavorable
variance, debit variance.
Direct Materials Cost Variance: Direct materials cost
variance is the difference between the actual direct
material cost incurred and the standard direct material
cost specified for the production achieved.
Direct materials price variance
(Standard Price - Actual Price) x Actual Quantity,
= (SP-AP) AQ
Causes of Material Price Variance:
a. Change in basic purchase price of material.
b. Change in quantity of purchase or uneconomical size
c. Rush order to meet shortage of supply.
d. Failure to take advantage of off-season price,
e. Failure to obtain cash and trade discounts
g. Payment of excess or less cost of freight.
Direct Materials Usage Variance: The difference between
the actual quantity used and the amount which should
have been used, valued at standard price.
Direct materials usage variance
(Standard Quantity for actual output - Actual Quantity)
Standard Price
Causes of Materials Usage Variance:
a. Variation in usage of materials
b. Inefficient inspection of raw materials.
c. Change in quality of materials
d. Inefficiency in production resulting in wastages
e. Use of substitute materials.
f. Theft or pilferage of materials.
j. Defective machines, tools, and equipments,
Direct Labour Cost Variance: Direct Labour Cost Variance
is the difference between the actual direct wages incurred
and the standard direct wages specified for the activity
achieved.
Direct Labour Rate Variance The difference between the
actual and standard wage rate per hour applied to the
total hours worked.
Labor Rate variance = (Standard Rate - Actual Rate) x
Actual Hours
LABOUR RATE VARIANCE
This is that portion of the wages variance which is due to
the difference between the actual rate and standard rate
of any specified. It is calculated like the materials price
variance.
Labour Rate Variance = Actual Hours (Standard Rate -
Actual Rate)
OR
LRV = AH x (SR – AR)
CAUSES OF LABOUR RATE VARIANCE
a. Change in basic wage rate.
b. Overtime work
c. Employment of workers of a different grade than the
standard grade.
d. Payment of guaranteed wages to workers
LABOUR EFFICIENCY VARIANCE
It is that portion of the direct wages variance which is due
to the difference between the standard labor hours
specified and the actual labour hours expended. It arises
due to those hours which has been worked but not
efficiently or effectively.
LEV = SR x (SH – AHW)
CAUSES OF LABOUR EFFICIENCY VARIANCE
a. Lack of proper supervision
b. Working conditions;
c. Defective machinery equipment, Tools.
d. Labour turnover;
e. Wrong selection of workers.
LABOUR COST VARIANCE = LABOUR EFFICIENCY VARIANCE
+ LABOUR RATE VARIANCE
IDLE TIME VARIANCE
It is represented by the standard cost of the actual hours
for which the workers remain idle due to abnormal
circumstances. For example:- Power Breakdown, Shortage
of Raw Material etc. Abnormal means which are specific
only to a particular factory only & can not be charged
from the customer.
It is always adverse & calculated as follows:-
Idle Hours x Standard Rate per hour.
VARIABLE OVERHEAD VARIANCE
(i) Variable Overhead Expenditure Variance (VOEV) = This
variance will arise due to changes in the rate of variable
overhead.
(Actual Hours × Standard Variable Overhead Rate per
Hour) – Actual Variable Overhead
(ii) Variable Overhead Efficiency Variance (VOEV) = It will
arise due to the inefficiency utilization of resources like
Labor Efficiency Variance.
(Standard Time for Actual Production × Standard Variable
Overhead Rate per Hour) – Actual Hours Worked ×
Standard Variable Overhead Rate per Hour).
Note:- Variable Overheads will not be incurred during idle
hours & therefore it is not possible to analyze variable
overhead idle variance.