LO 5.

STANDARD COSTING AND VARIANCE ANALYSIS

Standard costing – a technique which uses standards for costs and revenues for the purpose of control
through variance analysis.

Standard cost – a predetermined calculation of how much costs should be, under specified working
conditions.

Types of standards:

(i) Ideal standard – these are based on ideal conditions, this can only be achieved under
the most favorable of conditions with o allowance for normal losses and machines
downtime.
(ii) Basic standard – is a standard that is established for use over a long period of time and
does not change from year to year.
(iii) Current standard – a standard that represents costs and efficiencies currently being
achieved. It incorporates any inefficiencies there may be in the production process.
(iv) Attainable- this is one which can be attained if a standard unit of work carried out
efficiently. Allowances are made for normal losses, waste and acceptable machine
and labour down time.

Variance- the difference between a standard figure (budgeted ) and an actual figure is known as
a variance. The variances may be favorable or adverse. To make the variances as informative
as possible, they are analysed according to each element of cost. Ie., material, labour and
overheads.

BASIC VARIANCE ANALYSIS

The difference between the money values for the actual and standard results are known as
variances. These variances are intended as a guide to provide a basis for investigation, possible
corrective action and decision making.

Types of variances

1. Direct material variances – direct material variances are divided into direct material
price variance and direct material usage variance.
a. Direct material price variance – is the difference between the standard price and
actual purchase price for the actual quantity of materials.

Direct material price variance = Actual quantity x (Standard price – Actual Price)

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 b. Direct material usage variance – is the difference between the standard quantity
for the actual production and the actual quantity used at standard purchase
price.

Direct material usage variance = Standard price x ( Standard quantity – Actual

quantity)

2. Direct labour variances – are divided into direct labour rate variance and direct labour
efficiency variance.
a. Direct labour rate variance – is the difference between standard rate and the
actual direct labour fate per hour for the total hours worked.
Direct labour rate variance = Actual Hours x (Standard rate – Actual rate)
b. Direct labour efficiency variance – the difference between the standard hours for
the actual production achieved and the hours actually worked, valued at the
standard labour rate
Direct labour efficiency variance = Standard rate x (Standard hour –Actual Hour)
3. Variable overhead expenditure variance – is divided into variable overhead expenditure
variance and variable overhead efficiency variance
a. Variable overhead expenditure variance – is the difference between actual
variable overheads incurred and the allowed variable overheads based on the
actual hours worked.
Variable overhead expenditure variance = Actual Hours x (Standard variable
overhead rate – Actual overhead rate)
b. Variable overhead efficiency variance – is the difference between the allowed
variable overheads and the absorbed variable overheads.
Variable overhead efficiency variance = Standard variable overhead rate x
(Standard hours – Actual hours)
4. Fixed overhead variance – is the difference between actual fixed overheads and allowed
or budgeted fixed overheads for the period.
Fixed overhead variance = Budgeted Fixed overheads – Actual fixed overheads
5. Sales revenue variance – can be broken down into selling volume contribution variance
and selling price variance
a. Selling volume contribution variance = Standard contribution x (Actual quantity –
Budgeted quantity)
b. Selling price variance = Actual quantity x (Actual price – standard price)