Cost Variances Analysis

Cost Variance
The cost variances relate to the costs of a manufacturing
enterprise. The three elements of the costs of such
an enterprise are:

1. Material Cost Variance (MCV)

2. Labour Cost Variance (LCV)

3. Overhead Cost Variance (OCV)

 Material Cost Variances
Material cost variance is the difference between the standard cost of
materials and the cost of materials actually incurred.
MCV on Per Unit Basis
MCV = (SQ × SP × AO) – (AQ × AP × AO)
MCV on Aggregate Basis
MCV = (TSMC – TAMC)
Where,
SQ = Standard usage of materials per unit
SP = Standard price of materials per unit
AO = Actual output in units
TSMC = Total standard cost of actual output
AQ = Actual usage of materials per unit
AP = Actual price of materials per unit
TAMC = Total actual cost incurred
Example 1
Compute the material cost variance (MCV) from the following
information.
Particulars Standard Actual
Material usage per unit (kgs) 2 2.2
Price per kilogram (Rs) 14 15
Actual units produced 100

Solution
MCV = (SQ × SP × AO) – (AQ × AP × AO)
= (2 × Rs 14 × 100) – (2.2 × Rs 15 × 100) = Rs 2,800 – Rs 3,300
= Rs 500 (unfavourable/Adverse)
 i) Material Price Variance
Material price variance is the difference between the actual price paid for
purchase of material and the standard price.
When actual price exceeds standard price, the variance is unfavourable
(U/A); favourable variance (F) results when standard price is greater than
actual price. There will be no variance if both the prices are equal.

Material Price Variance = (SP – AP) × AQ

For the facts, in Example 1, the MPV would be:
(Rs 15 – Rs 14) × 220 kgs = Rs 220 (unfavourable/A).
Responsibility for MPV
Material price variance is mainly the responsibility of the purchase
officers who are in charge of making the entire purchases of the
firm.
 ii) Material Usage/Quantity
Variance (MUV)
Material usage variance occurs when actual usage of materials
differs from standard usage.

Material
MUV =Usage
[(SQ × Variance
AO) – (AQ = [(SQ××SP
× AO)] AO) – (AQ × AO)] × SP
For Example 1, the MUV would be:
= [(2 × 100) – (2.2 × 100)] × Rs 14 = Rs 280 (unvarouable).
Since the actual consumption of materials is more than the standard
quantity required for producing 100 units of output, the MUV is
unfavourable.
Responsibility for MUV
The overall responsibility for this variance lies with the
production personnel.
 2) Labour Cost Variance (LCV)

Labour cost variance is the difference between the standard

labour costs and the actual labour costs.

LCV on Per Unit Basis

LCV = (SH × SR × AO) – (AH × AR × AO) (on per unit basis)
LCV on Aggregate Basis
LCV = (TSLC – TALC)
Where
SH = Standard labour hours required per unit
SR = Standard wage rate per hour
AO = Actual output achieved during the period
AH = Actual labour hours spent per unit
AR = Actual wage rate per hour
TSLC = Total standard labour cost of actual output
TALC = Total actual labour cost of actual output
Example 4
From the following information, compute the labour cost
variance (LCV).
Particulars Standard Actual
Labour-hours per unit 4 5
Wage rate (Rs) 25 30
Actual units produced 100

Solution
LCV = [(SH × SR × AO) – (AH × AR × AO)]
= (4 × Rs 25 × 100) – (5 × Rs 30 × 100) = Rs 5,000
(unfavourable/A)
i) Labour Rate Variance (LRV)
Labour rate variance is the difference between the actual wage
rate and the standard wage rate.

Labour Rate Variance = (SR – AR) × AH × AO.

In Example 4,
LRV = (Rs 25 – Rs 30) × 5 × 100 = Rs 2,500 (unfavourable).
Responsibility for LRV
The departmental executives may be held responsible only for
that portion of the LRV which arises due to employment
of wrong grades of labour.
 ii) Labour Efficiency
Variance (LEV)
Labour efficiency variance is a function of the difference between
the hours workers should have consumed in actual production
and the actual hours worked and the standard wage rate.

Labour Efficiency Variance = [(SH × AO) – (AH × AO)] × SR

In Example 4,
LEV will be: [(4 × 100) – (5 × 100)] × Rs 25 = Rs 2,500
(unfavourable).
Labour efficiency variance can be sub-divided into
(1) Idle time variance
(2) Labour revised efficiency variance consisting of
Labour mix sub-variance and Labour yield sub-variance.