Standard Costing &

Variance Analysis
 Definitions
•Standard Cost: (CIMA) “Standard cost is the
pre-determined cost based on the technical estimates
for materials, labor and overhead for a selected
period of time for a prescribed set of working
conditions.”

•Standard Costing: (CIMA) “the preparation of

standard costs and applying them to measure the
variations from the actual costs and analyzing the
causes of variations with a view to maintain
maximum efficiency of the operations so that any
remedial action may be taken immediately.
 Variance Analysis
• Cost Variance: is the difference between the
standard cost and the actual costs.
• Variance Analysis: is the resolution into
constituent parts and the explanation of the
variances.
❖ Favorable & Unfavorable Variances.
❖ Controllable & Uncontrollable Variances
 What all could be
the reasons for the
actual
manufacturing cost
or the sales/profit
to vary from their
standard costs and
price/profit?
 1. Material 2. Labour 3. Overhead
Variance Variance Variance

Material Cost Labour Cost Overhead Cost

variance Variance Variance

Types of
Variances Material Price Labour Rate Variable
Variance Variance overheads Var.

Labour
Material Usage Variable o/h
Efficiency
Variance efficiency var.
Variance

Labour Mix
Material Mix Variance Variable o/h
Variance expenditure var.
Idle Time
Variance
Material Yield Fixed overhead
Variance variance
Favorable & Unfavorable Variances
• Favorable variances(F) arise when
actual costs are less than budgeted
costs or actual sales/profit exceed
budgeted.
• Un favorable variances(U) arise
when actual costs exceed budgeted
or actual sales/profit are less
Profit Revenue than
Costs
Actual > Expected budgeted.
F F U
Actual < Expected U U F
 Standard Costs
Based on carefully
predetermined amounts.

Standard Used for planning labor, material

Costs are and overhead requirements.

The expected level

of performance.

Benchmarks for
measuring performance.
 Setting Standard Costs
Accountants, engineers, personnel administrators, and
production managers combine efforts to set standards
based on experience and expectations.
 Standards vs. Budgets

A standard is the expected

cost for one unit.
Are standards the same as A budget is the expected cost
budgets? for all units.
 How will the material price
variance and material usage be
computed if the quantity
purchased is different from the
quantity used?

The price variance is computed

on the entire quantity
purchased.
The quantity variance is
computed only on the quantity
used.
 Material Cost Variance
• Material cost variance arises due to variance in the price of
material or its usage.

• This can be calculated by using the following formula,

• Material Cost Variance = (SQ x SP) – (AQ x AP) ,

• Where,
SQ = Standard quantity for the actual output
SP = Standard price per unit of material
AQ = Actual quantity
AP = Actual price per unit of material

• A positive result implies favorable variance and a negative

result implies unfavorable variance (adverse variance).
 Material Price Variance
• Material price variance may arise due to number of reasons like
fluctuations in market prices, error in buying due to wrong
purchasing policy etc,

• This can be calculated by using the following formula,

• Material Price Variance = (SP – AP) x AQ

• Where,
SP = Standard price per unit of material
AQ = Actual quantity
AP = Actual price per unit of material

• A positive result implies favorable variance and a negative result

implies unfavorable variance (adverse variance).
 Material usage/Quantity Variance
• Material Usage variance is the difference between the actual
quantities of raw materials used in production and the
standard quantities that should have been used to produce
the product,

• MUV may arise due to number of reasons like Pilferage of

materials , Wastage , Sub-standard or defective materials etc,

• This can be calculated by using the following formula,

• Material Usage Variance = (SQ – AQ) x SP
 Material Mix Variance
• MMV is calculated when a product uses mixture of
different raw materials,

• MMV is that portion of the materials quantity variance,

which is due to the difference between the standard
and actual composition of a mixture.

• It can be represented by the following formula:

• Material mix variance =
• (Standard cost of actual quantity of the standard
mixture – Standard cost of actual quantity of the actual
mixture) or (Revised SQ – AQ) x SP
 Practical Problems

1. A furniture company uses sunmica tops for tables.

It provides the following data:
St. Quantity for sunmica per table 4 sq. ft
St. price per sq. ft of sunmica Rs. 5
Actual production of tables 1,000
Sunmica actually used 4,300 sq.ft
Actual purchase price per sq. ft Rs. 5.50.
Calculate Material variances.
2. From the following information calculate (i) material cost
variance (ii) material price variance (iii) Material Usage
variance
Standard output 100 units
Standard Material per unit 3 Ibs
Standard price per Ib. Rs. 2
Actual output 80 units
Actual price Rs. 5.50
Actual materials used 250 Ibs
3. From the following information calculate (i) material cost
variance (ii) material price variance (iii) Material Usage
variance
Quantity of material purchased 3000 units
Value of material purchased Rs. 9000
St. quantity of raw material req. p.u. 25 units
Standard rate of material unit Rs. 2 per
Opening stock of material Nil
Closing stock of material 500 units
Finished production during the period 80 units
4. The standard output of the production house has been set
at 1000 pieces per month. However actually 1020 pieces
were produced. Following is the data for actual and
standard production.
Standard Actual Results
Usage 1.5 sq. ft per pad 1.3 sq. ft per pad
Price Rs. 0.15 per sq. ft Rs. 0.18 per sq. ft
Calculate all material variances.
5. A mfg. concern, which has adopted standard costing, furnishes the
following information:
Standard:
Material for 70 kg. Of finished products 100 kgs.
Price of materials Rs. 1 per kg.
Actual:
Output 210,000 kgs
Material used 280,000 kgs.
Cost of materials Rs. 2,52,000
Calculate all material variances.
Material Mix Variance

• Material Mix Variance

= [Revised St. Qty – Actual Qty] x St. Price
Rev. St. Qty = St. Qty of 1 Mat. x Actual Total
Standard Total
From the following information regarding a standard product,
compute 1. Mix 2. Usage 3. Price Variance:
From the following information regarding a standard product,
compute 1. Mix 2. Usage 3. Price Variance:
Standard Actual
Unit
Material Qty. Rs. p.u. Total Qty Price Total
A 4 1.00 4.00 2 3.50 7.00
B 2 2.00 4.00 1 2.00 2.00
C 2 4.00 8.00 3 3.00 9.00
Total 8 7.00 16.00 6.00 8.50 18.00
Material variances
Labour Variances
• Labour Cost Variance SH*SR – AH*AR
• Labour Usage/Efficiency Var (SH-AHactual)*SR
• Labour Rate Variance (SR-AR)* AH
• Idle time Variance SR*Idle time
 Practice Problem
A firm gives you the following data:
Standard time per unit 2.5 hours
Actual hours worked 2,000 hours
Standard rate of pay Rs. 2 per hour
25 % of the actual hours has been lost as idle time.
Actual output 1,000 units
Actual wages Rs. 4,500
Calculate all labour variances.
St. Rate 2 LUV 2000F
St. Hrs 2500 LPV -500U
Actual Rate 2.25 ITV 1000F
Actual Hrs 2000 LCV 500F
Idle time 500
 Practice Problems
Compute the Labour variances from the
information given below:
Standard time 3 hours per unit
Standard rate of wages Rs. 6 per hour
Actual production 700 units
Actual time taken 2000 hours
Actual Wages Rs. 14000
Idle time 50 hours
 Practice Problems

St. Rate 6 LUV 900F

St. Hrs 2100 LPV -2000U
Actual Rate 7 LCV -1400U
Actual Hrs 2000 IDV 300
Idle time 50
Labor Efficiency Variance- Causes
Poorly Poor
trained quality
workers materials

Unfavorable
Efficiency
Variance
Poor Poorly
supervision maintained
of workers equipment
Responsibility for Labor Variances
You used too much
time because of poorly
trained workers and I am not responsible for
poor supervision. the unfavorable labor
efficiency variance!
You purchased cheap
material, so it took more
time to process it.
 Overhead Variances
• Overhead variances arise due to the difference
between actual overheads and absorbed
overheads. The estimate of budget of the overheads
is to be divided into fixed and variable elements. i.e.
1. Variable overhead variances.
– Variable overhead budget or spending variance, and
– Variable overhead efficiency variance.
2. Fixed overhead variances.
 Formulas
1. Variable overhead variances.
(Standard variable o/h– Actual variable o/h)
2. Variable overhead budget or spending variance,
(Budgeted variable overhead for actual hours – Actual
variable overhead) i.e. (AH-SH)*Actual Rate
3. Variable overhead efficiency variance.
Standard variable overhead rate per hour [Std. hours for
actual output – Actual hours] i.e. (SH-AH) *SR
4. Fixed Overhead Variance
Budgeted FO- AFO
The variable overhead standard rate for
Jerry’s is $5 per direct labor hour and the
standard direct labor hours is 0.10 per
unit.
 Variable Manufacturing
Overhead Variance Analysis for
Jerry’s Ice Cream
The managerial accountant at Jerry’s Ice
Cream is interested in finding the cause of
the unfavorable variable overhead
spending variance of $5,500. The spending
variance can result from variances in the
cost of variable overhead items and the
usage of these items. What might have
caused the $5,500 unfavorable variable
overhead spending variance?