CHAPTER 13 – STANDARD COSTING
1. Learning objectives
Calculate advanced variances (Planning, Operational, ABC, Learning Curve, etc.)
Interpret and analyze variances.
Explain relationships between variances.
Apply Standard Costing for profit reconciliation.
Assess future performance improvements.
Understand behavioral and ethical issues in modern environments.
2. Analysis of Advanced Variance
Planning & Operational Variances
Why Needed?
Original standards (ex-ante) may become outdated due to changing conditions.
Revised standards (ex-post) reflect actual conditions.
Planning Variance = Revised Standard vs. Original Standard.
Operational Variance = Actual vs. Revised Standard.
Example: (Material)
Usage Planning Variance = (Std. Qty – Revised Std. Qty) × Std. Price
Usage Operational Variance = (Revised Std. Qty – Actual Qty) × Revised Std. Price
Price Planning Variance = (Std. Price – Revised Std. Price) × Revised Std. Qty
Price Operational Variance = (Revised Std. Price – Actual Price) × Actual Qty
Variance Analysis in Activity-Based Costing (ABC)
Variances analyzed by activity drivers (setup, testing, etc.).
Efficiency Variance = (Std. Activities – Actual Activities) × Std. Rate/Driver.
Expenditure Variance = (Std. Cost of Actual Activities – Actual Cost).
Learning Curve Effect on Variances
Learning Curve Formula:
y = axᵇ
Where:
y = Average time per unit for x units
a = Time for 1st unit
b = log(LR)/log(2) (Learning Rate, LR)
Adjust standard hours for learning impact before variance calculation.
Cost Approach
Considers opportunity cost (lost contribution from under-utilization of scarce resources).
Variance Analysis & Throughput Accounting
Focus on bottleneck resource utilization.
Variances related to buffer inventory before constraints.
Variance Analysis in Advanced Manufacturing
High automation → Fixed costs dominate.
Labour variances less relevant (labour = committed cost).
Focus on Material & Power Variances.
Variance Analysis in Service Sector
Difficult due to high overheads.
ABC-based variance analysis recommended.
Variance Analysis in Public Sector
Use unit cost of service (e.g., cost per visit/hour).
Adjust for timing, accruals, unpaid services.
3. Standard Marginal Costing
Includes variable costs only.
No Overhead Volume Variance.
Fixed Overhead Expenditure Variance only.
4. Sales Variances
i) Under Absorption Costing (Profit-Based)
Sales Margin Variance = Actual Margin – Budgeted Margin
= (AQ × AM) – (BQ × SM)
Sales Margin Price Variance = AQ × (AM – SM)
Sales Margin Volume Variance = SM × (AQ – BQ)
Sales Margin Mix Variance = SM × (AQ – RAQ)
Sales Margin Quantity Variance = SM × (RAQ – BQ)
ii) Under Marginal Costing (Contribution-Based)
Sales Contribution Variance = Actual Contribution – Budgeted Contribution
Sales Contribution Price Variance = AQ × (AC – SC)
Sales Contribution Volume Variance = SC × (AQ – BQ)
Sales Contribution Mix Variance = SC × (AQ – RAQ)
Sales Contribution Quantity Variance = SC × (RAQ – BQ)
iii) Market Size & Market Share Variances
Market Size Variance = Budgeted Market Share % × (Actual Industry Sales –
Budgeted Industry Sales) × Avg. Budgeted Margin/Contribution.
Market Share Variance = (Actual MS% – Budgeted MS%) × Actual Industry Sales
× Avg. Budgeted Margin/Contribution.
5. Profit Reconciliation
Absorption Costing:
Budgeted Profit
± Material, Labour, Overhead, Sales Margin Variances
= Actual Profit.
Marginal Costing:
Budgeted Profit
± Material, Labour, Overhead, Sales Contribution Variances
= Actual Profit.
6. Investigation of Variances
When to Investigate?
Size (beyond threshold)
Type (adverse > favourable)
Cost-benefit
Patterns over time
Budget Realism
Methods
Rule of Thumb: Absolute/percentage limits.
Statistical Decision Model: "In-Control" vs. "Out-of-Control" variances.
7. Interdependence of Variances
Cheaper material → Adverse usage variance.
Skilled labour → Adverse rate, favourable efficiency.
Price cuts → Higher sales volume.
Favourable efficiency → Excess material wastage.
8. Interpretation of key Variances
Material Price: Supplier, order size, delivery costs, purchasing inefficiency.
Material Usage: Quality, wastage, pilferage, production method.
Labour Rate: Pay rates, bonuses, workforce composition.
Labour Efficiency: Training, supervision, learning curve, quality of material.
Overheads: Spending patterns, machine efficiency.
Sales Price: Discounts, competition, market conditions.
Sales Volume: Demand, marketing success, competition.
9. Reporting of Variances
Timely, exception-based, cause-oriented.
Show expected vs. actual, variance magnitude, and responsibility.
10. Behavioural and Ethical Issues
Can promote short-term focus & budget slack.
Involve employees in standard setting.
Use balanced measures (financial + non-financial).
Ethical caution in healthcare, public services.
11. Contemporary Issues
Modern Production: Automated, customized, continuous improvement (Kaizen).
Traditional variance reports often lagging & less relevant.
12. KEY FORMULAE QUICK RECAP
Material Variances
Price Variance = (SP – AP) × AQ
Usage Variance = (SQ – AQ) × SP
Planning/Operational Variances (as detailed in 2.1).
Labour Variances
Rate Variance = (SR – AR) × AH
Efficiency Variance = (SH – AH) × SR
Planning/Operational Variances (as detailed in 2.1).
Overhead Variances
Variable Expenditure = (SR – AR) × AH
Variable Efficiency = (SH – AH) × SR
Fixed Expenditure = Budgeted – Actual
Fixed Volume = (SH – BH) × SR
Sales Variances (Price, Volume, Mix, Market Size, Market Share – as above).
