Standard Costing &

Variance Analysis!
TOPIC 7
MOHD HADLI SHAH MOHAMAD YUNUS

UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

INTRODUCTION
 During a project's lifecycle, project managers
monitor the progress and compare it with the project
plan to ensure that their predictions align with
reality.
 Failure to do so can result in budgetary issues, which
can lead to project failure.
 However, identifying such deviations, including cost
variance, and taking corrective measures can help
avoid project failure and, in some cases, enhance
project performance.
 Calculating cost variance is one effective method of
preventing cost overruns.
 Project managers can determine if the project is
under or over budget by comparing the actual project
costs against the budgeted or planned costs.
 With this information, they can make informed
decisions to adjust the project plan and ensure that
the project stays on track toward successful
completion.
 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

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.
 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

SETTING STANDARD COSTS

Accountants, engineers, personnel administrators, and
production managers combine efforts to set standards
based on experience and expectations.
 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

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.
 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

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.
 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

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.
 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

UNDERSTANDING
PROJECT COSTS
 Regardless of the project's size, scope,
or objectives, all projects have
associated costs.
 Project costs can take various forms,
from material to general business
expenses such as rent and salaries.
 Therefore, it is the responsibility of the
PROJECT MANAGER to consider all
these costs and develop a dynamic
budget plan that accommodates potential
changes.
 Essentially, just like the saying "there's
no free lunch," there's no such thing as a
cost-free project.
 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

DIFFERENT
TYPES OF
PROJECT COSTS
To comprehensively comprehend project cost variance,
it's important to have knowledge of the primary types of
project costs. The following are the four most common
types of project costs that can significantly impact the
overall cost variance of a project:
 Direct Costs: These are costs that are directly associated
with the production or execution of a particular project
activity. Examples: labor costs, material costs, and
equipment expenses.
 Indirect Costs: These are costs that are not directly
attributable to a specific project activity but are necessary
to carry out the project. Examples: rent, utilities, and
administrative expenses.
 Fixed Costs: These are costs that do not change
regardless of the volume of work being done on the project.
Examples: rent, insurance, and salaries.
 Variable Costs: These are costs that change depending on
the volume of work being done on the project.
Examples: hourly wages, overtime pay, and material costs.
 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

 Variance analysis is a valuable organizational

feedback tool that aims to understand the difference
between actual and planned/projected levels of
performance (Luckett & Eggleton, 1991).
 This process usually involves three stages:
calculation of variances, identification of the
problems leading to the variances, and
determination of the underlying causes of these
problems.
Variance  While accounting textbooks provide extensive details
on variance calculation, they often lack guidance on
Analysis the latter two stages of the variance analysis process.
 For instance, management accounting experts
Horngren and Foster (1990) state that identifying and
eliminating the underlying cause of variance is
crucial, but they don't provide recommendations on
how to identify these root causes. As a result,
organizations may need to seek additional
resources or guidance to identify and address the
underlying causes of variances to ensure effective
performance improvement.
 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

Cost Variance (CV)

Variance Favorable & Unfavorable

Variances.
Analysis
Controllable &
Uncontrollable Variances
 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

Refers to the difference

between the actual costs
Cost incurred during a project
and the expected or
Variance standard costs that were
budgeted for that project.
 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

Favorable Favorable Variances (F)

& Unfavorable
Unfavorable Variance
Variances (U)
 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

Favorable & Unfavorable Variances

Favorable variances (F)
arise when actual costs are less than budgeted costs or actual sales/profit
exceed the budget.

Unfavorable variances (U)

arise when actual costs exceed budgeted or actual sales/profit are less than
budgeted.

Profit Revenue Costs

Actual > Expected F F U
Actual < Expected U U F
 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

Controllable Variances
Controllable variance is a collection of
overhead variances, including both
variable and fixed costs, which
management can control or influence.
Essentially, it refers to the set of overhead
variances that management can modify or
Controllable & manipulate.
Uncontrollable
Variances
Uncontrollable Variances
An uncontrollable variance refers to a
budget variance that results from factors
outside of management's control.
Examples: changes in the market, shifts in
consumer preferences, or fluctuations in
raw material prices.
UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE
 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

Material Cost Variance (MCV)

► 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 (MCV) = (SP x SQ) – (AP x AQ) ,

► 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).
 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

Material Price Variance (MPV)

► 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).
 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

Material Usage Variance (MUV)

► 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
 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

Practice Question

1. A furniture company uses sun mica tops for tables.

It provides the following data:
Std Quantity for sun mica per table 4 sq.
ft
Std price per sq. ft of sun mica RM 5
Actual prod. Of tables
1000
Actual quantity used
4,300 sq. ft
Actual purchase price per sq. ft
 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

Std. price x Std Quantity 5 x 4000 = 20000

Std. price x Actual Quantity 5 x 4300 = 21500
Actual Price x Actual Quantity 5.5 x 4300 = 23650

Material Cost Variance -3650

Material Usage Variance -1500
Material Price Variance -2150
 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

2. From the following information calculate:

(i) Material cost variance (MCV)
(ii) Material price variance (MPV)
(iii) Material Usage variance (MUV)

Standard output
100 units
Standard Material per unit 3 Ibs
Standard price per Ib. RM
2
Actual output
80 unit
Actual price
RM 5.50
Actual materials used 250 Ibs

SP x SQ = RM2 x 3 x 80 = 480
SP x AQ = RM2 x 250 = 500
 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

(i) MCV = 480 – 1,375 = -895

(ii) MPV = 480 - 500 = -20
(iii) MUV = 500 – 1,375 = -875
 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

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 the material purchased RM 9000
Std. quantity of raw material req. p.u. 25 units
Std. rate of material unit RM 2 per
Opening stock of material Nil
Closing stock of material 500 units
Finished production during the period 80 units
ANSWER:
Std. price x Std. Quantity 2 x 2000 = 4000
Std. price x Actual Quanity 2 x 2500 = 5000
Actual Price x Actual Quanity 3 x 2500 = 7500
Material Cost Variance -3500
Material Usage Variance -1000
Material Price Variance -2500
 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

4. The standard output of the production house has been

set at 1000 pieces per month. However, actually, 1,020
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 RM 0.15 per sq. ft RM 0.18 per sq.
ft
Sd. price
Calculate x Std.
all Quantity
material variances. 0.15 x 1530 = 229.5
Std. price x Actual Quanity 0.15 x 1326 = 198.9
ANSWER:
Actual Price x Actual Quanity 0.18 x 1326 = 238.68
Material Cost Variance -9.18
Material Usage Variance 30.6
Material Price Variance -39.8
 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

5. A company, which has adopted standard costing, furnishes the following

information:
Standard:
Material for 70 kg. of finished products 100 kgs.
Price of materials RM 1 per kg.
Actual:
Output 210,000 kgs
Material used 280,000 kgs.
Cost of materials RM252,000
Calculate all material variances.

Std price x Std Quantity 1 x 300000 = 300000

Std price x Actual Quanity 1 x 280000 = 280000
Actual PricexActual Quanity 0.9 x 280000 = 252000
Material Cost Variance 48000
Material Usage Variance 20000
Material Price Variance 28000
 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

LABOUR VARIANCES

1 2 3 4
Labour Cost Labour Labour Rate Idle Time
Variance (LCV) Usage/Efficiency Variance (LRV) Variance (ITV)
Variance (LUV)
SH*SR – (SR-AR)* AH SR*Idle time
(SH-AH)*SR
AH*AR
 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

Practice Problem 1
A firm gives you the following data:

Standard time per unit 2.5 hours

Actual hours worked 2,000 hours
Standard rate of pay RM2 per hour
25 % of the actual hours have been lost as idle
time.
Actual output 1,000 units
Actual wages RM. 4,500
Calculate all labour variances.
 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

Answer Practice Problem 1

Calculate all labour variances.

Std. Rate (SR) 2 LUV 1000 F

Std. Hrs (SH) 2500 LRV -500 U

Actual Rate (AR) 2.25 ITV -1000 U

Actual Hrs (AH) 2000 LCV 500 F

Idle Time (IT) 500

 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

Practice Problem 2
Compute the Labour variances from the information given below:
Standard time 3 hours per unit
Standard rate of wages RM 6 per hour
Actual production 700 units
Actual time taken 2000 hours
Actual Wages RM 14000
Idle time 50 hours

Answer practice Problem 2

Std. Rate (SR) 6 LUV 900 F

Std. Hrs (SH) 2100 LPV -2000 U

Actual Rate (AR) 7 LCV -1400 U

Actual Hrs (AH) 2000 ITV 300

Idle Time IT) 50

 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

Labor Efficiency Variance- Causes

Poorly Poor
trained quality
workers materials

Unfavorabl
e
Efficiency
Variance Poorly
maintained
Poor
equipment
supervision
of workers
 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

Responsibility for Labor Variances

You used too much
time because of poorly
trained workers and
poor supervision.

I am not responsible for

the unfavorable labor
efficiency variance!
You purchased cheap
material, so it took more
time to process it.
 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

Overhead Variances
►Overhead variances arise due to the difference
between actual overheads and absorbed
overheads.
►The estimate of the budget of the overheads is to
be divided into fixed and variable elements.
►i.e.
1.Variable overhead variances.
►Variable overhead budget or expenditure variance,
and
►Variable overhead efficiency variance.
2.Fixed overhead variances.
 UNIVERSITI KUALA LUMPUR - MALAYSIA ITALY DESIGN INSTITUTE

Formulas
► Variable overhead variances.
(Standard variable O/H for actual production – Actual
variable O/H)
► Variable overhead budget or expenditure variance,
(Budgeted variable overhead for actual hours – Actual variable
overhead)
i.e., AH*BR – Actual Cost
► Variable overhead efficiency variance.
Standard variable overhead rate per hour [Std. hours for actual
output – Actual hours]
i.e. (SH-AH) *SR
► Fixed Overhead Variance
Budgeted FO- Actual FO
THANK YOU