Standard costing and variance analysis
Standard costing sets predetermined costs and compares them with actual costs. A variance is favourable when actual cost is below standard, and adverse when above.
The standard costing cycle
- back to Set standards
Only significant variances go to managers for action.
Material and labour variances
| Variance | Formula | Usually answerable |
|---|---|---|
| Material cost (MCV) | (SQ × SP) − (AQ × AP) | Total of price and usage |
| Material price (MPV) | AQ × (SP − AP) | Purchase department |
| Material usage (MUV) | SP × (SQ − AQ) | Production department |
| Labour cost (LCV) | (SH × SR) − (AH paid × AR) | Total of rate, efficiency and idle time |
| Labour rate (LRV) | AH paid × (SR − AR) | Personnel; wage agreements |
| Labour efficiency (LEV) | SR × (SH − AH worked) | Production supervisor |
| Idle time (ITV) | SR × idle hours; always adverse | Production planning, maintenance |
Reading the signs
- SQ and SH mean standard quantity and standard hours for the actual output, not for the budgeted output.
- Compute standard − actual: a positive answer is favourable (F); a negative answer is adverse (A).
- Material usage variance splits into mix and yield variances.
- A favourable price variance from cheap, poor material can cause an adverse usage variance, so read variances together.
- Management by exception: attention goes only to significant variances.
Material variances
Standard: 2 kg per unit at ₹10 per kg. Actual output 1,000 units, using 2,100 kg bought at ₹9.50 per kg.
- SQ for actual output = 1,000 × 2 = 2,000 kg; standard cost = 2,000 × 10 = ₹20,000
- Actual cost = 2,100 × 9.50 = ₹19,950
- MCV = 20,000 − 19,950 = ₹50 (F)
- MPV = 2,100 × (10 − 9.50) = ₹1,050 (F)
- MUV = 10 × (2,000 − 2,100) = −₹1,000, that is ₹1,000 (A)
- Check: 1,050 (F) − 1,000 (A) = ₹50 (F)
MCV ₹50 F = MPV ₹1,050 F + MUV ₹1,000 A.
Labour variances with idle time
Standard: 3 hours per unit at ₹20 per hour. Actual output 480 units. Workers were paid for 1,600 hours at ₹21 per hour, of which 100 hours were idle.
- SH for actual output = 480 × 3 = 1,440 hours; standard cost = 1,440 × 20 = ₹28,800
- Actual cost = 1,600 × 21 = ₹33,600; LCV = 28,800 − 33,600 = ₹4,800 (A)
- LRV = 1,600 × (20 − 21) = ₹1,600 (A)
- Idle time variance = 100 × 20 = ₹2,000 (A)
- Hours worked = 1,600 − 100 = 1,500; LEV = 20 × (1,440 − 1,500) = ₹1,200 (A)
- Check: 1,600 + 2,000 + 1,200 = ₹4,800 (A)
LCV ₹4,800 A = LRV ₹1,600 A + idle time ₹2,000 A + LEV ₹1,200 A.
Overhead variances
| Variance | Formula |
|---|---|
| Variable OH expenditure | (AH × standard VOH rate per hour) − actual VOH |
| Variable OH efficiency | Standard VOH rate per hour × (SH − AH) |
| Fixed OH cost | Absorbed FOH (actual output × standard rate per unit) − actual FOH |
| Fixed OH expenditure (budget) | Budgeted FOH − actual FOH |
| Fixed OH volume | Absorbed FOH − budgeted FOH = standard rate per unit × (actual output − budgeted output) |
| Volume sub-variances | Capacity, efficiency and calendar variances |
Overhead variances
(a) Variable overhead: standard rate ₹4 per hour; standard hours for actual output 2,000; actual hours 2,200; actual variable overhead ₹8,400. (b) Fixed overhead: budget ₹50,000 for 10,000 units; actual output 9,000 units; actual fixed overhead ₹52,000.
- (a) VOH expenditure = 2,200 × 4 − 8,400 = 8,800 − 8,400 = ₹400 (F)
- VOH efficiency = 4 × (2,000 − 2,200) = ₹800 (A); total = 2,000 × 4 − 8,400 = ₹400 (A)
- (b) Standard rate = 50,000 ÷ 10,000 = ₹5 per unit; absorbed FOH = 9,000 × 5 = ₹45,000
- FOH cost variance = 45,000 − 52,000 = ₹7,000 (A)
- Expenditure variance = 50,000 − 52,000 = ₹2,000 (A); volume variance = 45,000 − 50,000 = ₹5,000 (A)
- Check: 2,000 + 5,000 = ₹7,000 (A)
VOH: ₹400 F expenditure + ₹800 A efficiency = ₹400 A. FOH: ₹2,000 A expenditure + ₹5,000 A volume = ₹7,000 A.
NET gives standard and actual quantity, price or hours and asks for one variance with its sign, or asks you to match variances with formulas and check that the parts add up to the total.
Typical MCQ: “SP ₹12, AP ₹13, AQ 500 kg. What is the material price variance?” 500 × (12 − 13) = ₹500 adverse. Trap: using standard quantity instead of actual quantity.
Typical MCQ: “Can idle time variance ever be favourable?” No. It is always adverse, because hours are paid for but nothing is produced.
Price uses Actual quantity; usage uses Standard price. Always compute standard − actual: plus is favourable, minus is adverse.