Standard Costing &
Variance Analysis!
Definitions
• Standard Cost: (CIMA) “Standard cost is the predetermined cost based on the technical estimates for
materials, labour 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
Variance
Types of
Variances
2. Labour
Variance
3. Overhead
Variance
4. Other
Variances
Material Cost
variance
Labour Cost
Variance
Overhead Cost
Variance
Calendar
Variance
Material Price
Variance
Labour Rate
Variance
Variable
overheads Var.
Sales Value
variance
Material Usage
Variance
Labour
Efficiency
Variance
Variable o/h
efficiency var.
Sales price
variance
Variable o/h
expenditure var.
Sales volume
variance
Fixed overhead
variance
Profit Variance
Material Mix
Variance
Material Yield
Variance
Labour Mix
Variance
Idle Time
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 than budgeted.
Actual > Expected
Actual < Expected
Profit Revenue Costs
F
F
U
U
U
F
Standard Costs
Based on carefully
predetermined amounts.
Standard
Costs are
Used for planning labor, material
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
Are standards the same as
budgets?
A standard is the expected
cost for one unit.
A budget is the expected cost
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
SP
AQ
AP
= Standard quantity for the actual output
= Standard price per unit of material
= Actual quantity
= 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
AQ
AP
= Standard price per unit of material
= Actual quantity
= Actual price per unit of material
• A positive result implies favorable variance and a negative result
implies unfavorable variance (adverse variance).
Material usage 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 prod. Of tables
1000
Sunmica actually used
4,300 sq.ft
Actual purchase price per sq. ft Rs. 5.50.
Calculate Material variances.
St. price x St. Quantity
St. price x Actual Quanity
Actual Price
x Actual Quanity
Material Cost Variance
Material Usage Variance
Material Price Variance
5x
5x
5.5 x
-3650
-1500
-2150
4000 =
4300 =
4300 =
20000
21500
23650
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
Material Cost Variance
Material Usage Variance
Material Price Variance
65
-60
125
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
St. price x St. Quantity
St. price x Actual Quanity
Actual Price
x Actual Quanity
Material Cost Variance
Material Usage Variance
Material Price Variance
2x
2x
3x
-3500
-1000
-2500
2000 =
2500 =
2500 =
4000
5000
7500
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.
St. price x St. Quantity
St. price x Actual Quanity
Actual Price
x Actual Quanity
Material Cost Variance
Material Usage Variance
Material Price Variance
0.15 x
0.15 x
0.18 x
-9.18
30.6
-39.8
1530 = 229.5
1326 = 198.9
1326 = 238.68
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.
St. price x St. Quantity
St. price x Actual Quanity
Actual Price
x Actual Quanity
Material Cost Variance
Material Usage Variance
Material Price Variance
1 x 300000 = 300000
1 x 280000 = 280000
0.9 x 280000 = 252000
48000
20000
28000
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. Price 3. Usage Variance:
Raw Material
Standard
Actual
X
40 units @ Rs. 50 p.u. 50 units @ Rs. 50 p.u.
Y
60 units @ Rs. 40 p.u. 60 units @ Rs. 45 p.u.
Total
100 units
110 units
Rev.ST. QtySt. PriceSt. Qty Act.Price Act. Qty
Revised St. Qty X 40/100 x 110 = units
44
50
40
50
50
Revised St. Qty Y 60/100 x 110 = units
66
40
60
45
60
Material Mix Variance
For X
-300
For Y
240
-60 MMV
Material Usage Variance
For X
-500
For Y
0
-500 MUV
Material Price Variance
For X
0
For Y
-300
-300 MPV
From the following information regarding a standard product,
compute 1. Mix 2. Price 3. Usage Variance:
Standard
Material
Qty.
Rs. p.u.
Actual
Total
Qty
Unit
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
Revised St. Qty A
4/8*6= units
Revised St. Qty B
2/8*6= units
Revised St. Qty C
2/8*6= units
Material Mix Variance
For A
1
For B
1
For C
-6
Material Usage Variance
For A
2
For B
2
For C
-4
Material Price Variance
For A
-5
For B
0
For C
3
St. Price St. Qty Act.Price Act. Qty
3.00
1.00
4
3.50
2
1.50
2.00
2
2.00
1
1.50
4.00
2
3.00
3
-4 MMV
0 MUV
-2 MPV
Material variances
Labour Variances
•
•
•
•
Labour Cost Variance
Labour Usage/Efficie. Var
Labour Rate Variance
Idle time Variance
SH*SR – AH*AR
(SH-AHactual)*SR
(SR-AR)* AH
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.
2
LUV 2000F
Actual output 1,000 units St. Rate
St. Hrs
2500
LPV -500U
Actual wages Rs. 4,500
Calculate all labour
Actual Rate 2.25
variances.
Actual Hrs 2000
Idle time
500
ITV 1000F
LCV 500F
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
St. Rate
6
Actual Wages
Rs. 14000
St. Hrs
2100
Idle time
50 hours
Actual Rate
7
Actual Hrs 2000
Idle time
50
LUV
900F
LPV -2000U
LCV -1400U
IDV
300
Labor Efficiency Variance- Causes
Poor
quality
materials
Poorly
trained
workers
Unfavorable
Efficiency
Variance
Poor
supervision
of workers
Poorly
maintained
equipment
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.
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 expenditure variance, and
– Variable overhead efficiency variance.
2. Fixed overhead variances.
Formulas
1. Variable overhead variances.
(Standard variable o/h for actual prodn. – Actual variable o/h)
2. Variable overhead budget or expenditure variance,
(Budgeted variable overhead for actual hours – Actual
variable overhead) i.e. AH*BR – Actual Cost
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
Sales Variances
• Sales Margin Price Margin = (AP-BP)*AQ
• Sales Margin Volume variance = (AQ-BQ)*BC
• Total Sales Margin variance = AQ*AC – BQ*BC