Standard Costing

Material Variances
There are two factors;
1. Price paid
2. Quantity of material used in production
Actual cost differs from standard cost due to
change in price and change material
consumed vs set standard
Material Price Variance
(SP-AP) x QP
Material Usage Variance
(SQ-AQ) x SP
Compared standard quantity that shouldve
been used with the actual quantity which has
been used.
Calculated on standard price to remove price
effects
Manager procurement held responsible for
procurement of materials, irrespective of
material efficient use by the production

Total Material Variance
(SC-AC)
Difference between the standard material cost
for actual production and the actual cost.
Combination of material price & material
usage variance
Labor Variance

Labor cost is determined by the price paid &
the quantity of labor used.
Price and quantity variance arise for labor.

Labor Rate Variance
(SR-AR) x AH
Comparing standard price per hour with the
actual paid per hour.
Labor rate is least subject to control by
management.


Labor Efficiency Variance
It represents quantity variance for direct labor
Difference between the standard labor hours for actual
production & the actual labor hours worked x standard
wages rate.
Similar to the material usage variance.
Normally controllable by the manager production
Arise due to use of inferior quality material, failure of
machinery, change in production process
Incase of poor production planning or change in quality
control standards then manager production is not liable
(SH-AH) x SR
Variable Overhead Variance
Difference between standard variable & the
actual variable incur
(SC-AC)
Vary with direct labor or machine hour & will
be due to price variance & quantity variance
similar to direct labor
Variable overhead expenditure
Variable Overhead Expenditure
Difference between budgeted overheads &
the actual cost incurred.
(BVO-AVO)

Possible Causes
Aggregation of a various individual overhead items such as,
indirect labor, indirect material, power consumption,
maintenance and other support services
Can arise because prices have been changed.
Can also be effected by the use of overheads. For example;
using more electricity than the amount which should have
been used. This will increase cost of power.
Expenditure variance is not informative and meaningful
unless comparison of each individual item of overhead
expenditure with the set standard focusing on individual
line items & not isolated on total variance.
Variable Overhead Efficiency Variable
Identical to the labor efficiency variable.
(SH-AH) x SR

Fixed Overhead Expenditure or
Spending Variance
Fixed cost assume to remain unchanged in short
term in response to changes in the level of
activity but may change due to price increase
Such as changes in salaries of supervisors
increase in rent rates, taxes & utilities.
Likely to be incontrollable in the short term
It will arise for both marginal and absorption
costing systems
VFO-AFO
Volume Variance
It is due to actual production different from budgeted
production if actual production is greater than the
budgeted production, volume variance is favorable &
vice versa
Not useful for cost control
Calculated to meet to meet the profit measurement
requirements of financial requirements
For direct costing volume variance will not occur as
fixed cost are allocated to product
Volume variance subdivided into efficiency and
capacity variance
(AP-BP) x SR
Efficiency Variance
(SH-AH) x SR
Identical with the labor efficiency variance
Not useful because fixed overhead will not
change

Volume Capacity Variance
Indicates failure to utilize capacity
Difference between actual hour of input & the
budgeted hour of the input.
(AH-BH) x SR
Reasons include: material shortage, machine
breakdown, labor disputes, reduction in sales
demand.