Standard Costing

Material Variances
There are two factors;
1. Price difference
2. Quantity of material used in production differ from standard material.
Material Price Variance:
(SP-AP) x QP
Possible reasons:
1. Actual prices may exceed standard prices due to inflation.
2. It is beyond the control of the company.
3. A favorable price variance can be due to the purchase of inferior quality lead to inferior product or
more wastages.
4. An emergency purchase may cause higher price because of additional handling and freight on
especial rush order

Material Usage Variance:
(SQ-AQ) x SP
Compared standard quantity used with the actual quantity used.
Calculated on standard price to remove price effects
Possible reasons:
1. Controllable by the production manager
2. Careless handling of material, use of inferior quality material, change in method of production,
change in quality standards, pilferage etc.
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 labor hour with the actual paid per labor hour.
Labor rate is least subject to control by management.
Labor Efficiency Variance:
(SH-AH) x SR
Difference between the standard labor hours for actual production & the actual
labor hours worked x standard wages rate
Represents quantity variance for direct labor
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


Variable Overhead Variance
Total 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:
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 Variance:
Identical to the labor efficiency variable.
(SH-AH) x SR




Fixed Overhead Expenditure or Spending Variance
(VFO-AFO)
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 etc.
Expenditure variance will arise for both marginal and absorption costing systems
Volume Variance
(AP-BP) x SR
Due to actual production different from budgeted production.
if actual production is greater than the budgeted production then volume variance is favorable & vice versa
Not useful for cost control purpose.
Calculated to meet to meet profit measurement requirements of financial reporting.
For absorption costing volume variance will occur as fixed cost are allocated to product.
Volume variance subdivided into efficiency and capacity variance.
Indicates as to why the actual production is different from budgeted production
Company has failed to utilize the plant capacity
Efficiency variance indicates a failure to utilize capacity efficiently
A failure to achieve the budgeted capacity maybe for a reason. Machine breakdown, material shortages, poor
production schedule, labor disputes, reduction in sales demand.
it is not meaningful to attach fixed cost to the variances since, fixed cost will not be affected by a failure to
utilize capacity
Efficiency Variance:
(SH-AH) x SR
Identical with the labor efficiency variance
Not useful because fixed overhead will not change




Volume Capacity Variance
(AH-BH) x SR
Difference between actual hour of input & the budgeted hour of the input.
Indicates failure to utilize capacity
Reasons include: material shortage, machine breakdown, labor disputes, reduction in sales
demand.
Material Mix and Yield:
Material mix variance =
(Actual quantity used - Actual quantity in standard mix %) x standard price

When the mix of materials used differ from standard mix, if the mixture is varied a
larger than expected of expensive material than unfavorable MM arises.
When combination of two or more materials is used
MM is based on standard price of each material to avoid price effect.
Production manager may change standard mix for economical material mixed
to save cost but without compromise on quality of product.
Input standard be established for each material mix. Studies necessary to
establish material mix.
An adverse MM will result in more expensive materials used in place of cheap
materials.



Material Yield variance:
Material yield variance = (Actual yield - standard yield on actual input of material) x standard
cost unit of output
Difference between the actual output & the actual output for a given level of inputs.
Arise failure to follow standard procedures.
Use of inferior quality materials may result in an adverse yield variance.
For example; An input of 100,000 litres expected an output of 90,000 litres of product
Actual production is 92,700 litres. It means , 2,700 litres is produced in excess. Cost per unit
of output is Rs 6 per unit. A favorable yield variance is Rs 16,200
Material price, mix & yield variances are interrelated and should not be interpreted in
isolation.
Inter dependencies be recognized
Changes in relative input prices of materials will affect the optimum standard mix & yield of
material
Appropriate to those production process where manager has the authority to change the mix
of material & deviate from standard mix

Material Usage Variance :
It consists of mix & yield variance