LESSON TEN: STANDARD COSTING AND BASIC VARIANCE ANALYSIS

Lesson objectives
After studying this lesson, the learner should be able to:
a) Explain the objectives of standard costing and define a standard cost.
b) Distinguish between standard costing and budgetary control.
c) Explain the various types of performance standards and prepare a standard
cost.
d) Define variance analysis and explain its components.
e) Calculate material, labour, fixed overhead and variable cost variances.
f) Identify the causes of material, labour and overhead variances.
1.0 Objectives of standard costing
The term standard costing is derived from ‘ standard cost’. A standard cost is a
planned or predetermined unit cost of production. The total standard cost of a product
is the total planned cost per unit of materials, labour, variable and fixed overheads.It
is determined from estimates of expected prices or rates for materials ,labour and
overheads.
Standard costing is a control technique which establishes predetermined estimates of
the costs of products or services, collects actual costs and output data and compares
the actual results with the predetermined estimates. It measures control by way of
variance analysis, whereby standard costs are compared with actual costs and
differences arising therein are investigated.
The main purposes or objectives of standard costing may be summarised as follows:
a. To assist in setting budgets and evaluating managerial performance.
b. To act assist in cost control by highlighting variances in cost of
material, labour and overheads.. Managers are then able to know those
adverse situations that require remedial action.
c. To provide a prediction of future costs that can be used for decision
making
d. To provide a basis for inventory valuation, thus avoiding tedious
methods like FIFO, LIFO and Weighted average cost.
e. To provide targets that managers are expected to achieve .Those who
achieve the set targets become motivated.
1.1Standard cost and budgetary control
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 It may be important to note that most students confuse standard costing and
budgetary control. The following include some of the differences between standard
costing and budgetary control:
1) Standard costing is applied mainly in manufacturing activities whereas
budgetary control is universal.
2) Standard costing emphasises set cost standards maintained while budgetary
control emphasises profit planning
3) Standard costing uses standard cost per unit of product or service as benchmark
whereas budgetary control is a total concept for departmental organisation in an
entire period.
4) Standard cost is established after considering a variety of factors like production
volume, methods employed and efficiency determinants whereas budgetary
control is based on previous performance and makes adjustments for any
expected changes
5) Standard costing is the basis of variance analysis which is normally revealed
through accounting; in budgetary control variances are revealed through
statistical measure
6) standard costing lays the basis for investigation of variances ; budgetary
control gives more emphasis on budget over expenditures
7) Standard costing is useful in decision making pertaining to cost management;
budgetary control puts more emphasis on general administrative and policy
decisions.
8) Standard costing is more useful for cost accounts whereas budgetary control
mirrors financial accounts.

1.2 Performance standards and standard standard costs

The quantity of materials and labour time required will depend on the level of
performance required by management. You may note remember that material and
labour costs are prime costs and therefore are a major determinant of a standard cost.
Standards imply an acceptable level of production efficiency and one of the major
objectives of setting standard is to motivate employees to achieve efficiency in
operations

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 Types of performance standards
a. Basic or constant cost standards: These are constant standards that remain
unchanged over long periods of time. They provide a basis for comparison
with actual costs. However, they are seldom used because they disregard
changes in production, material prices and labour rates.
b. Ideal or theoretical standards: These are standards which can only be
achieved under perfect operating conditions. They represent perfect
performance .Such standards assume no idle time, no machine breakdowns
and no material shortages and labour strikes. They tend to be unrealistic and
unattainable; they are unlikely to be attained and used in practice due to their
adverse impact on employee motivation.
c. Attainable or expected standards: These represent costs that should be
incurred under normal or efficient operating conditions .They are standards
that are difficult but not impossible to achieve .They cater for normal material
spoilage, machine breakdowns and lost time etc.
d. Current standards: These are set for a relatively short period to reflect
current conditions .They are normally used in during inflationary times but
are same as attainable standards when the conditions stabilise .They are set
for short periods but quickly adjusted when circumstances change.
1.4Problems of standard costs
Using standard costs for performance evaluation has been criticised on the
following grounds:
1) Standards discourage operating improvements beyond the standards
set.
2) Standards may not be preserved for long especially in a rapidly
changing, dynamic production environment.
3) Standard narrow employees focus to efficiency improvements and
makes them ignore overall organisational objectives.
4) Standards may cause employees to unduly focus attention on their
own divisional, departmental or branch operations to the detriment of
other operations that require them.
1.5Components of a standard cost

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 Setting a standard cost is the essence of standard costing .A standard
cost is accumulated for each product, comprising the standard cost of materials and
labour (wages) used together with a predetermined share of budgeted variable and
fixed production overheads. For standard cost of materials, material prices, quantity
issued and consumed and actual output units have to be ascertained.In case of labour
costs, labour efficiency ( time worked and time paid) and estimated wage rates and
actual rates are required.
variable overheads are absorbed into production on the basis of labour hours. It is
therefore necessary to estimate the variable overhead for the year and budgeted
activity (output) units or hours.These are used to calculate the variable overhead
absorption rate (VOAR) per unit.
Fixed overheads can be budgeted in total before production starts but the amount to be
included in a standard product cost depends on budgeted output. A fixed overhead
absorption overhead rate (FOAR) is the determined. The total standard production
costs per unit are summarised into a standard cost card or sheet specification.

Example 1
The standard cost for production of one unit of product ‘Z’ is given as below:
Material: 1 kg at shs 4 per kg
Labour : 1 hour at shs 2 per hour
Variable overheads shs 2 per unit
Fixed overheads shs 5 per unit
Required: a) Prepare a standard cost card and determine the standard cost for production of
2,000 units.
b) calculate the unit selling price if the profit margin is estimated to be 20%.
Solution
a) Standard cost card
Cost shs per unit
Materials : 1kg @ shs 4 4
Labour : 1 Hr @ shs 2 2
Variable overhead rate (VOAR) 2
4
 Fixed overhead rate (FOAR) 5
Standard cost per unit 13

Standard cost for production of 2,000 units = 2,000× shs 13 =shs 26,000 .
b) Selling price per unit = shs 13 + 25% ×shs 13 = shs 13 +3.25=shs16.25
If profit margin is 20%(⅟5) , the profit mark up is 25% ( ¼) ( Note the relationship
:cost price + profit= selling price)
Example 2
The following information is given for manufacture of a product:
Budgeted output for the year 9,800 units
Standard details for one unit:
Direct labour : 40 sq. metres at shs 53 per sq.metre
Direct wages: Bonding dept : 48 hours at shs 25 per hour
Finishing dept : 30 hours at shs 19 per hour
Budgeted costs and hours per annum
Variable overheads : Shs Hours
Bonding dept 3,750,000 500,000
Finishing dept 1,500,000 300,000
Fixed overheads :
Shs
Production 3,920,000
Selling & Distribution 1,960,000
Administration 980,000
Required:a) Prepare a standard cost card for one unit to show Prime cost,
Variable production cost, Total production cost and Total cost.
b) Calculate the selling price if profit margin is 15%.
Solution
a) Standard cost per unit ( Budget)
Shs shs
Material : 40 sq.m @ shs53 2,120
Labour : Bonding :48 Hrs @ shs 25 1,200
Finishing:30 Hrs @ shs 19 570 1,770

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 PRIME COST
3,890
Variable overhead
Bonding ( shs 7.50×48 hours) * 360
Finishing ( shs 5.00× 30 hours)* 150 510
Variable cost of production
4,400
Fixed overheads
400**
Total production (factory) cost 4,800
Selling & distribution overheads (shs 960,000÷9,800 units) 200
Administration overheads (shs 980,000÷9,800 units) 100 300
Total cost
5,100
Add : Profit mark up (3/17 × shs 5,100 ) 900
Selling price per unit 6,000
*Variable overhead absorption rates (VOAR):
Bonding dept : shs 3,750,000 /500,000 Hrs= sh 7.50 per Hour.
Finishing dept : shs 1,500,000/300,000 Hrs = shs 5.00 per Hour.
**Fixed overhead absorption rate(FOAR): (shs 3,920,000÷9,800 units)= shs 400.

1.0 VARIANCE ANALYSIS

A variance simply means a deviation or difference from the expected. Actual costs are
compared with the budgeted or standard costs to obtain a variance. Variance analysis
refers to critical analysis of each element of production cost (material, labour, variable
and fixed overheads) in an attempt to reveal adverse or favourable variances which need
to be investigated if they are ‘out of control’.
Price or rate variance measures the difference between actual prices (AP) or rate (AR)
paid and the standard price (SP) or rate (SR) that should have been paid for materials or
labour.
Quantity or efficiency variance measure the difference between the actual quantity (AQ)
or hours (AH) for direct material or labour used and the standard quantity(SQ) or hours
(SH) that should have been used.
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Standard quantities or hours are based on actual units produced (output achieved).
The standard hour is the quantity of output or amount of work which should be performed
in one year.
Variance analysis relies to a great extent on standard costing. For instance, Standard
prices and quantities and actual prices and quantities must be known in order to calculate
variances. Variance analysis is used as a control and evaluation tool. The following is the
breakdown of basic variances:
1) Material cost variance =Price variance + Usage variance.
2) Labour cost variance= Rate variance + Efficiency variance
3) Variable overhead cost variance= Expenditure variance +Efficiency variance
4) Fixed overhead cost variance= Expenditure variance+ Volume variance;
Fixed overhead volume variance=Volume efficiency variance+ Volume capacity
variance.
1.1 Material cost variances
The direct material cost variance can be subdivided into material PRICE variance
and USAGE variance.
The direct material cost variance is the difference between what the output
actually cost and what it ought to have cost, in terms of material.
The material price variance is the difference between the standard cost and the
actual cost for the actual quantity of material used or purchased.
The material usage or quantity variance is the difference between the standard
quantity of materials that should have been used for the number of units actually
produced and the actual quantity of materials used, valued at the standard cost per
unit of material.
PRICE variance= Actual quantity (Actual price-standard price)=AQ(AP-SP)
USAGE variance =Standard price (Actual quantity-standard quantity)=SP
(AQ-SQ)
Note that the price variance may be segregated at the time of purchase ( when the
material is taken into stock) or at the time of issue from the stock(when the
material is put into production ).Both methods have their advantages and
disadvantages .However, where a full standard costing system is operation,
as is usually the case, price variance should be calculated on purchases for

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 the period .If actual price or actual quantity exceed the standard price or standard
quantity respectively, the material cost variances would be adverse or vice versa.
Reasons for material cost variances
Material price variance
a. Price changes as a result of wage awards,
increases in customs duties etc
b. Differences in standard and actual order
quantities due to gains or losses in quantity
discounts
c. Obtaining materials from a different supplier
other than the listed one
d. Differences between standard and actual
carriage costs ( freight, insurance, storage
etc)
e. Differences between the standard and actual
quality of materials
2.2 Labour cost variances
Direct labour cost variance can be subdivided into labour rate variance and
efficiency (quantity) variance.
Labour cost variance is the difference between what the output should have cost
and what it actually cost in terms of labour.
The labour rate variance is the difference between the standard cost and the actual
cost for the actual number of hours paid for.
The labour efficiency variance is the difference between the hours that should
have been worked for the number of units actually produced and the actual
number of hours worked valued at the standard rate per hour .The variances may
either be adverse or favourable. If actual rate or actual hours exceed the standard
rate or standard hours respectively, the labour cost variance would be adverse or
vice versa.
The calculation of labour cost variances are similar to those of material cost
variances. The actual price and standard price are replaced with actual rate and
standard rate respectively in labour cost variances. Similarly, the actual quantity

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 and standard quantity are replaced with actual hours and standard hours
respectively in labour cost variances.
RATE variance= Actual Hours paid ( Actual rate- standard rate)=AHP(AR-
SR)
EFFICIENCY variance= Standard rate (Actual hours-standard hours)=SR
(AH-SH)
However, note that when there is idle time, actual hours worked are used to
calculate the efficiency variance. In this case, idle time is the difference between
actual time worked (AH) and actual time or hours paid (AHP).
Idle time variance= Standard rate (Actual hours paid-Actual hours)=SR
(AHP-AH).Idle time variance is always adverse.
Reasons for labour cost variances
Labour rate variance
a) Use of different grades of labour other than planned
b) Payment of unplanned overtime or bonuses
c) Material prices variance causes
Labour efficiency variance
a) Idle time due to machine breakdowns and material
shortages
b) Errors in allocating time to jobs
c) Poor supervision and disorganisation in the factory workshop
2.3 OVERHEAD COST VARIANCES
The overhead cost variance is the difference between the standard overhead cost
specified for the production achieved, i.e. the flexible budget and the actual
overhead cost incurred. The standard overhead cost usually comprises the variable
and fixed overheads. It is necessary therefore to break the overhead cost variance
into variable overhead and fixed overhead cost variances.
1VARIABLE OVERHEAD COST VARIANCES
The variable overhead cost variance can be subdivided into variable overhead
expenditure variance and variable overhead efficiency variance.
Variable overhead cost variance is the difference between the actual variable
overheads incurred and the variable overheads absorbed, which may be over or under
absorbed overheads.
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Variable overhead expenditure variance is the difference between the actual variable
overheads incurred and the allowable variable overheads based on the actual hours
worked.
Variable overhead efficiency variance is the difference between the allowed variable
overheads and the absorbed variable overhead.
Variable overhead efficiency variance is uses the same hours as in labour efficiency
variance but priced at the variance overhead rate per hour.
Variable overhead expenditure variance=Actual variable overhead-(VOAR ×Actual
labour Hours )
VOAR= Variable overhead absorption rate.
Variable overhead efficiency variance= VOAR (Actual Hours- Standard Hours).
2 FIXED OVERHEAD COST VARIANCE
Fixed overhead cost variance is the difference between the standard cost of fixed
overhead absorbed in the production achieved ,whether completed or not, and the
fixed overhead attributed and charged to that period. The fixed overhead cost
variance can be subdivided into fixed overhead expenditure and fixed overhead
volume variances.
Fixed overhead expenditure variance is the difference between the budget cost
allowance for production for a specified control period and the actual fixed
expenditure attributed and charged to that period.
Fixed overhead volume variance is the difference between the standard cost absorbed
in the production achieved, whether completed or not, and the budget cost allowance
for a specified control period.
The fixed overhead volume variance can further be subdivided into fixed overhead
efficiency variance and fixed overhead capacity variance.
The fixed overhead efficiency variance is the difference between the standard cost
absorbed in the production achieved, whether completed or not, and the actual direct
labour hours worked, valued at the standard hourly absorption rate.
Fixed overhead capacity variance is the difference between budgeted (planned) hours
of work and the actual hours worked, multiplied by the standard absorption rate per
hour.
Fixed overhead expenditure=Actual Fixed overhead expenditure-Budgeted Fixed
overhead expenditure.
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 Fixed overhead volume variance=Standard cost unit
rate (Actual production-Budgeted production)
Fixed overhead efficiency variance=FOAR (Actual Hours in input-Standard Hours
in output)
Where FOAR= Fixed overhead absorption rate.
Fixed overhead capacity variance=FOAR (Actual Hours in input-Budgeted
Hours)
Or =Standard cost per unit (Budgeted production-
Standard

Production)
Example 2
The standard direct material specification for product ‘Z’ is to use 5 kg of raw material X at
sh 60 per kg. Last month, 30 units of product Z were produced from 160 kg of the raw
material, which cost shs 9,400 in total.
Required: Calculate the material PRICE and USAGE variance.
Solution
Material price variance = AQ (AP-SP) =160kg (shs 58.75-60.00) =shs 200 F
, usage variance =SP (AQ-SQ) = shs 60 (160-150) =shs 600 A
Material cost total variance= shs 200 F + shs 600 A=shs 400A.
Standard quantity (SQ) = Standard usage rate per unit× Actual units produced=5kg×30 units=
150kg.
Example 3
The standard direct cost of a unit of a product is given below:
Materials : 2kg at shs 12.50 per kg
Wages: 10 Minutes at sh 24 per hour.
In a certain period, 420 units were produced, 860 kg of material were used at a cost of shs
10,300 and 72 hours of labour were worked .Actual labour hours paid were 80 hours at a
cost of shs2,000.
Required: Calculate the Material and labour cost variances.
Solution
a)material cost variances
Price variance= AQ(AP-SP)=860 kg(11.979-12.50)=shs 10,300-10750=shs450 F
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 Usage variance= SP(AQ-SQ)=shs12.5(860-840)= shs 250A
Material cost variance= shs 450F +250A=shs 200F.
Standard quantity (SQ)= 2kg ×420 units=840 kg.
Check:material cost variance=(AP×AQ)-(SP×SQ)=shs 10,300-(12.50×840)-shs
10,300-10,500=shs200F
b)Labour cost variances
Rate variance=AHP(AR-SR)=80 hrs (sh25-24)= shs 80A
Efficiency variance =SR( AH-SH)=shs24 (72-70)=shs 48A
Idle time variance=SR (AHP-AH)=shs24 (80-72)=shs 192 A
Labour cost variance=shs 80A+48A +192A= shs 320A.
Standard hours =10/60 ×420 =70 hours.
Check: Labour cost variance=(AR×AHP)- (SR×SH)=Sh(80×25)-(24×70)= sh 2000-
1680=sh320A.
Example 4
The variable production overhead cost of one unit of a product were:2 hours for sh 15 per
Hour. During a certain period, 400 units of the product were made. The actual labour hours
were 760 hours at a total cost of shs 12,300.
Required: Calculate the variable overhead cost variances.
Solution
Variable overhead expenditure variance=Actual variable overheads- (VOAR× Actual labour
hrs)
=shs 12,300-(sh15×760)=shs 12,300-
11,400=shs900A.
Variable overhead efficiency variance=VOAR (Actual Hours-Standard Hours)=shs 15 ( 760-
800)=sh600F.
Variable overhead cost variance=shs 900A+600F= shs 300A.
Variable overhead absorption rate (VOAR) = sh 15 per hour.
Standard hours= 2hours× 400 units= 800 hours.
Example 4
The following information is given for product :
The standard fixed overhead cost per unit: 5 hours at sh shs 80 per hour.
Budgeted fixed overheads shs 400,000.Budgeted production 1,000 units.

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Actual fixed overhead expenditure shs 409,000.Actual labour hours were 5,400 hours for
output of 1,100 units.
Required: Calculate the fixed overhead cost variances.
Fixed overhead expenditure variance=Actual fixed overheads- Budgeted fixed overhead
expenditure.
= shs 409,000-400,000 =shs 9,000 A
Fixed overhead volume variance=Standard cost unit rate ( Actual production-Standard
production)
= shs 400 (1,100-1,000)= shs 40,000 F.
Fixed overhead volume efficiency variance=FOAR ( Actual hours-Standard hours)=shs 80(
5,400-5,500)= shs 8,000 F.
Or =standard cost unit rate (Actual quantity-Standard production).
Fixed overhead volume capacity variance=FOAR (Actual hours-budgeted hours)
=shs80 (5,400-5,000)= sh 32,000 F
Or Capacity variance= Standard cost unit rate ( Budgeted production-
Standard production).Note that standard production quantity is not given .

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 LESSON TEN: QUIZZES
1 Which of the following is NOT TRUE about standard costing?
A It makes possible the use of management by exception.
B It facilitates cash planning and inventory planning.
CIt provides comparison of actual and budgeted performance at given activity levels
DIt represents realistic yardsticks, more useful for cost reduction.
Correct answer C
2 Machine tools Ltd has set the following labour standard for one unit of its product :
Direct labour time per unit: 15 minutes
Direct labour rate per hour : sh 5.50
Actual results for a period were: Actual hours worked ,7,700 hours for a total cost of sh
40,810.
Output: 30,000 units. Calculate the labour rate and efficiency variance.
Solution
Labour rate variance=AH(AR-SR)=7,700 ( 5.30-5.50)=sh1,540 F
Labour efficiency variance=SR (AH-SH)= 5.50( 7,700-7,500)= sh 1,100A.
Total labour cost variance= sh 1,540F+ sh 1,100A=sh 440F.
Standard hours(SH)=15/60× 30,000 units=7,500 hours.
3 Which of the following reasons might cause adverse material quantity variances
1 Change in material standard
II Defective material
III Stricter quality control
IV Lower rate of scrap then expected
AI
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B 1 and II
C 1,II and III
D I,II,III and IV
Correct answerD
.
LESSON TEN: QUESTIONS

1) New Bomas Ltd uses variance analysis as a method of cost control. The following
information is available for the year ended 30th September, 2011
Budget: Production for the year 12,000 units
Standard cost per unit:
Shs
Direct material (3kg at sh 10 per kg 30
Direct labour (4 hours at sh 6 per hour) 24
Overheads ( 4 hours at sh 2 per hour) 8
Standard cost 62
Actual results :
Actual production for year: 11,500 units
Materials:37,250 kg at a total cost of shs 345,000
Labour: 45.350 Hours at a total cost of shs 300,000
Required : Material and labour cost variances.
Solution
Material cost variances:
Price variance =AQ (AP-SP)=37,250 kg(9.26-10)=345,00-372,500= sh 27,500F
Usage variance =SR(AQ-SQ)=sh 10 ( 37,250-34,500)=sh27,500A.
Labour cost variances:
Rate variance= AH( AR-SR)=45,350 Hrs ( 6.61-6)=shs 300,000-272,100=sh27,900
A
Efficiency variance= SR ( AH-SH)= sh 6( 45,350-46,000) =sh 3,900 F.
2 Jumba manufacturers Ltd produces single product for sale in the local market. The
company uses standard costing to control its operations. The standard cost per unit of the
product is as follows:
shs
15
 Direct materials ( 4 litres @ sh12 ) 48
Direct labour ( 3hours @ sh10) 30
Variable factory overheads (3hours @sh 6) 18
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During the month of June, 2010, 12,000 units were produced and the following costs
incurred:
Material purchases : 55,000 Litres @ sh 11 per litre
Direct labour (36,800 hours ) : total cost shs 360,000
Variable factory overheads: shs 202,000
Raw material stocks were : Beginning 6,000 litres and ending 12,200 litres.
Required :
a) material price and usage variance.
b) Labour rate and usage variance
c) Total variable factory overhead variance
d) Explain the possible causes of each of the above variances.
Solution
amaterial cost variances:
Price variance= AQ (AP-SP)= 55,000 ( sh 11-12 ) =sh 5,500 F
Usage variance = SP (AQ-SQ)= sh 12 ( 48,800-48,000)=sh 9,600A
b Labour cost variances
Rate variance= AH (AR-SR)= 36,800 ( sh 9.78-10)= sh 360,000-368,000)=sh 8,000F
Efficiency variance= SR( AH-SH )= sh 10( 36,800-36,000)=sh 8,000A.
C Total variable overhead variance= Actual variable overheads charged-( VOAR× Actual
output)
= sh 202,000-18×12,000= sh 202,000-216,000= sh
14,000 F
d) Causes of material and labour cost variances (refer text)
Causes of variable overhead variances:
 Savings in costs incurred
 More economical use of services
 Efficiency in labour force work
 Overtime
 Machine breakdowns, strikes, labour shortages
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3The production manager of Viwandani Ltd has given a weekly budget the machining
section as follows:
Day work ( 40 hours)
Four skilled operatives 160
Ten semi-skilled operatives 400
560
Production: Product X 330 units at 1 hour each
Product Y 460 units at ½ hour each
Wage rates are sh 50 and sh 36 for skilled and semi-skilled workers respectively.
The actual results for a week were as follows:
Five skilled and nine semi-skilled workers were paid shs 23,600 for a 40-hour week.
.Production was 300 of product X and 440 of product Y. There was a power blackout for 2
hours which disrupted production.
Required : Calculate the direct labour variances for the week.
Solution
Labour rate variance=Actual cost-Actual hrs× standard rate= sh23,600-560×40=23600-
22400= sh 1,200A.
Labour efficiency variance= Standard rate( Actual hrs worked-standard hours)=Sh 40( 560-
520)=sh 1,600 A.
Budgeted wages= 160×shs 50 + 400×sh 36= sh 22,400.
Budgeted standard hours= 330 × 1hr + 460×½ hr= 560 hours.
Standard rate= sh 22,400÷560 hrs= sh 40 per hr.
Standard hours=300×1 hr + 440×½ hr= 520 hours.
Idle time variance= idle time × standard rate= 14 ×2hrs× sh 40= sh 1,120.

4 A manufacturing company engages 200 artisans at the rate of sh 60 per hour in its
production department. A 42-hour working week is in operation an there are 4 weeks in
January .The standard performance is set at 60 units per hour.
During February, 182 artisans were paid at a standard rate of sh 60 per hour, but 10 artisans
were paid sh 62.50 per hour, while 8 artisans were paid at sh 57.50 per hour. The factory
production was disrupted for2 hours due to a power failure. Actual output was 10,100 units in
the month.
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Required: Labour cost variances.

Solution
Direct wages rate variance= AH (AR-SR)= 1,680( 62.5-60) + 1344(57.5-60)= sh 4,200 A +
3,360F=sh 840A
Direct wages efficiency variance =SR (AH-SH)= sh 60 ( 33,200-33,667 )= sh 28,000 F.
Idle time variance= idle time × standard rate=200×2 hours× sh 60 –sh 24,000A.
Actual hours worked= 200 artisans × 166(168-2) hours = 33,200 hours.
Rate variance occurs when actual rate differs from standard ie 10 artisans ×42 hrs×4
weeks=1680 hours and 8 employees ×42 hours× 4 weeks=1,344 hours. Actual
quantity=10,100 units.
Standard hours= Number of men× Quantity produced=
Standard quantity per hour
= (200×10,100)/60= 33,667 hours.
Actual hours worked per artisan= 42 hours × 4 weeks= 168 hours less 2hours stoppage=166
hours
5 The standard cost for a unit of product of an item is given as follows:
Material: 1 kg @ sh 4 per kg
Labour: 1 hour @ sh 8 per hour
Variable overheads: sh 48,000 for budget period.
Fixed overheads: sh 24,000 for budget period.
Output: 24,000 units.
Actual results:
Actual production: 2,000 units
Materials:3,000 kg @ sh 3.50 per kg
Labour : 2,400 hours @ sh 8.50 per hour
Variable overheads: sh 5,000
Fixed overheads: sh 4,000.
Time worked : 2,300 hours.
Required:
aPrepare a standard cost card for 2,000 units.
bCalculate I material cost variances
ii Labour cost variances
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 iii Total variable cost variance
iv Total fixed cost variance
solution
a Standard cost card (based on 2,000 units):
sh
Material : 1kg @ shs 4 sh 4@2000 units 8,000
Labour :1hr @ sh8 sh 8@2,000 units 16,000
Variable overheads (sh 48,000/24,000 ) sh 2 @2,000 units 4,000
Fixed overheads ( sh 24,000/24,000) sh 1 @2,000 units 2,000
Standard cost sh 15 @ 2,000 units 30,000
b Material cost variances:
Price variance= AQ (AP-SP) =3000 (sh3.5-4.0) =sh 3,000 F
Usage variance = SP (AQ-SQ) = sh 4 (3,000-2,000)= sh 4,000 A
Material cost variance= sh 3,000 F+4,000 A = sh 1,000 A
c Labour cost variances:
Rate variance= AH ( AR- SR)= 2,400 ( sh 8.5-8.0)= sh 1,200A
Efficiency variance = SR (AHW-SH)=sh 8.50 ( 2,300-2,000)=sh 2,550 A
Idle time variance= SR (AH-AHW)= sh 8.50 ( 2,400-2,300)= sh 850 A
Total Labour cost variance= sh 1,200A + 2,550 A +850 A= sh 4,600 A.
AHW= Actual hours worked.
AH=Actual hours paid.
d Total variable overhead variance= Actual variable ohds- VOAR@ Actual output
= sh 5,000- sh2 @ 2000=sh5,000-4,000 =sh 1,000 A
e Total fixed overhead variance= Actual fixed ohds- FOAR @Actual output
= sh 4,000- sh 1 @ 2000 = sh 4,000-2,000= sh 2,000 A

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Reference books

1T.Lucey,(1995) costing, 4e, DP Publications Ltd, ISBN 1 858050 52 9

2 Ray H.Garrison(1985) , Managerial Accounting: Concepts for planning, Control, Decision
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