Standard Costing

And Variance Analysis

 Standard Costing
Standard costing is a technique which is used in many
industries, where production is of repetitive nature.

Standard costing is developed due to the shortcomings of

historical costing.

CIMA, London, defines standard costing as the

predetermined cost based on technical estimates of
materials, labour and overheads for selected period of time
and for the prescribed set of working conditions.

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 Standard costing is that technique in which the standard
cost is determined before starting the production.

Standard cost is a predetermined cost and such cost

indicates what a product should cost.

Standard cost is calculated by considering all the

situations ideal in nature.

Standard costs have been defined as the normal costs for

normal production efficiency at normal level of output.

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 Standard

The word standard means a criterion (principle,measure).

A standard figure is one against which one can measure an
actual figure to see the deviation.

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 Standard Cost

Standard cost is a predetermined cost which is compared

in advance of production on the basis of specifications of
all the factors affecting costs and used in standard costing.
In other words, standard cost is a predetermined cost that
should be attained under a given set of operating
conditions.

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 Objectives Of Standard Costing

To establish control
To set standards for various elements of cost
To fix responsibility
To make budgetary control more effective

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 Establishing A System
Of Standard Costing

Setting up cost centers

Classification of accounts
Determination of size of the standard
Current
Ideal
Expected
Basic
Setting up of standard
Standard cost card

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 Need For Standards

Cost control
Pricing decisions
Performance Appraisal
Cost awareness
Management by objective

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 Application Of Standard Costing

Process industries
Service industries
Engineering industries
Textile industries
Extraction industries

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 Advantages Of Standard Costing
Formulation of price and production policies
Comparison and analysis of data
Management by exception
Delegation of authority and responsibility
Cost consciousness
Better capacity to anticipate
Better economy, efficiency, and productivity
Preparation of periodical financial statements
Facilities budgeting

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 Limitations Of Standard Costing

high degree of technical skill

segregation of variances into controllable and non-
controllable factors
duplication in recording,
either too strict or too liberal.

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 Variance Analysis

The deviation of actual from standard is called variance.

When the actual cost is less than standard cost or actual
result is better than standard set, it is known as favourable
variance.
On the other hand, when actual cost exceeds standards
cost or actual result is not up to standard, it is known as
unfavourable or adverse variance.

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 Classification Of Variances

Functional Basis
Measurement Basis
Result Basis
Controllability Basis

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 Functional Basis

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 Measurement Basis

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 Absolute variance: Difference between the standard cost
and the actual cost in terms of money is known as absolute
variance.

Relative variance: difference is expressed as a percentage of

the standard cost, it is known as relative variance.

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 Result basis

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 Material cost variance
Material cost variance = (Standard quantity of input for
actual production SP) (Actual quantity of input AP)

Material cost variance = Material price variance +

Material usage variance

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 Material price variance
This is that portion of the material cost variance which is due to
the difference between the standard price specified and the actual
price paid.
If the actual price is higher than the standard price, it would
result in adverse price variance and if the actual price is lower
than standard price, the result is favourable price variance.

Material price variance = Actual quantity (Standard price

Actual price)

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 Material Usage Variance
This is that portion of material cost variance which is due to
the difference between the standard quantity of actual
production and the actual quantity used.

Formula:

Material Usage Variance = Standard price (Standard

quantity Actual quantity)

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 Material Mixture Variance

This is that portion of usage variance which is due to the difference

between the standard and actual composition of mixture.

Formula:
Material Mixture Variance = Standard price [Actual quantity in
standard mix (i.e. RSQ) Actual quantity]

Revised Standard quantity = Total actual quantity consumed

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 Material Yield Variance
When there is a loss in process industries, the material yield
variance can be calculated.
This variance arises due to the difference between the standard
yield specified and actual yield obtained.
This is also a portion of the material usage variance.

Formula:
Material yield variance = [(Standard loss in terms of
actual input) (Actual loss on actual input)] (Average
standard price)
Material yield variance = Material usage variance
Material mix variance
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 Material Sub-usage Variance
When a product is produced from a mixture of two or more kinds of
material, there may arise material sub-usage variance.
There can be two possibilities:
(a) Total quantity of material consumed and standard quantity are not
equal, and mix ratios are also different.
(b)Total quantity of material consumed and standard quantity are not
equal, but mix ratios are equal.

It should be noted that material sub-usage variance is calculated

only when the quantity of wastage or output is not given.
When these quantities are given, this variance will be the same as
material yield variance.
This variance is also known as material revised usage variance or
25 material quantity variance.
 Formula:
Material sub-usage variance = (SQ RSQ) SP

It can be seen from this formula that material

sub-usage variance is the analysis of variance in
basic standard quantity of each material.

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 Labour Rate Variance
This is that portion of the labour cost variance which is
caused by the use of actual wage rate other than
predetermined.

Labour rate variance = Actual labour time (Standard wage

rate Actual wage rate)

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 Labour Efficiency Variance
It is the difference between the standard time and the actual
time spent multiplied by standard wage rate.

Labour efficiency variance = Standard wage rate

(Standard labour time Actual labour time)

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 Labour Idle Time Variance
It is that portion of labour cost variance which is due to the
abnormal idle time of workers.
While calculating labour efficiency variance, abnormal idle time
is deducted from the actual time spent to determine the real
efficiency of the workers.

Idle time variance = Abnormal idle time Standard wage rate

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 Labour Yield Variance
It is computed on the basis of the increase or decrease in
the actual yield or output when compared to the standard.

Labour Yield Variance = [Standard yield in units

expected from the actual hours worked actual yield]
Standard labour cost per unit

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 Labour Mix Variance
This variance arises due to the change in the composition or
mix of a group of workers as compared to the standard
composition or mix.

It can be calculated in the following two situation:

(a)When the totals of standard labour mix and actual labour mix
are same, but the two mix ratios are different.
(b)When the totals of standard labour mix and actual labour mix
are different, and the two mix ratios are also different.

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 Situation A
Labour mix variance = (Standard time mix Actual
time mix) Standard rate per hour

Situation B
Labour mix variance = (Revised standard time Actual
time) Standard rate per hour
Here, RST= Total actual time

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 Variable overhead variance
Difference between the standard variable overheads and
absorbed variable overheads is called variable overhead
variance.
If variable overhead absorbed to actual output is more or
less than its standard variable overhead, this variance is
created.
Overhead variance is the difference between the amount
calculated at standard rate of variable overhead and the
amount calculated at actual rate of variable overhead on
the on the actual output.

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 Variable overhead variance = AO (SR AR)
= (AO SR) (AO AR)
= SVO AVO

Here, AO = Actual output, SR = Standard rate,

AR = Actual rate,
SVO = Standard variable overhead, and
AVO = Actual variable overhead

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Net or overall variable overhead variance
Variable overhead variance =
[Standard hours Standard variable overhead rate per hour]
[Actual hours Actual variable overhead rate per hour]
= [SH SVOR] [AH AVOR]

This net variable overhead variance can be decomposed into

following two variances:
(a)Variable overhead spending variance
(b)Variable overhead efficiency variance

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 Variable overhead spending variance (VOSV)
VOSV = (Actual hours Standard variable
overhead rate per hour)
- (Actual hours Actual variable
overhead rate per hour)

Variable overhead efficiency variance (VOEV) :

The difference between the actual hours used to complete a
job and the standard hours allowed to do it indicates the
efficiency or inefficiency.
It measures the extent of cost saved or excess cost incurred
due to efficient or inefficient performance.

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 VOEV = (Standard hours allowed for actual volume or
output
Actual hours taken for actual volume)
Standard variable overhead rate per hour

= (Actual output hours Standard per unit)

(Actual hours Standard variable overhead
recovery rate)

The variable overhead can be attributed to the causes

which are responsible for the labour efficiency variance.
Factors such as workers personal problems, incentive
plans, work process, frequency and quantity of machine
repairs, materials quantity, etc. will cause variable
overhead efficiency variance.
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 Variable overhead expenditure variance
Variable overhead expenditure variance =
Budgeted variable overheads Actual variable overheads

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 Fixed overhead variance
Fixed overhead variance is mainly concerned with over
absorption or under absorption on fixed overheads.
As the fixed overheads are not affected by the volume of
output, its absorption is done on actual output the
predetermined rate only.
Fixed overhead variance is caused due to the difference
between standard fixed overhead and actual fixed overhead
on actual output.
Fixed overhead variance = TSC TAC
[AO SFO] [ AO AFO]
TSO TAO
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 Here, TSC = Total standard cost for actual
output,
TAC = Total actual cost,
AO = Actual output
SFO = Standard fixed overhead
AFO = Actual fixed overhead
TSO = Total standard overhead
TAO = Total actual overhead

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 Expenditure Variance
The difference between the amount actually spent during a
certain period as fixed overhead and the amount of fixed
overhead budgeted for the period is expressed by this
variance.
This part of fixed overhead cost variance shows whether
the actual amount of fixed overhead is less or more than
the amount budgeted for it.

Expenditure variance =
Budgeted fixed overhead Actual fixed overhead

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 Volume variance
Volume variance is caused mainly due to the difference
between budgeted output and actual output.
To calculate this variance, the difference of budgeted
output and actual output is multiplied by the budgeted
standard absorption rate.

Volume variance = SC (AQ BQ)

Where, SC = Standard cost per unit of fixed overheads
AQ = Actual output in actual hours worked
BQ = Budgeted standard output in budgeted
standard hours

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 Efficiency variance
This variance gives information about the efficiency of
workers because it arises due to their being less or more
efficient.
It also arises due to the change in production process or
quality of material and efficiency of the machinery, plant,
and workers.

Efficiency variance = SC (AQ SQ)

Here, SQ means the quantity produced during actual
working hours at the standard rate.

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 Capacity variance
Capacity is expressed in terms of average direct labour
hours per day.
If capacity is utilized to a level less or more than the
planned standard, variance arises.
Use of plant and instruments less or more than their
capacity affects the efficiency due to which this variance
arises.

Capacity variance = SC (SQ BQ)

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 Calendar variance
If the number of actual working days during a certain
period is different from the standard number of working
days during the same period, then it is called calendar
variance.

Calendar variance = SC (RBQ BQ)

Here, RBQ = Budgeted quantity of output for actual
working days.

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 Note:
If the calendar variance is being calculated, capacity
variance should be ascertained using the formula given
below:

Capacity variance = SC (SQ RBQ)

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 Sales Value Variance
It is the difference between the standard value and the actual
value of sales affected during a period.

Sales value variance =

Actual value of sales Standard value of sales

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 Sales price variance
It is the portion of the sales value variance which is due to
the difference between actual price and standard price
specified.

Sales price variance =

Actual quantity sold (Actual price Standard price)

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 Sales Volume Variance
It is the portion of the sales value variance which is due to
the difference between actual quantity of sales and standard
quantity of sales.

Sales Volume Variance = Standard price (Actual quantity

of sales Standard quantity of sales)

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 Sales mix variance :
It is the part of the sales volume variance and it arises due to
the difference in the proportion in which various articles are
sold and standard proportion in which various articles were
to be sold.
Sales mix variance = Standard value of actual mix
Standard value of revised standard mix

Sales Sub Volume Variance :

This represents the difference between the budgeted sales. It
is also called as sales quantity variance.
Sales Sub Volume Variance = (Revised standard sales
quantity Standard selling price) (Standard sales
53 quantity Standard selling price)
 Variances Based On Profits
Total sales margin variance :
This is an overall or composite variance made of other sub-
variances, and is represented by the difference between the
standard margin appropriate to the quantity of sales
budgeted for a period and the margin between standard cost
and actual selling price of the sales affected.

Total sales margin variance =

Standard or Budgeted margin Actual margin

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 Sales margin variance due to the selling
price
This is that portion of total margin variance which is due to
the difference between the standard price on the quantity
of sales affected and the actual price of those sales.

Sales price variance =

(Actual quantity of sales Standard price)
(Actual quantity of sales Actual price)
or
Sales price variance =
Profit on actual sales at standard price and standard cost
Actual profit
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 Sales margin variance
due to the volume of
sales
This is that portion of total margin variance which is due to
the difference between the budgeted quantity and the actual
quantity of sales.
The variance is composed of two sub-variances, due to
change in the ratio of quantities of sales (mix variance) and
actual being more or less than the budgeted sales (quantity
variance).

Sales volume variance = Standard profit on standard

quantity of sales Standard profit on actual quantity
of sales
or
Sales volume variance = Standard profit profit on
actual sales at standard price and standard costs
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 Sales margin variance
due to sales mixture
This is that portion of total margin variance which is due
to the difference between the budgeted and actual
quantities of each product of which the sales mixture is
composed, valuing sales standard net selling prices and
cost of sales at standard.

Sales mixture variance = Standard margin

(Standard proportion for actual sales Actual
proportion)
or
Sales mixture variance = Standard sales unit
(weighted budgeted margin per unit Margin of
actual sales units at standard price)

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 Sales margin variance due to sales
quantities
This is that portion of the sales volume
variance which arises due to the difference in
the total actual and the budgeted sales.

Sales quantity variance = Standard

margin (Budgeted sales Standard
proportion for actual sales)

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 Efficiency ratio
Efficiency ratio is the standard hours equivalent to the
work produced, expressed as percentage of the actual hours
spent in producing that work.
This is related to the labour efficiency and variable
overheads/fixed overheads efficiency variance

Efficiency ratio = 100

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 Activity ratio
Activity ratio is the number of standard hours
equivalent to the work produced, expressed as a
percentage of the budgeted standard hours.
This ratio is related to the fixed overhead volume
variance.

Activity ratio = 100

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 Calendar ratio
Calendar ratio is the relationship between the number
of working days in a period and the number of
working days in the relative budget period.

Calendar ratio =

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 Capacity usage ratio
Capacity usage ratio is the relationship between the
budgeted number of working hours and the maximum
possible number of working hours in the budget period.

Capacity usage ratio =

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 Capacity utilization ratio
Capacity utilization ratio is the relationship between the
actual hours in a budget period and the budgeted working
hours in a given period.
This ratio is related to fixed overhead capacity variance.

Capacity utilization ratio =

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