Unit IV: Standard Costing and

Variance Analysis
Variance Analysis
 Variances
 A variance is the difference between a planned, budgeted, or standard cost and the actual
cost incurred. The same comparisons may be made for revenues. The process by which
the total difference between standard and actual results is analyzed is known as variance
analysis.

 When actual results are better than expected results, we have a favorable variance (F). If,
on the other hand, actual results are worse than expected results, we have an unfavorable
variance (U).

 Variances can be divided into three main groups:

 • Variable cost variances.

 • Sales variances.

 • Fixed production overhead variances.

 Direct material cost variances

 Material cost variance is the difference between the total cost of the direct
materials used and standard cost of direct materials specified for the output
achieved.

 The direct material total variance is the difference between what the output
actually cost and what it should have cost, in terms of material

 This variance results from differences between quantities consumed and

quantities of materials allowed for production and from difference between
prices paid and prices determined.
Reasons for Material cost variance
 Change in market price of materials.
 Failure to purchase the specified quality, thereby resulting in a different price
being paid.
 Change in the quantity of materials purchased, thereby leading to lower /
higher quantity discount.
 Not availing cash discount.
 Inefficient purchasing.
 Change in delivery costs.
 Rush purchases.
 Purchase of a substitute material on account of non-availability of the
material specified.
 Change in rates of excise duty, purchase tax.
 Off-season purchasing for certain seasonal products.
Calculation of Direct Material Cost Variance

 Material Cost Variance = SC – AC

 MCV = [Standard quantity for actual output * Standard price] – [Actual

quantity * Actual price] Material Cost Variance = (SQ * SP) – (AQ * AP)
Q1. Product X has a standard direct material cost as follows:

10 kilograms of material Y at Nu.10 per kilogram = Nu.100 per unit of X.

During the period Fourth, 1000 units of X were manufactured, using 11 700
kilograms of material Y which cost Nu. 98 600.

Calculate the direct material total variance.

Q2.

Standard Quantity : 10 units

Standard Price: Nu. 20 per unit

Actual quantity : 2500 units

Actual price = Nu. 25 per unit

Actual output: 1500 nos.

Standard output: 5 nos.

Calculate material cost variance?

Q3.

Standard Quantity : 1unit per no.

Standard Price: Nu. 20 per unit

Actual quantity : 2500 units

Actual price = Nu. 25 per unit

Actual output: 1500 nos.

Calculate material cost variance?

 Home Task

Q4.

Standard cost for 1 No. : Nu. 100

Standard Price: Nu. 20 per unit

Actual quantity : 2500 units

Actual price = Nu. 25 per unit

Actual output: 1500 nos.

Calculate material cost variance.

 Material Cost Variance

Material Price Variance Material Qty Variance

Material Price Variance

This is the difference between the standard price and the actual price for the
actual quantity of material used or purchased. In other words, it is the difference
between what the material did cost and what it should have cost.

Material Price Variance ( MPV) = ( Standard Price – Actual Price) * Actual Qty
Material Qty Variance

This 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. In other words, it
is the difference between how much material should have been used and how
much material was used, valued at standard cost.

Material qty Variance ( MQV) = ( Std Qty – Actual Qty) * Std Price
Problem Solving
Q. Product X has a standard direct material cost as follows:

10 kilograms of material Y at Nu.10 per kilogram = Nu.100 per unit of X.

During period 4, 1,000 units of X were manufactured, using 11700

kilograms of material Y which cost Nu. 98 600.

Calculate the material variances.

Q.

Standard Quantity : 10 units

Standard Price: Nu. 20 per unit

Actual quantity : 2500 units

Actual price = Nu. 25 per unit

Actual output: 1500 nos.

Standard output: 5 nos.

Calculate material variances?

Q. The following particulars are regarding the standard and actual production
of product A:

Standard quantity of material per unit: 5 kg

Standard price per kg: Nu. 5

Actual number of units produced: 400

Actual Qty of material used: 2200 kg

Price of materials: Nu. 4.8 per kg

Calculate material variances.

Q.Calculate material cost variance, material quantity variance and
material price variance from the following:

Material Standard Actual

Qty Rate Qty Rate

X 1000 6 1100 7

Y 700 10 600 8
Q. XY Co. purchased 2500 units of material for Nu. 5000. The standard materials
required for producing 1 tone of the final product is 30 units. The standard price
of the materials is Nu. 1.75 per units. The stock materials in the beginning and at
the end is 700 units and 1300 units respectively. Actual production is 75 tones.

Calculate materials cost, material price and material usage variances.

 Home Task
Q. During the month of May, the following data applies

Raw Material Standard Actual

Units(kg) Price(Nu) Amount ( Nu) Units (kg) Price ( Nu) Amount
(Nu)
X 60 25 1500 56 25 1400
Y 40 50 2000 44 50 2200
100 3500 100 3600
 Material Usage Variance

Material Mix Variance Material Yield Variance

Material Mix Variance

Material Mix Variance is that portion of the material quantity variance which is
due to the difference between the actual consumption of the mixture and the
standard mixture.

MMV = ( Revised standard mix qty – actual qty Mix) * standard price.

Revised standard qty = Standard qty mix/ total standard qty) * Actual qty
Material Yield Variance

It is the portion on materials usage variance which is due to the difference

between the actual yield obtained and standard yield specified.

MYV = ( Actual yield – standard yield ) * standard cost per unit

MYV = ( Standard qty – Revised standard qty ) * standard price

 Home Task
Q. During the month of May, the following data applies. Calculate material mix
and yield variances.
Raw Material Standard Actual
Units(kg) Price(Nu) Amount ( Nu) Units (kg) Price ( Nu) Amount
(Nu)
X 60 25 1500 56 25 1400
Y 40 50 2000 44 50 2200
100 3500 100 3600
Q.
Standard mix to produce one unit of product is as follows:
Material A: 60 units @ Nu. 15 per unit = Nu. 900
Material B: 80 units @ Nu. 20 per unit = Nu. 1600
Material C: 100 units @ Nu. 25 per unit = Nu. 2500
During the month of April, 10 units were actually produced and consumption
was as follows:
Material A: 640 units @ Nu. 17.5 per unit = Nu. 11,200
Material B: 950 units @ Nu. 18.0 per unit = Nu. 17,100
Material C: 870 units @ Nu. 27.50 per unit = Nu. 23,925
Calculate material variances
Q. ABC Co. manufactures X product by mixing three raw materials. For every batch of 100kg of X
product, 125 kg of raw materials are used. In July 2019, 60 batches were prepared to produce an
output of 5600 kg of X product. The standard and actual particulars for July 2019 are as follow:

Standard Actual Qty of raw materials

purchased(kg)
Raw Mix Price Mix Price
Material
A 50% 20 60% 21 5000
B 30% 10 20% 8 2000
C 20% 5 20% 6 1200

Calculate material variances.

Labour variances
Labour Cost Variance
Labour
Labour Rate Idle time
Efficiency
Variance
Variance Variance
Labour Cost Variance

Labour Cost Variance denotes the difference between the actual

direct wages paid and the standard direct wages specified for the
output achieved. The variance is calculated by using the following
formula.

Labour Cost Variance= Standard cost of labour for actual output –

Actual cost of labour or

LCV = ( Std hour * std rate) - ( Actual hour * actual rate)

Labour Efficiency Variance

Labour efficiency variance occurs when labour operations are more efficient or
less efficient than standard performance. It is the difference between actual
hours spent and standard labour hours specified multiplied by the standard
labour rate per hour.

labour Efficiency Variance = ( Standard hours – actual hours) * standard rate

per hour.
Labour Rate Variance

Labour Rate Variance is computed in the same manner as material price

variance. When actual direct labour hour rate differ from standard rate, the
result is a labour rate variance which is due to the difference between actual
rate paid and standard rate specified. The formula for its calculation is:

Labour Rate Variance = ( Standard rate – actual rate) * Actual hours

 Idle time variance

Idle time variance occurs when workers are not able to do the work due to some
reason during the hours which they are paid. Idle time can be divided according
to causes responsible for creating idle time.

e.g. Idle time due to breakdown, lack of materials or power failure.

Idle time variance will be equivalent to the standard labour cost of the hours
during which no work has been done but for which workers have been paid for
unproductive time.
Labour mix variance

Labour mix variance is computed in the same manner as material mix

variance. Manufacturing or completing a job requires different types or
grades of workers and production will be completed if labour is mixed
according to standard proportion.

Labour Mix Variance = ( Revised standard labour mix – actual labour mix)
* standard rate per hour
Labour Yield Variance
The final product cost contains not only material cost but also labour cost.
Therefore, gain or loss ( higher or lower output than the standard output) should
take into account labour yield variance also.

A lower output simply means that final output does not correspond with the
production units that should have been produced from the hours spent on the
inputs. It can be computed by applying the following formula-

Labour Yield Variance = ( Actual output – standard output) * average standard

rate per unit of output.
Q1- Calculate various labour variance from the following
information

Workers Standard Actual

No. of labour Wage rate per No. of labour Wage rate per
week week

Male 30 500 25 550

Female 20 400 20 425
Children 10 300 15 280
60 60

The standard time required for completing a job is 10 weeks and

actual time taken for completing the work is 8 weeks.
Q2- The normal standard hours in a week of a company is 40 and the standard
production is 5000 units. The workers required for producing standard output are
20 skilled workers, 15 semi-skilled workers and 10 unskilled workers and they
have to be paid @ Nu. 7, Nu. 5 and Nu.4 per hour respectively.

Actual production is 4500 units. Actual worker employed are 17 skilled workers,
16 semi-skilled workers and 12 unskilled workers and they are paid @ Nu. 8, Nu.
4 and Nu. 3 per hour respectively.

The abnormal idle time is three hours. Calculate labour variances.

Q3- A gang of workers normally consists of 30 men, 15women and 10 boys. They
are paid at standard hour rate as under

Man - Nu. 0.80

Woman- Nu. 0.60

Boy – Nu. 0.40

In a normal working week of 40 hours, the gang is expected to produce 2000

units of output. During the week ending 31st December2019, the gang consisted
of 40 men, 10 women and 5 boys. The actual wages paid were @ Nu. 0.70, Nu.
0.65 and Nu. 0.30 respectively. Four hours were lost due to abnormal idle time
and 1600 units are produced.