Standard costing and variance analysis
Standards and variances
A standard cost card states, per unit, the standard quantity and standard price of materials, labour and overhead. A variance is the difference between the standard cost allowed for actual output and the actual cost. Adverse means actual cost exceeds standard; favourable means it is below.
Key variances:
- Material price = (standard price − actual price) × actual quantity purchased (or used, per policy).
- Material usage = (standard quantity for actual output − actual quantity used) × standard price.
- Labour rate = (standard rate − actual rate) × actual hours paid.
- Labour efficiency = (standard hours for actual output − actual hours worked) × standard rate.
- Idle time is reported separately as an adverse variance.
- Variable overhead expenditure and efficiency variances mirror labour.
- Fixed overhead expenditure, capacity and efficiency variances apply under absorption costing.
- Sales price and sales volume variances; volume is valued at standard contribution under marginal costing or standard profit under absorption costing.
An operating statement reconciles budgeted profit to actual profit through these variances.
Traps
- Getting signs wrong; always check that the sum of variances equals the total difference.
- Using hours paid where hours worked are required, or vice versa.
- Mixing purchase quantity with usage quantity in the price variance.
- Forgetting to flex to actual output.
- Ignoring material mix and yield variances where input proportions can vary.
Worked example
Standard: 3 kg at £4 per kg, so £12 per unit. Actual output 1,000 units; 3,200 kg used, costing £13,440 (£4.20 per kg).
Usage variance = (3,000 − 3,200) × £4 = £800 adverse. Price variance = (4.00 − 4.20) × 3,200 = £640 adverse. Total £1,440 adverse, which reconciles to £13,440 − £12,000.