Standard Costing and Variance Analysis
Domain focus
Standard costing sets predetermined costs for materials, labour and overhead, then explains differences through variances. The exam tests price and rate variances, usage and efficiency variances, sign conventions, operating statements and responsibility for variances.
Core rules
- Material price variance = (standard price - actual price) × actual quantity purchased or used; usage variance = (standard quantity for actual output - actual quantity) × standard price.
- Labour rate variance = (standard rate - actual rate) × actual hours paid; efficiency variance = (standard hours for actual output - actual hours worked) × standard rate.
- Adverse (A) reduces profit; favourable (F) increases it.
- Variances should be investigated selectively, considering controllability, materiality and trend.
Worked example
Standard: 2 kg at ₹10 per kg, so ₹20 material per unit. Actual output is 500 units, using 1,100 kg costing ₹11,550; actual price is ₹10.50. Price variance = (10 - 10.50) × 1,100 = ₹550 A. Usage variance = (1,000 - 1,100) × ₹10 = ₹1,000 A. Total material cost variance = ₹1,550 A. Check: standard cost 500 × ₹20 = ₹10,000; actual ₹11,550; difference ₹1,550 A.
Traps
Using budgeted output instead of actual output for standard quantity; reversing A and F; calculating price variance on quantity purchased but usage on quantity used without stating the basis; ignoring idle time; blaming a price variance on the production manager when purchasing controls price.