Standard Costing and Variance Analysis
What this domain tests
Standard costing produces the variances used for control and performance evaluation. The exam tests computation from given data, interpretation of causes, and the split between planning and operating variances.
Core rules
- Standards may be ideal (theoretical) or attainable (currently achievable with normal efficiency); attainable standards are more motivational.
- Material price variance = (standard price − actual price) × actual quantity purchased. Material usage variance = (standard quantity for actual output − actual quantity used) × standard price.
- Labour rate variance = (standard rate − actual rate) × actual hours paid. Labour efficiency variance = (standard hours for actual output − actual hours worked) × standard rate. Idle time is normally an efficiency variance.
- Variable overhead variances mirror labour; fixed overhead splits into expenditure and volume (capacity and efficiency) variances.
- Planning variances isolate errors in the original standard, such as an unexpected price change; operating variances measure controllable performance against the revised standard.
- Mix and yield variances decompose the usage variance where inputs are substitutable.
Worked example
Standard: 3 kg at Rs. 20 = Rs. 60 per unit. Actual output 1,000 units used 3,200 kg costing Rs. 67,200 (Rs. 21 per kg). Price variance = (20 − 21) × 3,200 = Rs. 3,200 adverse. Usage variance = (3,000 − 3,200) × 20 = Rs. 4,000 adverse. Total = Rs. 7,200 adverse, reconciling with actual Rs. 67,200 less standard Rs. 60,000. Interpretation: purchasing may have paid more for better quality - but usage is also adverse, so that defence fails and both should be investigated.
Traps
Using actual output instead of standard quantity for actual output; mixing purchase quantity and usage quantity in the price variance; failing to separate planning from operating effects; ignoring idle time; assuming a favourable variance is automatically good (bulk discounts may explain it).