Standard Costing and Variance Analysis
Standard costing and variance analysis tests whether you can set standards, compute operating variances and interpret them for control. ICSAN frequently examines material, labour, variable overhead and fixed overhead variances, and the distinction between planning and operating variances.
Core rules
- Material price variance = (standard price - actual price) × quantity purchased or used. Material usage variance = (standard quantity for actual output - actual quantity) × standard price.
- Labour rate variance = (standard rate - actual rate) × actual hours. Labour efficiency variance = (standard hours for actual output - actual hours) × standard rate.
- Variable overhead expenditure and efficiency follow the same hours logic. Fixed overhead expenditure = budgeted - actual. Fixed overhead volume = (actual hours - budgeted hours) × standard absorption rate.
- A variance is adverse when actual profit is lower than standard; favourable when higher. Investigate by significance, controllability and trend, not sign alone.
Worked example
Standard material is 2 kg at ₦5 per kg (₦10 per unit). Actual output is 1,900 units, using 3,900 kg costing ₦20,475. Actual price = ₦5.25. Price variance = (5.00-5.25)×3,900 = ₦975 adverse. Standard quantity = 1,900×2=3,800 kg. Usage variance = (3,800-3,900)×₦5 = ₦500 adverse. Total = ₦1,475 adverse, which equals actual ₦20,475 minus standard 1,900×₦10=₦19,000. The reasoning: paying more and using more both reduced profit.
Traps
Calling every adverse variance bad; using actual output instead of standard quantity; mixing purchase quantity with usage quantity; computing fixed overhead volume on actual instead of standard hours; applying mix and yield variances when inputs are not substitutable.