Standard Costing and

Variance Analysis
CHAPTER OUTLINE
Introduction; Meaning and definition of standard cost and standard costing:
Applicability: Standard cost and estimated cost; Standard costing and
budgetary control; Advantages; Limitations; Prelimineries; Variance analysis;
Material variances; Labour variances; Overhead variances; Sales variances;
Disposiion of variances; Control ratios; Summary of formulae; Problems
and solutions; Key terms; Examination questions.

Introduction
Standard costing is a specialised technique of cost accounting to control the cost. From cost
control point of view, 'what a product should have costed' is more important than "What it
did actually cost. The actual cost is the past cost or historical cost and historical costing
is a system in which actual costs incurred in the past are ascertained.
Limitations of Historical Costing
Ascertainment of actual costs does not serve any useful purpose and has certain limitations.
Firstly, such costs are obtained too late and cannot be used for price quotations.
Secondly, histoical costs do not serve the purpose of cost control because the cost has
already been incurred before cost figures are available foI managerial control.
Thirdly, historical costs do not provide any yardstick against which efficiency can be measured.
These limitations encouraged the development of a more satisfactory standard costing approach
based on predetermined costs. Standard costing is not a method of costing like job orderwith on
conjunction
process costing. It is a special technique to control costs and can be used in
any other system like job costing. process costing or marginal costing, etc.
Standard costing is one of the most important tools to control costs. InSuchthis technique, all
pre-determined
costs are pre-determined, i.e., costs are determined in advance of production.
the actual costs and
costs are then compared with the actual costs. The difference between
their
pre-determined costs, known as variances, are then analysed and investigated to know costs
actual
Teasons. Variances are reported to management for taking remedial steps so that
adhere to pre-determined or standard costs.
3.1
 Management Accounting
Neaning and Definition of Standard Cost
The word standatd means n norm or ACriterion Standard cost is thus a criterion cost which
may be need as a Vardstick to measure the efficiency with which actual cost has been incurred.
In othet words standard costs are pre determined costs or target costs that should be incurred
under efhcient op1aing conditions.
According to Chaitered Institute of Management Accountants (C.I.M.A.), London, "Standard
overhead
fhy pre ete mined cost dased on technical estimates for materials, labour and
o a seleted penod of hme for apreseribed set of working condittons .
n tne words of Brown and Howard "the stomdovd cost it apredetermined cost which determines
what each product or service should cost under qiven circumstances". Thus standard costs are
f tacosts that shoutd be attained under agiven set of operatingconditions. The main object
andard cost is to look forward and assose what the cost 'should be' as distinct 1ont wldt
the cost has been in
the past.
Meaning and Definition of Standard
Costing
andStandard costingcompared
is simplythe name given to atechnique whereby standard costs are computed
subsequently
These differences
(known as
with the actual costs to find out the differences between the two.
ie a Dasis of control. Thevariances)
of standard C.I.M.A.
are then analysed to know the causes thèreof so as to
London has defined standard costing as "the
the costs and applying preparaton
couTses of vaniations with athem to measure the variations from actual costs and analysing
Howard have defined it, "as a view to maintain maximum efficiency in production". Brown and
each product or
service with thetechnique of cost accounting which compares the standard cost of
may be takenactual costs, to determine the efficiency of the operations so that
any remedial action
Steps. Standard costing immediately".
1. The setting of system involves the following steps
overheads. standard Costs for different elements of cost, i.e., material, labour and
2.
Ascertairing actual costs.
3. Comparing standard
as 'variances. with actual costs to
determine the differences between the two,
4. Analysing Know
5. Reporting variances
of these
for ascertaining reasons
thereof.
variances and analysis thereof to
action, where necessary. management for appropriate corrective
Applicability of Standard Costing
The application of
standard
(a) Asufficient volume of costing requires certain conditions to be fulfilled. These are :
(b) Methods, operations andstandard products or components should be produced.
(c) A sufficient number of processes should be capable of being standardised.
costs should be capable of being
Industries producing standardised products which controlled.
process costing method, fulfil all the above are repetitive in nature, i.e., industries using
best advantage in such conditions and thus the system can be used to the
industries.
In jobbing industries, it is not
Examples are fertilisers, cement, steel, sugar, etc.
worthwhile to develop and employ a full system of standard
costing. This is because in such industries
and setting standards for each job may prove each job undertaken may be different from another
difficult and expensive. In such industries, therefore,
 Analysis 3.3
Standard Costing and Vaniance
circumst ances. For example, certain processes and
partialsystem may be adopted in approptiatenature and thus the principles of standard costing
a of a tepetitive
operations performed may destandard for each such process or operation.
may be applied by setting
Costs Comparison
Standard Costs and Estimated
estimated costs ate predetermined costs computed in advance of production.
Bath standard costs and different. The differences between the two are
summarised as
But their objectiveS are normally
under :
Estimated cost
Standard cost
Basis
the
Estimated cost is an assessment of what
1. Aim. Standard cost aims at what the cost cost WILL be.
SHOULD be
ate Estimated costs are based on average of the
2, Basis. Standard costs are planned costs whichafter consideration
determined on a scientific basis past figures, taking into
level of anticipated changes in future.
taking into account certain
efficiency.
Estimated costs are used as statistical data
Relation to In standard costing system, standard costs Such costs
3.
are usually incorporated into the
accounts, for comparing with actual fiqures. accounts.
accounts. from are not entered in the b0oks of
from which variances of actual
standaid are ascertained.
4. Use. Standard costs are meant to be used for a Estimated costs may be used in any concem
concern operating ,on a standard costing operating on a historical cost system.
system.
5. Purpose. Standard costs srve the purposeof cost Estimated costs do not serve the purpose of
control. cost control. Such costs serve other purposes,
like quoting selling price of new products,
decision to buy or manufacture, etc.

Standard Costing and Budgetary Control Comparison

estabushing
Standard costing and budgetary control have the common objective of cost control bypredetermined
predetermined targets. The actual performances are measured and compared with the
and
targets for control purposes. Both the techniques are of importance in their respective fields
are complementary to each other.
Points of Similarity
There are certain basic principles which are common to both standard costing and budgetary
control. These are:
1. The establishmernt of predetermined targets of performance.
2. The measurement of actual performance.
3. The compaYison of actual performance with the predetermined targets.
performance.
4. The analysis of variances between the actual and the standard
5. To take cormrective measures, where necessary.

Points of Difference
control, there are some
In spite of so much similarity between standard costing and budgetary
important differences between the two, which are as follows:
 Mantyement Aeeeunting
idotary ntnst
Rudgets comptlet fat
h
thanbtina Nt And s0mtimes of the husinet tuch A
tales,
ifferont fumetions
Nìnistyaton fune duction cash apital purchases, pto
And developtent etc oxpenditure, roseareh
Tnteneity
`tan dard cnina is inteneive in apnlica
tion a it callk fo detaled analysit of Rudgetary controt is extensive in nature ad
the intensity of analysis tends to he
2 Relatinn to In less than that in standard costing. much
standard costing va1iances are 18ually In
areeunts. Te vealed
thiongh ACCOUnts
budgetary control, variances are normally
not revealed throuqh accounts and control is
exercised by statistically putting budgets and
4 Dsefulness. Stan actuals side by side.
dard costs represent realistic
and. are therefoTe. more useful yardsticks
for con
Budgets usually represent an upper e on
trolling and reducinq costs. spending without considering the effective
5. Basis. ness of the expenditure in terms of output.
Standard costs ate usually established Budgets may be
after considering such vital matterS as based on previous year's costs
production capacity, methods employed and without any attention being paid to efficiency.
other factors which require attention
when
determining an acceptable level of
6.
efficiency.
Projection. Standard cost is a projection of cost Budget is a
accounts. projection of financial accounts.
ADVANIAGES OF STANDARD COSTING
The advantages to be derived from a
to another. Much depends upon the degreesystem of standard costing will vary frOm one
of sophistication achieved and the business
management utility of the system. Possible advantages are as follows : acceptance by the
of
1. Effective cost control. The most
the control of costs. Control is important advantage of standard costing is that it facilitates
exercised by comparing actual performance with
taking action on the basis of variances so revealed. standards and
2. Helps in planning.
which instils in management Establishing standards is a very useful exercise in business
a habit of thinking in
advance. planning
3. Provides incentives.
Standards provide incentives and motivation to work
effort. Schemes may be formulated to with greater
increases efficiency and productivity. reward those who achieve or surpass the standard. This
4. Fixing prices and
in determining prices andformulating policies. Standard costs are a valuable aid to
adding a standard margin offormulating production policies. For example, prices may management
be fixed by
profit to standard cost.. Similarly, standard
estimates while planning production of new products. costing furnishes cost
5.Facilitates delegation of
may be identified directly withauthority. In order that
the persons concerned,responsibility for off-standard performance
shows delegated authority and establishes an organisation chart is prepared which
6. Facilitat es responsibility of each executive.
coordination. While establishing standards, the performance of different
departments such
as production, sales, purchases etc. is
Working standard cost system, coordination of various taken into isaccount. Thus through the
of
functions achieved.
Standard Costing and Variance Analysis 3.5

1 Eliminates wastes. By fixing standard, certain waste such as material wast age, idle time.
lost machine hours, etc. are reduced,
8. Valuation of stocks. Standard costing simplifies the valuation of stock because the stock
transferred to a
is valued at standard cost. The difference between standard and actual cost is
work-in
vaiiance account. This ensures uniform pricing of stocks in the form of raw materials,
progress and finished goods.
9.Management by exception. Reporting of variances is based on the principle of management
management
by exception. Only variances beyond a predetermined limit may be considered by the
for corrective action. This also reduces the cost of preparing reports.
10. Economical and simple. Standard costing is an economical and simple means of cost
accounting and generally results in savings in the cost of costing system. It results in reduction
leads to
in paper Work in accounting and needs fewer number of forms and records. This
considerable saving in clerical labour.
LIMITATIONS OF STANDARD COSTING
Standard costing system may suffer from certain disadvantages. This may be because of lack
of education and communication and resultant misunderstanding on the part of managerial staff.
Possible disadvantages are :
1. The system may not be appropriate to the business.
2. The staff may not be capable of operating the system.
3. A business may not be able to keep standards up-to-date. In other words, a business may not
revise standards to keep pace with the frequent changes in manufacturing conditions. Firms
may avoid revising standards as it is a costly affair.
4. Inaccurate and unreliable standards cause misleading results and thus
may not enjoy the
confidence of the users of the system.
5. Operation of the standard costing system is a costly affair and
small fims cannot afford it.
6. Standard costing is expensive and unsuitable in job order
industries which are manufacturing
non-standardised products.
PRELIMINARIES IN ESTABLISHING A SYSTEM OF STANDARD COSTING
In establishing a system of standard costing, there are a
considered. These are as follows : number of preliminaries to be
ESTABLISHMENT OF COST CENTRES
The first step in the establishnent of a system of standard
centres with clearly defined areas of responsibility. In this costing is the establishment of cost
establishing cost centres, there should be no doubt about the context it may be noted that in
responsibility of each cost centre
so that in case of off standard performance,
responsibility may be identified.
CLASSIFICATION OF ACCOUNTS
Accounts are classified according to the purpose in hand. Classification may be by
function, revenue item, etc. For speedy collection and analysis of accounts, codes and symbols
may be used.
 3.6
Management Accountino
TYPES OF STANDARDS
and current.
Standards may be divided into the followinq two main classes-basic indefinite
which are established for an period of
time.Basic
It isstandards. These
similat to an the standards
indexarenumber against which alllater results are measured. Variances from
basic standards show trends of deviaiation of the actual cost. However, basic standards are of no
practical utility fom the point of view of cost control.
related
Current for a limited period and are
to current Standards. Such standards remain in operation intervals. Current standards are of
three typesconditions. These
: () ldeal st and standards are revised at reqular
and (iii) Normal standards.
ldeal standards. This is a ards, (i) Expected standards; to attain. It pre
supposes that the perfomance theoretical
of men,standard
materialswhich rather notis practicable
and ismachines perfect and thus makes no
allowance for loss of time, accidents, machine breakdowns, wastage of materials and any other
type of
the advantwaste or loss. This
age of ideal is
obviously unrealistic and unattainable. Such standards
have

Expected establishing a goal This

or practical
which though not attainable in practice,is always aimed at.
dunng a future period. standards, is a standard which may be anticipated to be attained
reasonable Such standards are based on expected performance after making a
By far allowance for
this is the most unavoidable losses and other inevitable from prfect efficiency.
point of view. lapses
commonly used type of standard and is best suited from cost control
Normal standards. This is
average performance
in the cost known as Past Performance Standard because it is based on the
in the past.
The aim of such a standard
which arise out of trade may be to eliminate the variations
SETTING STANDARD COSTS cycles.
The success of a
of the
standards. standard costing system depends on the
Extreme
considered in the establishmentcare,
therefore,
of must be taken toreliability, accuracy and acceptance
ensure that all factors have been
Standard
These costs are set for each standards.
are
described below : element of cost i.e. direct materials. direct labour and
Setting standards for direct overheads.
Two standards are materials.
(a) Material price developed for material costs
(b) Material usage standard.
(or quantity)
Material price standard. This is astandard.
period. This standard is quite forecast of the average prices of
external factors than by the difficult to establish
because prices materials during the future
are
standard prices after consideringcompany management. The purchasing regulated more by the
(a) Purchase prices of factors like: department notifies the
(b) recent orders,
Prices specified in the long term
(c) contracts,
Forecasts of the commodity price trends.
Provision should be made for
Material quantity (or
discounts, packing and delivery charges, etc.
of material items to be usage) standard. While setting
material specifications consumed should be standardised. quantity
The standard, the quality and size
standard
prepared by the department of engineering of is usually developed from
product design.
 Standard Costing and Vanance Analysis 3.7

Setting standards for direct labour.

The following two standards are usually established for direct labour costs :
(a) Labour rate standard.
(b) Labour time standard.
Labour rate standard. This standard is determined having regard to the current rates of pay
and any anticipated variations. Sometimes an agreement between trade unions and employer
covers a number of future mont hs or years. In such cases, the agreed rate should be adopted as
the standard rate for the period.
Where workers are paid on time basis, it is necessary to establish :
(a) the labour time standard for each operation
(b) the wage rate of each grade of labour
(c) the grades of labour to be employed.
Type of operation will determine the grade of labour to be employed - male or female, skilled,
unskilled or semi-skilled, etc.
Where woTkers are paid on piece basis, the standard cost will be a fixed rate per piece.
Labour time (or efficiency) standard. Standard time for labour should be scientifically
determined by time and motionstudies carried out in conjunction with a study to determine the
most efficient method of working. Due allowance should be made for normal loss of labour time
like fatigue, idle time, tool setting, ete.
Setting standards for direct expenses
Direct expenses are not very common, but if there are any di: ect expenses relating to the cost
unit, standards for these too must be set. Setting these standardsis usually quite simple as these
may be based on nast records adjusted according to anticipated changes therein.
Setting standards for overhezds
Setting standards for overheads is more complex than the development of material and labour
standards. Developing this standard involves the following two distinct caleulation :
(a) Determination of the standard overhead costs; and
(b) Determination of the estimates of production, i.e., standard level of activity reduced to a
comnon base, such as direct labour hours, units of production, machine hours, etc.
Astandard overhead absorption rate is computed with the use of these two figures by the
following formula :

Standard oveil:ead Standad oveihead cost for the period

rate (per hour) Standard hours for the Jeriod

Standard oveihead Standard overhead cost for the period

rate (per nit) Standard production (in units) for the period
Thus this rate may be per unit of production when base is in units of production and it will
be per hour, if base is the numler of hours.
Anoverall blanket rate of overhead absorption is rarely accurate in ary costing system. Thus
 3.8 Managemnent Accountino
a separate rate should be computed foI each cost centre (or department) created ror this purpose.
Overhead standards willbe more use ful to management if they are divided to show hixed and
variable components. Separate overhead absorption rates should be computed for these two types
of overheads, i.e., fixed overhead and variable overheads.

STANDARD HOUR
roduetion may be expressed in diverse type of units such as kilograms, tonnes, litres, gallons,
numbers, etc. When acompany is manufacturng different types of products, it is almost imposs1ble
t0 aggregate the production, which cannot be expressed in the same unit. Therefore, it is
essenial to have a common unit in which the production which is measured in aifferent type
Or unts can be expressed. As time factor is common to all operations, a comnon practice is to
express the various units in terms of time-known as standard hour. The standard hour is the
quantity of output or amount of work which should be performed in one hour. In the words of
Cil.M.A., Lordon, a standard hovr is "a hypothetical hour which represents the amount of work
Which should be performed in one hour under stated conditions". Time and motion studies may
indicate what the output of each process in one hour should be. For example, if 10 units of
product should be produced in one hour, then an output of 200 units would represent 20
standard hours.

Example
Britannia Co. Ltd. produces three types of biscuits - Nice, Hot and Pearl. Production per hour
should be 50 packets, 75 packets and 100packets respectively. Actual production during a month
is 500 packets, 1.500 packets and 5,000 packets of Nice, Hot and Pearl respectively. Production
measured in standard hours will be as follows :
Product Actual output Standard output
(packets) per hour (packets) Standard hours
(a) (b) (a + b)
Nice 500 50 10
Hot 1,500 75 20
Pca1l 5,000 100 50
Total standard hours 80

STANDARD COST CARD

(Standard Cost Sheet)
Once the standard costs have been established, these are recorded on a standard cost card. A
standard cost card is thus a record of the standard material, labour and overhead costs. Such a
card is maintained for each product or service. The casd will nTrmally show the quantity and
price
of each material item to be consumed, the time and rate of labour required, the
be absorbed and the total cost. Costs shown in the card should be
overheads to
approved by the pers0n who
will be re:ponsible for the operations concerned, othervise he may not co-ope:ate with much
enthusiasm in attaining the standards.
A standard cost card with assumed Fiqures is given in Fig. 3.1.
 Analysis
Standard Costing and Variance 3.9

Standard Cost Card

- 102 Date of fixing standard : 16 July 2011
Product:Component RIL Date of revision
Unit : Dozen
Rate Dept. I Dept. II Total

Direct materials : 160

40 160
material X
4 units of 60 600 600
material Y
10 units of 760
Total
Direct labour :
300
Machine operator giade I 30 300
10 hous 150 150
30
5 hours 450

Total
200
Factory overhead : 20
200
hrs. 200 200
Machine hour rate I 10 40
II 5 hrS. 400
Total
Cost Summary
760
Direct materials 450
Direct labour 7 400
Factory overhead ? 1,610
Stan dard cost per unit

Fig. 3.1 Standard Cost Card

VARIANCE ANALYSIS
Cost variance is
Variance-Difference between standard and actual is known as variance.
Cost
standard cost and the comparable actual cost incurred during a period."
the "difference between a
C.I.M.A., London.
of analysing variances by sub-dividing the total variance in
Variance analysis is the process According
management can assign responsibility for any off standard performance.
such a way that
Terminology, variance analysis is "the process of computing the amount of
to C.I.M.A., London, variance between actual and standard." An important aspect
isolating the causes of
variance and
separate controllable from uncontrollable variances. A detailed
of variance analysis 1s the need to responsible
analysis of controllable variances will help the management to identify the persons
corrective action can be taken.
for its 0ccurrence so that
FAVOURABLE AND UNFAVORABLE VARIANCES
than standard cost, it is known as 'favourable' or 'credit variance.
Where the actual cost is less than standard cost, the difference is referred
the actual cost is more
On the other hand, where
to as 'unfavourable', 'adverse' or 'debit
variance.
 3.10 Management Accounting

In other words, any variance that has a favourable effect on profit is favourable variance and
any variance which has an adverse or unfavourable effect on profit is unfavourable variance.
Many students experience difficulty in ascertaining whether a variance is favourable or adverse.
In the formulae given in this book, positive (+) variance willindicate favourable variance and
negative (-) variance will indicate adverse variance. Favourable variances will be designated by
(F) and Adverse by (A).
CONTROLLABLE AND UNCONTROLLABLE VARIANCES
If a variance can be regarded as the responsibility of a particular person, with the result that
his degree of efficiency can be reflected in its size, then it is said to be a controllable variance.
For example, excess usage of material is usually the responsi bility of the foreman concerned.
However, if the excessive usage is due to material being defective, the responsibility may rest
with the Inspection Department for non-detection of the defects.
If a variance arises due to certain factors beyond the control of management, it is knoWn as
uncontrollable variance. For example, change in the market prices of materi als, general increase
the
etc. are not within
in the labour rates, increase in the rates of power or insurance premium,
variances cannot be
control of the management of the company. Responsi bility for uncontrollable
assigned to any person or department.
important. The
The division of variances into controllable and uncontrollable is extremely variances which
is these
management should place more emphasis on controllable variance as it
variances, on the other
require investigati on and possibly corrective action. The uncontrollable
exception" whereby those matters
hand, may be ignored. Thisfolows the well known "principle of
performance are investigated.
which are going right are ignored and any deviations from efficient
METHODS VARIANCE
If, for some reason
While setting standards, specific methods of production are kept in view. a different amount
to
oI the other, a different method of production is adopted, it will give rise
as methods variance. Thus a
of cost, thereby resulting in a variance. Such a variance is knownthose specified. According to
methods variance arises due to the use of methods other than
standard cost of
C.I.M.A., London Terminology, methods variance is "the difference between the
and the standard cost of a
aproduct or operation produced or performed by the normal method actually employed."
product or operation produced or performed by the alternative method
REVISION VARIANCE
account of unavoidable
After setting standards, sometimes standard cost has to be revised on
once set are not
changes in prices of various factors like wages, materials etc. The standard costs
factors. Rather a revision
disturbed every now and then to account for these uncontrollable
revision variance is the
variance is created and the basic standard cost is allowed to stand. This
difference between the standard cost originally set and the revised standard cost.
Thus :
Revision Original standard Revised standard
variance cost of actual output cOst of actual output

standard costing
Creation of revision variance is only an interim adjustment which allows the
system to operate usefully even when there are changes in standard costs.
 output
3.11 Actual
price
Overhead
Cost Calender
Variance
Variance Variance
Volume the
Variance
Labour Overhead for cost X lquantity
Yield Variance
Cost Actual
Actual
specified
Efficiency
Variance
Capacity
Variance
Labour Fixed Variance
Budget as -
or
Expenditure calculated
output Standard]
materials
Variance price
Time
Idle actual AP)
Analysis
Efficiency
Variance MATERIALdirect
VARIANCES is X x
Variance
Cost
Total It of for(AQ
quantity
[standard
output
actual
Variance of used.cost
Cost
Labour Variance cost -
Variance Labour Variance Standard SP)
Rate Labour materials
Mix Cost standard AC x
- (SQ
SC
3.?
= = = =
Efficiency
Variance Fig. thedirectVariance MCV
MCV Variance
Analysis Variance between
Variance Material
Material Yield Overhead
Variable of
Usage Variance
Cost cost Cost Cost
Variance
difference
Variance
Cost
Materialactual
Material Material
or
Variance
Budget
Expenditure
and the Or
Costing Cost
Material
Variance MaterialVariance theand
Material
Variance Mix is achieved
Price
Standard This
 Management Account
3.12

Example
tables. It provides the
following data :
sunmica tops for 4 sq. ft.
Afuniture Company uses
table
Standard quantity of sunmica per ?5
Standard price per sq. ft. of sunmica 1,000
Actual production of tables 4,300 sq. ft.
Sunmica actually used ?5.50
Actual purchase price of sunmica per sq. ft.
under :
Material cost variance will be calculated as
MCV = (SQ x SP) - (AQ x AP)
MCV (1,000 x 4 x 5) - (4,300 x? 5.50)
20,000 23,650
- 3,650 (A)
price variance and usage variance.
The material cost variance may be further divided into
Material Price Variance
This is "that portion of the material cost variance which is due to the difference between
the standard price specified and the actual price paid"* It is calculated by the following
formula :
Material Price Variance = (Standard price - Actual price) x Actual quantity
MPV = (5P - AP) x AQ
Thus, this is the difference between standard price and actual price multiplied by actual quantity.
Example
With the figures in Example given above, the material price variance will be calculated as follows :
MPV = (SP - AP) x AQ
MPV = (5 - 5.50) x 4,300
-?2,150 (A)
Reasons for Material price Variance. This variance usually arises due to the
reasons : following
1. Change in the market prices of materials.
2. Failure to purchase the specified quality, thereby resulting in a
different price being paid.
3. Change in the quantity of materials purchased, thereby leading to
discount. lower/higher quantity
4. Not availing cash discounts, when standards set took into
account such discounts.
5. Inefficient purchasing.
6. Change in the delivery costs.
7. Rush purchases.
8. Purchase of a substitute material on account of
non-availability of the material specified.
* C.I.M.A., London Terminology
 Analysts
standard Costing and Variance
3.13

o. Change in the rates of exC1se duty, purchase

tax, etc.
10. Off-season purchasing for certain seasonal products like jute, cotton, etc.
Variance
Material Usage (or Quantity)
of the material cost variance which is due to the difference
Thisis "that portion between the
and the actual quantity used". Its formula is :
standard quantity specified
Standard quantity Actual Standard
Material Usage Variance = for octual output quantity price
MUV = (SQ - AQ) x SP
and actual quantity multiplied by th:
Thus. this is the aifference between standard quarntity
standard price.
Example
be calculated as under :
Continuing example given above, material ucage varianca will
MUV = (SQ - AQ) x SP
= (4,000 - 4,300) x 5
=7 1,500 (A)
Reasons for Material Usage Variance. The material usage variance may be caused by some
oI all of the following reasons :
1. Use cf defective or sub-standard materials.
2. Carelessness in the use of materials.
3. Pilferage.
4. Poor Workmanship.
5. Defect in plant and machinery.
6. Change in the design or specification of the product.
7. Change in the quality of materials.
8. Use of substitute materials.
9. Use of non-standard material
nürtu:e.
10. Yieid from mterials in excess of or less than standard yield.
Check
The algebraic sum of material price variance and
material cost variance. Thus :
material usage variance should be equal to
MCV = MPY + MUV
3,650 (A) =? 2,150 (A) + ? 1,500 (A)
Figure 3.3 shows the qraphic analysis of mate:ia! variances which has been
figures of the above examsle. In this chart, the sulid xectarie ind:cstes the prepaed vith the
5) and the dotted rectangle shows the actual cost (4,303 × stazlard rst (4,cO
5.50).
3.14
Management Accountino
R 5.50 MPV 2,150 (A)
MUV
1,500
(A)
R5

?in
Price

Quantity in sq. ft. 4,000 4,300

Fig. 3.3 Analysis of Material Cost Variance.

MPV =(R 5 - 5.50) x 4,300 -?2,150 (A)
MUV =(4,000 - 4,300) x 5 = 1,500 (A)
The difference between the ateas of standard cost rectangle and the actual
cost rectangle i.e.
shaded area represents material cost variance, which has been analysed into
variance and material usage variance. The variances are adverse because the actual material price
is larger in size than the standard cost cost rectangle
rectangle.
Illustration 3.1
The standard cost card shows the following details
kg. of groundnut oil :
relating to material needed to produce 1
Quantity of groundnut required 3kg.
Price of groundnut
Actual production data : 2.50 per kg.
Production during the month 1,000 kg.
Quantity of material used
Price of groundnut 3,500 kg.
? 3 per kg.
Caleulate : (a) Material Cost Variance (b) Mateial Price Variance (c) Material
Usage Variance.
(B. Com. Calicut)
Solution
Basic Data
Standard Quantity (Sa) = 1,000 kg. of production x 3 kg. = 3,000 kg.
Standard Price (SP) = 2.50 per kg.
Actual quantity (AQ) 3,500 kg.
Actual price (AP) =?3 per kg.
Caleulation of Variances
(a) Material Cost Variance = SC - AC
=(SQ xSP) - (AQ x AP)
= (3,000 x 2.50) - (3,500 x 3) =?3,000 (A)
 MCVa

Analysis y 3.15
Costingand Variance
Standard
(SP-AP) xA0
Price Variance 3,500
- (2.50 - 3) xSP -1,750 (A)
(b) Material
AQ)
Usage Variance (SQ - 3,500) 2.50 -Z4,250(A)
(c) Material (3,000 -
Variance
Pice Variance + Usage
Check Variance -
MateialCost + 1,250(A)
(A) = 1,750 (A)
3,000
Variance
Material Usages sub-divided into :
Classification of
variance is further
Material usage
Material mix variance Material sub-usage variance)
(a) (0r
Material yield variance. type of
(b)
arises only where more than onemixture of
Material Mix Variance
usage variance. It
company may be using aqives rise to
material product. A standard mixture. This
sub-variance of finished
Thisis the predetermined
for producing
material is used does not comply with the which is
usage variance arise in
materials which material
material mix variance. that portion of the materials. It mayproduce a
defined as composition of mixed to
mix variance isstandard and actual of raw materials are more
The material
difference between where a number non-availability of one or the
due to the chemicals, rubber,standardetc. due to Increase in
mix may be proper time. more
industries like from the non-purchase of materials at
vice versa, the use of
Change variarnce and
final product. the mix or due to favourable mix variance.
components of materials results in
in adverse
proportion of cheaper larger proportion results following formula
materials in help of the
expensive calculated with the
variance is Standard
This (Revisedstandard Actual price
= quantity quantity
Material mix variance
actual
MMV = (RSQ -
A@) x SP proportion of total of
standard
but the
standard quantity is nothing
calculated as under :
The revised This is
quantities of allthe materials. quatities
Totalofactual
one maierial ofall materials
Stanrlard quantily of
of all mauterials
RSQ = Total ofstandard quantities
usage
Also calculate price and
Illustration 3.2 variance.
material mix
following data, calculate Actual
From the
2(
variances. Standard @50 per unit
e 50 units
Raw material
50 per unit 45 per unit
40units @ 60 units
40 per unit 110 units
60 units @
Y 100 units
Total
 3.16
Management Acdcounting
Solution
Calculation of Revised Standard Quantity (RS0).
40
RSQ of X * 110 - 44 units
100

60
RSQ of Y x 110 - 66 units
100
Material Mix Variance - (RSQ - AQ) x SP
MaterialX (44 50) x 50 =300 (A)
MaterialY (66 - 60) x 40 -240 (F)
MMV - 60 (A)
Material Price Variance - (SP - AP) * AQ
Material Y - (50 - 50) x 50 = Nil
Material Y = (40 - 45) x
60. - 300 (A)
MPV - 300 (A)
Material Usage Variance = (SQ - AQ) x SP
Material X =(40 - 50) x 50 =500 (A)
MaterialY = (60 - 60) x 40
Nil
MUV - 500 (A)
Material Sub-usage (or Material
Revised Usage)
This is a
sub-variance of the material usage Variance
material usage variance and
variance which is attributed to reasons represents that portion of
material mix variance. Thus the algebraic sum of this other than those which give nse the
variance is equal to material usage revised usage variance and t
variance. Its formula is : material mi:
Material revised (Standard Revised
usage variance quantity. standard\ quantity x Standard price
MRUV = (SQ - RSQ) x SP
In Illustration 3.2 material revised usage variance is calculated as follows :
MRUV = (SQ - RSQ) x SP
X = (40 - 44) x 50 = 200 (A)
Y = (60 - 66) x 40
-? 240 (A)
MRUV = 440 (A)
Check
MUV = MMV MRUV
500(A) = 60 (A) + 440 (A)
Material Yield Variance
This is also a sub-variance of material usaqe variance. It arises in process industries, like
chemicals, where loss of materials in production is inevitable. While setting standards, the normal
or standard loss is taken into account. But actual loss may differ from normal or standard loss.
This results in actual yield or output being different from standard yield.
 |

Variance Analysis 3.17

Standard Costing and
portion of tthe material usage variance which is due to the
material yield variance is that
Thus
between standard yield specified and actual vield obt ained. The standard yield is the
difference
to be obtained
from the actual usage of raw materials. It should be noted that
output expected costing is the same thing as abnormal loss or abnormal gain
used in standard
yield variance as
costing systems. which differentiates it from other matertal variances
in the other yield variance
feature of an output variance while others are
One important vaiances) is that yield variance is
(pnce, usage and
mix
yield variance represents a gain or loss on output in terms of
other words,
input variances. In while other variances represent a
gain or loss on the cost of material input.
finished production,
follows :
Its formula is as Actual Standard Standard
Material Yield
yield output price
Variance yield
x SOP
MYV = (AY - SY) output.
standard material cost per unit of
(S0P) is the
Standard output price
Ilustration 3.3 applies:
month of May, the following data Actual mix
During the Standard mix Amount
Units Price
Raw material Price Amount
Units Kg.
Kg. 1,400
56 25
60 25 1,500 2,200
44 50
40 50 2,000
3,600
3,500 100
100
Total 26
30
Less: LOSS 74
70
Yield

is 30%. Calculate:
The standard loss variance.
yield variance (b) Material mix
(a) Material
Solution
Variance (AY - SY) x SOP
(a) Material Yield x 50* = 200
(F)
MYV = (74 - 70)
output is calculated as follows:
cost per unit of
"Standard material Standard material cost 3,500-= 50
70
SOP Standard output
(RSQ - AQ) x SP =? 100 (F)
Mix Variance
(b)Material Material X = (60 -
56) x25 -
200 (A)
MaterialY = (40 -
44) x 50
MMV - 100 (A) because tot.
quantity (RSQ)) is the same
standard 100 units.
quantity and revised quantity is the same, i.e.,
case, standard and total
standard
Note. In this materials
of all the
actual quantity
 3.18
Management Accountino
Ilustration 3.4
The standard mix to produce one unit of product is as follows:
MateialA 60 units @15 per unit 900
MateialB 80 units @ 20 per unit 1,600
Mateial C 100 units 25 per unit 2,500
240 units 5,000
Dung the month of July, 10 units were actually produced and consumption was as follows:
MaterialA 640 units @ 17.50 per unit = 11,200
MaterialB 950 units @ 18.00 per unit = 17,100
Material C 870 units @27.50 per unit = 23,925
2460 units
52,225
Calculate all material variances!
Solution (BBM, Bangalore)
Material
Standard for 10 units Actual for 10 units
Qty. Rate Amt. Qty. Rate
units Amt.
Units
A
600 15
B 9,000 640 17.50
800 20
11,200
16,000 950 18.00
1,000 25 17,100
25,000 870 27.50
Total 23,925
2,400
50,000 2,460
1. Material Cost 52,225
Variance = Standard cost - Actual cost
7 50,000 - 52,225 (A)
MCV -
2. Material Price Variance 2,225(A)
= (St. Price -
Material A
Actual Price) x Actual Qty.
= (15 - 17.50) x
Material B = (20 - 640 = 1,600 (A)
18) x 950
Material C = (25 - 27.50) x
870
=1,900 (F)
-2,175 (A)
3. MPV = 1,875 (A)
Material Usage Variance = (St.Qty. -
Material
Actual Qty.) × St. Price
= (600 - 640) x 15
Material B (800 - 950) × 20 600 (A)
Material C = 3,000 (A)
= (1,000 - 870) x 25
= 3,250 (F)
4. Material Mix Variance MUV = 350 (A)
(Revised St. Qty. -
MaterialA = (615*- 640) x 15 Actual Qty.) x St. Price
Material B = (820* - =? 375 (A)
950) x20 = 2,600 (A)
MaterialC - (1,025* - 870) x 25
-3,875 (E)
MMV = 900 (F)
 activity
3.19 variances.
the Actual
rute)
hour
per
-7
5,000
for
material :
specified
under
hours
Actuul
X
to as
follows: equal. similar costcalculated
units (A) Actual
labour
10.25
units Price-7
225(A) = MRUV
-400(A) -1,250(A)
always labour per
hour
10 1,250(A) 625(A) 1,250 quite St
rute
as COSt AR)
made + Standard LABOUR
VARIANCES is
50,000 (MRUV) are MRUV) is direct
It x
followe:-6nits units + variances incurred. output (AH
Xfor
uctuul
15 820
1nits be - two (A) (0r (F)
to 2460240 - x MRUV) 900 standardSt. ofuctual
output
labour
cost St.hours -
1,025. Quantity)
5,000Variance These 1,250
have - MYV SR)
as
calculated SOP x (0r + + labour cost AC ×
1,000 calculationsoutput 10.25) 25 caleulated. +
MYV MMV(A) thelabour - (SH
800
N materials output)
× Sub-usage)
Standard20 x
15 (F) 1,875 SC -|
600 of -SY) 1,025) + 900 +
of between = = =
x unit - xx MMV MPV computation Variance LCV
Analysis is of (AY (10 615)820) LCV
direct Variance
(RSQ)2460x 2400 24602400 24602400 basic of per unit Revised - is
usage = MCV
-
usage - = (or - - (1,000 MRUV 72,225
(A)
Variance (600(800 MUV?350
(A) difference
Variance QuantityMateial
A R
Mateial CMateial certainActualStandard
per MYV Usage Labour
Cost
Variance
actual
Cost Cost
costMaterial
Yield
Variance -(Quantity
Standard
= - or Or,
C and Labour
Yieldvariance, Revised A Material
B Material
Material
MYV the Labour
and Standard Standard
yield=
material analysis the
Either and
Costing Material
yield Material is
*Revised (St.
Note.Check
(1) (ii) Thisachieved
Standard SOP
The
5. For
 Management Accountino
3.20

Example
is given :
The following information 15
4 per hour
Standard hours per nit
Standard rate
Actual data: 1,000 units
Actual production 15,300 hours
Actual hous
R 3.90 per hour
Actual ate
Calculate labour cost variance.
Solution
Labour Cost Variance - (SH for actual output x SR) - (AH x AR)
- (1.000 x 15 x 4) - (15,300 x 3.90)
LCV - R 330 (F)
Labour cost variance is further divided into rate variance and efficiency varnance.
Labour Rate Variance
This is that portion of the labour cost variance which is due to the difference between the
standard rate specified and the actual rate paid. Its formula is :
Labour Rate Variance = (Standard rate - Actual rate) x Actual
hours
LRV - (SR - AR) x AH
Thus this is the difference between standard and actual rates of wages,
hours. multiplied by actual
Example
Using the data given in above example :
LRV - (SR - AR) x AH
(4 - 3.90) x 15,300 = ? 1,530 (E)
Reasons for labour rate variance. Usual reasons
are:
1. Change in the basic wage rates.
2. Use of a different method of
wage payment.
3. Employing workers of grades different from the standard grades specified.
4. Unscheduled overtime.
5. New workers not being paid at full rates.
Often, labour rate variance will be an
determined by demand and supply uncontrollable variance as labour rates are usually
conditions in the labour market, backed by negotiable strength
of the trade union. Where this variance is due to the use of a
specified, there may well be such acceptable explanations as grade of labour other than that
specified. But when aforeman carelessly employs a wrong grade non-availability the labour grade
of
held responsible. of labour on a job, he may be

Labour Time (or Efficiency) Variance

This is that portion of the laboui cost variance which is due to the
hours specified for actual output and the actual labour hours difference between labour
as follows expended. This variance is calculated
Standard Costing and Variance Analysis
3.21
Labour Efficiency Variance = St. hours for Actual
actual output hours x Standard rate
LEV = (SH AH) × SR
Thus this variance
is the difference between standard and actual time valued at
standard rate.
Example
above example
Using the data given in
LEV = (SH for actual output - AH) × SR
- (15,000- 15,300) x 4 =? 1,200 (A)
The total of labour rate variance
and labour efficiency variance is equal to
labour cost
variance. Thus :
LCV = LRV + LEV
?330 (F) = 1,530 (F) + ? 1,200 (A).
far laholr efficiency variance. This varlance is usually caused by one or more of
the following reasons : heatinn te
1. Poor working conditions, e.g., inadequate lighting and ventilation, excessive
machinery.
2. Defective tools and plant and
3. Inefficient workers.
4. Incompetent supervision.
materials.
5. Use of defective or non-standard
etc.
6. Time wasted by factors like waiting or matenals, tools or machine break-down,
7. Insufficient training of workers.
8. Change in the method of operation.
9. Non-standard grade of workers.
Classification of Labour Efficiency Variance
Labour efficiency variance is further divided into the following sub-vanances.
(a) Idle time variance
(b) Labour mix variance
(c) Labour Yield Variance (or Labour revised-efficiency vaiance)
Idle Time Variance

Thisvariance represents that portion of the labour efficiency variance which is due to abnormal
idle time, such as time lost due to machine break-down, power failure, strike, etc. It is calculated
by valuing idle hourS at standard rate. Thus:
Idle Timne Variance = Idle hours x Standard rate
ITV = IH × SR
As idle hours represent a loss, idle time variance is always
unfavourable.
Some accountants do not treat Idle Time Variance as a part of labour efficiency
treat it as a part of labour cost variance. variance but
 Management ACCounting

idle time is 200 hours,

22 assuminq that
example and further
Example above laho.
data giv in the be and not of
(ing the variance Rnld - t R00 (A) cost variance 15,300 - 206
the jdle time of labour would be
then Sub-variance time Thue
troated as A variance, the actual basis of 15,100 hours.
variance ie officiency on the
When idie time then for labonvariance will be calculated
efheiency ranance labonrefficiency
hours AH) SR
- 15 100 Panane - (SH - 4-? 400 (A) and Idle Time
Lohy ESen -(15,000- 15,100) Labour Efficiency Variance
Variance,
total of Labour Rate
case, the Variance. Thus
În thiswould equal to Labour Cost
Variance be + IIV
LCV - LRV +LEV (A)
1,530 (F) +400 (A) + 800
330 (F) -
Variance (Gang Composition Variance) when more than one
grade of
Labour Mix mateial mix variance. It
arises only
from those specified
similar to of workers differ
This vaniance is
and the composition of actual grade
workers are emploed formula :
is calculated with the help of following
t Revisedstandard Actual × Stundard rate
hours
Labour Mix Varnance = hours
SR
LMV = (RSH - AH) x

IMustration 3.5 which

manufactures a particular product, the standard direct labour cost of
Coates India Ltd. involves the following :
is 120 per unit whose manufacture Amount
Hours Rate
Grade of
workers
30 2 60
A
20 3 60

50 120

which was
During a period, 100 units of the product were produced, the actual labour cost of
as follows :
Rate Amount
Grade of Hours
workers
3,200 1.50 4,800
1,900 4.00 7,600
5,100 12,400

Calculate (a) Labour Cost Variance (b) Labour Rate Variance

(c) Labour Efficiency Variance (d) Labour Mix Variance.
Standard Costing and
Variance Analysis 3.23

Solution
Standard for 100 units
Grade of Actual for 100
units Amt.
Houws Rate Hours Rate Amt.
worker

2 6,000 3,200 1.50 4,800

3.000
A 3 6,000 1.900 4.00 1,600
2.000
12,000 5,100 12,400
5,000
Total

Variance - SC - AC
(a) Labour Cost 12,000 12,400 400 (A)
LCV
AH
Variance = (SR - AR) x
(b) Labour Rate 3,200 1,600 (F)
A (2 - 1.50) x 1,900 (A)
1,900
B (3 - 4.00) x LRV =? 300 (A)

Labour Efficiency Variance = (SH - AH) × SR 400 (A)

(c) x2
A = (3,000- 3,200)
x3 300(E)
B (2.000 - 1,900) LEV 100 (A)
LCV = LRV + LEV
Check
400 (A) = 300(A) + 100(A)
(d) Labour Mix Variance = (RSH* - AII) x SR
A = (3,060 - 3,200) × 2
280 (A)
B (2,040 - 1,900) x 3 420 (E)
LMV - 140 (F)

*Calculation of Revised Standard Hours (RSH)

St. hours of the grade -xTotal actual hours
RSH
Total st. hours

3,000 x5,100 = 3,060 hrs. 2,000-x5,100 = 2,040 hrs.

Grade A = Grade B =
5,000 5,000
Labour Revised Efficiency Variance. (0r Labour Sub-efficiency Variance) This is similar to
Material Revised Usage Variance and is a sub-variance of labour efficiency variance. It arises due
to factors other than those which give rise to idle time variance and labour mix variance. Thus,
this is a residue of labour efficiency variance left after idle time and mix variance have been
separated. Its formula is :

St. hours for Revised

Labour Revised Efficiency Variance
uctual ouiput st. hours x St. rate
LREV (SH - RSH) × SR
 3.24 Management Acconti
Example
Using the data qiven in Ilustration 3.5.
Ladour Revised Efhciency Vaiance = (SH - RSH) xSR
Grade A= (3,000 - 3,060) x 2 = 120 (A)
Grade B (2,000 - 2,040) x 3 = 120 (A)
LREV = 240 (A)
Check
LEV LMV +LREV
100(A) - 140 (F) + 240 (A)
0our tela Variance. This is quite similar to Material Yield Variance. This
tne efect on variance reveals
Its formula +is:labour cost of actual outout or vield being more or less than the standard
yield.

Labour Yield Vaiance Actual St. yield St. labour cost

yield from actual input per unit of output
Ilustration 3.6
Standard output 500 units.
Actual output 450 units.
Standard time 1000 hrs.
Standard rate
Calculate Labour Yield Variance 20 per hour.
Solution
St. time per unit =
1000
St. cost per unit = 2 hrs hrs
+ 500 units = 2
hrs.
@ 20 = 40.
Labour Yield Variance = Actual St. cost per unit
yield St. yield
of output
- (450 - 500) ×R 40 =
Alustration 3.7 2,000 (A)
The standard labour
employment and the actual labour engaged in a week foI a job are as
Skilled under :
Semi-skilled Unskilled
workers
Standard no. of workers in the gang 32
workers workers
Actual no. of workers employed i2 6
28 18
Standard wage rate per hour 3
Actual wage rate per hour 4
1
3
During the 40 hours working week, the gang 2
Calculate: produced 1,800 standard labour hours of work.
(a) Labour Cost Variance
(b) Labour Rate Variance
(c) Labour Efficiency Variance (d)
(e) Labour Yield Variance Labour Mix Variance
(B. Com Hons Delhi)
 and Variance Analysis
d Costing
Standard
3.25
Solution
Standard
Actual
Hrs.* Rate Amount
Category Hrs.*
ofworkers Rate Amount
1,280 3 3,840
Skilled 1,120
Semi-skilled 480 2 960 4,480
720
Unskilled 240 1 240 2,160
,160
320
2,000 5,040 2,000
6,960
*Hrs. - No. of workers x 40 hours.

?5,040
St. cost of actual output x 1,800 hrs, =? 4,536
2,000 hrs
Labour Cost Variance = St. cost of actual output - Actual cost
LCV - 4,536 - 6,960 - 2,424 (A)
Labour Rate Variance - (SR - AR) × AH
Skilled - (3 - 4) *1,120 =1,120 (A)
Semi-skilled = (2 - 3) x 720 -7 720 (A)
unskilled - (1 - 2) x 160 160 (A)
LRV = 2,000 (A)
Labour Efficiency Variance= (" SH foi actual output - AH) x SR
Skilled z (1,152 - 1,120) × 3 96 (F)
Semi-skilled = (432 - 720) x 2 - 576 (A)
Unskilled = (216 - 260) x 1 56 (F)
=

LEV 424 (A)

*St. hrs. for actual output are calculated as
follows:
1,800
Skilled x 1,280
2.000 = 1,152 hrs.
1,800
Semi-skilled 2,000 x 480 = 432 hIs.
1.800
Unskilled =2.000 x 240 = 216 hrs.

Labour Mix Variance (Revised st. hrs. - AH) × SR.

Skilled z (1,280 - 1,120) ×3 =
480 (F)
Semi-skilled = (480 - 720) x = 480 (A)
Unskilled - (240 - 160) x 1 80 ()
LMV = 80 (E)
 3.26 Management Accountino
Labour Yield Variance Actual St. output fo, St. rate per hour of work
output actual hours

5,040
LYV - 1,800 - 2,000) x - 504 (A)
2,000
Check
(1) LCV - LRV + LEV
72.424 (A) 7 2,000 (A) + 424 (A)
(0) LEV - [LMV + LYV
R 424 (A) - 80 (F) + 504 (A)

OVERHEAD VARIANCES
Overhead is the aggregate of indirect materials, indirect labour and
Of overhead variances is indirect expenses. Analysis
1s considered to be a different from that of direct material and direct labour variances and
difficult part of variance analysis. There are.
aifficulty. irstly, standard mainly two reasons for this
overhead rate for fixed overhead is difficult
changes in the volume of output will distort this rate even to establish because
amount of fixed overhead cost. Generally though
fixed overhead absorption there is no change 1n the
basis of normal volume of output. rate is determined on the
of computing Secondly, there is conflicting
overhead variances. Overhead variances m£y be terminology and different ways
overhe ads and variable separately computed for nXed
methods overheads. Then there are two variance, three
of analysing overhe
of output. All these ad variances. Moreover, overhead rate mayvariance
lead to confusion be per
and four variance
In this book, in overhead variance analysis. hour or per unit
and then further overhead variances have been classified into fixed and variable overhead
analysed
It is important to according to causes. variances
understand at the outset that
over-absorption of overhead. Certain basic terms usedoverhead variance is
explained first of all. in connection with nothing but under or
overhead variances are
Standard Overhead Rate: This overhead
unit, depending upon the absorption rate may be computed per hour or per
method of absorption. This is calculated as follows :
Standard overhead Budgeted overhead
rate (per hour)
Budgeted hours
Or

Standard overhead Budgeted overhead

rate (per unit)
Where overhead variances are
Budgeted output (in units)
overhead rates are to be computed separately computed for fixed and variable
for fixed overhead and variable overheads, separate
When overhead rate per hour is used overhead.
The following basic
calculations should be made before computing variances.
(a) Standard hours for actual
absorbed on the basis of overhead output (SHAO). It is required to be calculated when
rate per hour. It is
calculated as under:
overhead are
 overhead it thediffering
total Its
3.27
defined
and overheads.
between
when achieved
has incurred
follows:
calculated London of overhead
difference
outputover-absorption
overhead Actual
overhe
ad
as xActual
hours C.I.M.A.,
St. rate
per
hour
overhead be calculated the Actual
xActual
uput the
St. per Actual
overhead
rate
houroverhead
10,000
units. 12,000
units.
rate
hour
per to in actual
St.
overhead
rate
per
hour as
required absorbed
incurred. - 20,000
722,000
described or overhead 10,000
is overhead
St. unit
per
rate the
units) under
actual
output It rate
S:.
hrs.
for is unit. overhead
Actual ad to
overhead
St.
overhead
Budgeted
output
X
Budgeted made: (in hours
Budgeted St.
overhead
rate
unit
per duesinplyAbsorbedabsorption
overhe
Budgeted
hours It overhead
St. unit
per
rate unit
per
rate
hours hoursActual
Actual hours - output
be
per
(SOAH) can arises
be X of
andactual
cost is
ad shouldrate Budgeted St.
for
actual
output
time and
variance = (0CV).
used hours forXoutput
overhe overhead S'1.'Budgeted
X standrd Variance
variance
Analysis X
output output X total absorbed hours
SHAO calculations Actual output
Actual actual Variance
is actual
Recovered) unit SOAH
= and this Cost St. ad
of the
oerhead (
overhe
Budgeted
output
Budgeted
hours Actual
overhe
ad
Variance = = = absorbed
Thus,
overhead Actual
output
ad adoverhe per for basis ad ad between Overhead 0CV
= Cost
overhe ad output overhe adoverhe overhe ad
Nenhead
Cost
Variance Budgeted
and (or overheratebasic the overhe
total
cost." Overhead
overhead standard
(Costi:g Absorbed Budgeted overhead
Standard following
on
Standard Absorbed Budgeted difference
overhead
Standard the
Actual absorbed Actual formula
is
: Calculate
Standard is standardthe Example
(b) (c) (d) (e) WhenThe(a) (b) (d) "his "theactual
(c) (e) from
are
as
 Management Accounting

3.28

Solution
Budgeted overhead Rs. 20,000 = 2 per hour
Budgeted hours 10.000 hrs.
St. oveihead absoption ate

10,(000 hrs. x 12,000 units

St. hours ton actnal output 10.000 units
- 12,000 hours.
0CV = (12,000 × 2) 7 22,000
- 2,000 (F)
overhead -var+ances.
eedd Cost Variance is divided into vaiable overhead and fixed
VARIABLE OVERHEAD (VO) VARIANCES
raidble Overhead Cost Variance : It nay he defned as the diference between absoIbed
variable overhead and actual vaiable overhead. Its formula 1s :
Variable Overhead St. hours for St. variable Actualoverhead
Cost Variance actual output overhead rate Cost
VOCV = (Absorbed V.0. - Actual V.0.)
This variance is sub- divided into the
following two
(a) Variable Overhead Expenditure Variance. This variances
:
Budget Variance. This variance arises due to the is also known as Spending Variance or
allowed and actual variable overhead difference between standard variable overhe ad
incurred. Its formula is:

V.0. St. variable

Expenditure Variance =
Overhead rate
Actual Actualoverhead
hours COSt

=
(Standard V.0. - Actual V.O.)
(h) Variable Overhead Efficiency
standard hours Variance. This variance arises due to the difference between
allowed for actual output and
same which give rise to labour efficiency actual Its
hours. The reasons for this variance are the
variance. formula is as follows:
Si. hours for Avtual St. variable
V.0. Efficiency Variance = X
uctuul oulput hours overhead rate
=Absorbed V.0. Standard V.0.
Check

V.0. Cost Variance = V.O. Ependiture V.O. Efficiency

Vuriance Variance
Ilustration 3.8
Calculate variable overhead variances from the following :
Budgeted Actual
Output (units) 20,000 19,000
Hours
5,000 4,500
Overhead - Fixed 7 10,000 10,500
Variable ? 5,000 4,800
 for
3.29 Budget
fixed
cost between
the
arises
and
overhead or actual which
Variance production
difference
: : and variance
is variances
Actual
ariable Actual
variable
overhead formula
fixed
overhead overhead
Spending
19,000
x standard the actual
ad
fixed
Orerhead
Its ctual two to overhe
Overhead.
20,000 0 -
-5(A). 300
(A).
? - ? Variance
250
(F) ad.
overhead.
as fixed due by
ho: 5,000
lper followinq
rate between
overhe known of absorbedxSt.
1ate
arises
portion
Eicicncy budgeted
fixed
overhead
St. St.
rute ted
xActual
outp1t Actual also Budge
x fixedF.O.) Aeualvariance
ad
Ictual
outputx difference the
St.
hrs.
or St.
iate) that
overhe Budgeted
5,000
houns
5,000
Acual) + rate-
is
between
intoThis hours
4,8004,800 1 Varianee actual
St. as -
ad This Overhead
x sub-divided
overhe of
defined
4,500) Variance.
1)- theand foractual
output Jixed
ovvheual cost
Budqeted
output
Budgeted
hours hours St.
hours
for difference Variance. foructual
-4hours.
,750 1) Expenditure Bulgetel 0utput
Budgeted
overhead Variance is hours Absorbed
Budgeted
houus × (Actual
x
(4,750
-
(F).
VARIANCES)
It ad
is houws Absorbed
standard
Analysis (4,500 (4,750 It
250 overhe
St.
Variance. Expendit1ure output.
is output.
variance
St.
the Volune
Cost - = + between
Variance (A) =
Variance absorbed
F.O.
Cost
Variance
Calculation
ofVariances to : F.O. actualthat F.0.
Eypenliture Volne
actual Overhead (c)
Efficiency
Variance 300 (FO)Cost is VariuICe
due
costOverhead Vuriance
Overhead
'caiculations
:Basic formula for
and ovechead
rate e OVERHEADOverhead anddifference
St.
variable for output Expenditure V.0.
Cost 50
(A)
Variance (oI overheadarises allowance
Costing tours output
Variable output
Fixed Its Fixed
It
Solution St. Fixed overhead. the
Standard
(6) Check Fixed Variance. standard
standard
(a) FIXED actual (a) to
(a) (b) (b)
due
 Management Accounting

Illustration 3.9
Caleulate fixed ovehe ad vaiancos in lstration 3.8.
Solution
Basic caleulations :
Budqeted fixed overhead 2 10,000
(a) owrhead rate 5,000 hrs.
Budqeted hours

St. hours for Budgeted hrs. x Actual output

()
ctual output Budgeted output
5,000 19,000 - 4.750 hrs.
20,000
Caleulation of Variances
(a) Fixed Overhead Cost Variance

St. hours for x St. Actual fxed

actualoutput Overhead

= (4,750 x 2) - 10,500 -? 1,000 (A)

(6) Fixed Overhead Expenditure Variance
Budgetel Actual
)rerheud Overlheud

= 10,000 - 10,500 = 500 (A)

(c) Fixed Overhead Volume Variance
St. hrs. for Budgeted |x St. rate
actual output hours

= (4,750 - 5,000) x 2 -? 500 (A)

Check

F.0. Cost Variarce = L.ypenditure Variance + Volune Variance

1,000 (A) 500 (A) + 500 (A)
Illustration 3.10
The following data is given:
Budget Actual
Production in 1inits 12,500 11,000
Man hours 6,250 5,750
Overhe ad costs :
Fixed 12,500 13,000
Variable 50,000 45,000
Calculate overhead variances when :
(A) Standard overhead rate per hour is used.
(B) Standard overhe ad rate per unit is used.
 3.31
hrs.
5,500 overhead cost rate
overhead Actual
overhead 1-(A)
,500
=
units Cost (A) rate
?2 Actual
1,000 overhead (A)
overhead (A) St.
xrate
11,000
overhead
Actual (F) 2,000 2,000 -7
500
(A)
7 6.250 6.250
hrs.
hrs. ?50,000
12,500 overhead) (0BV)
Actual -1,000 St. -
- ? (A) overhead :?(0BV)Actual Bulgeted)
x rate 45,000 -rate) x
hrs. 12,500
6,250units. Variance 45,000
- Actual) -
hours8 2,000 rate 13,000
rs.
(A)
used - St. overhead ? Variance
- 2
x?
hour) - St. St. 1,500
- 45.000 x overhead prohhction
utual6,250)
hou) St.
for output
actual 8)
hours
X
x 8) (0EV) outpul5,/50 - 13.000
ishour
per Budgethrs. ? for actual + St.
hours
for x2)
aclual
oulput ?
Analysis (pei Variance SL.
for
hrs.
x houis
Standard« - Variance OEV (F) Budget (0V) +
(per output Variances (5.500 (Actual(5,750
46,000 - 1,000 Variance Budgeted 0V(A)
rate (5,500 + -
(5,500 12.500 --
rate or St. OBV Variance (5,500) + 500
Variance
overhead
rate overhead Cost Expenditure =?Variances or OBV
overhead actual Caleulation
of
Variances VOCV - - Efficiency = = FOCV
= Expenditure
Overhead
Overhead VOCV(A) Cost = = =
FOCY(A)
and caleulations
Basic for 1,000
Overhead
Overhead
Volume
variable 2,000
Costing fixed hours
Variable
Variable Overhead Overhead
(A)
When Overhead ad
Solution
Standard
Standard Standard Standard Fixed
Fixed
Overhe
(ii) Check
(a) (i) (ii) (ii) (ii) Check
(b) (i)
3.32
Management Accountina
(B) When overhead rate per unit is used
Whether standard overhead rate used is per hour or per unit, the results will be the same. Thu.
the variances calculated by both the methods would be identical. In fact, these are two different
ways of looking at the same thing.
Basic caleulations:

7 12,500
(i) St. tixed oyohoad ato
12,500units ?1 peI unit

(ii) St. variable 0vehead rate ?50,000

12,500 units,. ?4 pe unit

(M) St. output for actual hours Budgeted output x Actual hours
Budgeted hrs.
12,500 units
x 5,750 hrs.= 11,500 units.
6,250 hrs.
Calculation of Variances
Variable Overhead Variances
(a) Variable Overhead Cost
Variance
- (Actual output x St.
rate) -- Actual overhead
= (11,000 × 4) - 45,000
- 71,000 (A)
(b) Variable Overhead Expenditure Variance
= (Standard overhead) - (Actual
overhead)
Actual St. output Standard
Outp1ut for actual hrs. rate
= (11,500 × 4) 45,000
(c) -? 1,000 (F)
Variable Overhead Efficiency Variance
Absorbed overhead - Standard overhead
Actual SL. outpul. Standard
Oulput for actual hrs ate
- (11,000 - 11,500) × 4 -? 2,000 (A)
Fixed Overhead Variances :
(a) Fixed Overhead Cost Variance
Actual Actual
- St. rate
output overheads
= (11,000 x 1) - 13,000 - 2,000 (A)
(b) Fixed Overhead Expenditure Variance
- Budyeted overhead Actual overhead
12,500 - 13,000 500 (A)
(c) Fixed Overhead Volume Variance

Actiual Budgeted |- S. rate

output outpit
- (|1,000 - 12,500) x ? 1 -- 1,500 (A)
Standard Costing and Variance Analysis 3.33

Sub-division of Overhead Volume Variance

Volume variance is further sub-divided into the following variances
1. Efficiency Variance.
2. Capacity Variance.
3. CalenderVariance.
Fixed Overhead Efficiency Variance. This is defined as "that portion of volume variance which
reflects the increased or reduced output arising fron efficiency above or below the standard which
quartity produced is different from standard
is expected". This variance thus shows that the actual
engaged in production. Its formula is :
quantity because of higher or lower efficiency of workers
Standard fixed overhead
Efficiency Variance = Absorbed fixed overhead -
(St. hrs. for actual output - Actual hours) x St rate
0verhead Capacity Variance This is "that portion of the volume variance which is due
Fixed
working at higher or lower capacity usage than the standard". Thus this variance arises when
to than the capacity planned to be utilised due to
plant capacity actually utilised is more or lessdemand, strikes, power failure, etc. Its formula is :
factors like idle tËng, under oI over customer
Capacity Variance =(Standard fixed overhead - Budge ted overhead)
(Actual hrs. worked - Budge ted hours) x St. rate
Example:
given in
Calculate fixed overhead efficiency variance and capacity v¡riance from information
Illustration 3.10.

Solution

Efficiency Variance
St. Ihus. for Acal
hours ,
X SI. rate
(actual nutput
(5.500- 5,750) x =? S00 (A)

Capacity Variance
(Actual
hours
Bulyetel|
hours
x St. rate
(5,750-- 6,250) x 2 = 1,000 (A)
Check
Volume Variance Efficiency Variance + Capacity Variance
7 1,500 (A) - 500 (A) + 1,000 (A).
variance which is due
Calendar Variance. It may be defined as "that portion of the volume of
period and the number
to the difference between the number of working days in the budget
Calendar variance is actually
actual working days in the period to which the budget is applied".number of working days being
volume variance arising due to a particular cause. i.e., actual
declared on the death of a national
different from those budgeted due to extra holiday being exceptional cirmustances because
only in
leader or any other reason. Calendar variance arises
laying down the standard.
normal holidays are taken into account while
calculation of capacity variance has to be modified
When calendar variance is calculated, the
analysis. Calendar variance is calculated by the
so as to induct this additional variance into the
following formula :
 3.34

Acual No. of St. No. of

Management.c ounting
Calenda Vaiance
wwrking days working days) St. rate per day

(Revised bulgeted
hours
hudgeted)
hours X St. rate per hour

Generally. this vaiance is adverse because of extra

days (decause of less holidays), then this variance willholidays,
be
but if there are extra workina
favourable.
lustration 3.11
The tollowmg
intomation Is qiven
St. tixed ovehead 1ate (pen
houi) 75
Budqeted hous 12,500
St. No. ot working days
25
Actual hous
Actual No. of working days 11,500
22
Calculate Calenda1 Vaiance.
Solution
St. No. of hrs. per day
12,500 25 days - 500
Revised budqeted hours = St. hours per day x
= 500 x 2? =
Actual No, of days
Calen dar Variance 11,000
- (11,000 -
- 7,500 (A)
12,500) x ? 5
Alternative Method
St. overhead rate per day= St. h:s. per day x
St. rate per hr
500 hrs x5 2.500
Calendar Variance (Actual No. of St. No. of St. rate
* \norking days Working ds X per day
= (22 - 25) x 2,500- ?
7,500 (A)
Revised Capacity Variance
When calendar variance is to be
to be modified. The new formula incalculated, the method of
that case is a follows. calculating capacity variance has
Revised Capacity Variance |Actual No. of St. No. of x
!
working days working days) St. rate per day
In the Illustration given
above, capacity variance will be calculated as
Revised Capacity Variance - (11,500- 11,000) follows :
x 5. = 2,500 (F)
Illustration 3.12
XYZ Ltd. has furnished you the following
information for the month of : Auqust
Budget Actual
Output (units) 30,000 32,500
Hours 30,000 33,c00
Fixed overhead 45,000 50,J00
Variable 0verhead 7 60,000 68,000
Working days 25 26
Calculate overhead variances. (C.A. Intei)
 Variance Analysis 3.35
Standard Costing and

Solution
Basic caleulations :
Budgeted hours 30, 000 1hour
it Budgeted units 30, 000
Standard hours per
32,500 units x 1 hr = 32,500
output
St. hrs. for actual
Budgeted overhead
Standard overhead rate per hour - Budqeted hours

45,000 = 1.50 per hour

For fixed overheads 30,000

60,000 - 2.00 per hour

For variable overhead 30,000
=1,800
= 45,000 + 25 days
St. F.0. rate per day output x St. 1ate
Recovered overhead St. hrs. for actual
48,750
32,500 hrs. x? 1.50 -
For fixed overhead =?65,000
hrs. x 2
For variable overhead -- 32,500
= Actual hours St. Iate
Stan dard overhead - 49.500
For fixed overhead = 33,000 × 1.50
33,000 2 = 66,000
For variable overhead
Bulgeted hours x Actual days
Revised budgeted hors Bulyeled days
30,000
x 26= 31,200 hours.
25

(For fixed overhead)

Revised budgeted ove:head = 31.200 x 1.50 =46,800

Calculation of variances
:
Fixed Overhead Varinces Recovened Overhead Actual Overhead
(i) F.O. Cost Variance 48,750 - 50,000 - 1,250 (A)
- Actual Overhead
Variance er Budgeted Overhead
(ii) F.0. Expenditure - 45,0(00 50,000 - 5,000 (A)
Overhead
Vajiance Recovered Overhead - Budgeted
(iii) F.0. Volume 48,750 45,000 7 3,750 (F)
Overhead
Overhead - Standard
- Recovered
Variance
(iv) F.0. Efficiency - 48,750 - 49,500
=? 750 (A)
Budqeted Overhead
Standard Overhead - Revised
Variance -
(v) F.0. Capacity 46,800 - 2,700 (E)
= 49,500 -
Actual Budgeted St. rate per day.
(vi) Calendar Variance days days
1,800 (F)
(26 - 2S) x 1,800
 3.36
Management Accoùntin,
Variable Overhead Variances
(:) V0 Cost Vaiance -Recovered Ovehead Actual Overhead
-65,000 68,000
3,000 (A)
(n) V.o Expendite Vaiance St Ove1head Actual 0verhead
66.000 68,000
- Recovered
2,000 (A)
( vo Effhiencv Vaiance Overhead - St. overhead
65,000 66,000
Check
1,000 (A)
Expenditure Efficiency
0 tast Vaiance Capacity
Variance Calendar
+
Variance Variance
1h0 (A) - 5,000 (A) + 750 (A) + Variance
2,700 (F) + 1.800 (E)
() F.0. Volume Varnance Eliciency Capacity Calendar
Variance Variance Variance
3,750 (F) - 750 (A) + 2,700 (F) +
1,800 (E)
(ii) V.o. Cost Variance Expenditure
Variance Efticicncy
Variance
3,000 (A) - 2,000 (A) + 1,000
(A).
SALES VARIANCES
Some companies calculate only
variances are, of course, cost variances relating to
many companies also invaluable, but to obtain full material, labour and overheads. These
their effect on calculate sales variances. While costadvantage ofstandard costing systen,
budgeted
the budgeted profit due profit due to favourable or variances are concerned with cost and
to changes in adverse variances, the sales variances affect
sales quantities. sales Eevenue i.e., changes caused by
in selling prices or
There are two distinct either a variatiu
methods of
(a) Tumover (or
value) method calculating sales variances
(b) Margin (or profit)
The following chart method
shows the various main and
sub-ariances of sales.
Sales Variances

Turnover Method
Marqin Met hod
Price Variance Volume Variance Price Variance
Volume Variance
Mix Vaiance
(Quantity Variance Mix Variance
Quantity Variance)
Fig. 3.4 Sales Variances
SLandard Gosting and Variance
Analysis
3.47

SUMMARY OF FORMULAE
Material Variances
(i) Material
Cost Variance
- - St. cost of
(St. qty. for actual actual output Actual cost
(ii) Material Price oit put x St. price) (Actual qty. * Actual price)
(iii) Material Usage Variance - (St. price
Actual price) Actual qty.
(iv) Material Mix Variance - (SQ foI actual output - Actual qty.) St. price
(v) Material Yield
Variance - (Revised SQ Actual qty.) × St. price
(vi) Material Revised
Variance - (Actual yield - St. yield) x St. output price
Usage Variance - (SQ. for actual
Labour Variances output Revised SQ.) x St. price

(i) Labour Cost Variance - St. cost of actual output - Actual cost
- (St. hrs. for actual
output x St. rate) (Actual hours x Actual rate)
(ii) Labour Rate Variance = (St. ate - Actual rate) x Actual hours
(11) Labour Efficiency Variance = (St. hrs. for actual output - Actual
hrs.) x St. rate
(iv) Idle Time Variance = Idle hours x Standard rate
(v) Labour Mix Variance (Revised st.. hours - Actual hours) x St. rate.
(vi) Labour Yield Variance
- (Actual yield - St. yield for actual hours) xSt. cost per unit of output
(vi) Labour Revised Efficiency Variance
= (St. hours for actual output - Revised standard hours) x Standard rate
Overhead Variances
Variable Overhead (vo) Variances: 4, sl
overhead
(i) Variable Overhead Cost Variance = Absorbed overhead - Actual
Standard overhead - Actual overhead
(ii) VO Expenditure Variance
Absorbed overhead - Standard overhead
(ii) VO Efficiency Variance
Fixed Overhead (FO) Variances: Actual overhead
Absorbed overhead
(i) FO Cost Variance
Budgeted overhead - Actual overhead
(i) FOExpenditure Variance = Absorbed overhead Budgeted overhead
(ii) FO Volume Variance Standard overhead
- Absorbed overhead -
(iv) FO Efficiency ariance - Budgeted overhead
= Standard overhead
() FO Capacity Variance = St. overhead - Revised
budgeted overhead
Variance
(vi) FO Revisd Capacity St. No. of St. rat
(Actual No. of per day
working days w.king days)
(vii) Calendra Variance x St. rate per
budegeted hours - Budegeted hours)
(Revised
Or hour.
 Management Accounting
Sales Variances
Sales Value Method
Selex hre Vriance - Actual sales Budgeted sales
Se mume Variance -Standard sales Budgeted sales
- (AQ BQ) × SP
N) Sales Pe Vanance Actual sales Standard sales
- (AP - SP) × AQ
() Sales Mix Variance - St. sales - Revised st. sales
- (AQ - Revised SQ) × SP
(v) Sales Quantity Variance - Revised St. Sales -
-
Budgeted sales
Sales Margin Method
(Revised SQ - Budgeted qty.) x SP
(i) Total Sales Margin Variance - Actual profit
(ii) Sales Margin Pice Variance - Actual profit Budgeted profit
= (Actual Staldard profit
(ii) Sales Marqin Volume Variance profit per unit-St. profit
- per unit) x AQ
Standard
- (AQ - BQ) x
profit
-
Budgeted profit
St.
Quantity Variance = Revised St. profitprofit
('v) Sales Margin per unit
- Budgeted profit
(v) Sales Margin Mix Variance (Revised SQ - BQ) x St. profit per
= St. profit - unit
= (AQ -
Revised St. profit
Control Ratios Revised SQ) × St. profit per unit.
(i) Efficiency Ratio St. hours for actual
output
Actual hours worked X 100

(ii) Activity Ratio Standard hrs. for actual output

X 100
Budgeted hours
(i) Capacity Ratio Actual hours worked
Budgeted hours X 100
(iv) Calender Ratio Actual working days
x 100
Budgeted working days
PROBL.EMS AND SOLUTIONS
Problem 3.1 (Material Variances)
From the following
(a) Material cost
particulars, compute:
variance, (b) Material price variance, and (c) Material usage
Quantity of materials purchased varnance
3,000 units
Value of materials purchased ?9,000
 3.49
Variance Analysis
standard Costing and
ton of out put 30 units
Standard quantity of materials required per ? 2.50 per unit
Standard price of material Nil
materials
Opening stock of 500 units
materials
Closing stock of 80 tons
Output during the period (B. Com., Hons. Delhi)

Solution
Basic calculations:
- 3,000 units
purchased
Actual quantity of materialpurchased - 9,000
Value of materials
79,000 ?3 per unit
Actual price per unit - 3,000 units
unit
Stan dard price = 2.50 per 30 unitS= 2,400 units
tons x
Standard quantity = 80 + Purchase - Closing stock
= 0pening stock
Actual quantity 500 = 2,500 units
= Nil + 3,000 -
Caleulation of variances
Variance - SC - AC
(a) Material Cost .)
= (SQ x SP) - (AQ x x 3.00)
(2,500
= (2,400 x 2.50) -
MCV = 1,500 (A)
= (SP - AP) x AQ
(b) Material Price Variance 2,500
= (2.50- 3.00) x
MPV = 1,250 (A)
= (SQ - AQ) x SP
(c) Material Usage Variance (2,400 - 2,500) x 2.50
=
MUV =? 250 (A)
Check
MCV = MPV + MUW
? 1,500 (A) = 1,250 (A) + ? 250 (A)
? 1,500 (A) = 1,500 (A)

Problem 3.2 (Material Variances) furnishes the following

manufacturing concern which has adopted standard costing
A
information :
Standard : 100 kg
Material for 70 kg finished products
Price of material
? 1 per kg
Actual:
2,10,000 kg
Output 2,80,000 kq
Material used
2,52,000
Cost of materials.
Calculate :
variance, (c) Material cost variance.
(a) Material usage variance, (b) Material price (B. Com. Kerala)
 Management Aceounting
3.50

Solution
100 kg
Standard Quantity (SQ) for actual output- 2,10,000 kg * 70 ka 3,00,000 kg

Actual Quantity (AQ) - 2,80,000 k

Standard Pice (SP) 1 pei kg
Actual Pice (AP) - (? 2,52,000 + 2,80,000 kg) = Re 0.90 per kg.
(a) Material Usage Variance - (SQ - A0) × SP
- (3,00,000 - 2,80,000 kg.) x 1 = 20,000 (F)
() Material Price Variance (SP -AP) xAQ
(1 - 0.90) x2,80,000 - 28,000 (F)
(c) Material Cost Variance (SQ x SP) - (AQ x AP)
(3,00,000 x 1) - (2,80,000 × 0.90) - 48,000 (E)
Check
MCV 48,000 (F)

MPV 28,000 (F) MUV 20,000 (F)

Problem 3.3 (Material Variances)
For making 10 kg. of gemco, the
Material standard material requirement is :
A Quantity (kg.) Rate per kg. (?)
6.00
4
During April, 1,000 kg. of Gemco were produced. The 4.00
Material actual consumption of materials is as unueI
A Quantity (kg.) Rate per kg. (?)
750
7.00
500
Calculate (a) Material Cost Variance; (b) Material Price 5.00
Variance; (c) Material usage Variance.
Solution (C.A. Inter)
Basic calculations
Standard for 1000 kg. Actual for 1000 kg.
Qty. Rate Amount Qty Rate Amount
Kg. Kq.
800 6 4,800 750 7 5,250
400 1,600 500
Total 2,500
1,200 6,400 1,250 7.750
Calculation of Variances 'rv3
(a) Material Cost Variance = SC for. actual o:'put - AC
MCV = 6,400 - 7,750 ? 1,350 (A)
(b) Material Price Variance - (SP - AP) x AQ
A = (6 - 7) x 750 =? 750 (A)
= (4 - 5) x 500 = 500 (A)
MPV = 1,250 (A)

2
standard Costing and Variance Analysis
(c) 3.53
Material Usage Variance - (SQ - AQ) × SP
A
B (800- 750) x 6 300()
- (400 - 500) x 4
400 (A)
Check MUV - 100 (A)
MCV 1,350 (A)

MPV 1,250 (A) MUV ? 100 (A)

PrgbBein 3.4 (Material Variances)
From the following information compute :
(a) Mix, (b) Price, and (c) Usage variances:
Standard Actual

Quantity Unit Toia! Quantity Unit Total

(kg.) price (kg.) price

1.00 4.00 2 3.50 7.00

Material A 4
4.00 1 2.00 2.00
Material B 2 2.00
8.00 3 3.00 9.00
Material C 2 4.00
6 3.00 18.00
2.00 16.00:
Total
(B. Com. Hons., Delhi)

Solution
Material Price Variance - (SP - AP) xAQ
5 (A)
MaterialA = (1 - 3.50) × 2 Nil
Material B - (2 - 2) × 1
3 (F)
Material C = (4 - 3) x 3 2(A)
MPV
(SQ - A0) x SP
Material Usage Variance = 2 (F)
Material A = (4 - 2) x 1 2 (F)
Material B = (2 - 1) x 2 4(A)
Material C = (2- 3) × 4 Nil
MUV
AQ) x SP
Material Mix ariance = (Revised SQ - 1(F)
Material A = (3 * - 2) x 1 1(F)
2
Material B
= (1.5 * - 1) x 6 (A)
x 4
- (1.5 * - 3) 4 (A)
Material C MMV
as follows:
quantity is calculated quantity
standard material item xTotal actual
* Revised Standard quantity of
Total standard quantity
 Management Accounting
3.52
2
6 - 3 ko. Material B x 6 - 1.5 k.
Metetial A
2
Material C x6 1.5 kg.

Problem 3.5 (Material Variances)

The standard cost of a chemical mixture is as follows:
40% material A at 20 per kg
60% material B at 30 per kq
Astandard loss of 10% of input is expected in production. The cost recoras Tor a
showed the following usage: penot
90 k materialA at a cost of? 18 per kg
110 kq material B at a cost of 34 per kg
The quantity produced was 182 kg of good product.
Calculate all material variances.
Solution (B. Com. Hons., Delhi)
Basic caleulations:
Material Standard for 180 kg. output Actual for 182 kg. output
Qty. Rate Amt. Qty. Rate Amt.
kg. kg.
A 80 20 1,600 90
B 18 1,620
120 30 3,600 110 34 3,740
Total 200 5.200 200 5,360
Less: Loss 20
18
180
5,200 182
5,360
St. cost of actual output 182
=5.200 x ?5,257.78
180
Calculation of ariances
1. Material Cost Variance = (SC of
actual output - AC)
- (5,257.78 - 5,360) - 102.22 (A)
2. Material Price Variance = (SP AP) x AQ
Material A = (20 - 18) x 90
Material B
180 (F)
= (30 - 34) x 110 = ? 440 (A)
MPV = 260 (A)
3. Material Usage Variance = (SQ for actual
output - AQ) x SP
182
Material A |120 x x 20 -7 182.22 (A)
180

182
Material B
10 180
-

x 30 = 340.00 (F)
MUV = 157.78 (F)
 Material- Mix ariance =
Material A
(RevisedSQ - AQ) x SP 3.53
(80 - 90) × 20
Material B (120 - 110) x 30 200 (A)
300 (F)
MMV - ? 100 (E)
5. Material Yield Variance = (AY - SY) x St.
material cost per unit of output
5,200
MYV - (182 - 180)
180 757.78 (E)
Check
MCV 102.22 (A)

MPV 260 (A) MUV 157.78 (F)

MMV ? 100 (F) MYV 57.78 (F)

Problem3.6 (Material Variances) be ?
The standard material cost to produce one tonne of chemical X is:
300 kg. of material A @ 10 per kg.
400 kq. of material B @ 5 per kg.
500 kg. of material C @ 6 per kg.
produced from the usage of :
During a period, 100 tonnes of chemical X were
9,000 per tonne
35 tonnes of material A at a cost of
6,000 per tonne
42 tonnes of material B at a cost of ?
7,000 per tonne
53 tonnes of material C at a cost of ? (B.Com. Hons., Delhi)
Calculate material variances.
Solution
Rate is 1 tonne= 1,000 kq.
Basic Caleulations : Conversion Actual for 100 tonnes
Standard for 1 00 tonnes
Material Rate Amt.
Rate Amt. Qty.
Qty. Kg.
Kg. 35,000
3,15,000
10 3,00,000 2,52,000
A 30,000 42,000 6
5 2,00,000 3,71,000
40,000 53,000 7
B 3,00,000
50,000 6 9,38,000
C 1,30,000
8,00,000
Total 1,20,000 30,000
20,000 9,38,000
Less : Loss 1,00,000
8,00,000
Output 1,00,000

Caleulation of Variances
SC of actual output - AC Z1,38, 000 (A)
1. Material Cost Variance = 9,38,000
MCV = 8,00,000 -
3.54
Management Accountino
2. Material Price
Variance - (SP - AP) x AQ
A = ( 10 - 9) × 35,000 35,000 (F)
B - (5 - 6) x 42,000 42,000 (A)
C - ( 6 - 7) x 53,000 53,000 (A)
MPV 60,000 (A)
3. Material Usage (or Quantity) Variance - (SQ - AQ) x SP
A - (30,000 - 35,000) x? 10 50,000 (A)
B (40,000 - 42,000) × 5 =? 10,000 (A)
C = (50,000 - 53,000) × 6 18,000 (A)
MUV - 78,000 (A)
4. Material Mix Variance - (Revised SQ* - AQ) × SP
A - (32,500 - 35,000) x 10 25,000 (A)
1,30, 000
B 3 6,667 (F)

C= -S3,00 x 6 =
7,000 (F)
MMV -? 11,333 (A)
* Revised Standard Quantity is calculated as follows :
Total AQ
x SQ
1,30,000 x 30,000 = 32,500 kg.
A =
Total SQ 1,20,000

1,30,000 1,30,000 1,30,000 x 50,000 =1,62,500

B = x 40,000 = kg. C=
1,20,000 3
kg.
1,20,000
5. Material Yield Variance (MY)
- (Actual yield St. yield) x *St. cost per unit of output
1,300 *
100
12
x 8,000 =? 66,667 (A).
*Working Notes:
Total standard cost 8,00,000
1. Std. cost per unit of output 100 Tonnes
Total standard output
= 8,000 per tonne

Actual output 100 Tonnes 1,300

x 1,30,000 tonnes.
2. Std. yield x Total AQ = 1,20,000 12
Total SQ

Check
MCV 1,38,000 (A)

MUV ? 78,000 (A)

MPV 60,000 (A)

MYV 66,667 (A)

MMV 11,333 (A)
Standard Costing and Variance Analysis
3.55

Problem3.7 (Material Variances)

on kas, of material A at a standard price of ? 2
per kg and 40 kas of material 8 at a st and ard
ioe of 5 per kg. were to be used to manufacture 100 kgs. of a chemical
During amonth, 70 kgs. of matenal A piced at? 2.10 per kg. and 50 kgs. of material Bpricod
t 7 4.50 per kg. were actually used and the output of the chemical was 102 kas.
Find out the material variances. (IC. WA. Inter)
Solution
Basic caleulations :
St. cost of 100 kg. of output Actual cost of 102 kq. of output

Rate Amount aty. Rate Amount

Materia! Qty.
kg.
kg. 70 2.10 147
160
80 4.50 225
A 200 50
40
372
360 120 kg.
120 kg.
Rs. 360 367.28
102 kq =
output
St. cost of actual 100 kg
3.60
= 360 + 100 ka =
St. output price
Calculation of Variances Actual cost
actual output -
Material Cost Variance = $t. cost of 4.80 (A)
372 =
= 367.20 - quantity
- Actual price) x Actual
Material Price Variance = (St. price 7(A)
(2 - 2.10) × 70
A = = 25 (F)
(5 - 4.50) x 50
B = MPV = 18 (F)
Actual Qty.) x S. P.
Material Mix Variance (Revised St. Qty. - 20 (F)
A
(80 - 70) x 2 50 (A)
5
B = (40 - 50) x MMV =? 30 (A)
p1ice
yield - St. yield) × S.. output
Material Yield Variance = (Actual 3.60=7.20 (F) consumed and
= (102 -
100) x quantities of materials
of actual
MYV
Qty because the total
is Revised St.
Note : SQ qiven
quantities is equal.
that of standard
Check
MCV 4.80 (A)

MUV 22.80 (A

MPV 18 (F) MYV 7.20 (A)

MMV 30 (A)
3.66
Management Accounting

1,800
Dept. B-0.35 - x 5,800 ? 230 (F).
5,800,
Labour Efficiency Variance- (SH - AH) × SR
Dept. A - (8,000 - 8,200) x 0.30 60 (A)
Dept. B (6,000 - 5,800) x O.35 70 (F)
Check
Labour Cost Variance - Rate Variance + Efficiency Variance
Dept. A400 (F) - 460 (F) + 60 (A)
Dept. B 300 (F) -230 (F) + 70 (F)
Problem 3.17 (Labour Variances)
Standard hours for manufacturing two products Mand N are 15 hours per unit and 20 hours
per unit respectively. Both products require identical kind of labour and the standard wage rate
per hour is? 5. In a year 10,000 units of Mand 15,000 units of N were manufactured. The total
of labour hours actually worked were 4,50,500 and the actual wage billcame to 23,00,0C). This
included 12,000 hours paid for @ 7 per hour and 9,400 hours paid for @ 7.50 per hour,
the balance having been paid at 5per hour.You are required to compute the labour varnances.
(B. Com Hons Delhi, I.C.WA. Inter)
Solution
Labour Cost Variance = Standard cost for actual output - Actual cost.
Standard cost:
For product M 10,000 units x 15 hrs. x 5
7,50,000
For product N = 15,000 units x 20 hrs. x5 - 15,00,000
Total stan dard cost = 22,50,000
Total actual cost =
23,00,000
Labour cost variance = 22,50,000 - 23,00,000
Labour Efficiency Variance = (St. hrs. - Actual hrs.) x St. rate
750,000 (A)
- (4,50,000 - 4,50,500) x 5 -7 2,500 (A)
Labour Rate Variance = (St. rate - Actual rate) x Actual hrs.
- [(5 - 7) x 12,000] + [(5 - 7.50) x 9,400] + [(5 -
5) x 4,29,100]
-47,500 (A)
ProbleDm 3.18 (Labour Variances)
The details regarding the composition and the weekly wage rates of labour force engaged on
ájob scheduled to be completed in 30 weekS are as follows :
Standard
Actual
Category of No. of
Workers Weekly No. of
Workers Wage rate Weekly
Workers Wage rate
per worker
Skilled 75 per worker
60
Semi-skilled 45
70
? 70
Unskilled ? 40 30
60 50
7 30
80
20
 Costiny Iysis

work is actually
The
completed in 32 weeks. Calculate the 3.67

Stand solution

gasic caleulations:
all labour
vari(B.aCom.
nces. Hons.. Delhi)
Category of Standard
workers
Weeks Actual
No. of workers Rate Amt.
x No. of Weeks
Skilled
weeks (No. of workers
Rate Amount
75 × 30 x No. of
Semi-skilled
45 x 30 = 2,250 60 weeks)
Unskilled 1,350 40
1,35,000 70 x 32 - 2.240 70 1,56,800
60 x 30 - 54,000
Total
1,800 30
30 x. 32 - 960 50 48,000

5,400
54,000 80 x 32 - 2,560 20 51,200

Calculation of Variances 2,43,000 5,760 2.56,000

Labour Cost Variance
-(SC - AC)
=
2,43,000 - 2,56,000
Labour Rate Variance= - 13,000 (A)
(Standard rate - Actual rate) x Actual time
Skilled - (60 - 70) x 2,240 =22,400 (A)
Semi-skilled = (40 - 50) x
960 = 9,600 (A)
Unskilled (30 - 20) × 2,560 - 25,600 (E)
LRV 6400 (A)
Labour Efficiency Variance = (Standard time - Actual time) x
Standard rate.
Skilled = (2,250 - 2,240) x 60 600 (F)
Semi-skilled (1,350 - 960) x 40 = 15,600 (F)
Unskilled = (1,800 - 2,560) x 30 -722,800 (A)
LEV - 6,600 (A)
Labour Mix Variance = (*Revised standard time - Actual time) x Standard rate
Skilled = (2,400 2,240) x 60 =7 9,600 (F)
Semi-skilled - (1,440 - 960) x 40 - 19,200 (F)
Unskilled = (1,920 - 2,560) x 30 =? 19,200 (A)
LMV = 9,600 (F)
*Revised standard time is calculated as under.

St. time of grade x Total actual time

Revised Standard time Total standard time

2,250
Skilled = 5,400 x 5,760 = 2.400 weeks
1,350
Semi-skilled = x 5,760 - 1,440 weeks
5,400
1,800
Unskilled x 5,760 = 1,920 weeks.
5,400
Labour Revised Efficiency Variance = (St. time - Revised st. time) x S.R.
Skilled - (2,250 - 2,400) x 60 -? 9,000 (A)
 3.68 Management Accountino

Semi-skilled (1,350 - 1,440) x 40 -? 3,600 (A)

Unskilled - (1,800- 1,920) 30 - 3,600 (A)
LREV - 1 6,200 (A)
Labour Yield Variance - (AY - SY) x SOR
5,760
LYV x 2,43,000 - 16,200 (A)
5,400
Check

(1) LCV LRV +LEV

? 13,000 (A) - ? 6,400 (A) +? 6,600 (A)
(i1) LEV - LMV + LREV (0r LYV)
? 6,600 (A) = 9,600 (F) + 16,200 (A)
Problem 3.19 (Labor Variances)
The standard output of X is 25 units per hour in a manufacturing department of a company
employing 100 workers. The standard wage rate per labour hour is 6.
In a42 hour week, the department produced, 1,040 units of Xdespite 5% of the time paid
was lost due to abnormal reason. The hourly rate actually paid were ? 6.20, 6 and ? 5.70
respectively to 10, 30 and 60 workers.
Compute relevant variances. (C.A. Inter)
Solution
Basic caleulations :
Standard hours per unit = 100 + 25 = 4
Standard hours for actual output = 1,040 units x 4 hours = 4,160
Standard cost of actual output = 4.160 hrs x 6 =7 24.960
Actual cost is calculated as follows :

No. of Actual hours Idle Effective Rate per Amount.

workers paid* hours hours hour ?
10 420 21 399 6.20 2,604
30 1,260 63 1,197 6.00 7,560
60 2,520 126 2,394 5.70 14,364
Total 4,200 210 3,990 24,528

*Actual hours paid is No. of workers x 42 hors.

Caleulation of Variances
Labour Cost Variance = St. cost - Actual cost
= 24,960 24,528 - 432 (E)
Labour Efficiency Variance - (SH - AH) x SR
= (4,160 - 3,990) x 6 =? 1,020 (F)
Labour Rate Variance - (SR - AR) ×AH
- (6 - 6.20) x 420] + [(6 - 6) x 1,260]
+ [(6 - 5.70) x 2,520)]
84 (A) + Nil + 756 (F) - 672 (F)
 standard Costing and Variance Analysis
Tale Time Variance -Idle 3.69
hours x St.
- 210 x 6 rate
Check -{ 1,260 (A)
Labour cost
variance Effidengy
variance
Rate
variance variance
Idle time
432 (F) - 1,020 (E) + 672
Note : Idle time variance has been (E) + 1,260 (A)
it may be
calculated as a sub-variancecalculated as a
of efficiency sub-variance labour cost variance.
of
Altermatively,
Problem 3.:20 (Labour Variances) variance.
group of 10 skilled and 20 unskilled workers were
BXT in an 8 hour day. The standard hourly expected to produce 400 kg
wage rate was fixed at 25 and ? 15 of Chemical
Actualy. agroup of 15 skilled and 10 unskilled workers was deployed and respectively.
at an nourly wage rate of 22 and 18 paid for 8 hour day
due to power failure and only 300 kg ofrespectively. Two hours were wasted for the entire grOup
BXT was produced.
You are required to compute :
(i) Labour cost variance; (i) Labour rate variance; (iii)
variance; (v) Labour mix variance (i) Labour yield varianceIdle time variance; (iv) Labour usage
(B. Com. Hons., Delhi)
Solution
) Basic caleulations:
Type of Standard for 400 g Actual for 300 kg.
Worker Hrs.* Rate Amt. Hrs, + Rate Amt.

Skilled 80 25 2,000 120 22 2,640

Unskilled 160 15 2,400 80 18 1,440
240 4,400 200 4,080
*Hrs. = No. of workers x 8 hrs.

4,400
Standard cost of actual output (SC) = x 300 =?3,300
400
Labour cost variance = SC - AC
LCV = 3,300 4,080 780 (A)
Labour Rate Variance - (SR - AR) × AH
Skilled - (25 - 22) x 120 360 (F)
Unskilled = (15 - 18) x 80 =
240 (A)
LRV = 120 (E)
Labour Efficiency Variance (SH* - AH) × SR
Skilled = (60 - 120) x 25 =? 1,500 (A)
Unskilled = (120 - 80) × 15 600 (F)
LRV = 900 (A)
 Management Accounting
3.70

under:
*SH St. hours fo actual output are calculated as
80 hrs 60 hrs.
Skilled x 300 ka
400 kg

I60 hrs 120 hrs.

Unskilled x 300 ka
400 kg
Idle hrs x St. rate
ldeal Tinme Variance 25
750 (A)
Skilled- 15 workers x 2 hrs x 300 (A)
Unskilled - 10 workers x 2 hrs x? 15 7 1050 (A)
ITV LAV hour
sub-variance of labour efficiency variance. Now LMV and
calculated as a
"ldle time variance is
deen calculated after deducting idle hrs. from actual hours.
Labour Mix Variance - (RSH* - AH*) x SR -? 1,000 (A)
Skilled (50 - 90) x 25
Unskilled - (100 - 60) x 15
600 (E)
LMV
400 (A)
* Actual hours Original actual hours - Idle hrs.
Skilled = 120 - 30 = 90 hrs
Unskilled - 80 - 20 = 60 hrs
Total = 150 hrs

* RSH (Revised stan dard hours)

80
Skilled = 150 x = 50
240

Skilled = 150 x = 100

240
Labour Yield Variance (AY - SY) x SOR
400 4400
300- 150 x 240) 400
= 550 (E)

Problem 3.21 (Labour Variances)

30 men, 15 women and 10 boys. They are paid
Agang of workers normally consists ofWoman-? 0.60, Boy- 0.40.
standard rates per hour as Man-- 0.80,
expected to produce 2,000units of outp
In a normal working week of 40 hours, the gang is
men, 10 women and 5 bo
During the week ended 31 December, the gang consisted of 40
0.30 respectively. 1,600 units' were produc
The actual wages paid were @0.70, 0.65 and
Four hours were lost due to abnormal idle time.
Calculate (i) Wage variance, (ii) Wage rate variance, (ii) Labour efficiency variance, (iv) l
Gang composition variance, (i.e., labour mix variance) and (vi) Labour revis
time variance (v) (B.Com. Hons., Del
efficiency variance, or Labour yield variance.
 3.71
Standard Costing and Variance Analysis

Solution
Basic caleulations:
Actual
Type of Standard
Rate Amt.
Rate Amt. Hrs.*
worker Hrs.

0.70 1,120
0.80 960 1,600
Men 1,200 0.65 260
360 400
Women 600 0.60 60
200 0.30
0.40 160
Boys 400
1,440
1,480 2,200
Total 2,200

*Hrs. - No. of workers x Weekly 40 hours

1,600 1,184
SC of actual output = 2.000 X 1,480 =?

Standard hours (SH) for actual output : 400

* 1,600 - 320
Men X
1,200 1,600 - 960 Boys 2,000
2000
600
1,600 = 480
Women 2,000
Caleulation of Variances (Actual cost)
(Labour cost variance) = (SC of actual output) -=7256 (A)
(i) Wage Variance = 1,184 - 1,440
- (SR - AR) x AH
Rate Variance =7 160 (F)
(ii) Labour or Wage Men = (0.80 - 0.70) x 1,600
- 0.65) x 400
= 20 (A)
Women =(0.60 -? 20 (F)
Boys = (0.40 - 0.30) x 200
LRV = 160 (F)
output - AH) × SR
Variance = (SH for actual ? 512 (A)
(iii) Labour Efficiency Men (960- 1,600) x 0.80 =? 48 (F)
x 0.60
Women = (480 - 400) =7 48 (F)
Boys = (320 200) x 0.40 LEV -416 (A)
variance. Thus labour
sub-variance of labour efficiency
Variance is treated as a yield variance.
Here Idle Time time variance, mix variance and
Note: idle
be segregated into Idle hours
efficiency variance may - Standard rate per hour x
7 128 (A)
Variance
(iv) Idle Time Men =?0.80 x 160
=? 24 (A)
Women =0.60 x
8 (A)
x 20
Boys =? 0.40 ITV =160 (A)

*Caleulation of idle hours 160

hrs =
Men = 40 x 4
= 40
Women = 10 x 4 hrs
4 hrs - 20
Boys = 5 x
220
Total
 3.72
Managemnent Accounting
Actual hours after tdle hours are t
Men - 1600 160 -{1440 hrs.
Women 400 40 360 hrs.
Boys - 200 20 ?180 hrS.
Total 2,200 220 -1,980 hrs.
NoW KSH for the pupose of labour mix variance and labour vield variance are computed on the basis
of 1,980 actual hours i.e. 1980 hrs in the ratio of st. hours of 1200 : 600 : 400.
() Labour Mix Variance - (RSH - AH) × SR
Men (1,080- 1,440) x 0.80 - 288 (A)
Women - (540 - 360) × 0.60 ? 108 (F)
Boys - (360 - 180) x 0.40 -? 72 (E)
LMV - 108 (A)
(iv) Labour Revised Efficiency Variance - (H -
RSH) x SR
Men - (960 - 1,080) x 0.80 - 96 (A)
Women= (480 - 540) x 0.60 - 36 (A)
Boys - (320 - 360) x 0.40 -7 16 (A)
LREV - 7148 (A)
Labour Yield Variance may be calculated in place of Labour
Labour Yield Variance Revised Efficiency Variance :
(Actual yield - St. yield) x St. yield rate
LYV = (1,600 - 1,800) x 71,480
2,000 units
7148 (A)
2,000
Standard yield 2,200 x 1,980 = 1,800 units
Check
() LCV = LRV + LEV 256 (A) = 160 (F) + 416 (A)
(ii) LEV = ITV + LMV + LYV 416 (A) = 160 (A) + 108 (A) + 148 (A)
Problem 3.22 (Materials and Labour Variances)
From the following data of A Co. Ltd. relating to budgeted and actual performance for the
month of March, compute direct materials ànd direct labour cost variances :
Budgeted data for March :
Units to be manufactured 1,50,000
Units of direct material required (based on standard rates) 4,95,000
Planned purchase of raw materials (units) 5,40,000
Average unit cost of direct material
Direct labour hours per unit of finished goods 3/4 hour
Direct labour cost (total) ? 29,92,500
Actual data at the end of March :
Units actually manufactured 1,60,000
Direct material cost (purchase cost based on units actually issued) 7 43,41,900
Direct maternal cost (purchase cost based on units actually purchased) ? 45,10,000
8.20
Average unit cost of direct material
Total. direct labour hours for March 1,25,000
Total direct labour cost for March 33,75,000
(I.C. W.A., Inter)
tandard Costing and Variance Analysis
3.73
Solution
Material Variances :
(a) Material Cost Variance - (SC - AC)
*Standard material quantity* (1,60,000 units *A
per unit of finished
3.30) - 43,41,900 -? 1,17,900(A)
product is :
(b) Material Price Variance -(4,95,000 1.50.000) - 3.30 units
-(SP - AAY ×
AQ
- (8 -
8.20) x - 1,05,900 (A)
(c) Materials Usage Variance- (SQ - AQ) SP
43,41,900
X 3.30
8.20
x8 - 12,000 (A)
Labour Variances :
(a) Labour Cost
Variance = SC - AC

* St.
- (1,60,000 x 19.95*) - 33,75,000 -? 1,83,000 (A)
rate per unit - 29,92,500 + 1.50.000 =7 19.95
(b) Labour Rate Variance = (SR - AR) x AH
= (26.60 - 27) × 1,25,000 50,000 (A)
St. rate per hour
- (29,92,500 +(1,50,000 x 3/4 hrs.)] ? 26.60
Actual rate per hour = (33,75,000 + 1,25,000) 27
(c) Labour Efficiency Variance = (SH - AH) × SR
-(1,60,000 *3/4 - 1,25,000) ×26.60 -7 1,33,000 (A)
Probtem 3.23 (Overhead Variances)
From the following information compute Fixed Overhead Cost, Expenditure and Volume Variances.
Normal capacity is 5,000 hours. Budgeted fixed overhead rate is 10 per standard hour. Actual
level of capacity utilised is 4,400 standard hours. Actual fixed overhead 52,000.
(B. Com. Hons., Delhi)
Solution
1. Fixed Overhead Cost Variance
- (St. hrs. for actual output x St. ohd. rate) - Actual overhead
=(4,400 x 10) - 52,000 -8,000 (A)
2. Expenditure Variance
Budgeted overhead - Actual overhead
- (5,000 x? 10) - 52,000 - 2,000 (A)
3. Volume Variance
(St. hrs. for actual output - Budgeted hrs) x St. overhead rate
(4,400 - 5,000) x R 10 { 6,000 (A)
Check
F.0. Cost Variance = Expenditure Variance + Volume Variance
? 8,000 (A) -? 2,000 (A) + 6,000 (A)
 s
Tollowing,
Budgeted activity calculate variances due to Management Accountìng
Actual activity
Actual production controllable reasons :
Standard rate of fixed
Actual 5,000 units
Variable
Budget of vaableoverhe ad ad overhe ad 80%
3,750 units
Solution overhe for each 5% ?8 per unit

Variable overhead : variation in

activity 85,000
7 5,000
Basic Caleulations variances are due to (C.A. Inter)
1.
Budgeted variable overhead (at controllable reasons.
2. 100% activity) =?
Variable overhead rate per 5,000 x =? 1,00,000
5
unit ? 1,00,000
3.
Absorbed (budgeted)
Standard overhead = 3,750 units x 20 = 5,000 units ? 20
4. -
Calculation of overhead 1,00,000
Variances x 80% = 75,000
V.0. Cost Variance 80,000
V.o. Expenditure Variance = Absorbed- overhead Actual overhead
75,000
= St. 85,000
overhead - T10,000 (A)
V.O. Efficiency Variance
=
=
80,000 - 85,000Actual overhead
Absorbed overhead - Standard 75,000 (A)
Check V.O. Cost Variance 75,000 - 80,000 overhead
- 5,000 (A)
10,000 (A) -
Expenditure Variance +Efficiency Variance
5,000 (A) + 5,000 (A)
Problem 3.25 (Overhead Variances)
In
Department A of a plant, the following data are
Standard output for 40 hours per week submitted for the week ending 31-3-2005.
Budgeted fixed overhead 1,400 units
Actual output 7 1,400
Actual hours worked 1,200 units
Actual fixed overhead 32

Calculate variances. 71,500

(I.C.W.A, Inter)
Solution

St. overhead rate (per unit) Budgeted fixed overhead ?1,400

= Re 1
budgeted output (units) 1,400units
1,400 units
Standard output per hour 40hours
= 35 units

St. output (in actual hours) = 35 units x 32 hours 1,120 units

 3.75
standard Costing and Variance Analysis
Calculation of variances (Based on output in units) :
(i) Fixed Overhead Cost Variance
- Actual overhead cost
(Actual output x St. overhead rate)
7 300 (A)
- (1,200 x 1) - 1,500
(i) Fixed Overhead Expenditure Variance
Actual fixed overhead
- Budgeted fixed overhead
= 1,400 - 1,500 7 100 (A)
(iüü)) Fixed Overhead Volume Variance
output) x St. rate
* (Actual output - Budgeted 7 200 (A)
- (1,200 - 1,400) x 1
(iv) Fixed Overhead Efficiency Variance
Standard output) x St. rate
= (Actual output x
= (1,200 - 1,120) x 1 Z 80 (F)
(v) Fixed Overhead Capacity Variance
output) x St. rate
- (St. output - Budgeted - 280 (A)
- (1,120 - 1,400) x 1
Check Capacity Variance
Variance = Exp. Variance + Efficiency Variance +
Cost
(A)
300 (A) - 100 (A) + 80 (F) + 280
Problem 3.26 (Overhead Variances) and showed the following data for
the month
standard costing system
a
A Company operates Budgeted
of March: Actual
20
22
4,000
No. of working days 4,300
Man-hours 70.50
10
Overhead rate per hour
Hours per unit of output ? 1,800
Fixed overhead incurred 425

No. of units produced

Calculate: (b) Budget Variance
variance (d) Capacity Variance
(a) Overhead Cost () Efficiency Variance
(I.C. WA. Inter)
(c) Volume Variance
(e) Calender Variance
Solution
Basic Caleulations :
4,000 hours 400 units
10 hours
1. Budgeted output 2,000
@? 0.50
= 4,000 hrs. = 4,250
2.Budgeted overhead 10hrs.
- 425 units @ 0.50 - 2,125
actual output
3.Standard hours for
@
= 4,250 hrs. 0.50
=72,150
4. Absorbed overhead 4,300 hrs. x?
5. Standard overhead
 Management Accounting
3.76

22 days x 0.50?2.200
6. Revised budgeted overhead AR00 hrs. 20 days
22
7. Revised budqeted houns -4,000 x 4,400 hrs.
20

Calculation of Variances
Actual overhead
(a) Overhead Cost Variance - Absorbed overhead
-2,125 1,800 {325 (F)
(6) Budget Variance -Budgeted overhead - Actual overhead
- (2,000 - 1,800) 7200 (F)
(c) Volume Variance - Absorbed overhead Budgeted overhead
(2,125 - 2,000) -125 (F)
(a) Capacity Variance - Standard overhead Revised budgeted overhead
- (2,150 - 2,200) ? 50 (A)
(e) Calendar Variance -(Revised budgeted hours - Budgeted hours) x St. rate
- (4,400 -4,000) x 0.50 - 200 (E)
() Efficiency Variance - Absorbed overhead - Stan dard overh ead
- (2,125 - 2,150) ? 25 (A)
Check
() Cost Variance Budget Variance + Volume Variance
325 (F) = 200 (F) + 125 (F)
(1) Volume Variance= Efficiency Variance + Capacity Variance + Calendar Variance
125 (F) = 25 (A) + 50 (A) + 200 (F)
Problem 3.27 (Overhead Variances)
CIPLA Ltd. has furnished you the following data:

Production in units
Budget Actual (July)
20,000 22,000
Fixed overheads ? 30,000 31,000
No. of working days. 25 27
Budqeted fixed overhead rate is 1 per hour. In July, the actual hours worked were
Calculate overhead variances. 31,500.
(C.A., Inter, Adapted)
Solution
Basic .caleulations :
Budgeted hours =30,000 1= 30,000 hrs.
St. hours for actual output Budgeted hours
Acutal output
Budgeted output
30,000
St. rate per day 20,000 x 22,000 = 33,000 hours
=? 30,000 + 25 days =? 1,200
Recovered overhead = 33,000 hrs.x 1 = 33,000
Standard overhead = 31,500 hrs. x? 1=? 31,500

-Rerised budgeted hours (for Budgeted hours x Acutal days

27 days)
Budgeted days
 nandart Costing and Vartance Analyis 3.71

30,(000
25 * 27 - 12,400 hours
Revised budgeted overhead -32,400 hrs. x 1- 32,400
Calculation of Variance&
() R0. Cost Variance - Recovered overhead Actual overhead
-33,000 7 31,000 - 2,000 (F)
()Expenditure Variance - Budgeted overhead - Actual overhead
? 30,000 31,000 ? 1,000 (A)
(01) Volume Variance- Recovered overhead - Budgeted overhead
-7 33,000 - 30,000 ? 3,000 (E)
(iv) Capacity Variance - Standard overhead - Revised budgeted overhead
-731,500 - ? 32,400 ? 900 (A)
(v) Efficiency Variance - Recovered overhead - Standard overhead
? 33,000 - 31,500 -? 1,500 (F)
(vi) Calendar Variance = (Actual days - Budgeted days) x St. rate per day
= (27 - 25) x 1,200 =?2,4400 (F)
Check
(i) EO. Cost Variance Expenditure Variance + Volume Variance
2,000 (F) = 1,000 (A) + 3,000 (F)
(ii) Volume Variance - Capacity Variance + Efficiency Variance + Calendar Variance
3,000 (F) = 900 (A) + 1,500 (E) + 2,400 (F)

Problem 3.28 (Overhead Variances)

The following data has been collected from the cost records of a unit for computing the
various fixed overhead variances for a period :
25
Number of budgeted working days
Budgeted man-hours per day 6,000
Qutput (budgeted), per man-hour (in units) 1

Fixed overhead cost as budgeted 7 1,50,000

Actual number of working days 27

Actual man-hours per day 6,300

Actual output per man-hour (in units) 0.9
Actual fixed overhe ad incurred 71,56,000
Calculate fixed overhead variances :
(a) Expenditure Variance, (b) Calender Variance,
(c) Capacity Variance, (d) Eficiency Variance,
(e) Volume Vaziance, () Fixed Cost Variance. (I.C. W.A. Inter)
Solution
Basic Caleulations
1. Budgeted overhead (given) -? 1,50,000
2. Actual overhead (given) =? 1,56,000
:. Absorbed overhead (6,300 hrs. x 27 days x 0.90 x ?
*1) = 1,53,090
Standard overhead (6,300 hrs x 27 day x 1) = 1,70,100
3.78
Managemnent Accounting
5. St. overhead rate per day (? 1,50,000 + 25 days) 6,000
6. Revised budgeted overhead (? 6,000 x 27 days) - 1,62,000
*St. overhead rate per hr. 1,50,000 (6,000 hrs x 25 days) 1.
Caleulation of variances

(a) Expenditure Variance - Budgeted overhead -Actual overhead

(1,50,000 - 1,56,000) -? 6,000(A)
Actual No. St. No. of St. overhead
(b) Calendar Variance of days days rate per day
- (27 - 25) x 6,000 - 12,000 (F)
(c) Capacity variance - Standard overhead Revised budgeted overhead
- (1,70,100 - 1,62,000) -7 8,100(F)
(d) Efficiency Variance - Absorbed overhead - Stan dard overhead
- (1,53,090 - 1,70,100) -7 17,010(A)
(e) Volume Variance Absorbed overhead - Budgeted overhead
- (1,53,090 - 1,50,000) -7 3,090(F)
() Hxed Cost Variance Absorbed overhead Actual overhead
- (1,53,090 - 1,56,000) ?2,910(A)
Check
(i) Fixed Cost Variance = Expenditure Variance + Volume Variance
2,910(A) = 6,000 (A) + 3,090 (F)
(ii) Volume Variance - Calender + Capacity + Efficierncy variance
3,090(F) = 12,000 (F) + 8, 100 (F) + 17,010 (A)
Problem 3.29 (Overhead Vartances)
days in a
Acompany has a normal capacity of 120 machines, working 8 hours per day of 25
month. The fixed overheads are budgeted at ? 1,44,000 per month. The standard time required
to manufacture one unit of product is 4 hours.
day and produced 5,305 unit:
In April,, the company worked 24 days of 840 machine hours per
of output. The actual fixed overheads were.1,42,000.
Compute :
(i) Efficiency variance (ii) Capaity Variance
(in) Calender variance (iv) Expense variance
(v) Volume variance (vi) Total fixed overhead variance.
(B Com Hons Delhi, C.A. Inte

Solution
Basic Caleulations : Actual
Budget
1,42,000
1,44,000
Fixed overhead (? ) 24
25
Working days 840 hrs x 24 days
25 days
120 machines x 8 hrs x = 20,160
Working hours = 24,000