Standard Costing and variance analysis, Material Variance and Labour Variance

1. STANDARD COSTING
ARUN KUMAR M.Com., (Ph.D.)
Asst. Professor,
Department of Commerce,
Govt. First Grade College, Koppa
g-mail: arunkumarduna@gmail.com

2. STANDARD
The term standard is a predetermined measurable quantity set in
defined conditions against which actual performance can be
compared.
In Simple, we can say the term standard refers to predetermined
rate against which performance is judged

3. STANDARD COST
Standard-cost is defined by CIMA in the following way:—A predetermined calculation of how
much cost should be used under specified working conditions.
In other words, this is theoretically the amount of money a company will have to spend to
produce a product or perform a service under normal conditions

4. Standard Costing
Standard costing is a technique which is used in many industries,
where production is of repetitive nature.
Standard Costing is the method of measuring the differences
between the costs actually incurred in manufacturing and the
expected costs under “standard condition”, which always refers to
a specific costing rule which serves as the basis.

5. Variance Analysis
A variance is the difference between the standards and the actual
performance
When the actual results are better than the expected results,
there will be a favourable variance (F)
If the actual results are worse than the expected results, there
will be an adverse variance (A)

6. Classification Of Variances
Functional Basis
Measurement Basis
Result Basis

7. Functional Basis
Functional
Basis
Variance related
to Cost factor
Material
Labour
Variance related
to Sales factor Overhead

8. Measurement Basis
Difference between the
standard cost and the actual
cost in terms of money is
known as absolute variance.
Difference is expressed as a
percentage of the standard
cost, it is known as relative
variance.

9. Result basis When the actual results are better than the
expected results, there will be a
favourable variance (F)
If the actual results are worse than the
expected results, there will be an adverse
variance (A)

10. Cost variance
• Cost variance = Price variance + Quantity variance
Cost variance is the difference between the standard cost and the Actual cost
• Price variance = (standard price – actual price)*Actual quantity
A price variance reflects the extent of the profit change resulting from the change in activity
level
• Quantity variance = (standard quantity – actual quantity)* standard
cost
A quantity variance reflects the extent of the profit change resulting from the change in activity level

11. Three types of cost variance
• Material cost variance
• Labour cost variance
• Variable overheads variance

12. Material Cost variance
Material Cost Variances
Material Price Variances Material Usage Variances
Material Mix Variance
Material Yield Variance

13. MATERIAL COST VARIANCE:
Material cost variance is the difference between standard cost and
actual cost. Mathematically it is written as
Formula:
MCV = (SQ × SP) – (AQ × AP)
Material Cost Variance = Standard quantity × Standard Price-(Actual
quantity × Actual Price)
Or

14. Material Price Variance:
It measures variance arises in the material cost due to difference in actual material
purchase price from standard material price. Mathematically it is written as:
Material Price Variance:
𝐴𝑐𝑡𝑢𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 ∗ × (𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑝𝑟𝑖𝑐𝑒 − 𝐴𝑐𝑡𝑢𝑎𝑙 𝑝𝑟𝑖𝑐𝑒)
MPV = AQ x (SP-AP)
Or
*Here actual quantity means actual quantity of material purchased. If in
the question material purchase is not given, it is taken as equal to material

15. Material Usage Variance:
It measures variance in material cost due to usage/ consumption of
materials. It is computed as well
Material Usage Variance:
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑃𝑟𝑖𝑐𝑒 × (𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 − 𝐴𝑐𝑡𝑢𝑎𝑙 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦) ∗
MUV: SP (SQ − AQ)
Or
*Here actual quantity means actual quantity of material used

16. Material Mix Variance:
Variance in material consumption may arise due to difference in proportion
used actually from the standard mix/ proportion. It arises only when two
more inputs are used to produce a product.
Material Mix Variance = (Revised standard quantity – Actual quantity) × Standard price
Or
MMV= (RSQ – AQ) × SP
Where;
RSQ =
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑜𝑓 𝑜𝑛𝑒 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙
𝑻𝒐𝒕𝒂𝒍 𝑜𝑓 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑜𝑓 𝐴𝑙𝑙 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙
× Total of Actual of all material

17. Material Yield Variance (or Material Sub-usage Variance):
Variance in material consumption which arise due to yield or productivity of the inputs.
It may arise due to use of sub-standard quality of materials, inefficiency of workers or
due to wrong processing.
Material Revised Usage Variance =
(𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 − 𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦) × 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑃𝑟𝑖𝑐𝑒
Or
MRUV = (SQ – RSQ) SP
Material Yield Variance:
(𝐴𝑐𝑡𝑢𝑎𝑙 𝑌𝑖𝑒𝑙𝑑 − 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑌𝑖𝑒𝑙𝑑) × 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑜𝑢𝑡𝑝𝑢𝑡 𝑝𝑟𝑖𝑐𝑒
Or
MYV = (AY – SY) SOP

18. Verification of the Formula:
Material Cost Variance = Material Usage Variance + Material
Price Variance*
Or
Material Cost Variance = (Material Mix Variance + Material
Revised usage Variance) +Material price variance
*If material purchase quantity and material consumed quantity is same

19. The Standard material required to manufacture one unit of product
‘X’ is 10 Kgs, and the standard price per kg of material is ₹ 25 Kgs.
The cost account records, however reveals that 11,500 Kgs,
Materials costing ₹ 2, 76,000 were used for manufacture of 1,000
units of product ‘X’. Calculate material variances.
Illustration 1

20. Calculation of Material Variance
 Material cost variances = (𝑆𝑄 × 𝑆𝑃) – (𝐴𝑄 × 𝐴𝑃)
 Material Price Variance = 𝐴𝑄 × (𝑆𝑃 − 𝐴𝑃)
 Material Usage Variance = 𝑆𝑄 − 𝐴𝑄 × 𝑆𝑃
Given:
SQ: For Production of 1 unit Required 10 Kgs of Material
There fore for 1000 units = 1000 × 10 = 10,000 Kgs
AQ: 11,500 Kgs
SP: ₹ 25
AP: ₹ 24 ( 2,76,000/11,500Kgs)
The Standard material required to
manufacture one unit of product ‘X’ is 10
Kgs, and the standard price per kg of
material is ₹ 25 Kgs. The cost account
records, however reveals that 11,500 Kgs,
Materials costing ₹ 2, 76,000 were used for
manufacture of 1,000 units of product ‘X’.

21. = (10,000Kgs× ₹ 25) – (11,500 × ₹24)
= 2,50,000 – 2,76,000
= ₹ 26,000(A)
= (25 – 24) × 11,500
= 1 × 11,500
= ₹ 11,500 (F)
= (10,000 – 11,500) × 25
= (- 1,500) × 25
= ₹ 37,500 (A)
SQ: 10,000 Kgs
AQ : 11,500 Kgs
SP: ₹ 25
AP: ₹ 24
MCV = (SQ × SP) – (AQ × AP)
MPV = (SP – AP) × AQ
MUV = (SQ – AQ) × SP

22. Darling Company limited works on the standard costing system and
produces X. The standard estimates of material for the manufacturer
of 1,000 units of product X is 400 Kgs at ₹ 2.5 per kg. In the month
of January 2018, manufactured 2,000 units of product X and it is
found that 820 Kgs of material is consumed at ₹ 2.60 per kg.
Calculate - Material Variance
Illustration 2

23. Calculation of Material Variance
 Material cost variances = (𝑆𝑄 × 𝑆𝑃) – (𝐴𝑄 × 𝐴𝑃)
 Material Price Variance = 𝐴𝑄 × (𝑆𝑃 − 𝐴𝑃)
 Material Usage Variance = 𝑆𝑄 − 𝐴𝑄 × 𝑆𝑃
Given:
SQ = for 1000 units need 400 kgs = for 2000 units
400
1000
× 2,000 = 800
AQ = 820 kgs for 2000 units
SP = ₹ 2.5
AP = ₹ 2.6
The standard estimates of material for
the manufacturer of 1,000 units of
product X is 400 Kgs at ₹ 2.5 per kg. In
the month of January 2018,
manufactured 2,000 units of product X
and it is found that 820 Kgs of material
is consumed at ₹ 2.60 per kg.

24. = (800 × 2.50) – (820 × 2.60)
= 2,000 – 2132
= 132 (A)
= (2.50 – 2.60) × 820
= ( - 0.10) × 820
= 82 (A)
= (800 – 820) × 2.50
= (- 20) – 2.5
= 50 (A)
SQ: 800
AQ: 820
SP: ₹ 2.5
AP: ₹ 2.6
MCV = (SQ × SP) – (AQ × AP)
MPV = (SP – AP) × AQ
MUV = (SQ – AQ) ×SP

25. LABOUR VARIANCE

26. LABOUR COST VARIANCE
Labour cost variance is the difference between standard
labour cost allowed for actual output achieved and actual
labour cost. It is also known as wages variance.
(𝑆𝑡𝑑. ℎ𝑜𝑢𝑟 𝑓𝑜𝑟 𝑎𝑐𝑡𝑢𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡 × 𝑆𝑡𝑑. 𝑟𝑎𝑡𝑒 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟) − (𝐴𝑐𝑡𝑢𝑎𝑙 ℎ𝑜𝑢𝑟𝑠
× 𝐴𝑐𝑡𝑢𝑎𝑙 𝑟𝑎𝑡𝑒 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟)
Labour Cost Variance:
𝐿𝑎𝑏𝑜𝑢𝑟 𝐶𝑜𝑠𝑡 Variance = St. Labour Cost for actual output − Actual labour cost
or

27. Labour Cost Variance
Labour Efficiency Variance
Labour Yield VarianceIdle- Time VarianceLabour Mix Variance
Labour Rate Variance
Classification of Labour Cost Variance

28. Labour Rate (Pay) Variance
Labour rate variance arises due to “difference in actual rate paid
from standard rate”
Labour Rate Variance = (Std. Rate - Actual Rate) × Actual Hours

29. Labour Efficiency (Time) Variance
Labour efficiency variance arises due to “deviation in the
working hour from the set standard”
Labour Efficiency Variance:
𝑆𝑡𝑑. 𝑅𝑎𝑡𝑒 (𝑆𝑡𝑑. ℎ𝑜𝑢𝑟𝑠 𝑓𝑜𝑟 𝑎𝑐𝑡𝑢𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡 − 𝐴𝑐𝑡𝑢𝑎𝑙 𝐻𝑜𝑢𝑟𝑠) ∗
*Actual time worked

30. Idle Time Variance
Idle Time Variance is calculated for the unproductive
labour hours. Here idle time means labour idle time arises
due to abnormal
Idle Time Variance:𝐼𝑑𝑒𝑙 ℎ𝑜𝑢𝑟𝑠 × 𝑆𝑡𝑑. 𝑟𝑎𝑡𝑒 (or) ITV = IH × SR

31. Labour Mix Variance - (Gang Composition
Variance):
Labour Mix variance which arises due to change in the proportion
or combination of different skill set i.e. number of skilled workers,
semi-skilled workers and un-skilled workers.
Labour Mix Variance:(𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑆𝑡𝑑. ℎ𝑜𝑢𝑟𝑠 − 𝐴𝑐𝑡𝑢𝑎𝑙 ℎ𝑜𝑢𝑟𝑠) × 𝑆𝑡𝑑. 𝑟𝑎𝑡𝑒
Revised Standard Hours:
𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑 ℎ𝑜𝑢𝑟𝑠 =
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 ℎ𝑜𝑢𝑟𝑠 𝑜𝑓 𝑡ℎ𝑒 𝑔𝑟𝑎𝑑𝑒
𝑇𝑜𝑡𝑎𝑙 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐻𝑜𝑢𝑟𝑠
× 𝑇𝑜𝑡𝑎𝑙 𝐴𝑐𝑡𝑢𝑎𝑙 𝐻𝑜𝑢𝑟𝑠

32. Labour Yield Variance
Labour Yield variance which arises due to productivity
of workers
Labour Yield Variance:
𝐴𝑐𝑡𝑢𝑎𝑙 𝑦𝑖𝑒𝑙𝑑 − 𝑆𝑡𝑑. 𝑌𝑖𝑒𝑙𝑑 𝑓𝑜𝑟 𝑎𝑐𝑡𝑢𝑎𝑙 𝑖𝑛𝑝𝑢𝑡 𝑆𝑡𝑑. 𝐿𝑎𝑏𝑜𝑢𝑟 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡
Labour Revised Efficiency Variance:
(𝑆𝑡𝑑. ℎ𝑜𝑢𝑟𝑠 𝑓𝑜𝑟 𝑎𝑐𝑡𝑢𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡 − 𝑟𝑒𝑣𝑖𝑠𝑒𝑑 𝑆𝑡𝑑. ℎ𝑜𝑢𝑟𝑠) 𝑆𝑡𝑑. 𝑟𝑎𝑡𝑒
Or

33. Dept. A
Actual direct wages ₹ 2,000
Standard hours 8,000
Standard rate per hour ₹ 30 paise
Actual hours worked 8,200
From the following, calculate labour variances of department A
Given:
SH : 8000
SR: ₹ 0.30
AH : 8200
AR: ?
AR = 𝐴𝑐𝑡𝑢𝑎𝑙 𝐷𝑖𝑟𝑒𝑐𝑡 𝑊𝑎𝑔𝑒𝑠
𝐴𝑐𝑡𝑢𝑎𝑙 𝐻𝑜𝑢𝑟𝑠 𝑊𝑜𝑟𝑘𝑒𝑑
= ₹ 2000
8200 ℎ𝑜𝑢𝑟𝑠
AR= 0.2439AR: ₹ 0.2439
ILLUSTRATION

34. Calculation of Labour variance
= (8,000 Hr × ₹0.30) – (8,200 Hr × ₹0.2439)
= ₹ 2400 – ₹ 2,000
= ₹ 400(F)
1. Labour cost variance = (SH × SR) – (AH × AR)
2. Labour rate (pay) variance = (SR – AR) × AH
3. Labour efficiency (time) variance = (SH – AH) × SR
LCV = (SH × SR) – (AH × AR)
SH : 8000
SR: ₹ 0.30
AH : 8200
AR: ₹ 0.2439

35. = (₹ 0.30 – ₹ 0.2439) × 8200 Hr
= ₹ .00561 × 8200 Hr
= 460 (F)
= (8000 – 8200) × ₹ 0.30
= (-200) × 0.30
= 60 (A)
LPV = (SR – AR) × AH
LEV = (SH – AH) × SR
Labour Cost Variance 400 (F)
Labour Efficiency (Time) Variance 60 (A)Labour Rate Variance 460 (F)

36. The information regarding composition and the weekly wages rates of labour force
engaged on a job scheduled to be completed in 60 weeks are as follows:
Types of labour
Standard Actual
No. of workers
Weekly wage rate
per hour
No. of workers
Weekly wage
rate per hour
Skilled 75 60 70 70
Semi-skilled 45 40 30 50
Unskilled 60 30 80 20
The work completed in 62 weeks.
Calculate:
(a) Labour cost variance
(b) Labour rate variance
(c) Labor efficiency variance
(d) Labour mix variance
ILLUSTRATION

37. Workers
Standard Mix
Hours
(No. of Workers × 60
Weeks)
Rate Per Hour Cost
Skilled 75 × 60 = 4,500 60 2,70,000
Semi-Skilled 45 × 60 = 2,700 40 1,08,000
Unskilled 60 × 60 = 3,600 30 1,08,000
Total 10,800 4,86,000
Calculation of Labour Variance:
Workers
Actual Mix
Hours
(No. of Workers ×
62 Weeks)
Rate Per Hour Cost
Skilled 70 × 62 = 4,340 70 3,03,800
Semi-Skilled 30 × 62 = 1,860 50 93,000
Unskilled 80 × 62 = 4,960 20 99,200
Total 11,160 4,96,000

38. Labour Cost Variance
LCV = SC - AC = ₹
Skilled = 2,70,000 - 3,03,000 = 33,800(A)
Semi- Skilled = 1,08,000 - 93,000 = 15,000 (F)
Unskilled = 1,08,000 - 99,200 = 8,800 (F)
= 10,000(A)
Labour Rate (Pay) Variance:
LRV = (SR – AR) × AH = ₹
Skilled = (60 – 70) × 4,340 = 43,400(A)
Semi- Skilled = (40 – 50) × 1,860 = 18,600 (A)
Unskilled = (30 – 20) × 4,960 = 49,600 (F)
=12,400 (A)

39. Labour Efficiency Variance:
LEV = (SH – AH) × SR = ₹
Skilled = (4,500 – 4,340) × 60 = 9,600 (F)
Semi- Skilled = (2,700 – 1,860) × 40 = 33,600 (F)
Unskilled = (3,600 – 4,960) × 30 = 40,800 (A)
= 2,400 (F)
Labour Mix Variance = ( 𝐑𝐒𝐓 − 𝐀𝐓) × 𝑺𝑹

40. Revised Standard Hours:
𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑 ℎ𝑜𝑢𝑟𝑠 =
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 ℎ𝑜𝑢𝑟𝑠 𝑜𝑓 𝑡ℎ𝑒 𝑔𝑟𝑎𝑑𝑒
𝑇𝑜𝑡𝑎𝑙 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐻𝑜𝑢𝑟𝑠
× 𝑇𝑜𝑡𝑎𝑙 𝐴𝑐𝑡𝑢𝑎𝑙 𝐻𝑜𝑢𝑟𝑠
Unskilled =
3,600
10,800
× 11,160 = 3,720
Skilled =
4,500
10,800
× 11,160 = 4,650
Semi skilled =
2,700
10,800
× 11,160 = 2,790
Workers
Standard Mix Actual Mix
Hours
(No. of Workers × 60 Weeks)
Hours
(No. of Workers × 62 Weeks)
Skilled 4,500 4,340
Semi-Skilled 2,700 1,860
Skilled 3,600 4,960
Total 10,800 11,160

41. Labour Mix Variance = ( 𝐑𝐒𝐓 − 𝐀𝐓) × 𝑺𝑹
LMV = (RST – AT) × SR = ₹
Skilled = (4,650 – 4,340) × 60 = 18,600 (F)
Semi- Skilled = (2,790 – 1,860) × 40 = 37,200 (F)
Unskilled = (3,720 – 4,960) × 30 = 37,200 (A)
LCV Rs. 10,000 (A)
LRV Rs. 12,400(A) LEV 2,400 (F)

42. Thank You