L9: Standard Costing (variance analysis)

What is a standard cost?

A pre-determined unit cost used to measure performance. Variance = Standard vs Actual cost.

What is the purpose of standard costing?

To set cost targets per unit and compare with actual results for control and efficiency.

How does standard costing differ from budgeting?

Standard costing sets unit-level targets; budgeting sets total-level targets

What are the standard cost components for a unit (marginal costing)?

• Sales Price: £500

• DM: 10kg @ £5 = £50

• DL: 12h @ £11 = £132

• Var OH: 12h @ £9 = £108

• Contribution = £210

Match the standard to its definition:

• No allowance for inefficiencies →

• Based on current performance →

• Allows normal inefficiencies →

• Long-term, unchanged benchmark →

• Ideal

• Current

• Attainable

• Basic

What causes an adverse variance?

Actual > Standard cost, or actual < standard revenue.

What causes a favourable variance?

Actual < Standard cost, or actual > standard revenue.

Formula for Price variance (Material)?

(AP – SP) × AQ

Formula for Usage variance (Material)?

(AQ – SQ) × SP

Example: 620kg used @ £5,518; std = 3kg/unit × 200 units × £9

• Price variance: £62 F

• Usage variance: £180 A

• Total variance: £118 A

Labour rate variance formula?

(AR – SR) × Actual hours paid

Efficiency variance formula?

(SH – AH worked) × SR

Idle time variance formula?

(Hours paid – Hours worked) × SR

Total variance = ?

Rate + Efficiency + Idle Time

VOH expenditure variance formula?

(AR – SR) × Actual hours

VOH efficiency variance formula?

(SH – AH) × SR

Sales price variance formula?

(AP – SP) × AQ

Sales volume variance formula?

(AQ – BQ) × SM (standard margin)

Example: Actual sales £257,400; standard was 19,500 × £12.50

• Sales price variance: £13,650 F

• Sales volume variance: 500 units A × £5 = £2,500 A

Fixed OH expenditure variance = ?

Budgeted fixed OH – Actual fixed OH

Volume variance (units) = ?

(Actual units – Budgeted units) × FOAR

Volume variance (hours) = ?

(Standard hrs – Budgeted hrs) × FOAR

Example: FOAR = £20/unit

• Budgeted: 500 × £20 = £10,000

• Actual: 600 × £20 = £12,000

£2,000 Favourable

Efficiency variance = £7,800 F, AH = 17,500 hrs, SR = £6.50. What are SH?

• £113,750 + £7,800 = £121,550

• SH = £121,550 / £6.50 = 18,700 hrs

Rate unknown. DL efficiency variance = £160 A, total cost = £15,300, 420 units × 4h, SR = £8. What is actual rate?

• SH = 1,680 hrs

• Actual hours = (1,680 hrs ± variance)

• Work backwards to find actual hours, then actual rate = £15,300 / AH