Standard Cost

• Meaning:
Standard Cost are pre determined cost which
is calculated from management’s standard of
efficient operation and the relevant necessary
expenditure. It may be used as a basis for
price fixing & for cost control through variance
analysis.
 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 favorable
variance (F)
If the actual results are worse than the
expected results, there will be an adverse
variance (A)
 Variance

Direct Labour Cost Overhead

Material Cost

Fixed Variable
Price Quantity Efficiency
Mix Variance Rate Variance Overhead Overhead
Variance Variance Variance
Variance Variance
•Material Cost Variance
Material price variance
= (standard price – actual price)*actual quantity

Material usage variance

= (Standard quantity – actual quantity)* standard
price

Material mix variance

=(standard mix quantity of direct material- actual
quantity)* standard price
Material Price Variance- DM Price Variance = ( SP − AP ) × AQ

Example :
Calculate the direct material price variance if the standard
price and actual unit price per unit of direct material are
Rs4.00 and Rs4.10 respectively; and actual units of direct
material used during the period are 1,200. Determine
whether the variance is favorable or unfavorable.
Solution :
Standard Price 4.00
− Actual Price 4.10
Difference Per Unit − 0.10
× Actual Quantity 1,200
Direct Material Price Variance − Rs 120

Since the price paid by the company for the purchase of direct material is more
than the standard price by Rs120, the DM price variance is unfavorable.
Material Quantity Variance-
DM Quantity Variance = ( SQ − AQ ) × SP

• Example :
Use the following information to calculate direct material
quantity variance. Also specify whether the variance is
favorable or Unfavorable.

Standard Price of a Unit of Direct Material Rs. 4

Standard Quantity of Direct Material Per Unit is. 2
Actual Units Produced During the Period 620
Actual Quantity Used During the Period 1,200
Solution:
Actual Units Produced 620
× Standard Quantity of Direct Material Per Unit 2
Standard Quantity Allowed 1,240

Standard Quantity Allowed 1,240

− Actual Quantity 1,200
Difference 40
× Standard Price of a Unit of Direct Material 4
Direct Material Quantity Variance Rs 160

In this case the production department performed efficiently and

saved 40 units of direct material. Multiplying this by standard price
per unit yields a favorable direct material quantity variance of
Rs160.
Material Mix Variance-
DM Mix Variance = ( SM − AQ ) × SP
• Example :
A product T is produced by mixing three materials:
P, Q and R in a standard mix ratio of 1:2:2.
Actual materials consumed during the month
ended May 31, 2012 were 4,670g, 8,450g and
8,390g respectively. Standard prices are Rs. 0.04/g,
Rs. 0.03/g and Rs. 0.02/g per gram respectively.
Calculate the direct material mix variance.
Solution:
Total Actual Quantity = 4,670 + 8,450 + 8,390g = 21,510g

Material P's Standard Mix % = 1 ÷ (1 + 2 + 2) = 0.2

Material Q's Standard Mix % = 2 ÷ (1 + 2 + 2) = 0.4
Material R's Standard Mix % = 2 ÷ (1 + 2 + 2) = 0.4
Particulars P Q R
Total Actual Quantity (g) 21,510 21,510 21,510
× Standard Mix % 0.2 0.4 0.4
Standard Mix Quantity (g) 4302 8604 8604
− Actual Quantity (g) 4670 8450 8390
Difference (g) -368 154 214
× Standard Price (Rs/g) 0.04 0.03 0.02
Individual Material Mix Variance − 14.72 4.62 4.28
(Rs)
Total DM Mix Variance (Rs) − 5.82
 •Labour cost variance
Labour rate variance
= (standard price – actual price)*actual
quantity(in Hour).

Labour efficiency variance

= (standard quantity – actual quantity)*standard
price
•Labour rate variance
DL Rate Variance = ( SR − AR ) × AH
Example
Calculate the direct labor rate variance if
standard direct labor rate and actual direct
labor rate are Rs.18.00 and Rs.17.20
respectively; and actual direct labor hours used
during the period are 130. Is the variance
favorable or unfavorable?
Solution:
Standard Rate Rs.18.00
− Actual Rate 17.20
Difference Per Hour 0.80
× Actual Hours 130
Direct Labor Rate Variance Rs 104

Since the actual labor rate is lower than the

standard rate, the variance is positive and thus
favorable.
Labour efficiency variance
DL Efficiency Variance = ( SH − AH ) × SR
Example:
Use the following information to calculate direct labor
efficiency variance. State whether the variance is
favorable or unfavorable.

Standard Rate Per Hour of Direct Labor Rs 18

Standard Direct Labor Hours Required Per Unit 0.2
Actual Units Produced During the Period 620
Actual Direct Labor Hours Used During the Period130
 Solution:
Actual Units Produced 620
× Standard Direct Labor Hours Per Unit 0.2
Standard Direct Labor Hours Allowed 124
Standard Direct Labor Hours Allowed 124
− Actual Direct Labor Hours Used 130
Difference −6
× Standard Direct Labor Rate Rs 18
Direct Labor Efficiency Variance Rs −108

Since the direct labor efficiency variance is negative, it is

unfavorable.
•Overhead Variance
 Variable Overhead Spending(rate) Variance
= (standard variable overhead rate - actual variable
overhead rate) * actual units of allocation base

 Variable Overhead Efficiency Variance

= (standard direct labor hours allowed - actual direct
labor hours) * standard variable overhead rate

 Fixed overheads variance

= Fixed overheads absorbed – Actual fixed overheads
incurred
Variable Overhead Spending Variance
VOH Spending Variance = ( SR − AR ) × AU

• Example:
Calculate variable overhead spending variance
if actual labor hours used are 130, standard
variable overhead rate is Rs. 9.40 per direct
labor hour and actual variable overhead rate
is Rs. 8.30 per direct labor hour. Also specify
whether the variance is favorable or
unfavorable.
Solution:
Standard Variable Overhead Rate Rs 9.40
− Actual Variable Overhead Rate − 8.30
Difference Per Hour Rs 1.10
× Actual Labor Hours 130
Variable Overhead Spending Variance Rs 143

The variable overhead variance calculated

above is favorable.
Variable Overhead Efficiency Variance
VOH Efficiency Variance = ( SH − AH ) × SR
• Example
Calculate the variable overhead efficiency
variance using the following figures:

Number of Units Produced 620

Standard Direct Labor Hours Per Unit 0.2
Actual Direct Labor Hours Used 130
Standard Variable Overhead Rate Rs.9.40
Solution:
Actual Units Produced 620
× Standard Direct Labor Hours Per Unit 0.2
Standard Direct Labor Hours Allowed 124
Standard Hours Allowed 124
− Actual Hours Used 130
Difference −6
× Standard Variable Overhead Rate Rs 9.4
Direct Labor Efficiency Variance − Rs 56.4

The variance calculated above is negative and thus

unfavorable.
Reasons for variances
 Material price variance
 Price changes in market conditions
 Change in the efficiency of purchasing dept. to obtain good
terms from suppliers
 Purchase of different grades or wrong types of materials

 Materials usage variance

 More effective use of materials/ wastage arising from the
efficient production process
 Purchase of different grade or wrong types of materials
 Wastage by the staff
 Change in production methods
Reasons for variances
Labour rate variance
 Non-controllable market changes in the basic
wage rate
 Use of higher/lower grade of workers
 Unexpected overtime allowance paid
Reasons for variances
 Labour efficiency variance
 Purchase of different grade or wrong types of materials
 Breakdown of machinery
 High/low labour turnover
 Changes in production method
 Introduction of new machinery
 Assignment wrong type of worker to work
 Adequacy of supervision
 Changes in working condition
 Change in motivation methods
CA Pooja Shrivastava