MA

Standard Costing

Proschoolonline.com
Variance analysis
• Variances analysis uses standard costs for calculating and analyzing differences.
• It provides detailed insights into the reasons for discrepancies between expected and actual
costs/revenues.

Labour
variances Variable
Raw material
overhead
variances
variances

Key Fixed
Sales variances
overhead
variances analyzed
include: variances.

Proschoolonline.com
Variance analysis
Sales volume
variance calculated • Marginal costing: Standard contribution used.
differently based on • Absorption costing: Standard profit utilized.
costing system:

• Marginal costing: Fixed overhead variance comprises

Fixed overhead fixed overhead expenditure variance only.
variance varies by • Absorption costing: Total fixed overhead variance
costing system: divided into expenditure, volume (further divided into
capacity and efficiency).

Proschoolonline.com
1. Sales variances
There are two causes of sales variances
• a difference in selling price
• a difference in sales volume

TOTAL SALES VARIANCE

SALES PRICE SALES VOLUME

VARIANCE VARIANCE
Proschoolonline.com
Sales volume variance
Sales volume variance measures impact on profit due to actual sales volume differing from
budgeted.
Effect on profit varies based on marginal or absorption costing system.

Under absorption costing, difference in units valued at standard profit per unit.

Under marginal costing, difference in units valued at standard contribution per unit.

Formula: (Actual quantity sold - Budget quantity sold) x Standard margin.

Standard margin: standard contribution per unit (marginal costing) or standard profit per unit
(absorption costing).
Favourable variance if actual quantity sold exceeds budget, increasing profit.

Proschoolonline.com
Sales price variance
Sales price variance
measures the impact on If actual price > budget
profit of selling at a price, it creates a
different price than favorable variance,
expected. increasing profit.

Formula:
(Actual price - Budget
price) x Actual quantity
sold

Proschoolonline.com
Illustration
The following data relates to 20X8.
Actual sales: 1,000 units@ $650 each
900 units
Budgeted output and sales for the year:
Standard selling price: $700 per unit
Budgeted contribution per unit: $245
Budgeted profit per unit: $20
Required:
Calculate the sales volume variance (under absorption and marginal costing) and the sales price variance.

Solution:
Sales volume variance - absorption costing (1,000 units - 900 units) x $205 = $20,500 Fav
Sales volume variance - marginal costing (1,000 units - 900 units) x $245 = $24,500 Fav
Sales price variance
($650 - $700) x 1,000 = $50,000 Adv

Proschoolonline.com
2. Materials cost variances
There are two causes of material cost variances
• a difference in purchase price
• a difference in quantity used.

TOTAL MATERIALS
VARIANCE

MATERIALS PRICE MATERIALS USAGE

VARIANCE VARIANCE
Proschoolonline.com
Materials total variances
Materials total variance is the difference between actual and
standard material costs.

It consists of two sub-variances: materials price variance and

materials usage variance.

Materials price variance analyzes if the company paid more or

less than expected for materials.

Materials usage variance quantifies the impact of using a

different quantity of raw material than expected for production.

Proschoolonline.com
4. Variable overhead variances
Variable overhead variances are very similar to those for materials and labour because, like
these direct costs, the variable overhead cost also changes when activity levels change.

VARIABLE OVERHEADTOTAL
VARIANCE

VARIABLE OVERHEAD VARIABLE OVERHEAD

EXPENDITURE VARIANCE EFFICIENCY VARIANCE

Proschoolonline.com
Variable overhead total variance
• Variable overheads typically change with direct labor hours.

Variable Expenditure variance: When the variable

overhead total overhead cost per hour differs from
variance arises expectations.
from:
Efficiency variance: When actual
production involves more or fewer hours
than expected.

Proschoolonline.com
Variable overhead total variance
1. Actual hours × Actual rate
Expenditure variance (the difference between row 1 and row 2)

2. Actual hours × Standard rate

Efficiency variance (the difference between row 2 and row 3)

3. Standard hours × Standard rate

Total variance (the total of the rate and the efficiency variances)

The standard hours are the number of hours that should have been worked to produce the actual output.

Proschoolonline.com
Illustration
The following information relates to the production of Product X. Extract from the standard cost card of Product X
$
Direct labour:
Bonding (24 hrs @ $5 per hour) Variable overhead: 120
Bonding (24 hrs @ $1.50 per hour) 36

Actual results for production and labour hours worked:

Production 1,000 units produced
Bonding 23,900 hours Actual results for variable overheads:
Bonding Total cost $38,240
Required:
Calculate the variable overhead total, expenditure and efficiency variances in the Bonding department for Product X
for the period

Proschoolonline.com
Solution:
Variable overhead variances in Bonding department

Actual hours x Actual rate $38,240

Expenditure variance $2,390 (A)
Actual hours x Standard rate
23,900 hours x $1.50 $35,850
Efficiency variance $150 (F)
Standard hours x Standard rate
1,000 x 24 hours x $1.50 $36,000
Total variance $2,240 (A)

Proschoolonline.com
Fixed overhead variances
Fixed overhead variances reflect profit impact of
actual vs. expected fixed overhead differences.

Actual and expected fixed overheads typically

remain constant during activity level changes.

Variances are often calculated using budget

figures.

Profit effect varies based on marginal or

absorption costing system.
Proschoolonline.com
Fixed overhead variances in a marginal
costing system
• Marginal costing does not allocate fixed overheads to units.

• No under- or over-absorption of fixed overheads.

• Fixed overheads are treated as period costs.

• Fixed overhead costs remain constant regardless of activity level changes.

• Only one fixed overhead variance exists in a marginal costing system.

Proschoolonline.com
Fixed overhead expenditure variance
$
Actual expenditure X
Less: Budget expenditure (X)
Fixed overhead expenditure variance X

If actual expenditure is greater than budgeted expenditure there is an adverse variance.

Fixed overhead variances in an absorption costing system

➢ Absorption costing links fixed overheads to cost units via absorption rates.
➢ Fixed overhead variances in absorption costing consider changes in expenditure and production volume.

Proschoolonline.com
Fixed overhead variances in an absorption
costing system

FIXED OVERHEAD TOTAL

VARIANCE

FIXED OVERHEAD FIXED OVERHEAD

EXPENDITURE VARIANCE VOLUME VARIANCE

Proschoolonline.com
Fixed overhead total variance

Fixed overhead total variance in absorption costing system

measures profit impact of actual costs vs. absorbed budgeted costs.

It indicates under- or over-absorption of overhead in a period.

Under absorption costing, total variance can be split into

expenditure and volume variances.
Proschoolonline.com
Fixed overhead expenditure variance
The fixed overhead expenditure variance shows the effect on profit of the actual fixed overhead expenditure
differing from the budgeted value. It is calculated in exactly the same way for both marginal and absorption
costing.
$
Actual expenditure X
Less: Budget expenditure (X)
Fixed overhead expenditure variance X

If actual expenditure is greater than budgeted expenditure there is an adverse variance.

Fixed overhead volume variance

➢ Fixed overhead volume variance is the difference between budgeted overhead expenditure and actual overhead
absorbed by production.
➢ Calculation depends on whether the fixed overhead absorption rate (FOAR) was based on units produced or hours
worked.
➢ FOAR can be based on units produced or hours worked to produce the units.
➢ FOAR at the start of the period determines the calculation method for fixed overhead volume variance.

Proschoolonline.com
Fixed overhead expenditure variance
Units produced $
Actual units × Fixed overhead absorption rate per unit X
Less: Budgeted expenditure (X)
Fixed overhead volume variance X

OR

Hours worked $
Standard hours for actual production x FOAR per standard hour X
Less: Budgeted expenditure (X)
Fixed overhead volume variance X

Proschoolonline.com
Fixed overhead capacity and efficiency
variances
In absorption costing systems, if the fixed overhead is absorbed based on hours, then the
fixed overhead volume variance can be subdivided into capacity and efficiency variances.
• The capacity variance measures whether the workforce worked more or less hours than
budgeted for the period:

$
Actual hours × Fixed overhead absorption rate per hour X
Less: Budgeted expenditure (X)
Fixed overhead volume variance X

Proschoolonline.com
Fixed overhead capacity and efficiency
variances
If actual capacity is greater than budgeted capacity there is a favourable variance as
more hours have been worked therefore a greater capacity has been achieved.
• The efficiency variance measures whether the workforce took more or less time than
standard in producing their output for the period:
$
Standard hours for actual production x FOAR per standard hour X
Less: Actual hours × FOAR per hour (X)
Fixed overhead efficiency variance X
➢ Standard hours > Actual hours = Favorable variance
➢ Workforce more efficient, needed fewer hours than planned
➢ Indicates favorable performance in completing tasks
➢ Combined with other sub-variances to explain activity level variance
➢ Contributes to fixed overhead volume variance
Proschoolonline.com