Lecture by: Mr.

Farrukh Abbas

Paper F2, Management Accounting

STANDARD COSTING / VARIANCE ANALYSIS

This costing method is used when a business makes and sells standard products.
In this costing method a standard cost/unit is calculated for every product and at the period end this actual cost is
compared with standard cost.
Any difference between standard and actual is known as Variance.
This variance is then analysed and reasons for these variances are identified and corrective actions are taken to
avoid the variance in future.

Example:
Material
4kg

Standard Usage/Unit

$5/kg

Standard Rate/Kg

$20/Unit
Standard Material
Cost/Unit

Labor
2hrs

Standard Labor
Hour/Unit

$10/hr

Standard Rate/hour

$20/Unit
Standard Labor
Cost/Unit

Variable Overheads
2hrs

Standard Hours/Unit

$5/hr

Standard Rate/hour

$10/Unit
Standard VOH
Cost/Unit

Fixed Overheads
2hrs
Standard Hours/Unit

$7.5/hr

Standard Rate/hour

$15/Unit
Standard FOH
Cost/Unit

Total Standard Cost / Unit

+ Standard Profit / Unit

$65
$15

Selling Price / Unit

$80

1-Page | 14th of June 2011

Prepared by: Mani Shah

CENTER FOR PROFESSIONAL EXCELLENCE, RAWALPINDI
http://acca.moviezbuzz.com

Lecture by: Mr. Farrukh Abbas

Paper F2, Management Accounting

1. Material Variances

 
  
 =       !"#   

 $% %  & 
 = !"# '#" (   /*

 +
 
 = , '"-. !"# '"-.0 ( !"# 1#2 '#"

 45 

= , 1#2  !"# '#" !"# 1#2 *0 (   '"/-.
$% % 67
8 4% = !"# '#" (   *./*
Example:
Std Material Cost /Unit are $20 made up as follows, 4kg @ $5/kg. in actual 1000 units were produced. Total
Material used was 4200kg and Actual cost was $16,800. Calculate the Material variances?
Solution:
     = !"# '#" (   /*
     = 1000 ( 20
     = $20,000
   >" =       !"#   
   >" = 20,000 16,800

 
  
 = $ABCC DEF
!"# '"-. =

!"# 
 *

!"# '"-. =

16800
4200

!"# '"-. = $4

 '" >" = ,$5 $40 ( 4200

 '" >" = 4200 IJ K
 1#2 * = !"# '#" (   *./*
 1#2 * = 1000 ( 4
 1#2 * = 4000-.
 *. >" = , 12  !"# '. !"# 12 *0 (   '"/-.
 *. >" = ,4000 42000 ($5/-.
 *. >" = 1000 M%J 
Price Variance
Usage Variance

4200 Favorable
(1000) Adverse

Total Variance

3200

Favorable

2-Page | 14th of June 2011

Prepared by: Mani Shah

CENTER FOR PROFESSIONAL EXCELLENCE, RAWALPINDI
http://acca.moviezbuzz.com

Lecture by: Mr. Farrukh Abbas

Paper F2, Management Accounting

2. Labor Variances

 NK  
 =     OF  !"#   OF

 $% %  & NK = !"# '#" (  OF /*
NK P 

= , OF QR# !"# OF QR# 0 ( !"# R# '
NK S&&

8 

= , R#  !"# '#" !"# R# T-0 (  OF QR#
$% % U7  & M7 + %7
 = !"# '#" (  OF R#/*
V%

W 
 = ,R# ' R# T-0 (  OF Q/R#
Example:
Std Labor Cost /Unit are $15 made up as follows, 5hrs @ $3/hr. In actual 100 units were produced. Total Hour
used was 400hrs and paid @ $4/hr. Calculate the Labor Variances?
Solution:
    OF = !"# '#" (  OF /*
    OF = 100 ( 15
    OF = $1500
 OF  >" =     OF  !"#   OF
 OF  >" = 1500 1600

 NK  
 = 100 !E
OF Q >" = , OF QR# !"# OF QR#0 ( !"# R# '
OF Q >" = ,$3 $40 ( 400
OF Q >" = 400 M%J 
 R#  !"# '#" = !"# '#" (  OF R#/*
 R#  !"# '#" = 100 ( 5
 R#  !"# '#" = 500 
OF Y""2 >" = , R  !"# '. !"# R T-0 ( /
OF Y""2 >" = ,500 4000 ( $3/
OF Y""2 >" = ACC IJ K
Rate Variance
Efficiency Variance

(400)
300

Adverse
Favorable

Total Variance

100

Adverse

3-Page | 14th of June 2011

Prepared by: Mani Shah

CENTER FOR PROFESSIONAL EXCELLENCE, RAWALPINDI
http://acca.moviezbuzz.com