Unit 06 (Standard Cost & Variance Analysis

STANDARD COST & VARIANCE ANALYSIS
UNIT 6
PRESENTATION OUTLINE
1) Difference between standard & budgeted cost

2) Different types of standards
3) Cost control and cost reduction
4) Revenue and production cost variance analysis
5) Profit reconciliation in variances analysis
6) Causes of variances / investigation of variances
7) Mix, yield and usage variances
8) Planning and Operational variances
9) Learning and experience curve theory
STANDARD VRS BUDGETED COST
 Standard Cost: is a cost established for one unit of

output efficiently produced.
 Budgeted Cost: is a cost related to total output

produced at a given time.
 Trial Question: Critically examine and explain the

difference between a Standard Cost and Budgeted
Cost
PURPOSE OF STANDARD COSTING
1) Carefully planned standard is an aid to budgeting

2) Standard costs are used in fixing realistic prices
3) Used for measurement of performance
4) Motivate managers
5) Encourage the practice of MBE
6) Realistic standards leads to economies of scale
7) Stimulate cost consciousness among managers
TYPES OF STANDARDS
1) Attainable Standard
2) Ideal Standard
3) Basic Standard
4) Current Standard
TYPES OF STANDARD CONT’D
 Attainable Standard: This is a standard based on
normal operating condition, allowances are made for
material wastage, machine break downs and
management inefficiencies, example process layout,
Coca Cola,
 Ideal Standard: this is standard set based on perfect

operating condition, no allowances is made for
wastage, no spoilage, no idle time, and no machine
breakdowns, example aviation industry, US Boeing
Aviation.
TYPES OF STANDARDS CONT’D
 BasicStandard: this is standard set for use over a long

period of time, and could be out of date as operating
conditions have changed, example automobile industry.
Mercedz Benz,
 Current Standard: this is a standard set based on

current conditions, this standard is used over a short
period of time, example telephony industry, Apple ,
Samsung, Infinix.
ADVANTAGES OF STANDARD COSTING
1) Ensure the practice of ‘MBE’.

2) Encourage appraisal of methods and processes
3) Standard costing can be used for pricing decision
4) Increase motivation of managers
5) Enhance attainment of goal congruence
DISADVANTAGES OF STANDARD COSTING
1) It may be time consuming and expensive to maintain

2) Standard may be out of date with time
3) Overly emphasis of variances may be misunderstood
4) Standard setting involves forecasting which is vague
5) Variance analysis is postmortems and past event
6) Variance analysis may be questionable
COST CONTROL VRS COST REDUCTION
 Costcontrol: It entails continuous regulation of cost of

operating a business and, it is concerned with keeping
cost within acceptable levels/ limits.
 Cost reduction: It is a planned and positive approach to

reducing expenditure when current cost levels or
planned cost levels are considered to be too high. It is
not continuous but instead, a one off program to reduce
expected cost levels.
PROCESSES OF COST CONTROL
1) Setting cost standards

2) Measuring of actual cost
3) Comparing the actual cost against established cost
4) Computing variances
5) Investigating the cause of the variance
6) Take corrective measures to prevent deviations
QUESTION 1
1) Distinguish between cost control and cost reduction

2) Give three (3) examples of each method.
SOLUTION
 Cost control: is the process of containing costs to some

predetermined norm. This is usually carried by the formal
comparism of actual results with those planned– the routine of
budgets and standard cost and operating statement and the
investigation of variances.
 Cost reduction: is the wider ranging attempt to reduce costs

below the previously accepted norm, standard or estimated
selling price for a new product, preferable without reducing
quality or effectiveness. This is dynamic rather than routine
process, often only carried out at infrequent intervals.
COST CONTROL - EXAMPLE
I. Budgetary control systems

II. Standard costing systems
III. Financial performance management systems
IV. Setting of spending limits by level of management
V. Procedure for formal authorization of recruitment
VI. Control of capital expenditure
COST REDUCTION - EXAMPLE
I. Target costing
II. Value analysis
III. Systems analysis
IV. Work- study
V. Operations research
VI. Investment appraisal
VII. Value for Money analysis
VIII. Product life cycle costing
IX. Zero based budgeting
VARIANCE ANALYSIS
 A variance is the difference between actual and

expected cost or revenue. It can occur when there is a
departure from an expected event. When actual results
are more than planned or expected, we have a
favorable (F) variance. When the actual results are less
than expected, we have an adverse (A) variance.(Sales
or Revenue).
 If a variance between actual cost and standard cost is

less than what is expected, the variance is a again
(Production Cost)
VARIANCE ANALYSIS CONT’D
 The analysis of variance from the point of revenue is

quiet different, when actual revenue is more than
expected revenue, there is a gain, and thus a favorable
(F) variance. On the other hand, the expected gain is
higher than the actual revenue, there is adverse or
unfavorable variance.
 Technically,
variance can be calculated for; Material,
Labor, Overheads and Sales (Income Statement Items)
SALES MARGIN VARIANCE
 It is the difference between the actual profit and

budgeted profit both based on standard unit, thus
Budgeted Profit minus Actual Profit. The sales margin
variance is made up of two key variances as follows;
 SMV = (BM x BQ) - (AM x AQ) / (BP - AP)
1) Sales margin price variance

2) Sales margin volume/Quantity variance
SALES MARGIN VARIANCE CONTD
 Sales price variance(SPV): It is the difference between

budgeted margin and actual margin multiplied by
actual quantity.
 SPV = AQ (BM - AM)
 Sales
quantity (SQV): It is the difference between actual
sales volume and budgeted volume multiplied by
budgeted profit margin.
 (SQV) = BM (BQ - AQ)
QUESTION 3
Consider the following information on budgeted and actual

sales of a company;
Actual profit (AP) is GH₵ 4,700,
Actual Units sold is 10,000 units
Standard margin per unit is GH₵ 0.50
Budgeted units to sell is 9,500 units
Required: Calculate the sales variances

SOLUTION
Sales Margin Variance:

= BP - AP
= ₵ (4,750 - 4,700)
= 50 A
BP = (9,500 x ₵0.50) = ₵ 4,750 workings… (1)
You budgeted to profit from sales at ₵4,750 but you had

only ₵4,700 the result is adverse variance. This variance
summarized the results of sales price & quantity
variances.
SOLUTION CONT’D
1) Sales margin price variance:

= AQ (BM - AM)
= 10,000 (0.50- 0.47)
= 300A
AM = (Actual Profit/Actual units sold)
AM = 4,700 / 10,000 = 0.47 workings……. (2)

SOULUTION CONT’D
2) Sales margin volume variance:

= BM (BQ - AQ)
= ₵ 0.5 (9,500 - 10,000)
= 250F
3)Total sales margin variance (TSMV)

= (SPV) + (SQV)
= -300 + 250
= 50A
SOULUTION CONT’D
Alternatively:
Total sales margin variance(TSMV):

= (BM x BQ) - (AM x AQ)
= (0.5 x9,500) - (0.47 x10,000)
= 4, 750 - 4,700
= 50 A
Student’s must search for, and assign reasons to the
sales variances: (Volume and Price)
MATERIAL COST VARIANCE(MCV)
 This is the difference between the standard direct

material cost of the actual production volume and the
actual cost of direct material. This is made up of;
 DMCV = (SQ x SP) - (AQ x AP)

1) Direct Material Price Variance
2) Direct Material Usage Variance
DIRECT MATERIAL PRICE VARIANCE
 It is the difference between actual price and the

Standard price for the actual quantity of materials
used. Is the difference between the purchase cost
and how much it should have cost multiplied by
actual quantity bought.
 DMPV = AQ (SP - AP)

DIRECT MATERIAL USAGE VARIANCE
 It is the difference between standard quantity specified

for actual production and quantity actually used in
production, multiplied by standard price at which
materials are to be bought.
 DMUV = SP (SQ - AQ)

QUESTION 4
The standard cost card of product Zinc shows the

following; Material “M” 50kg is sold at GH₵ 2.50 per
Kg= GH ₵ 125.During a particular month, production
was 150 units. Direct materials purchased was 7,000kg
at GH₵ 18,200.
Required: calculate the material variances.

SOLUTION
(1) Material price variance (MPV):

= AQ (SP - AP)
= 7000 (2.5 - 2.6)
= 700A
AP =(₵18,200/7,000kg) =2.6 workings…(1)

SOLUTION CONT’D
(2) Material usage variance( MUV):
= SP (SQ - AQ)
= 2.5 (7,500 - 7000)
= 1,250F
SQ =(50KG x150Units) =7,500 workings…(2)

SOLUTION CONT’D
Total material cost variance (TMCV):

= ( SP x SQ) - (AP x AQ)
= (2.5 x 7,500) - (2.6 x7,000)
= 18,750 - 18,200
= 550F
SOLUTION CONT’D
Alternatively:
Total material cost variance (TMCV):

This is the summary of material usage and material
price variance;
= (MUV - MPV)
= (1,250F - 700A)
= 550 F
CAUSE OF MATERIAL PRICE VARIANCE
1) Changes in purchase price of materials.

2) Change in delivery cost.
3) Economic condition – inflation
4) Change in demand for the material
CAUSES OF MATERIAL VOLUME VARIANCE
1) Defective materials due to deterioration

2) Material pilfering
3) Sub - standard materials used
4) Excessive material wastage
LABOR COST VARIANCES
 This is the difference between the standard direct

labor cost and the actual direct labor cost incurred
for the production achieved. It is made up of the
following;
DLCV = (AH X AR) – (SH X SR)
1) Direct Labor Rate Variance

2) Direct Labor Efficiency Variance
DIRECT LABOR RATE VARIANCE
 Is the difference between the standard and actual

direct labor hours rate per hours for the total
hours worked.
 DLRV = AH (SR - AR)

DIRECT LABOR EFFICIENCY VARIANCE
 Efficiencyvariance is the difference between the

standard hours for the actual production achieved
and the hours actually worked at standard labor
rate.
 DLEV = SR (SH - AH)
IDLE TIME VARIANCE
 Thisis done by multiplying the hours of idle time by

the standard rate, this together with efficiency
variance gives the labor hour usage variance.
 ITV = (Idle Time x SR)

 Example if labor goes to sleep for 2 hours, how
much does it cost the organization, assuming the
standard rate is $5.
QUESTION 5
The standard cost of product M contain the following.

Direct labor 14 hours at GH₵2.75 per hour = GH
₵38.50. Production in the month was 150 units. Wages
paid was GH₵ 5858. Hours worked is 2020 hours.
Required: Calculate the labor variances

LABOR RATE VARIANCE
(1) Labor rate variance :

= AH (SR- AR)
= 2020 (2.75 - 2.9 )
= 303A
AR = (5858 / 2020) = 2.9 workings……(1)

LABOR EFFICIENCY VARIANCE
(2) Labor efficiency variance:

= SR (SH - AH)
= 2.75 (2,100 - 2,020)
= 220F
SH = (14hrs x150Units) = 2,100workings…(2)

TOTAL LAB OUR COST VARIANCE
Total labor cost variance (TLCV):

TLCV = (AH X AR) - (SH X SR)
= (2020 X 2.9) - (2100 X 2.75)
= 83 A
VARIABLE OVERHEAD VARIANCE
 This is the difference between actual variable

overhead incurred and the budgeted variable
overhead to be absorbed into production. This is
made up of:
1) Variable Overhead Expenditure Variance.

2) Variable Overhead Efficiency Variance.
VARIABLE OVERHEAD EXPENDITURE
 It is the difference between actual variable overhead

incurred and budgeted overhead allowed based on
actual hours worked.
 VOE = AH(SR - AR)

VARIABLE OVERHEAD EFFICIENCY
 It is the difference between actual budgeted hours

and the actual hours incurred or absorbed into
production multiplied by the standard rate.
 VOEV= SR (SH – AH)

FIXED OVERHEAD VARIANCES
 Is the difference between the standard cost of fixed

overhead absorbed into the production period and
the fixed overhead attributed and charged to that
period, this is divided into the following:
1) Fixed Overhead Expenditure Variance

2) Volume Variance:
 Efficiency Variance
 Capacity Variance
FIXED OVERHEAD EXPENDITURE VARIANCE
 Thisis the difference between actual fixed

overhead incurred and budgeted fixed overhead.
 FOEV= (BFO- AFO)

FIXED OVERHEAD VOLUME VARIANCE
 Thisis the difference between actual production

and budgeted production for a period multiply by
standard fixed overhead rates.
 FOVV = (BFO - AFO)

FIXED OVERHEAD EFFICIENCY VARIANCE
 It is the difference between standard hours of

output and the actual hours of output worked for
the period multiplied by Standard Overhead Rate
(FOAR)
 FOEV = SR (SH - AH)

FIXED OVERHEAD CAPACITY VARIANCE
 Itis the difference between the actual hour of

output and the budgeted hours of inputs for the
period multiply by Fixed Overhead Rate (FOAR)
 FOCV = SR (BH - AH)

QUESTION 6
Consider the following budget for department A for

January, 2013. Expenditure incurred is $USD
(1) Budgeted Results:

Variable Overheads $13,120
Fixed overheads $11,480
Labor hours 3,120hrs
(2) Standard Results: hours of production 3,280 hours
QUESTION 6 CONT’D
(3) Actual Results :

Fixed Overheads $12,100
Variable overheads worked $13,930
Labor hours worked 3,150hr
Standard hours produced 3,230 hr
Required:
Calculate all relevant Overhead variances both
variable and fixed.
WORKING 1
= Variable Overhead Absorption Rate (VOAR)/SR

Budgeted Variable Overhead
Standard hours Allowed
= ($13,120 / 3,280 hours worked)
= $4
VARIABLE OVERHEAD EXPENDITURE VARIANCE
1) Expenditure variance:
= AH (SR - AR)
= 3,150 (4 - 4.5)
= 1,575 A
AR=(Actual overheads/Budgeted labor hours

=($13,930 /3,120hrs)
= 4.5
VARIABLE OVERHEAD EFFICIENCY VARIANCE
2) Efficiency variance:
= SR (SH - AH)
= 4 (3,280 - 3,150)
= 520 F
FIXED OVERHEAD EXPENDITURE VARIANCE
1) Expenditure variance:
= (BFO - AFO)
= ($11,480 - $12,100)
= $620A
BFO = ( $3.5 x 3,280) = $11,480

FIXED OVERHEAD ABSORPTION RATE( FOAR)/ SR
= ( FOAR)= SR
= Budgeted Fixed Overhead
Standard Hours Allowed
= ($11,480 / 3,280 hours)
= $ 3.50
FIXED OVERHEAD VOLUME VARIANCE
(2) Volume variance:
= BFO - AFO
= (3280 x 3.5) - (3230 x 3.5)
= 11480 -11305
= 175A
The firm ought to spend 3280 labor hours for

maximum production, but actually spent 3230 hours
for actual production, resulting in an adverse
variance of 50 hours at standard rate of $3.5= 175A.
FIXED OVERHEAD EFFICIENCY VARIANCE
a) Efficiency variance:
= SR (SH - AH)
= 3.5 (3230 - 3,150)
= 280 A
The maximum hours given in the question is 3,280(SHs),

and minimum hours 3,230 (SHs) for actual production. To
achieve the maximum output, labor supposed to work
within these range of hours. Hours less spent, will give a
lower output, hence resulting in an adverse variance.
FIXED OVERHEADS CAPACITY VARIANCE
b) Capacity variance:
= SR (BH - AH)
= 3.5 (3,120 - 3,150)
= 105F
The firm budgeted for 3,120 labor hours, but labor

actually worked for 3,150 hours, resulting in a
favorable variance of 30 hours at standard rate of
$3.5 =105F
QUESTION 7- ICAG EXAMS QUESTION JAN1991
ADAPTED
Why worry limited is a manufacturer of a single

product which has a standard cost of GH₵80 made up
of the following:
STANDARD COSTGH₵
Direct material 15sqm @ GH₵3 45
Direct labor 5 hours @GH₵4 per hour 20
Variable overhead 5hours @GH₵2per hour 10
Fixed overhead 5 hours @ GH₵1 per hour 5
Standard Cost 80
QUESTION 7 CONT’D
The standard selling price of the product is GH₵100.The

monthly budgeted production and sales is 1,000 Units.
Actual Results:
Actual figures for the month of April are as follows;
Sales 1,200 Units at ₵102.
Production 1400 Units.
Direct materials 22,000 sqm at ₵4 per sqm
Direct labor 6,800 hours at ₵5 per hour.
Variable overheads ₵11,000
Fixed Overheads ₵ 6,000
QUESTION 7 CONT’D
REQUIRED:
1. Prepare an operating system reconciling actual
and budgeted profit showing all appropriate
variances.
Actual Profit Statement DR ₵ CR₵
Sales (1,200 x ₵102) 122,400

Less Marginal Cost:
Material Cost (22,000 x ₵ 4) 88,000
Labor (6,800 x ₵5 ) 34,000
Variable Overhead 11,000
Fixed Overhead 6,000
Less Closing Stock (1,400 -1,200) = (200 x ₵80) (16,000) (123,000
Actual Net Profit Or (Loss) (600)
SALES MARGINVARIANCES
Sales margin price variance:

= AQ (BM - AM)
= 1,200(₵20 - ₵22)
= ₵2,400 F
Sales margin volume variance:

= BM (BQ - AQ)
= ₵20(1,000 -1,200)
= ₵4,000 F
MATERIAL VARIANCES
Material price variance:

= AQ (SP - AP)
= 22,000 (₵3 - ₵4 )
= ₵22,000A
Material quantity variances:

= SP (SQ - AQ)
= ₵3 (21,000 - 22,000)
= ₵3,000A
SQ =(15sqm x1,400) =21,000

LABOR VARIANCES
Labor rate variance:
= AH (SR - AR)
= 6,800(₵4 - ₵5)
= ₵6,800A
Labor efficiency variance:

SR (SH - AH)
= ₵4 (7,000 – 6,800)
= ₵800F
SH= (5hours x 1,400) = 7,000
VARIABLE OVERHEAD VARIANCES
Expenditure variance:
= AH (SR - AR)
= 6,800 (₵2 - ₵1.617)
= ₵2,600F
AR= (Variable Overhead/Direct labor hours Worked)
= (11,000 /6,800)
= 1.6176
Efficiency Variance:
=SR(SH - AH)
= ₵2 (7,000 – 6,800)
= ₵400F
SH = (5hours x 1,400) = 7000
Expenditure variance:
= (BFO - AFO)
= (₵5,000 - ₵6,000)
= ₵1,000A
BFO = GH₵5 x 1,000 = ₵5,000
Volume variance:
= BFO - AFO/(Budgeted Output - Actual Output) x SR
= (₵5 x1,000) - (₵5 x1,400)
=₵2,000F
Efficiency variance:
= SR(SH- AH)
= ₵1(7,000 - 6,800)
= ₵200F
SH= 5hours x 1,400 = 7000
Capacity variance:
= SR(BH - AH)
= ₵1(5,000 – 6,800)
=₵1,800F
BH = 5hours x 1000 = 5000
Reconciliation of Budgeted to Actual ₵ FA ₵ AD GH₵
Profit
Budgeted contribution (20 x1,000 Units) 20,000
Actual Profit / Loss:

Sales Variance : Price 2,400
:Volume 4000 6,400
Adjusted Budgeted profit 26,400
Production cost variances:
Material Variance : Price 22,000
: Usage 3,000
Labor Variances : Rate 6,800
:Efficiency 800
Balance C/D 800 31,800 26,400
Variable Overheads: Expenditure 2,600
: Efficiency 400
Fixed Overheads : Expenditure 1000
: Capacity 1800
: Efficiency 200
Total cost variances 5,800 32,800 (27,000)
Actual Profit Net Profit /( Loss) (600)
QUESTION 8 - ICAG EXAMS QUESTION NOV
2002 ADAPTED
Shango limited produces cylinders and presented to you the
data to revive its cost estimates in September 2001. At a
normal volume of output of 40,000 cylinders, its standard
costs, including overheads, for the year to 30 November
2001 were as follows:
Direct material 5kg @ ₵10 per kg ₵50

Direct labour 2hours@₵5 per hour ₵10
Variable overheads ₵5
Fixed overheads ₵10
The standard unit of a cylinder is sold at ₵80.
QUESTION 8 CONT’D
The operating statement for the period was as follows:
GH₵ GH₵
Budgeted profit 200,000
Add: Favorable variances:
Sales price 250,000
Sales volume variance 50,000
Fixed overhead expenditure variance 20,000
Fixed overhead capacity variance 50,000
Fixed overhead efficiency variance 50,000
Variable overhead efficiency variance 25,000
Labour efficiency variance 50,000
Material price variance 320,000 815,000
QUESTION 8 CONT’D
1015,000
Less: Adverse Variances:
Material usage variance 700,000
Labour rate variance 90,000
Variable overhead expenditure variance 55,000 (845,000)
Actual profit 170,000
There were no closing stocks of raw material and finish

goods.
Required: Prepare an operating statement in conventional
accounting form showing the actual results of the company
to enable the accountant to revise the budget.
SOLUTION
Budgeted profit statement GH₵ GH₵

Budgeted sales (40,000 x ₵80.00) = 3,200,000
Less cost of manufacture :
Direct material (40,000 x ₵50) = 2,000,000
Direct labour (40,000 x ₵10) = 400,000
Variable overheads (40,000 x ₵5) = 200,000
Fixed overheads (40,000 x ₵10) = 400,000 (3,000,000)
Budgeted profit 200,000
SOLUTION CONT’D
Reconciliation of Actual Profit AD FA ₵
Budgeted profit B/D 200,000
Sales price variance 250,000
Sales volume variance 50,000
Fixed overhead capacity variance 50,000
Fixed overhead efficiency variance 50,000
Labour efficiency variance 50,000
Material price variance 320,000
Material usage variance 700,000
Labour rate variance 90,000
Variable overhead expenditure variance 55,000
Total variances 845,000 815,000 (30,000)
Reconciled Actual profit 170,000
QUESTION 9 - ICAG EXAMS QUESTION NOV 2015
ADAPTED
Borga limited produces cocoa powder for beverage

manufacturing companies. The management accountant has
produced the variance analysis information for management
decisions.
Actual Cost / Units
Selling price $225
Sales volume 9,000 units
Variable cots $170
Standard Cost/ Units

Selling price $220
Sales volume 10,000 units
Variable cost $170
QUESTION 9 CONT’D
Other variances already been calculated are as follows:

Direct cost variances: $
Material : Price 22,250 A
: Usage 66,250 A
Labor :Rate 42,750 A
: Efficiency 33,750 A
Manufacturing overhead variances:
Fixed overhead expenditure variance 10,000 F
Variable overhead expenditure variance 12,500 F
Variable overhead efficiency variance 7,500 A
QUESTION 9 CONT’D
The following information was extracted from the

management accounts.
Budgeted net profit for the period $200,000

Actual profit $ 45,000
You have been asked as cost accountant to reconcile the

budgeted profit to the actual profit using the variance report
generated by the management accountant.
QUESTION 9 CONT’D
Required:
Calculate the sales variances
The total material variance
The total wage variances
Total manufacturing overhead variances
Reconcile budgeted profit to actual profit
SOLUTION
Sale margin price variance (SMPV)

= AQ (BM - AM)
= 9,000($50 -$55)
= 45,000 F
Sales margin volume variance (SMQV)

= BM (BQ - AQ)
= 50 (10,000 - 9,000)
= $50,000A
TSMV = $45,000 +(-$50,000) = $5000A
SOLUTION CONT’D
Total material variance (TMV)
MPV + (-)MQV
22,250 A + 66,250 A=88,500 A
Total wage variance (TW V)

LRV+(-)LEV
42,750 A+33,720 A =76,500 A
Total manufacturing overhead variance (TMOV)

FOE +(-) VOEV+(-) VOEV
10,000 F +12,500F-7,500 A =15,000 F
SOLUTION
Reconciliation of budgeted profit to actual profit

AD $ FA$ Total $
Budgeted net profit 200,000
Sales margin variances:
Sales margin price variance 45,000
Sales margin volume variance 50,000
Direct cost Variances:
Material price 22,250
Material Usage 66,250
Wage rate variance 42,750
Labor efficiency variance 33,750
215,500 45,000
SOLUTION
Balance C/D 215,000 45,000 200,000

Total overhead variances:
Variable overhead expenditure v. 12,500
Total Variances 222,500 67,500 (155,000)
Actual Net Profit 45,000
GENERAL CAUSES OF A VARIANCE
1) Bad measurement and recording of actual results
2) Bad budgeting and standard setting
3) Random factors or seasonality
4) Operational factors such as material price, usage.

OPEARTIONAL FACTORS
 Sales margin price variance:

1) Unplanned price increase
2) Unplanned price reduction to promote sales
 Sales margin volume variance:

1) Unexpected fall in demand due to recession
2) Additional demand attracted by reduced prices
3) Failure to satisfy demand due to production
difficulties
OPEARTIONAL FACTORS CONT’D
 Material Price Variances:

1) Different source of supply of materials
2) Unexpected general price increase
3) Alteration in quantity discounts
4) Substitution of a different grade of material
 Material Usage Variance:

1) High /low incidence of scrap work
2) Alteration of product design
3) Substitution of a different grade of materials
4) Material pilfering and wastages
 Labor/ Wages Rate Variance:

1) Unexpected national wage award
2) Overtime payments other than plan
3) Substitution of a different grade of labor
4) Improvement in productivity of labor
 Labor Efficiency Variance:

1) Improvement in method of working condition
2) Consequence of the learning effect
3) Introduction of incentive schemes
4) Substitution of a different grade of labor
 Variable overhead variance:

1) Unexpected price changes for overhead item
2) Incorrect split between fixed and variable spend
 Fixed overhead expenditure variance:

1) Changes in prices relating to fixed overhead items
2) Seasonal effect , heat/ light in winter. This normally arise
when the annual budget is divided into four equal
quarters, the ups and downs in the fixed overhead
spending will cancel at the end of the year.
Fixed Overhead Volume Variance:

1) Change in productivity of labor or machine
2) Production lost through strikes
3) Change in production volume due to change in
demand.
FACTORS TO CONSIDER WHETHER TO INVESTIGATE A
VARIANCE
1) Consider the size of the variance

2) Whether variance is favorable/ unfavorable
3) Cost or benefit of the investigation
4) Ability to correct the variance
5) Reliability of budgeting and standard set
6) Reliability of recording and measurement
QUESTION 10- ICAG EXAMS QUESTION NOV
2003 ADAPTED
Dzifa manufacturing company limited is located at the
Ghana Free Zone and registered to produce for the
export market. The company produces three types of
plastic related products. The budget estimates
submitted by the management accountant provided a
budgeted sales mix of :
Sales mix:
Q - 20%
R - 30%
S - 50%
Based on the following budgeted sales for the year
QUESTION 10 CONT’D
Product Units Selling Standard Profit
Price ₵ Cost₵ Margin ₵
Q 200 20 10 10
R 300 15 9 6
S 500 10 6 4
Total 1,000
During the year, the following actual results were achieved

Product Units Selling Standard Profit
Price ₵ Cost₵ Margin ₵
Q 150 22 10 12
R 350 15 9 6
S 600 9 6 3
1,100
From the above information, you are required to

calculate the following:
Required:
a. Sales mix variance
b. Sales Margin Quantity variance
c. Sales Margin Price Variance
d. Sales Margin Total Variance
SOLUTION
Actual Margin ( AM) GH₵

Actual Selling Price xxx
Less Standard cost (xxx)
Actual margin xxx
Budgeted Margin (BM) GH₵

Standard Selling Price xxx
Less Standard cost (xxx)
Budgeted margin xxx
SOLUTION CONT’D
(a) Sales Mix Variance
PRODUCT STD M. ACTUAL M. M. DIFF BM VARIANCE
Q ( 20% 220 150 -70 10 700 A
R ( 30% 330 350 +20 6 120 F
S ( 50% 550 600 +50 4 200 F
1,100 380 A
b) Sales Quantity / Volume Variance

PRODUCT B. VOLUME A.VOLUME V. DIFFE BM VARIANCE
Q 200 150 -50 10 500 A
R 300 350 +50 6 300F
S 500 600 +100 4 400F
200 F
SOLUTION CONT’D
c) Sales margin price variance

PRODUCT A. QTY BM AM M. DIFF VARIANCE
Q 150 10 12 -2 300 F
R 350 6 6 0 0
S 600 4 3 1 600 A
300 A
D) Sales margin total variance

PRODUCT SALES VOLUME V. SALES PRICE V. TOTAL VARIANCE
Q 500 A 300F 200 A
R 300 F 0 300F
S 400 F 600 A 200A
100 A
PLANNING AND OPERATIONAL VARIANCE
 Lynch (2003), notes: After you had calculated the

traditional variance you will notice that the cause of a
particular variance may affect another variance in a
corresponding or opposite way, for example cheaper
material may lead to more of it being used. This is referred
to as Interdependence of Variance (p.208).
 From the forgoing, we were told that one of the

possible cause of a variance is bad budgeting, therefore,
an organization my be working to a reasonable level of
efficiency but variance have been reported because its
performance has been assessed by comparing results
with an unrealistic budget.
CONT’D
 More useful information can be obtained from

variances, if the original standards are examined at the
end of an accounting period, to determine whether
or not they are realistic. If it is found that the standard
are unrealistic they can be revised, with hindsight, and
performance compared with the revised standard. The
traditional variances is calculated by comparing actual
result with the original standard.
CONT’D
 Planningvariances: are those obtained by comparing the

original standard with the revised standard. Planning
variance is calculated by comparing the revised
standard (actual) with the original standard (Ex- ante).
 Operational variances: are those found by comparing

actual performance with revised, more realistic
standards. Operational variance is calculated by
comparing the actual result with the revised standard(
Ex- post) (Kaplan, 2005).
CONT’D
 Planning and Operational variances represents a

split of the original / traditional total cost variance
which can then be subdivided into say, material
price and usage to isolate the causes of the variance
into planning and operational.
 Planningvariance may be caused by movement in

the world market price of materials, planning errors
and change overtime -hence uncontrollable
(Demski, 2006).
CAUSES OF PLANNING AND OPERATIONAL
VARIANCE
 Operational variances may be caused by improper

material combination, management actions and
operational factors -hence controllable.
 Planning variances are usually uncontrollable by

functional managers, but the operational variances
are controllable and functional managers need to be
held responsible.
ANALYSING TRADITIONAL, PLANNING & OPERATIONAL
VARIANCES
(1)TRADITIONAL (2) PLANNING (3) OPERATIONAL

VARIANCE VARIANCE VARIANCE
SQ X SP SQ X SP RSQ X RSP
Usage Usage Usage
AQ X SP RSQ X SP AQ X RSP
Price Price Price
AQ X AP RSQ X RSP AQ X AP
QUESTION 11- ILLUSTRATIVE QUESTION
Consider the following information:

Material X Original Revised Actual
Standard Standard Result
Material price $ 5.00/ kg $4.85/kg 4.75/kg
Material used 10kg / unit 9.5 kg/unit 108,900kg
Budgeted Production 10,000 - -
Actual production - - 11,000
Require:
1) Calculate the traditional variance
2) Analyze the variance into planning and operational
3) Comment on your result obtained in 2) above.
SOLUTION
(1)TRADITIONAL VARIANCE
SQ X SP
10kg X 11,000 X $5.00 550,000
5,500 F = USAGE
AQ X SP
108,900kg X $5.00 544,500
27,225 F = PRICE
AQ X AP
108,900kg X $4.75 517,275
TMCV 32,725 F = TMCV
SOLUTION
Material Price Variance:

= AQ (SP - AP)
= 108,900kg ($5.00 - $4.75 )
= $27,225F
Material Quantity Variances:

= SP (SQ - AQ)
= $5.00 (110,000kg - 108,900kg)
= $5,500F
SOLUTION
(2)PLANNING VARIANCE
SQ X SP
10kg X 11,000 X $5.00 550,000
27,500F = Usage
RSQ X SP
9.5KG X 11,000 X $5.00 522,500
15,675F = Price
RSQ X RSP
9.5kg X 11,000X $4.85 506,825
TMCV 43,175
SOLUTION

= RSQ (SP - RSP)
=104,500kg ($5.00 - $4.85)
=$15,675F

= SP (SQ - RSQ)
= $5.00 (110,000kg - 104,500kg)
= $27,500F
SOLUTION
(3) OPERATIONAL VARIANCE

RSQ X RSP
9.5kg X 11,000 X $4.85 506,825
AQ X RSP 21,340 A= Usage

108,900X $4.85 528,168
AQ X AP 10,890 F = Price
108,900 X$4.75 517,275
TMCV 10,450 A
SOLUTION
= AQ (RSP - AP)
= 108,900kg ($4.85 – $4.75)
= $10,890F

= RSP (RSQ - AQ)
= $4.85 (104,500 – 108,900kg)
= $21,340A
SOLUTION
Summary of variances:
AREAS OF PERFORMANCE PRICE USAGE TOTAL

1) Traditional Variance 27,225 F 5,500 F 32,725 F
2) Planning Variance 15,675 F 27,500 F 43,175F
3) Operational Variance 10,890 F 21,340 A 10,450A
Total 26,565F 6,160F 32,725 F
QUESTION 12- ICA EXAMS QUESTION MAY 2015
ADAPTED
Consider the following information on two different materials (X
and Z) used by a firm to produce two distinct products (W and
S).
Material X Ex – Ante Ex – post Actual Result
Price GH₵3/Kg GH₵4.5/Kg GH₵4.8/Kg
Material used (kg) 5kg - 10,800kg
Production - - 2,000
Material Z Ex – Ante Ex – post Actual Result
Price GH₵30/tone GH₵23/ tone GH₵25/tone
Material used (tones) 1.5 tones - 700 tones
Production - - 500
Required:
Analyze the material variances for both products, utilizing
the following :
1) Traditional approach to variance analysis

2) Analyze variance into planning and operational
3) Comment on the result obtained in 2) above
MIX , YIELD & USAGE VARIANNCES
 Background: In most cases firms would want to

know the right proportion of material combinations
to be used in the production process in order to
optimize the use of material resources. The
optimization of material resources can be achieved
through the following means;
MATERIAL OPTIMISATION
Models for material optimization:

1) Material Price
2) Material Mix
3) Material Yield
4) Material Usage Variance.
Check:
Mix variance + yield variance = Usage variance
MIX, YIELD & QUANTITY VARIANCES
 Different material quantities bought at differing standard

and actual prices can result in a gain or loss. Different
material usage at standard minus actual quantities
multiplied at standard prices, can also result in a gain or
loss to the firm.
 Material mixture in respect of standard proportion, less

actual proportions can give an adverse or favorable
variance. Material yield is derived from the various
combination of material units at a standard and actual
proportion relative to the actual output at standard price
can result in a gain or loss.
QUESTION 13 - ICA G EXAMS QUESTION NOV
2005 ADAPTED
Dom manufacturing limited uses a standard costing
system in its production department. The following are
the materials standards for its main product INFINIX-X
506)-used in the telephony industry.
Material Unit Std Price/Unit $ Amount $
X 18 1000 18,000
Y 9 800 7,200
Z 23 400 9,200
QUESTION 13- CONT’D
The standard mix is expected to produce 40 units of

finished products. The actual results for the period
were: Raw materials of 300,000 units were used as
follows:
Actual material uses:
X 138,000 units at $1,100
Y 30,000 units at $750
Z 132,000 units at $450
The output of the finished product was 230,000 units.
Required :
1) Calculate the price , mix and yield variances.
2) Describe briefly two major reasons for material
variances.
SOLUTION
1) Material Price Variance:

 Materials AQ ( SP - AP)
X 138,000units ($1000 - $1100) =13,800,000 A

Y 30,000 units ($800 - $750) = 1,500,000 F
Z 132,000 units ($400 - $ 450) = 6,600,000 A
Total 18,900,000 A
SOLUTION CONT’D
2) Material Mix Variance:
Mat actual quantity actual quantity

in Standard mix - in Actual mix x STD PX
X = (18/50 x300,000), Y = (9/50 x300,000), Z = (23/50 x300,000)
X 18 108,000 - 138,000 x $1000 = 30,000,000 A

Y 9 54,000 - 30,000 x $800 = 19,200,000 F
Z 23 138,000 - 132,000 x $400 = 2,400,000 F
50 300,000 (8,400,000) A
SOLUTION CONT’D
3) Material Yield Variance:
Mat standard input actual quantity

for actual output - in Standard mix x STD PX
X= (18x230,000/40),Y = (9x230,000/40), Z = (23x230,000/40)
X 103,500 - 108,000 x $1000 = 4,500,000 A

Y 51,750 - 54,000 x $800 = 1,800,000 A
Z 132,250 - 138,000 x $400 = 2,300,000 A
300,000 (8,600,000)A
SOLUTION CONT’D
4)Material Usage Variance:

for actual output - in actual mix x STDPX
X 103,500 - 138,000 x $1000 = 34,500,000A

Y 51,750 - 30,000 x $800 = 17,400,000F
Z 132,250 - 132,000 x $400 = 100,000F
300,000 (17,000,000)A
SOLUTION
ii) Two 2 major reasons for material variances:
 MaterialUsage Variance:
Material wastage, spillage and pilfering,
Change in the demand for material.
 MaterialPrice Variance:
Change in the price of the material
Change in the economic condition, example inflation
QUESTION 14 - ICAG EXAMS QUESTION MAY
2004 ADAPTED
Ebb Limited is a manufacturer of DDT - a garden

pesticide produced by mixing three chemicals, Kee, Lee
and Low in the proportions 5:3:2 respectively. The
production process does not always mix the chemicals
in the required proportions, but the pesticide can be
sold if the mixture is within a certain tolerance.
The standard prices for the chemicals are Kee -$1,200

per kilo, Lee - $1,000 per kilo, and Low - $ 1,440 per kilo.
There is considerable evaporation during the process, so
that a yield of 90% is normally expected.
During the last period the output of DDT was 92,000

Kilos.The material inputs were:
46,000 kilos of Kee at $1,260 per kilo
34,000 kilos of Lee at $ 940 per kilo
21,000 kilos of Low at $1,460 per kilos
Required: As the management accountant of the Ebb

Limited,
(a)Calculate the following variances:
1) Material Price Variance
2) Material Mix Variance
3) Material Yield Variance
b) Write the work in progress (Material Account)
SOLUTION
1) Material Price Variance:
Materials AQ ( SP- AP)
KEE 46,000units ($1,200 - $1,260) = 2,760,000 A

LEE 34,000 units ($1,000 - $940) = 2,040,000 F
LOW 21,000 units ($1,440 - $1,460) = 420,000 A
Total 1,140,000 A
SOLUTION CONT’D
2) Material Yield Variance:

for actual output - in Standard mix x STD PX
KEE 51,111 - 50,500 x $1,200 = 733,200 F

LEE 30,667 - 30,300 x $1,000 = 367,000 F
LOW 20,444 - 20,200 x $1,440 = 351,360 F
102,222 1,451,560F
STD Input = (100/90 x92,000 units) = 102,222
SOLUTION CONT’D
2) Material Mix Variance:
Mat actual quantity actual quantity

in Standard mix - in Actual mix x STD PX
KEE 50,500 - 46,000 x $1200 = 5,400,000F

LEE 30,300 - 34,000 x $1000 = 3,700,000 A
LOW 20,200 - 21,000 x $1440 = 1,152,000 A
101,000 548,000 F
SOLUTION CONT’D
4)Material Usage Variance:

for actual output - in actual mix x STDPX
KEE 51,111 - 46,000 x $1,200 = 6,133,200 F

LEE 30,667 - 34,000 x $1000 = 3,333,000A
LOW 20,444 - 21,000 x $1440 = 800,640 A
101,000 (1,999,560)F
MATERIAL CONTROL ACCOUNT
STORES LEDGER DR ($000) WIP CONTROL CR ($000)

MATERIALS USED:- MATERIAL IN PROGRESS:-
KEE (46,000 x $1260) 57,960,000 KEE (51,111 x $1,200) 61,333,200
LEE (34,000 x $940) 31,190,000 LEE ((30,667 x $1000) 30,667,000
LOW(21,00 0 x$1,460) 30,660, 000 LOW (20,444 x$1440) 29,439,360
MATERIAL PRICE VARIANCE:- MATERIAL PRICE VARIANCE:-
LEE 2,040,000 KEE 2,760,000
LOW 420,000
MATERIAL MIX VARIANCE:- MATERIAL MIX VARIANCE:-
KEE 5,400,000 LEE 3,700,000
LOW 1,152,000
MATERAIL YIELD VARIANCE:- MATERIAL YIELD VARIANCE:-
KEE 733 ,200
LEE 367,000
LOW 351,360
QUESTION 15- ICAG EXAMS QUESTION MAY
2012 ADAPTED
Bee limited produces cocoa drink in Accra by mixing

three ingredients K, Y and Z in the proportions 5: 3:2
respectively.
The production process does not always mix the
ingredients in these proportions , but the drink can
be sold if the mixture is within certain limits. The
standard prices for the ingredients are:
K GH₵2.40 /Littre
Y GH₵2.00/ Littre
Z GH₵2.88/ Littre
There is 10% normal loss during the process , so that

the expected yield is 90%. During the last period , the
output of the cocoa drink was 184,000 Littres .
The material inputs were in the following actual

proportions:
92,000 littres of K at GH₵2.52/ Littres

68,000 littres of Y at GH₵1.88/ Littres
42,000 littres of Z at GH₵2.92/ Littres
(a) Required: Calculate the following variances:
1) Material price variance

2) Material mix variance
3) Material yield variance
4) Material usage variance
( b)Explain the following variances :

1) Planning variance
2) Operational variance
3) Traditional variance
(c) State two (2) advantages and two (2) disadvantages of
variance analysis using planning and operational variances
LEARNING VRS EXPERIENCE CURVE THEORY
Learning curve theory is the theory that as output doubles

the average time per unit, thus total time for all units
divided by the units produced, drops by a fixed percentage
each time this happens. The theory can be applied to find
the average cost per unit as well as the average time.
The experience curve theory use similar principle as does

learning curve. However, it is more relevant to falling cost,
due to technological, organizational changes, management
experience or knowledge gained over years rather than just
the rate of learning a new skills.
CONT’D
Learning curve, It is a mathematical expression of the

phenomenon that, when a complex and labor intensive
procedures are repeated, until times tend to decrease at
a constant. The learning curve models mathematically
this reduction in unit production time.
(Cima Official Terminology).
CONT’D
The recognition of the learning curve effect was much

felt from the experience of aircraft manufacturers , such
as Boeing, during the second world War. They observed
that the time taken to assemble an individual aircraft
declined as the number of aircraft assembled increased,
as workers gained experience of the assembly process,
their proficiency and speedy increased.
ASUMPTIONS UNDERLYING LEARNING CURVE
THEORY
1) Method of production is labor intensive - learning

2) Production methods are repetitive - speedy
3) Production is in its early stages, no improvements
4) The same workforce are used, consistency
5) No production breakdowns
6) Output and labor hours are inversely related
APPLICATION OF LEARNING CURVE THEORY
Advantages of LCT
I. Can be used for pricing decisions
II. Setting of standards for cost centres
III. Planning / budgeting for manpower needs
IV. Used for performance evaluation
V. Provides basis for learning and motivation of labor
VI. Provides basis for strategy evaluation
VII. Can be apply as a cost control tool
APPLICATION OF LCT CONT’D
The rate of learning can be derived as a linear curve:
Formulae Y = 𝑎𝑋 𝑏
Where :
APPLICATION OF LCT CONT’D
Y = average time for that (X) number of units

a = time / cost for the first unit
X = the number of units to obtain cost per unit
b = the index of learning ( log r/ log 2)
If the learning rate of the workforce was 90% (r= 0.9)

then the average time or cost per unit falls by 10%
each time output doubles.
QUESTION 16
A company uses the learning curve theory to assess

the extent of labor mastering a task and the effect of
this on the hours used and the relationship with
series of output. It is assumed that in this firm:
 One 1 unit takes 10 hours to produce

 Two 2 units take 20 hours to make
 Four 4 units take 40 hours to make
 Eight 8 units take 80 hour to make
The management of the firm was not sure about this

assumption and claimed, if labor can learn and gain
experience, then the average labor hours per unit
should fall.
Best practice in the industry, suggests that 80% learning

curve applies, it means that each time output doubles on
a cumulative basis, the cumulative average labor hours
per unit fall by 20%.
Required:
As the management accountant, you are to advise
management, using the knowledge gained in the theory of
learning curve whether, the assumption stated in the
question regarding the relationship between units produced
and labor hours are true.
SOLUTION
UNITS AVERAGE
HRS PER
UNIT
1 Units take (1 x 10 hours ) = 10
2 Units take (2 x 10 hrs.) x 80% = 16 hrs. /2 8
4 Units take (4 x 10 hrs.) x 80% x 80% = 25.6 hrs./4 6.4
8 Units take (8 x10 hrs.) x 80% x 80% x 80%=40.96 hrs./ 8 5.12

SOLUTION CONT’D
Comment
From the above calculation, the average hours per unit
falls to 80% of its previous levels each time cumulative
output doubles.
This could occur where labor can learn and

therefore influence the time taken, it clearly could
not apply where the rate of production is machine or
process controlled.
QUESTION 17
Locus cars are a company set up in London to build mass-

produced Sport Utility Vehicles (SUVs). 5 skilled workmen
working a standard 35- hours a week build these cars.
Production has only just started but the workforces are
keen to learn quickly.
The first type was built however, the time taken had not
been recorded. The third unit however did record that the
average time for all units at this point was 11.36 hours.
Based on previous knowledge, management believe there is
a 70% learning rate of the new workmen.
Required , you are required to calculate:

1) The time taken for the first proto - type
2) The total time taken for the 12th car only
3) Total time taken for the 14th to the 15th car only
4) How many cars can Locus build in the first 2
months assuming the learning effect ceases at 200
cars?
SOLUTION
(1)Time taken to produce the first prototype :

= log 0.7/ log 2 = - 0.5146
−0.5146
=11.36 hours = a x 3
=11.36 = a x 0.5682
a =11.36 /0.5682
a = 20 hours
SOLUTION CONT’D
(2) Time taken to produce the 12th car only:

−0.5146
12 units (20 hours x 12 ) x 12 = 66.81 hr.
−0.5146 )
11 units ( 20 hours x 11 x 11 = (64.05) hr.
Total time taken for the 12th unit = 2.76 hr,
SOLUTION CONT’D
(3) Time taken to produce the 14th to the 15th car only:
−0.5146
15 units (20 hours x 15 ) x 15 = 74.46 hr.
−0.5146
13 units ( 20 hours x 13 ) x 13 = (69.46 ) hr.
Total time for the 14th and 15th unit = 5.00 hr.
SOLUTION CONT’D
4) How many cars Locus build in the first 2 months

assuming the learning effect ceases at 200 cars:
−0.5146
200 units (20 hours x 200 ) x 200 = 261.8 hr.
−0.5146
199 units ( 20 hours x 199 ) x 199 = (261.2) hr.
Total time for the 200 unit = 0. 6hr.
SOLUTION CONT’D
(a)Workmen work in 2 months

(8 weeks x 5 men x 35 hrs. = 1,400 hrs.
(b)Time taken to complete the first 200 units

261.8 hrs. as above
Hence 1,400 - 261.8 hrs. = 1,138 . 2 hrs. remaining
1,138 / 0.6 hours = 1,897 units
(c) Therefore, 200 units +1,897 units = 2,097 cars built in the
first 2 months

Unit 06 (Standard Cost & Variance Analysis

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Unit 06 (Standard Cost & Variance Analysis

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STANDARD COST & VARIANCE ANALYSIS

1) Difference between standard & budgeted cost

 Standard Cost: is a cost established for one unit of

 Budgeted Cost: is a cost related to total output

 Trial Question: Critically examine and explain the

1) Carefully planned standard is an aid to budgeting

 Ideal Standard: this is standard set based on perfect

 BasicStandard: this is standard set for use over a long

 Current Standard: this is a standard set based on

1) Ensure the practice of ‘MBE’.

1) It may be time consuming and expensive to maintain

 Costcontrol: It entails continuous regulation of cost of

 Cost reduction: It is a planned and positive approach to

1) Setting cost standards

1) Distinguish between cost control and cost reduction

 Cost control: is the process of containing costs to some

 Cost reduction: is the wider ranging attempt to reduce costs

I. Budgetary control systems

 A variance is the difference between actual and

 If a variance between actual cost and standard cost is

 The analysis of variance from the point of revenue is

 It is the difference between the actual profit and

 SMV = (BM x BQ) - (AM x AQ) / (BP - AP)

1) Sales margin price variance

 Sales price variance(SPV): It is the difference between

Consider the following information on budgeted and actual

Required: Calculate the sales variances

Sales Margin Variance:

BP = (9,500 x ₵0.50) = ₵ 4,750 workings… (1)

You budgeted to profit from sales at ₵4,750 but you had

1) Sales margin price variance:

AM = (Actual Profit/Actual units sold)

AM = 4,700 / 10,000 = 0.47 workings……. (2)

2) Sales margin volume variance:

3)Total sales margin variance (TSMV)

Total sales margin variance(TSMV):

 This is the difference between the standard direct

 DMCV = (SQ x SP) - (AQ x AP)

 It is the difference between actual price and the

 DMPV = AQ (SP - AP)

 It is the difference between standard quantity specified

 DMUV = SP (SQ - AQ)

The standard cost card of product Zinc shows the

Required: calculate the material variances.

(1) Material price variance (MPV):

AP =(₵18,200/7,000kg) =2.6 workings…(1)

(2) Material usage variance( MUV):

SQ =(50KG x150Units) =7,500 workings…(2)

Total material cost variance (TMCV):

Total material cost variance (TMCV):

1) Changes in purchase price of materials.

1) Defective materials due to deterioration

 This is the difference between the standard direct

1) Direct Labor Rate Variance

 Is the difference between the standard and actual

 DLRV = AH (SR - AR)

 Efficiencyvariance is the difference between the

 Thisis done by multiplying the hours of idle time by

 ITV = (Idle Time x SR)

The standard cost of product M contain the following.

Required: Calculate the labor variances

(1) Labor rate variance :

AR = (5858 / 2020) = 2.9 workings……(1)