Standard Costing & Variance Analysis: Material and Labour

📌 What is Standard Cost?

As per the Institute of Cost and Management Accountants, London:

➤ A predetermined cost based on technical estimates for materials, labour, and overheads

➤ Applicable to a specific time period under defined working conditions

📌 What is Standard Costing?

Defined by the Chartered Institute of Management Accountants, England as:

➤ The preparation and use of standard costs

➤ Comparison with actual costs

➤ Analyzing variances to find causes & responsible departments

✅ Advantages of Standard Costing

➤ Helps in evaluating production performance

➤ Assists in setting cost standards

➤ Aids planning and pricing policies

➤ Acts as a yardstick for measuring variances

➤ Helps in corrective actions to reduce inefficiency

❌ Limitations of Standard Costing

➤ Expensive for small businesses

➤ Difficult to establish technical standards

➤ Not useful for non-standardized products

➤ Responsibility fixing is difficult for uncontrollable variances

➤ Needs frequent revisions and skilled staff

🔁 Standard Costing vs. Budgetary Control

➤ 1. Establish Cost Centres → Define responsibility areas

➤ 2. Classify Accounts → Group expenses & revenues

➤ 3. Set Types of Standards (Based on practicality)

📂 Types of Standards

📌 Variance = Standard Cost – Actual Cost

📌 Variance Analysis: Breaking down variances to assign responsibility

➤ Favourable Variance = Actual < Standard

➤ Adverse Variance = Actual > Standard

🧩 Helps management:

• Know variance amount

• Identify reasons

• Assign responsibility

• Take corrective actions

💡 TYPES OF VARIANCES

🔹 A. Cost Variances

📦 I. Material Cost Variances (MCV)

🧮 MCV = SC – AC

or

🧮 MCV = (SQ × SP) – (AQ × AP)

SQ = Standard Quantity, SP = Standard Price, AQ = Actual Quantity, AP = Actual Price

➤ 1. Material Price Variance (MPV)

🧮 MPV = (SP – AP) × AQ

Arises due to change in price paid

➤ 2. Material Usage Variance (MUV)

🧮 MUV = SP × (SQ – AQ)

Caused by wastage, theft, inefficiency

➤ 3. Material Mix Variance (MMV)

(a) If Total Actual = Standard Weight:

🧮 MMV = SP × (SQ – AQ) or MMV = SP × (RSQ – AQ)

(b) If Weights Differ:

🧮 MMV = (Total weight of actual mix ÷ Total weight of standard mix × Standard cost of standard mix) – Standard cost of actual mix

➤ 4. Material Yield Variance (MYV)

🧮 MYV = SR × (AY – SY)

SR = Standard cost of mix ÷ Net standard output

✅ Verification Formulae

➤ MCV = MPV + MUV

➤ MUV = MMV + MYV

🔺 Favourable = +, Adverse = –

👷 II. Labour Cost Variances (LCV)

🧮 LCV = (SR × SH) – (AR × AH)

SH = Standard Hours, SR = Standard Rate, AH = Actual Hours, AR = Actual Rate

➤ 1. Labour Rate Variance (LRV)

🧮 LRV = AH × (SR – AR)

Due to change in wage rates, overtime, etc.

➤ 2. Labour Efficiency Variance (LEV)

🧮 LEV = SR × (SH – Effective AH)

Due to slow work, poor training, delays

➤ 3. Idle Time Variance

🧮 ITV = Idle Hours × SR

Strike, machine failure, etc.

➤ 4. Labour Mix Variance (LMV)

(a) When hours are equal:

🧮 LMV = Standard cost of standard mix – Standard cost of actual mix

(b) When hours differ:

🧮 LMV = (RSH – AH) × SR

➤ RSH = (Total AH ÷ Total SH) × AH

➤ 5. Labour Yield Variance (LYV)

🧮 LYV = Std labour cost/unit × (Standard Output – Actual Output)

Related to production efficiency/output deviation

✅ Verification Formulae

➤ LCV = LRV + LEV

➤ LEV = LMV + LYV

🏭 III. Overhead Variances (Concept Only)

➤ Overheads = Indirect Material + Labour + Expenses

➤ Overhead Cost Variance = Standard Overhead – Actual Overhead

Classification:

1. Variable Overhead Variances

• Variable Cost Variance

• Expenditure Variance

• Efficiency Variance

2. Fixed Overhead Variances

• Cost Variance

• Expenditure Variance

• Volume Variance

• Capacity Variance

• Efficiency Variance

• Calendar Variance