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

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📌 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

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✅ 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

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❌ 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

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🔁 Standard Costing vs. Budgetary Control

Aspect	Standard Costing	Budgetary Control
1. Projection	Of cost accounts	Of financial accounts
2. Usage	Not for forecasting	Used for forecasting income & expense
3. Definition	"What cost should be"	"What cost will be"
4. Industry	Applied in construction	Applied in mass production
5. Records	Statistical-based, not in books	Forms part of accounts

🏗️ Steps to Establish Standard Costing System

➤ 1. Establish Cost Centres → Define responsibility areas
➤ 2. Classify Accounts → Group expenses & revenues
➤ 3. Set Types of Standards (Based on practicality)

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📂 Types of Standards

Type	Description
➤ Basic Standard	Long-term, unchanged, for comparison
➤ Current Standard	Short-term, reflects current conditions
➤ Ideal Standard	Perfect conditions, nearly impossible
➤ Normal Standard	Usual working conditions, hard to forecast
➤ Expected / Practical Standard	Realistic & attainable with allowances

📊 Variance Analysis

📌 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

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💡 TYPES OF VARIANCES

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🔹 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

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➤ 1. Material Price Variance (MPV)

🧮 MPV = (SP – AP) × AQ

Arises due to change in price paid

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➤ 2. Material Usage Variance (MUV)

🧮 MUV = SP × (SQ – AQ)

Caused by wastage, theft, inefficiency

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➤ 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

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➤ 4. Material Yield Variance (MYV)

🧮 MYV = SR × (AY – SY)

SR = Standard cost of mix ÷ Net standard output

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✅ Verification Formulae
➤ MCV = MPV + MUV
➤ MUV = MMV + MYV
🔺 Favourable = +, Adverse = –

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👷 II. Labour Cost Variances (LCV)

🧮 LCV = (SR × SH) – (AR × AH)

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

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➤ 1. Labour Rate Variance (LRV)

🧮 LRV = AH × (SR – AR)

Due to change in wage rates, overtime, etc.

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➤ 2. Labour Efficiency Variance (LEV)

🧮 LEV = SR × (SH – Effective AH)

Due to slow work, poor training, delays

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➤ 3. Idle Time Variance

🧮 ITV = Idle Hours × SR

Strike, machine failure, etc.

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➤ 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

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➤ 5. Labour Yield Variance (LYV)

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

Related to production efficiency/output deviation

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✅ Verification Formulae
➤ LCV = LRV + LEV
➤ LEV = LMV + LYV

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🏭 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