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Standard Cost Variance Calculations and Analysis

 

Cost of producing product or service is the total of uni
  • Material Cost
  • Direct Labour Cost
  • Overhead Cost

 

Standard cost is the budgeted cost and against which performance is monitored so that cost control is maintained.  Each day accounting prepares reports that show: 

  • Whether the budgeted costs were exceeded

  • Which ones (i.e. material, labor, overhead)

  • Variances 

This data should cause appropriate corrective action to be taken.Variance Usually Calculated

 
Material Price Tells how much more than budgeted (standard) price was paid (or less) for the material that was used or bought
Material Usage Tells whether the quantity of material used is more than what should have been used according to the standard and what the $ value is
Labor Price Tells how much more or less was paid to workers per hour than the standard set and what the $ value is
Labor Efficiency   Tells difference between the hours expended and paid for compared to what should have been if standard was met
Overhead Budget Variance Difference between the actual OH cost spent and what should have been spent if budget was met
Oh Efficiency Variance Difference of  what should have been spent if budget was met and what actual production should have cost if standards were met
OH Volume Variance   Difference due to output volume change from that planned which caused less or more fixed OH to be applied
Re Cap  -

Variances may be due to:

  1. Paying more than the standard set
  2. Using more quantities
  3. Different production volume than anticipated

 

Reasons for this are numerous and must be investigated.

 

Analysis of Overhead Variance = OH Variance - Actual OH incurred - OH applied 

Budget (Spending) Variance 

    Actual Overhead Incurred

    Flexible Budget Allowance for

    Actual Operating Level

Efficiency Variance

    Flexible Budget Allowance

    For Actual Operating Level

    Flexible Budget Allowance

    For Actual Units Produced(per standard set)

 

Capacity Variance

Flexible Budget Allowance
For Actual Units Produced
OH Appled

 
Capacity Variance  

Standard Cost and OH Variance Analysis

Example

The Standard Cost for a product is: 

Direct Material 2 lbs. @ $l5 per lb. $30
Direct Labor 2 hrs. @ $20 per hr. 40
Variable OH 2 hrs. @ $5     10
Fixed OH   2 hrs. @ $8 16
Total Unit Cost     $96

 

Anticipated production is 7,500 direct labor hours.

Fixed OH budgeted to be $60,000. 

Actual Output

    6,000 Standard Labor Hours (3,000 units)

    Actual Variance OH Expense                            $30,600

    Actual Fixed OH Expense                                 $62,000

    Bought and used 12,000 lbs. @ $17 lb.           $204,000

    Paid for 6,500 hrs. of Direct Labor                    $13,000 

D.M. Price Variance  (17-15) 12,000 = 24,000 UNF 

D.M. Usage Variance (12,000-12,000)(15) = 0 

D.L. Price Variance (21-20)(6,500) = 6,500 UNF 

D.L. Efficiency Variance (6,500-3,000(2))(20) =10,000 UNF 

Fixed OH Flexible Budget Variance

        Actual Cost - Budget based on standard inputs allowing for actual outputs achieved

        62,000         -              60,000                 =          2,000 UNF

       (Fixed irrespective of volume) 

Fixed OH Production Volume Variance

       Budgeted Cost - Fixed OH Applied

       6,000                     6,000(8)               =   12,000 U 

 

Variable OH Flexible Budget Variance

        Actual V OH Cost - Budget Based on Standard Inputs Allowed for Outputs Achieved

               30,600                               6,000(5)   =  600 U 

Variable OH Applied

               Budget                              Applied

               6,000(5)                           6,000(5)    =  0 

Analysis - OH

   Spent $92,600 -

   Should have if within budget 6,000(8+5) = $78,000    14,600 U 

Because worked at 6,000 instead of 7,500, did not absorb the Fixed OH fully.

Fixed 

  60,000 (Budget)  -  6,000(8)            =  12,000  not absorbed

  62,000  Actual    -  60,000 (Budget)     2,000  spent more than budget                                                                                           14,000

 Variable

   30,600 Actual - 20,000 (should have spent per budget)   =       600

   30,000 should have spent if  -  6,000(5)   - V.OH             =        -0-

                standard was met                              applied

 

                                                                         TOTAL           =  14,600

 

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