Standard Costing and Variance Analysis: Material and Labour Variances
How to set standards, calculate price, usage, rate and efficiency variances, and explain them.
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Setting standards
A standard cost card states what one unit should cost. Standards are usually set by management accountants together with purchasing and production managers.
| Standard cost card (per unit) | Quantity | Rate | Cost |
|---|---|---|---|
| Direct material | 3 kg | 4.00 per kg | 12.00 |
| Direct labour | 2 hours | 9.00 per hour | 18.00 |
| Standard prime cost per unit | 30.00 |
Types of standard: an ideal standard assumes perfect conditions with no waste or idle time. An attainable standard allows for normal waste and delays and is more commonly used because it is realistic and motivating.
The actual results
The company made 1,000 units. It bought and used 3,200 kg of material at 4.25 per kg, and paid 2,100 labour hours at 9.50 per hour.
- Standard material for 1,000 units = 3,000 kg; standard material cost = 3,000 × 4 = 12,000.
- Actual material cost = 3,200 × 4.25 = 13,600.
- Standard hours for 1,000 units = 2,000 hours; standard labour cost = 2,000 × 9 = 18,000.
- Actual labour cost = 2,100 × 9.50 = 19,950.
Material variances
Usage variance = (Standard quantity − Actual quantity) × Standard price
| Price: (4.00 − 4.25) × 3,200 | 800 adverse |
| Usage: (3,000 − 3,200) × 4.00 | 800 adverse |
| Total material variance | 1,600 adverse |
|---|
Check: actual cost 13,600 − standard cost 12,000 = 1,600 adverse ✓.
Labour variances
Efficiency variance = (Standard hours − Actual hours) × Standard rate
| Rate: (9.00 − 9.50) × 2,100 | 1,050 adverse |
| Efficiency: (2,000 − 2,100) × 9.00 | 900 adverse |
| Total labour variance | 1,950 adverse |
|---|
Check: actual cost 19,950 − standard cost 18,000 = 1,950 adverse ✓.
Why a positive number can still be favourable: the formulas are built so that a positive answer is favourable and a negative answer is adverse. That is why “standard minus actual” is used for costs.
Possible causes to investigate
| Variance | Possible causes |
|---|---|
| Material price | Supplier price rise, rush orders, lost bulk discount, poor purchasing |
| Material usage | Waste, theft, poor-quality material, faulty machines, untrained staff |
| Labour rate | Overtime premiums, using more skilled or more senior workers, pay rises |
| Labour efficiency | Idle time, machine breakdowns, poor supervision, poor-quality materials |
Variances are often linked. Buying cheaper material (favourable price variance) might cause more waste (adverse usage variance), so look at them together before blaming anyone. See variance analysis and standard costing.
Common mistakes
- Using actual output incorrectly. Standard quantity must be for the actual units produced (3 kg × 1,000 units), not the budgeted units.
- Using the wrong quantity in price variances. Price and rate variances use actual quantity or hours.
- Mixing up the signs. Actual cost higher than standard is adverse.
Quick check
1. Standard labour rate 8.00; actual rate 7.50; actual hours 1,000. What is the rate variance?
(8.00 − 7.50) × 1,000 = 500 favourable, because the actual rate was lower than standard.
2. The standard hours for actual output were 400; actual hours were 380; standard rate is 10. What is the efficiency variance?
(400 − 380) × 10 = 200 favourable, because fewer hours were used than the standard allowed.
Practise with Problem 8 (material variances).
Frequently asked questions
What is the difference between a price variance and a usage variance?
A price variance arises from paying a different price per unit than the standard. A usage variance arises from using a different quantity than the standard allows for the output achieved.
What does an adverse variance mean?
Actual cost was higher than standard cost, which reduces profit. A favourable variance means actual cost was lower.
Why are standards usually set at attainable levels?
Ideal standards are almost never achieved and can demotivate staff. Attainable standards allow for normal waste and delays, so variances are more meaningful.
Keep learning
This lesson is for general learning. Terminology and layouts vary by syllabus and country.
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