Ch a p t er 21

STANDARD COSTING
AND VARIANCE ANALYSIS

Learning objectives

After studying this chapter, you are able to understand:

o Meaning and Definition of Standard Costing
Objectives of Standard Costing System
o Terninology of Standards and Types of Standards
Problems in Setting Standard Costs
Advantages and Disadvantages of Standard Costing System
o Ccmparison of Standard Costing with Estimated Costing and Budgetary Control
Meaning of Variance Analysis
O Various Classes of Variances and their Respective Formulae
Meaning of Planning and Operating and Variances
Q Interpretation and Investigation of Variances
o Techniques used in Investigation of Variances

Standard Costing:Meaning and Definition (21.1)

Standard costing isa technique which uses standards for costs and revenues for the purpose
of control through variance analysis. Standard is a predetermined measurable quantity set in
defined conditions against which actual performance can be compared, usually for an
element of work, operation or activity.
"Standard cost is a predetermined calculation of how nuch cosIs should be under specified
working conditions. It is built up from an assessment of the value of cost elements and
correlates technical specifications and the qualification of materials, labour and other costs
to the prices and/or usage rates expected to apply during the period in which the standard
cost is intended to be used. Its main purpose is to provide basis for control through vuriance
accounting for the valuation of stock and work-in-progress and in some cases, for fiing
selling prices." - CIMA Official Terminology
595
 596 Part Two Management Accounting

in order to provide
Standard costing involves the setting of predetermined cost estimates
cost for a unit of produet
basis for comparison with actual costs. Astandard cost is a planned effective instrument for
or service rendered. Standard costing is universally accepted as an cost are sometimes used
cost control in industries. Although the terms budgeted and standard
interchangeably, budgeted costs normally describe the total planned costs for a number of
products. Usually budgetary control is operated with a system of standard costing because
both systems are inter-related but they are not inter-dependent.
From a summary of the above study, we can understand what a 'standard means:
Predetermined estimates
Established for inputs and outputs
Applicable to all routine aspects of an organisation's operations
Accounting for standard costs and obtaining variances
Reporting to management for taking appropriate action wherever necessary.
With the use of standard costing the organisation achieves the objectives in a planned and
systematic manner. Standard costing can be used in Direct costing, Absorption costing, Job
costing, or Process costing. It is not a method of costing but a system which can be fitted in
any method.

Objectives of Standard Costing (21.2)

The objectives of standard costing technique are as follows:
To provide a formal basis for assessing performance and efficiency.
To control costs by establishing standards and analysis of variances.
To enable the principle of 'nanagement by exception' to be practised at the detailed,
operational level.
To assist in setting budgets.
The standard costs are readily available substitutes for actual average unit costs and
can be used for stock and work-in-progress valuations, profit planning and decision
making and as a basis of pricing where 'cost-plus' systems are used.
To assist in assigning responsibility for non-standard performance in order to correct
deficiencies or to capitalise on benefits.
. To motivate staff and management.
To provide a basis for estimating.
To provide guidance on possible ways of improving performance.
One cannot have perfect and effective system of budgetary control without standard
costing, and standard costing cannot be implemented without proper budgetary control
system. The budgetary control system and standard costing are both supplementary and
complementary to each other. The use of standard costing is useful for MIS, Profit planning,
inventory control, product pricing, decision making, cost control etc. Both standards and
budgets are concerned with setting performance and cost levels for control purposes. They
are similar in principle although they differ in scope. Standards are unit concept, ie, they
apply to particular products, to individual operations or processes. Budgets are concerned
with totals they lay down cost limits for function and departments and for the firm as a
whole. In order to enable an organisation to set up or install standard costing system the
management has to finalise and prescribe various forms, methods and systems keeping in
mind the nature, size and technicalities of the business and motivate
responsible persons.
 Chapter 21 Standard Costing and Variance Analysis 597

Terminology on Standards (21.3)

The terminology used by CIMA, London on standard costing systems are summarised as
follows :
Standard Hour/Minute-The quality of work achievable at standard performance, expressed
in terms of a standard unit of work in a standard period of time.
Standard Time- Standard time is the total time (hours and minutes) in which a task should
be completed at standard performance Le, basic time plus contingency allowance plus
relaxation allowance.
Standard Unit of Work -Standard unit of work is a unit of work consisting of basic time plus
relaxation allowance and contingency allowance where applicable. The unit of work may be
for labour output only, a combination of machine and labour output, or for a machine only.
Standard Performance of aMachine -It is the rate of output achievable by amachine on an
average, under specified conditions over a given period of time. It may include the standard
performance of the operator.
Standard Direct Material Cost- Standard direct material cost is the predetermined cost price
for a specified quality of material to be used at a standard material usage rate over a specified
period.
Standard Material Usage -Standard material usage is the quantity of material or rate of use
required as an average, under specified conditions, to produce a specified quantity of output.
Standard Direct Labour Cost- It is the planned average cost of direct labour for a specified
amount of direct labour effort to be used at standard performance over a specified period.
or standard minute.
It is usually expressed as a cost per unit of time ie, standard hour
cost/revenue/profit
Standard Overhead Cost- It is the predetermined cost of overhead of a method.
centre over a specified period, using an agreed overhead absorption In marginal
costing, this will be in respect of variable overhead only.
Standard Perfornance-Labour- It is the rate of output which qualified workers can achieve
without over exertion, provided they adhere to
on an average over the working day or shift, apply
the specified method and are motivated to themselves to their work.
Standard Production Cost-Total - It is the predetermined cost of producing or providing
specified quantities of products or service at standard performance over a specified period.
Standard Production Cost-Unit - It is the predetermined cost of producing or providing
performance.
specified quantity of a product or service at standard
or service for a
Standard Selling Price-Unit - It is a predetermined price for a productprocessed
of output.
specified unit to be sold. Aunit may consist of a single item or a batch
Standard Price -It is a predetermined price fixed on the basis of specification of a product
or service and of all factors affecting that price.
specified
Standard Operating Profit-Unt- It is the predetermined profit from the sale of a
price.
unit of a product or service at the standard selling
arising from the sale of actual quantities
Standard Profit-Total-It is the predetermined profitover
of products or services at standard selling prices, a specified period.
cost per unit)
Formula: Actual number of units sold x Standard selling price per unit - Standard
profit or combination. Protit which
Standard profit may be at the level of net profit, grossoperating profit.
relates only to trading activities is often referred to as
Types of Standards (21.3.1)
Current Standard Current standard is a standard established for use over a short Denud of
time, related to current conditions. The problem with this type of standard is that it does nut
ofefficiency.
try to improve on current levels
 598 Part Two Management Account1ng

Basic Standard Basic standard is standard established for use over a longperiod from which
is that
a current standard can be developed. The main disadvantage of this type of standard The main
because it has remained unaltered over a long period of time, it may be out of date.
advantage is in showing the changes in trend of price and efficiency from year to year.
Ideal Standard Ideal standard is astandard which can be attained under the most favourable
conditions. No provision is made, e.g., for shrinkage, spoilage or machine breakdowns. Users
believe that the resulting unfavourable variances will remind management of the need for
improvement in all phases of operations. Ideal standards are not widely used in practice
because they may influence employee motivation adversely.
Attainable Standard Attainable standard is astandard which can be attained if a standard
unit of work is carried out efficiently, on a machine properly utilised or material properly
used. Allowances are made for normal shrinkage, waste and machine breakdowns. The
standard represents future performance and objectives which are reasonably attainable.
Besides having a desirable motivational impact on employees, attainable standards serve
other purposes, e.g, cash budgeting, inventory valuation and budgeting departmental
performance. If correctly set attainable standards are the best type of standards to use, since
they provide employees with a realistic target. Attainable standards have the greatest
motivational impact on the workforce.

Setting Standards (21.4)

In order to use predetermined standard costs, standards have to be set for each element of
cost for each line of product manufactured or service supplied. Standard cost shows what
the cost should be keeping in mind the most favourable production conditions, and on the
assumption that plant willoperate at maximum possible efficiency. The collaboration of all
functional departments is a must in setting standards. The quantities, price and rates,
qualities or grades, terms of purchase, product substitution etc.have to be keptin mind while
setting standards. The success of standard cost system depends on the reliability, accuracy
and acceptance of the standards. Standards must be set and the system implemented
whatever may be faults or delay or cost, otherwise the whole exercise will go waste.
The methodology used in conventional approach to variance analysis is as follows:
(a) Setting of standards and construction of a budget based on them.
(b) Comparison of actual with budgeted outcomes.
() Factoring the variance into individual components and investigation of the significant
differences.
In this approach the standards are related to expectations over the budget period and do not
necessarily reflect optimal performance. Usually it is believed that standards should be
reasonably attainable in the circumstances envisaged. Thus in this context conventional
variance analysis is a post-mortem exercise. If the standards are tight then this will have a
disincentive effect, whereas if the standards are loose then this results in complacency. The
behavioural aspects and implications are generally ignored while setting the standards,
which cause the arbitrary investigation of variances. It does not give adequate guidance
regarding cost-benefit of variances investigated or cost of correcting errors. Thus the
conventional analysis is more a post-mortem.
The following aspects need to be given consideration while setting the standards:
Standard setting and variance analysis should be sufficiently refined to provide
adequate information.
Qualitative information isnot given proper attention.
. The standardcusting system should provide for opportunity costs and profit forgone.
 599
Chapter 21 Standard Costing and Variance Analysis

The conventional standard cost system is criticised because of using crude variance
classifications, in appropriate measurements, calculation of redundant variances, ignoring
variances related important control areas. The standard costing system should give aue
importance to interdependence between different responsibility centres rather than tradi
tional variance analysis.
(21.4.1)
Standard Costing System During Inflation
The inflationary tendency in the economy will cause fall in purchasing power of money
thereby affects the accounting for real value. In inflationary conditions the results shown in
financial statements do not represent the correct view of activities carried on in the business
concern. Any decision taken or estimates made without inflation would not be correct. The
expectations of the investors are more in the inflationary conditions. If an investor expects
8% in an intlation free world, he would expect 12% rate of return on investment in a world
subject to intlation pressures. The rate of inflation will have its impact on future cashflows
and profitability of the concern. Before any estimates made or standards set, the difference
between money rate of interest andreal rate of interest, the difference between them should
be taken as rate of inflation. The practical approach for adjusting inflation is as folows:
(a) predict the cash flows in nominal rupees and use the nominal discount rate.
(b) predict cash flows in real rupees and use a nominal discount rate.
The correct treatment of inflation, therefore, requires the assumptions about inflation which
enter the cash flow forecasts and discount rate calculations. Uncertainty in standard costing
can be caused by inflation, technological change, economic and political factors eic.
Standards, need to be continually updated and revised.
Standard Costing and Activity Based Costing (21.4.2)
The traditional standard costing systemis not compatible with activity based costing system
due to the following reasons:
. Product costing based on manufacturing costs alone today represents an unaccept
ably low proportion of total cost.
Non-manufacturing product costs such as product selling and distribution expenses
are ignored for product costing purposes.
ABC system addresses the treatment of all overhead related costs linking with cost
drivers and cost pools.
Material cost will be treated as direct costs both in ABC and standard costing system,
exceptthatall costs incurred in bringing the product to its current state and location
will be included in ABC system.
Labour, as a basis for assigning manufacturing overhead, is irrelevant as it is signifi
cantly less than overhead and many overheads do not bear any relationship to labour
cost or labour hours.
. The cost of technology is treated as product cost and consequently expensed on a
straight line basis, irrespective of use.
Service related costs like professional services, banking services, insurance services
have increased considerably in the last few decades.
. Customer related costs like finance charges, discounts, selling and distribution costs,
after sales service costs etc. are not related toproduct cost object.Customer profitabil
ity has become as crucial as product profitability.
. Direct labour is also replaced to some extent by information technolugy and svstems.
These costs are treated similarly to organisational overheads and not related lo
products or other cost objects, such as customers.
600 Part Two Management Accounting

Costs affected or driven by time (interest and inflation) have increased significanthy
yet time does not feature in traditional cost systems as a cost driver. Interest coct
treated as another period cost, whereas it may contribute significantly towárde
bringing the product (or customer) to its current status.
The traditional short-term focus of the financial year (12 months) is still intact, yet most
products and technologies have life cycles exceeding many accounting periods.
Vastly increased competition world-wide, mainly brought about by increased produc
tivity, economies of scale, better communication technology, improved transportation
and marketing skills, have led to substantially increased marketing costs.
Greater variety, diversity and complexity of products are not taken into consideration
in traditional systems.
A much more sophisticated market, which calls for the
rendering of services desired by the customer/client, and notproduction
those
of goods and
thought proper by
the supplier, accentuates the lack of customer focus in
traditional systems.
Standard Cost Card
After setting standard for each element of cost, a (21.4.3)
therein the unit standard cost for each standard cost card is prepared showing
standard selling prices, standard materials,element
of cost. Standard margin per unit
and
standard cost card that shows the itemizedlabour and factory overhead costs are kept on a
cost of each materials and labour operation as
well as the overhead cost. Astandard cost card gives
hvpothetical standard cost card is illustrated below. the standard unit cost of a product. A
Standard Cost Card
Item
Code
Quantity
Units
Standard Departmnent (Rs.) Totals
Price (Rs.) 2 3 4
MATERIALS (Rs.)
2.234 3.00 Pc
12.00
3.671 24 1.00 Doz 2.00
5.489 2 2.50 Pc 5.00
5.361 8 1.50 Pc
12.00
Total Material Cost 31.00
Operation Standerd Standard
Number Hours Rate per Department (Rs.)
Hour (Rs.) 2 3
DIRECT LABOUR 2.234 3 4.00 12.00
3.671 15 5.00
75.00
5.489 12 2.00
24.00
5.361 3.00
21.00
Total Direct Labour Cost 132.00
Operation Standard Rate Per Department (Rs.)
Number Hour (Rs.)
3
FACTORY 14, 1.80 26.10
OVERHEADS 4 2.00
8.00
2/, 1.50
3.75
Total Factory Overhead 37.85
Total Manufacturing Cost per Unt
200.85
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Chapter 21 Standard Cost1ng and Variance Analysis
(21.4.4)
Responsibility for Setting Standards
the standards must be involved in
The line managers who have to work with and acceptmotivational
establishing them. There are strong behavioural and factors involved in this
standard setting. The
process. The line managers must be involved in the critical part ofcost accOunlant has to
human aspects of budgeting apply equally to standard costing.cost The
determine the units of products to be made by producing centres and work to be
performed by service cost centres. After application of service cost centres rates to
production cost centres, a standard overhead rate has to be determined for each production
interested in calculatIon
cost centre. After the standards have been fixed, the management is members of variOus
of variance from the standards with the purpose of making the responsible for it. The
management levels to know what the variances are, and who isperformance of various
purpose of setting standards is to fix yardsticks for measuring the rates has to be deter
activities and helps in responsibility accounting. Overhead recovery
mined in advance and applied on that basis to product/cost centres. There is always a
difference in actual expenditure and overheads absorbed.
(21.4.5)
Problems in Setting Standard Costs
inevitable problems of
The problems involved in setting standard costs, apart from the
forecasting errors, include the following:
Deciding how to incorporate inflation into planned unit costs.
Agreeing a labour efficiency standard for example should current times, expected
times or ideal times be used in the labour efficiency standard?.
erial will
Deciding on the quality of materials to be used, because a better quality of mat
cost more, but perhaps reduce material wastage.
change in the
Deciding on the appropriate mix of component materials, where some
mix is possible.
dis
Estimating materials prices where seasonal price variations or bulk purchase
counts may be significant.
Possible behavioural problems. Managers responsible for the achievement of stan
dards might resist the use ofa standard costing control system for fear of being blamed
for any adverse variances.
standards.
The cost of setting up and maintaining a system for establishing
Advantages of Standard Costing (21.4.6)
following:
Astandard costing system has many advantages which include the
Budgets are compiled from standards.
Standard costing highlights areas of strengths and weaknesses.
Actual costs can be compared with standard costs in order to evaluate performance.
, The setting of standards should result in the best resources and methods being used
and thereby increase efficiency.
Standard costs can be used to value stock andprovide a basis forselting wage incentive
schemes.
Standard costing simplifies book-keeping, as information is recorded at slandard
instead of a number of historic figures.
. It act as a form of feed forward control that allows an organisation tu plan the
of output.
manufacturing inputs required for different levels
602 Part Two Management Accounting

It act as aform of feed back control by highlighting performancethat

the standard predicted, thus altering decision makers to situationsthat didn't
may beachiouteve
control and in need of corrective action. of
It motivates workers by acting:gas challenging, specific goalsthat arei
behaviour in the desired directions. intended to guide
. It helps to trace/allocate manufacturing costs to each individual unit produced
It operates via the management by exception principle, where only those varianeas
(differences between actual and expected results) which are outside certain toleranee
limits are investigated, thereby economising on managerial time and maximisino
efficiency.
Control action is immediate, e.g, as soon as materialis issued from stores to production
it can be compared with the standard material which should have been used for the
actual production.
Transfer prices are based on standard rather than actual costs. If the latter wvere used
inefficiencies in the form of excess costs might be passed on from one division to
another division.
The process of setting, revising and monitoring standards
encourages reappraisal of
methods,materials and techniques so leading to cost reductions.
Criticism on Standard Costing (21.4.7)
The following criticism is levelled against standard costing:
. Alot of input data is required which can be expensive.
Standard costing is usually confirmed to organisations whose processes or jobs are
repetitive.
Unless standards are accurately set any performance evaluation will be
meaningless.
Uncertainty in standard costing can be caused by inflation, technological change,
economic and political factors etc. Standards, therefore, need to be continually
updated and revised.
It may be difficult to set standards at a level which both
motivates the workforce and
achieves the corporate goals.
The maintenance of the cost data base is expensive.
The research evidence shows that overly elaborate variances are
stood by line managers and thus they are likely to be ineffective forimperfectly under
control purposes.
Virtually all aspects of setting standards involves
forecasting and subjective judgments
with inherent possibilities of error and argument.
. The usefulness of a number of variances relating to overheads, sales
margins, mix and
yield is questionable.
Al forms of variance analysis are post-mortem on past events.
cannot be altered so the only value variances can have is to guideObviously the past
identical or similar management ir
circumstances occur in the future.
 603
Variance Analysis
Chapter 21 Standard Costing and
(21.4.8)
Standard Cost and Estimated Cost
is given below:
The distinguishing features of 'standard cost'from 'estimated cost
Estimated Cost
Standard Cost
based on past per
1. It is a predetermined cost on a scientific basis 1. It is predetermined costanticipated changes.
taking into consideration all the factors re formance adjusted to theeach individual com
lating to costs e.g., raw material consump No minute appraisal of
tion rate, labour efficiency, machine effi ponent cost.
ciency etc.
business situation or
2. It is ascertained and applied when standard 2. It can be used in any ac
costing system is in operation. decision making which does not require control
curate cost. It is used in budgetary
system and historical costing system.
costs not to be
3. Its emphasis is on what should be the cost. 3. Its emphasis is on the level of
exceeded.
4. It is used for analysis of variances and cost and selection of
4. It is used in decision makingprofitability.
alternative with maximum It is
control purposes. also used in price fixation and tendering.
5. It is determined for each element of cost in 5. It is determined generally for the period.
the process of business generally on unit
basis Le, standard hour, standard unit etc.
6. It is used as a regular system of accounts 6. The use of estimated cost as a statistical data
from vhich variances are found out. only.

Standard Costing and Budgetary Control (21.4.9)

The important points of distinction between standard costing and budgetary control is given
below:
Standard Costing Budgetary Control
1. It is a planning exercise made by the manage
1. It is a system of accounting where predeter
mined costs are used for analysis of vari ment in setting budgets for the forthcoming
ances and control of the entire organisation. period and analysis of actuals with the bud
geted figures and corrective action is initi
ated if any deviations are identified.
2. Standard costs are scientifically predeter 2. Budgets are based on past performance ad
mined in respect of materials, labour, justed to the anticipated changes in the fu
overheads. It is based on engineering and ture. It is a written plan covering projected
technical data. Standard costs are fixed for activities of a firm for a definite time period.
each unit ie,, standard hour, standard unit, It is a financial measure of target and achieve
standard labour mix, standard material mix ment.

etc.
3. Standard may be expressed both in quantita 3. Budgets are mainly expressed in monetary
terms.
tive and monetary measures.
4. It is concerned with ascertainment and con 4. and
It is concerned with the overall profitability
trol of costs. financial position of the concern.
5. It puts emphasis more on excess over the
5. Any variance-adverse or favourable, is in
vestigated. budget.
6. Its emphasis is on the level of costs not to be
6. Its emphasis is on what should be the cost. exceeded.
7. IL is determined for a specified
7. It is determined [or each element of cost. period.
8. It is concerned with the
8. It is related with the control of costs and it is operalion ol busi
ness as a whole and it is more
more intensive in scope. exlensiVe.
604 Part Two Management Accounting

9. It is introduced primarily to ascertain the 9. It is introduced to state in figures

efficiency and effectiveness of cost perfor proved plan of action relating to a as ap-
mance. period. particular
10. Standards are usually limited to manufac 10. Budgets are set for all departments in
organisation. an
luring activities only.
11. Standard cost is a projection of cost ac 11. Budget is a projection of financial accounts
Counts.
12. Standard costs are used in tactical decisions 12. Its emphasis on policy determination, achieve.
like, price fixation, computation of product ment of goals, co-ordination of different de.
cost, valuation of inventorY etc. partments and activities, delegation of au
thority and responsibility

Variance Analysis (21.5)

Variance'is the difference between planned, budgeted or standard cost and actual costs and
similarly in respect of revenues. This should not be confused with the statistical variance
which measures the dispersion of a statistical population.
'Variance accounting' is a technique whereby the planned activities of an undertaking are
quantified in budgets, standard costs, standard selling prices and standard profit margins,
and the differences between these and the actual results are compared. The procedure isto
collect, compare, comment and correct.
Variance analysis' is the analysis of variancesarising in astandard costing system into their
constituent parts. It is the analysis and comparison of the factors which have caused the
differences between predetermined standards and actual results, with aview to eliminating
inefficiencies.
Variance analysis highlights areas of strengths and weaknesses, but doesn't indicate what
action, if any, should be taken. Amanager must be able to correctly interpret the significance
of variances before he can initiate control action. Allplanning is based on estimates (e.g, of
prices, costs, volumes) and actual outcomes willrarely be precisely in line with these
estimates. Some variation is inevitable. Variances obtained under standard costing system
have to be reported to management for taking remedial steps. Before taking any action, the
management must try to know the causes of such variances. In a business organisation,
control is arelative rather than absolute concept. Seldom, the management willattempt to
maintain absolute control. Control is justified only to the extent that it produces values and
the excess control is not suggested where the cost of control exceeds the values it produces.
Thus in some instances exercising little control may be the best policy.
For understanding of the 'variance analysis' topic, variances are classified into the following:
() Material variances (iv) Fixed overhead variances
(i) Labour variances (v) Sales variances
(ii) Variable overhead variances (v) Profit variances
Each of these variances are discussed elaborately in the following paragraphs:
Material Variances (21.6)
For the purpose of material variance analysis, the following two types of standards need be
fixed.
Materlal Price Standards Price factor is controlled by external factors. If the price changes
during the period due to inflation, raise in prices of controlled items like cement, steel, etC
there is going to be wide variations. Material prices are fixed keeping in mind the terms or
 Chapter 21 Standard Costing and Variance Analysis 605

contract of purchases, nature of items and other relevant factors. Some organisations have
regular system of purchases (rate contract) for the whole period/year at predetermined
price irrespective of the prevalent market rates.
Material Quantity Standards Quantity usage standards are set on the basis of various test
runs and guidelines provided by R&D department or Engineering department and speCiil
cations on the basis of past experience. The standards should also take into consideration
allowances for acceptable level of waste, spoilage, shrinkage, seepage, evaporation, leakage,
etc.

Material Cost
Variance

Material Price Material Usage

Variance Variance

Material Mix Material Yield

Variance Variance

EIGURE 5.1 CLASSIFICATION OF MATERIAL VARIANCES

MaterialCost Variance
The material cost variance is also called material total variance' is the difference between
standard direct material cost of actual production and the actual cost of direct material.
(Standard units x Standard price) - (Actual units x Actual price)
or
Standard cost of material Actual cost of material used

w Material Price Variance

The material price variance is the difference between the standard price and the actual
purchase price for each unit of material multiplied by the actual quantity of material
purchased. It is preferable to base the price variance on the actual quantity of material
purchased andnot onthe actual quantity used in order that price variances can be reported
for control purposes. )
Actual quantity (Standard price p.u. - Actual price p.u.)

Material Usage Variance

The material usage variance is the difference between the actual quantitv of material used
and the standard quantityof material that should be used for actual production, multiplied
material.
by the standard price per unit of
Standard price p.u. (Standard quantity Actual quantity)
Material usage variance is further segregated iio (a) Material inix variance, and (b)AMaterial
yield variance :
Material Mix Variance
If a process uses several different materials which could be combined in a standard
proportion, a mix variance can be calculated wnicn Shows the effect on cost of variances
606 Part TwNO Management Accounting

Irom the standard proportion. There are two recognised ways of calculating this
Variance. Some authorities regard the varjance as a sub-set of the usage variance but othmix
treat it as part of the price variance. If the mix variance is treated as a sub-set of th,e usage
variance, then the material mix variance is the difference between the total quantity
standard proportion priced at the standard price and the actual quantity of material used
priced at the standard price.
MaterialMix Variance
Standard price (Revised standard quantity - Actual quantity)
Revised Standard Quantity
Total quantity of actual mix
x Standard quantity
Total quantity of standard mix
Material Yield Variance
Apart fronm operator or machine performance, output quantities produced are often
different to those planned, e.g,this arises in chemical plants where plant should produce a
given output over a period for a given input but the actual output differsfor avarietyof
reasons. Material yield variance is the difference between the standard yield of the actual
material input and the actual yield, both valued at the standard material cost of the product.
Standard cost p.u. (Standard output for actual mix - Actual output)
Illustration 21.1
From the following data compute the material cost variances :
Name of the material Standard Actual
Qty. Price Qty. Price
(Units) (Rs.) (Units) Rs.
Z'ee
3,500 10 3,700 12
Wee 1:500 21 1,650 20
Tee 1,000 33 1,250 36

1.C.W.A. Inter Dec. 1994)

Solution
Basic Data

Material Material Actual cost of Std. cost of

used material used material used
(Units) Price Anount Price Aimount
(Rs.) (Rs.) (Rs.) (Rs.)
Zee
Wee
3,700
1,650
12
44,400 10 37,000
20 33,000 34,650
Tee 1,250 - 36 45,000 41,250
33
Total 1,22,400 1,12,900

Material Std. Qty. Std. price Std. cost of

(units) (Rs.) std. m¡terial (Rs.)
Zee 3,500 35,000
10
Wee 1,500 31.500
21
Tee 1,000 33,000
33
Standard cost of Standard material 99;500
 607
Chapter 21 Standard Costing and Variance AnalysiS

Material Amount
Std. mix, Std. rate
zunits Rs.
Rs.
3,500. 38,500
Zee X 6,600 = 3,850 10
6,000
1,500 34,650
Tee X 6,600 = 1,650 21
6,000
1,000 36,300
Wee X 6,600 = 1,100 33
6,000
Standard cost of material used in Standard mix (1,09,450

Calculation of Material Variances:

(1) Material Cost Variances
Actual cost of material used - Std. cost of std. material
= Rs. 22,900 (A).
Rs. 1,22,400 - Rs. 99,500
(2) Material Price Variance
Actual cost of material used - Std. cost of material used
= Rs. 9,500 (A)
= Rs. 1,22,400 - Rs. 1,12,900
(3) Material Usage Variance
Std. cost of material used - Std. cost of std. material
= Rs. 13,400 (A)
= Rs. 1,12,900 -Rs. 99,500
(4) Material Mix Variance
material used in std. mix
Std. cost of material used - Std. cost of
= Rs. 3,450 (A)
= Rs. 1,12,900 - Rs. 1,09,450
(5) Material Yield Variance mix
mix - Std. cost of std. material in std.
Std. cost of material used as per Std. = Rs. 9,950 (A)
= Rs. 1,09,450 - Rs. 99,500 (Rs.)
Summary of Material Variances
9,500 (A)
Price variance
Usage variance 3,450 (A)
() Mix variance 9,950 (A) 13,400 (A)
(i) Yield variance 22,900 (A)
Material cost variance

(21.7)
Labour Variances
is a variable cost but at times it becomes fixed cost as it is not
Normallv it is taken that labour production.
case of fall/stoppage in
possible toremove or retrench in dependent on the agreement
Labour Rate Standard and Grades of Labour This is basicallyarea or industry
unions or rate prevalent in the particular
with the labour (quantities) etficiencymeans the number of hors
Labour Efficienc Standard The labour
worker willtake to performthe necessary work. It is based on
that the appropriate grade of or group or workers PoSsessing average skill and using
actual performance of worker manual operatons or Working on machine under normal
average effort whileperformingfixed keeping In mind the past performance recordso.
conditions. The standardtimeis acceplable to the worker as well as the managma
study. This is on the basis that is
608 Part Two Management Accounting

Cost Variance

Rate Efficiency
Variance Variance

Mix Yield ldle Time Idle Time

Veriance Variance OR Net Efficiency
Variance Variance Variance
FIGURE 5.2 CLASSIFICATION OF LABOUR VARIANCES

Labour Cost Variance

The labour cost variance is also called 'labour total variance'is the
standard direct labour cost and the actual direct labour difference between the
achieved.
cost incurred for the production

(Standard labour hours produced x Standard rate per hour)

(Actual direct labour hours X Actual rate per hour)
or Standard cost for actual output - Actual cost
Labour Rate Variance
The labour rate variance is the difference between the actual direct labour
the standard direct labour rate per hour, multiplied by the actual rate per hor and
hours
hour paid to the direct labour force more or less than standard use of paid, i.e., the rate per
of skilled workers than planned or wage inflation higher/lower grade
causes this variance.
Actual time (Standard rate - Actual rate)

Labour Efficiency Variance

The labour efficiency variance is the difference between the actual hours
the actual output and the standard hours that this output should have taken to produce
the standard rate per hour. The possible cause for this variance is due to taken,
use
multiplied by
of higher/lower
grade of skilled workers than planned or the quality of material used, errors in
time to jobs. allocating
Standard rate (Standard time for actual outpst - Actual time)
1

The labour efficiency variunce can be segregated into the following:

Labour Mix Variance
The labour mix variance arises due to change in
composition of labour force.
Labour Mix Variance
Standard rate (Revised standard time - Actual time)
 Analysis 609
Chapter 21 Slandard Costing and Varnance

Revised Standard Tine

Total actual time
x Standard time
Total standard time
Labour Yield Variance
specificd and the
The labour yield variance arise due to the difference in the standard output
actual output obtained.
Standard cost p.u. (Standard output for actual time - Actual output)
Idle Time Variance
The idle time variance represents the difference between hours paid and hours worked, Le.,
This variance may arise duc to
idle hoursmultiplied by the standard wage rate per hour.line because of lack of material.
illness, machine break-down, hold-ups on the production
Idle hours x Standard rate

Net Efficiency Variance

hours. The efficiency
This variance is calculated after deducting idle hours from actual
variance less idle time variance is called net efficiency variance.
Standard rate ( Standard time for actual output - Actual time worked)
or Standard rate (Standard time - Actual hours paid - Idle time)
Illustration 21.2
work for 30 wecks
100.skilled workmen, 40 semi-skilled workmen and 60 unskilled workmen were to 24 respectively.
Rs. 60, Rs. 36 and Rs.
to get a ontract job completed. The standard weekly wages were
semi-skilled and 70 unskilled workmen
The job was actually completed in 32 weeks by 80 skilled, 50 wages.
who were paid Rs. 65, Rs, 40 and Rs. 20 respectively as weekly
labour efficiency
Find out the labour cost variance, labour rate variance, labour mix variance and
variance.
Solution
Basic Data for Calculation of Labour Variances

Standard Aciual
Category of 1Weeks Rate Amous
worknen Weeks Rute Anount
(Rs.) (Rs.) (Rs.) (Rs)

3,000 60 1,80,000 2,560 65 l.66,400

Skilled
36 43,200 1,600 40 64 000
Semi-skilled 1,200
1,800 24 43,200 2,240 20 44,80
Unskilled
2,66,400 6,400 275.200
6,000

Calculation of Labour Variances

(1) Direct Labour Cost Variance
Std. cost for actual output - Actual cost
= 2,75,200 - 2,66,400 = Rs. 8,800 (A)

(2) Direct Labour Rate Variance

Actual time (Std. rate Actual rate)
Skilled 2,560 (60 - 65) = Rs. 12,800 (A)
Semi-skilled 1,600 (36 - 40) = Rs. 6,400 (A)
Unskilled = 2,240 (24- 20) = Rs. 8,960 (F) = R. 10.240 (A)
 610 Part Two Management Accounting

(3) Direct Labour Efficiency Variance

Actual time)
Std. rate (Std. time for actual output -
Rs. 26,400 (F)
Skilled = 60(3,000 - 2,560) =
14,400 (A)
Semi-skilled = 36 (1,200 - 1,600) = Rs. = Rs. 1,440 (F)
Rs. 10,560 (A)
Unskilled = 24 (1,800 - 2,240) =
analysed into :
Direct Material Efficiency Variance can be further
(a) Direct Labour Mix Variance
Std. rate (Revised std. time' - Actual time)
Skilled = 60 (3,200 - 2,560) = Rs. 38,400 (F)
Semi-skilled =36 (1,280 - 1,600) = Rs. 11,520 (A)
= Rs. 7,680 (A) = Rs. 19,200 (F)
Unskilled =24 (1,920 - 2,240)
Revised std. time
6,400 X 3,000 = 3,200
Skilled
6,000
6,400 = 1280
Semi-Skilled X 1,200
6,000
6,400 X 1,800 = 1.920
Unskilled
6,000
(b) Direct Labour Revised Efficiency Variance
Std. rate (Std. time for actual output - Revised std. time)
Skilled =60 (3,000 - 3,200) = Rs. 12,000 (A)
Semi-skilled =36 (1,200 - 1,280) = Rs. 2,880 (A)
Unskilled = 24 (1,800 - 1,920) = Rs. 2,880 (A) = Rs. 17,760 (A)
Summary of Labour Variances (Rs.)

Rate variance 10,240 (A)

Efficiency variance
(a) Mix variance 19,200 (F)
(b) Revised efficiency variance 17,760 (A) 1,440 (F)

Direct material cost variance 8,800 (A)

Variable Overhead Variances (21.8)

For fixation of costs for overheads,asurvey of overheads willbe necessary and with the data
available for budgetary control, the overheads will be charged to various cost centres/
products etc. on the basis of standard costs. For this, after dividing the overheads into fixed
and variable the calculation of standard overhead rate for each cost centre/product is done.
The number of hours representing the capacity to manufacture is tobe reduced by various
idle facilities,etc. The choice of method of absorption (direct wage rate or machine hour) will
depend upon the circumstances. The main object is to establish a normal overhead rate
based on total factory overhead at normal capacity volume.
 Chapter 21 Slandard Costing and Variance Analysis 611

Variable Overhead
Cost Variance

Variable Overhead
Variable Overhead
Expenditure Variance Efficiency Variance

FIGURE 5.3 CLASSIFICATION OF VARIABLE OVERHEAD VARIANCES

Variable Overhead Cost Variance

The variable overhead cost variancerepresents the difference between the standard cost of
variable overhead allowed for actual output and the actual variable overhead incurred
during the period. The variance represents the under absorption or over absorption of
variable overheads.
(Actual output x Standard variable overhead rate p.u.) - Actual variable overhead cost
or
(Standard hours for actual output x Standard variable overhead rate per hour) -
Actuai variable overhead cost

Variable Overhead Expenditure Variance

It is the difference between the actual variable overhead rate per hour and the standard
variable overhead rate per hour multiplied by the actual hours worked. The actual hours
worked must be used not the actual hours paid because the latter may include idle time and
it is usually assumed that variable overhead will not be recovered in idle time.
(Standard variable overhead rate x Budgeted output) - Actual variable overheads
or (Standard hours for budgeted output x Standard variable overhead rate per hour) -
Actual variable overheads
or Budgeted variable overheads -Actual variable overheads
Variable Overhead Efficiency Variance
The variable overhead efficiency variance is calculated by taking the difference in standard
output and actual output multiplied by the standard variable overhead rate.
Standard variable overhead rate (Standard output - Actual output)

Illustration 21.3
The budgeted variable overheads for March are Rs. 3,840. Budgeted production for the month is 38,400
units. The actual variable overheads incurred were Rs. 3,830 and actual production was 38,640 units.
Calculate variable production overhead variance.
Solutlon
Working Notes:
Standard Variable Overhead p.u.
Budgeted variable overhead Rs. 3,840
= Re. 0.10
Budgeted production 38,400 units
Total Standard Variable Overhead
= AQ X SVO per unit = 38,640 units X Re. 0.10 = Rs. 3.864
 612 Part Two Management Accounting

V'ariable Production Overhead

= Standard variable overhead - Actual variable overhead
= Rs. 3,864 - Rs. 3,830 = Rs. 34 (F)

Fixed Overhead Variances

(21.9)
Fixed overhead represents all items of expenditure which are more or less remain constamt.
irespective of the level of output or the number of hours worked. The fixed overheads are
classified as follows:

Cost
Variance

Expenditure Volume
Variance Variance

Efficiency Capacity
Variance Variance

Revised Fixed OH. Calendar

Capacity Variance Variance
FIGURE 5.4 CLASSIFICATION OF FIXED OVERHEAD
VARIANCES

The formulae for calculation of fixed overhead

Fixed Overhead Cost Variance
variances are given below:
The fixed overhead cost variance represents the
overhcad in the period. This under/over absorbedunder/over
overhead
absorbed fixed production
may
between actual and budgeted fixed overheads, ie., expenditure be due to differences
ences between the actual and budgeted levels of activity ie, variances, and/or differ
volume variances.
(Actual output x Standard fixed overhead rate p.u.) - Actual
fixed overheads
or (Standard hours for actual output x Standard fixed overhead rate per
Actual fixed overheads hour) -
or Recovered fixed overheads - Actual fixed overheads
Fixed Overhead Expenditure Variance
This variance is also called budget
cosl actually incurred against the variance,obtained
by comparingthe total fixed overhead
budgeted fixed overhead cost.
Budgeted fixed overheads - Actual fixed overheads
Fixed Overhead Volume Variance
The volumc variance is computed by taking the difference
actual oulput and those on budgeted output. between overhead absorbed on
 Chapter 21 Standard Costing and Variance Analysis 613

(Actual output x Standard rate) Budgeted fixed overheads

Standard rate (Actual output - Budgeted output)
Standard rate per hour (Standard hours produced - Budgeted hours)
Fixed Overhead Efficiency Variance
The eticiency variance arise due to the difference between budgeted efficiency to produc
tion and the actual efficiency is achieved.
Standard rate (Actual output in units -Standard output in units)
or
Standard rate per hour (Actual hours worked - Standard hours for actual output)
Fixed Overhead Capacity Variance
The capacity variance represents the part of volume variance which arise due to working at
higher or lower capacity than standard capacity.
Standard rate (Budgeted quantity -Standard quantity)
Revised Fixed 0verhead Capacity Variance
The revised capacity variance is calculated as follows:
Standard fixed overhead rate (Revised budgeted quantity -Standard quantity)
Fixed Overhead Calendar Variance
The calendar variance arise due to the volume variance which is due to the difference
between the number of working days anticipated in the budget period and the actual
working days in the period to which the budget is applied.
Standard fixed overhead rate (Budgeted quantity - Revised budgeted quantity)
Illustration 21.4
From the following prepare variance analysis of a particular department for a month:
Variable overhead items : (actual) (Rs.)

Materials handling 8,325

Idle time 850
Re-Work 825
250
Overtime premium
4,000
Supplies
14,250

Fixed overhead items : (actual) (Rs.)

Supervision 1,700
Depreciation-Plant 2,000
Depreciation-Equipment 5,000
Rates 1,150
350
Insurance
10,200
Normal capacity 10,000 standard hours, budgeted rate Rs. 1.70 per standard hour for variable
Overhead and Re. 1 per standard hour for fixed overhead. Actual level 8,000 standard hours
614 Part Two Management Accounting

Solutlon
Calculation of Variable and Fixed Overhead Variances
(1) Variable Overhead Cost Variance
Recovered variable overheads - Actual variable overheads = Rs. 650 (A)
=(8,000 X 1.70) - 14,250
(2) Fixed Overhead Cost Variance
Recovered fixed overheads - Actual fixed overheads
= Rs. 2,200 (A)
= (8,000X 1) - 10,200
(3) Fixed Overhead Expenditure Variance
Budgeted fixed overheads - Actual fixed overheads
= Rs. 200 (A)
= (10,000 X 1) - 10,200
(4) Fixed Overhead Volume Variance
Recovered fixed overheads -Budgeted fixed overheads
= 8,000 - 10,000 = Rs. 2,000 (A)
llustration 21.5
The following data has been collected from the cost records of a unit for computing the various fixed
overhead variances for a period:
Number of budgeted working days 25
Budgeted man-hours per day 6,000
Output (budgeted) per man-hour (in units)
Fixed overhead cost as budgeted Rs. 1,50,000
Actual number of working days 27
Actual man-hours per day 6,300
Actual output per man-hour (in units) 0.9
Actual ixed overhead incurred Rs. 1,56,000
Caleulate fixed overhead variances: (a) Expenditure variance, () Calendar variance, (c) Capacity
variance, (d) Efficiency variance, (e) Volume variance, and () Fixed cost variance.
Solution
Computation of Fixed Overhead Variances
(a) Fixed Overhead Expenditure Variance
Actual fixed overhead - Budgeted fixed overhead
= Rs. 1,56,000 - Rs. 1,50,000 = Rs. 6,000 (A)
(h) Fixed Overhead Calendar Variance
Budgeted Budgeted fixed overhead X
fixed overhead Budgeted working days
Actual working days
Rs. 1,50,000
= Rs. 1,50,000
25 days
X 27
days
= Rs. J,50,000 - Rs. 1,62,000 = Rs. 12,000 (F)
f) Fixed Orerhead Capacity Variance
Budgeted fixed overhead Actual Working Actual fixed overhead
|Budgeted working days days for actual production
- R, i,62,000 - (6,300 27 X Re.l)
Rs i,62, 000 - Rs. I,70,100 = Rs. 8, 100 (F)
 Chapter 21 Standard Costng and Variance Analysis 615

(c) Fixed Overhead Efficiency Variance

Actual Std. fixed overhead Std. fixed overhead for
X
hours worked rate p.h. actual production
= (6,300 X27 XRe.l) -(6,300 X27 X0.90 XRe.l)
= Rs. 17,010 (A)
= Rs. 1,70,100 - Rs. I,53,090
(e) Fixed Overhead Volume Variance
Calendar + Capacity + Efficiency
= Rs. 3,090 (F)
= Rs. 12,000 (F) + 8,100 (F) + Rs. 17,010 (A)
() Total Fixed Cost Variance
Expenditure variance + Volume variance
= Rs. 2,910 (A)
= Rs. 6,000 (A) + Rs. 3,090 (F)
Working Notes:
Rs. 1,50,000 = Re. 1
Std. fixed overhead rate =
6,000 X 25 hrs.

Sales Variances (21.10)

the effects on
All of the variances discussed previously have been concerned with costs;direct labour or
profits due to adverse or favourable variances affecting direct materials,
overheads. Some companies calculate cost variances only, but to obtain the full advantages
business
of standard costing, it is required calculate sales variances. Sales variances affecta in sales
in terms of changes in revenue:changes which have been caused either bya variation
quantities or in sales prices. There are two distinctly separate systems of calculating sales
variances, which show the effect ofa change in sales as regards:
() Sales margin variance (on the basis of profit), and
(i) Sales value variance (on the basis of turnover).
Sales Variances Based on Profit (21.10.1)
Thesalesvariances based on profit are also called 'sales nargin variances'which indicates the
deviation between actual profit and standard or budgeted profit.
Total Sales
Margin Variance

Sales Price Sales Volume

Variance Variance

Sales MIx Sales Quantuty

Variance Variance

FIGURE 21.5 CLASSIFICATION OF SALES MARGIN VARIANCES

Total Sales Margin Variance

This variance takes into account the diflerence belween actual piotit nd andard oF
budgeted profit.
616 Part Two Management Accounting

Actual profit - Budgeted profit

or (Actual quantity of sales x Actual profit p.u.) -
Budgeted profit p.u.)
(Budgete quantity of sales x
Sales Price Variance
of the quantity of sales effected
The price variance is the difference between standard price
and the actual price of those sales.
profit p.u.)
Actual quantity of sales (Actual profit p.u. - Standard
quantity of sales x Actual price)
or (Actual quantity of sales x Standard price) - (Actual
Sales Volume Variance
and the budgeted quantity
II represents the difference between the actual units sold
multiplied by either the standard profit per unit or the standard contribution per unit. In
absorption costing standard profit per unit is used, but in marginal costing, standard
contribution per unit must be used.
Standard profit p.u. (Actual quantity of sales - Standard quantity of sales)
or
Standard profit on actual quantity of sales - Standard profit on standard quantity of sales
Sales volume variance can be further segregated into (a) Sales mix variance and (b) Sales
quantin variance as given below:
Sales Mix Variance
The sales mix variance arise when the company manufactures and sells more than one type
of product. This variance will be due to variation of actual mix and budgeted mix of sales.
Standard profit p.u. (Actual quantity of sales - Standard proportion for actual sales)
Standard profit - Revised standard profit

Sales Quantity Variance

The sales quantity is the difference between the budgeted profit on budgeted sales and
expected profit on actual sales.
Standard profit p.u. (Standard proportion for actual sales - Budgeted quantity of sales)
Revised Standard Profit - Budgeted Profit
or
Budgeted margin p.u. on budgeted mix (Total actual quantity Total budgeted quantity)
Illustration 21.6
Majestic Auto Ltd. is manufacturing and selling three standard products. The company has a standard
cost system and analyses the variances between the budget and the actual periodically.
The summarised working result for 2005-06 were as follows:
Product Budget Actual
Selling price Cost per No. of units Selling price Cost per No. of
per unit (Rs.) unit (Rs.) sold per unit (Rs.) zUnits sold
unit(Rs.)
A 50 32 10,000 48 30 12,000
40 24 14,000 42 25 12,000
30 18 16,000 31 20 15,000

(a) Calculate thc variance in profit during the period.

(b) variance,
Analyse ihe(iv)variance in profit into: () Sales price variance, (i) Sales volume variance, (i) Cost
Sales margin quantity variance, (v) Sales margin mix variance.
 Var1ance Analys1s 617
Chapter 21 Slandard Cosling and

Solution
Working Notes
(1)\a) Actual Margin Per Unit
per unit
Actual sales price per unit - Standard cost
= Rs. 16
A = Rs. 48 - Rs. 32
= Rs. 18
B = Rs. 42 - Rs. 24
= Rs. 13
C = Rs. 31 - Rs. 18

(6) Budgeted Margin Per Unit

cost per unit
Budgeted sales price per unit - Standard Rs. 18
A = Rs. 50- Rs. 32
= Rs. 16
B = Rs. 40- Rs. 24
= Rs. 12
C = Rs. 30 - Rs. 18
(2)(4) Actual Profit
per unit
= Actual quantity of units sold X Actual margin
(Rs.)
A (12,000 X 16) 1,92,000
(12,000 X 18) 2,16,000
C (15,000 X 13) 1,95,000
6,03,000

(6) Budgeted Profit

= Budgeted quantity of units sold X Budgeted margin per
unit
(Rs.)
A (10,000 X 18) 1,80,000
B (14,000 >X 16) 2,24,000
C (16,000 >X 12) 1,92,000
5,96,000
(3)(a) Budgeted Margin Per Unit on Actual Mix
(18 X 12,000) + (16 X 12,000) + (12 X 15,000)
39,000
2,16,000 + 1,92,000 + 1,80,000
= Rs. 15.077 p.u.
39,000
() Budgeted Margin Per Unit on Budgeted Mix
(18 X 10,000) + (16 X 14,000) + (12 X 16,000)
40,000
1,80,000 + 2,24,000 + 1,92,000 = Rs. 14.90 p.u.
40,000
Calculation of Sales Variances
(1) Total Sales Margin Variance
Actual profit - Budgeted profit
= Rs. 6,03,000- Rs. 5,96,000 = R 7,00UiTI
 Accounting
618 Part Two Management

Variance
(2) Sales Margin Price unit - Budgeted margin per unit)
marginper
Aelual qty. (Actual = 24,000 (A)
A = 12,000 (l6 - 18) = 24,000 (F)
B = 12,000 (18 - 16)
15,000 (F)
= 15,000 (13- 12) = Rs.15,000 (F)
Variance
(3) Sales Alargin Volume
- Budgeted qty.)
Budgeted margin per unit (Actual qty. = 36,000 (F)
A = 18(12,000 - 10,000)
= l6(12.000- 14,000) = 32,000 (A)
B
= 12 (15,000 - 16,000) = 12,000 (A)
= Rs. 8,000 (A)
further segregated into the following:
The sales margin volume variance can be
() Sales Margin Mlix Variance
actual mix - Budgeted
Tutal actual quantity (Budgeted margin p.u. on
margin p.u. on budgeted mix)
= 39,000 (15.077 - 14.90)
= Rs. 6,900 (F)

(5) Sales Margin Quantity (Sub-volume) Variance

budgeted gty.)
Budgeted margin per unit on budgeted mix (Total actual Qty. - Total
= Rs. 14,900 (A)
= 14.90 (39,000 - 40,000)
Summary of Sales Margin Variances (Rs)
Price ariance 15,000 (F)
l'olume variance:
() Mix variance 6,900 (F)
(i) Qtv. sub-volume variance 14,900 (A) 8,000 (A)
Tota! sales margin variance 7,000 (F)

Sales Variances Based on Turnover (21.10.2)

The sales variances based on turnover are classified as follows:

Sales Value
Variance

Sales Price Sales Volume

Variance Variance

Sales Mix Sales Quantity

Variance Variance

FIGURE 21.6 CASSIFICATION OF SALES VARIANCES BASED ON TURNOVER

 Chapter 21 Standard Costing and Variance Analysis 619

Formulas
Sales Value Variance
(Actual quantity x Actual selling price) - (Standard quantity x Standard selling price)
Sales Price Variance
Actual quantity (Actual selling price - Standard selling price)
Sales Volume Variance
Standard selling price (Actual quantity of sales - Standard quantity of sales)
Sales Mix Variance
Standard value of actual mix - Standard value of revised standard mix
Sales Quantity Variance
Standard selling price per unit (Standard proportion for actual sales quantity - Budgeted
quantity of sales)
or Revised standard sales value - Budgeted sales value

Ilustration 21.7
Standcost Corporation produces three products : A, Band C. The master budget called for the sale of
10,000 units of Aat Rs. 12;6,000 units of B
at Rs. 15 and 8,000 units of Cat Rs. 9. In addition, the standard
variable cost for each product was Rs. 7 for A, Rs. 9 for Band Rs. 6 for C. In fact, the firm actually
produced and sold 11,000 units of Aat Rs. 11.50, 5,000 units of B at Rs. 15.10 and 9,000 units of Cat
Rs. 8.55.
Calculate Sales Value Variances.
Solution
Computation of Sales Variances
Budgeted Sales Actual Sales Std. Sales
Product (Actual Qty.
Qty. Rate Amount Qry. Rate Amount X Std. Rate)
(Units) (Rs.) (Rs.) (Units) (Rs.) (Rs.)
A 10,000 12 1,20,000 11,000 11.50 1,26,500 1,32,000
6,000 15 90,000 5,000 15.10 75,500 75,000
8,000 72,000 9,000 8.55 76,950 81,000
24,000 2,82,000 25,000 2,78,950 2,88,000
Computation of Variances
(1) Sales Value Variance
= Budgeted sales - Actual sales
=Rs. 2,82,000 - Rs. 2,78,950 = Rs. 3,050 (A)
(2) Sale Price Variance
= Actual qty. X (Standard price - Actual price)
= Standard sales - Actual sales
= Rs. 2,88,000 - 2,78,950 = Rs. 9,050 (A)
(3) Sales Volume Variance
Std. rate X (Budgeted gty. - Actual qty.)
= Budgeted sales - Standard sales
= 2,82,000 - 2,88,000 = Rs. 6,000 (F)