Standard Costing Or Variance Analysis

Cost variances
Budget
Material budget ( Material ki expected cost)
Labour Budget ( Labour ki expected cost)
Factory overheads ( Expected FOH)

Material variances:
I am expecting to produce 5,000 Books of a Product A
Suppose 5 kg material is required to produce one Book of Product A
We need (5kg/unit X 5,000 units)= 25,000kgs material to produce 5,000 units of Product A

Expected price per kg Rs.10

Expected cost of material = 25,000 X 10 = Rs.250,000
(Agar hum product A k 5,000 units banate hain to us per material ki expected cost 250,000 hogi)

Actual Data
After production of 5,000 Books of Product A Following results are taken
We consumed 28,000 kgs of Material and bought Rs.9.50 per kg

Actual cost of material (28,000 X 9.50) Rs. 266,000

Material Variance ( Overall Variance)

Standard cost of material (25,000 X 10) Rs. 250,000
(-) Actual cost of material (28,000 X 9.50) (266,000)
Material variance ( Unfavorable or Adverse ) 16,000

Material quantity variance

(Actual quantity – Standard Quantity ) X Standard price

(28,000 – 25,000) X 10
3,000 X 10
Rs. 30,000 (Unfavorable variance)

Material price variance

( Actual price – Standard price ) X Actual Quantity
(9.50 – 10) X 28,000
0.50 X 28,000
Rs. 14,000 (Favorable )

Material Variance ( Overall Variance)

Material quantity variance 30,000 ( Unfavorable)
Material price variance 14,000 (Favorable)
Material overall variance 16,000 ( Unfavorable)
Labour Variances
Labour overall variance
Labour time variance / Efficiency Variance /Labour quantity variance
Labour Rate variance / Labour Price variance

LabourCost = Time X Rate

Hourly basis per pay karte hain to
Labour Cost = Hours worked X Rate /Hour
Labour Cost = 200 X 10 = 2,000

Direct Labour Over all Variance

Standard cost of Direct Labour ( Standard hours X Standard rate/hour)
Actual cost of direct labour ( Actual hours X Actual rate /hour)
Standard hours = 10,000 hours, Standard rate = Rs.10/hour
Actual hours = 12,000 hours, Actual rate Rs 9/hour

Overall variance
Standard cost ( 10,000 X 10 ) 100,000 ( Expected cost of Direct labour)
(-) Actual cost (12,000 X 9) (108,000) ( Actual cost of direct labour )
Direct Labour variance ( Unfavorable) 8,000

Labour time variance

Labour time variance = (Actual Hours – Standard hours) X Standard rate
Labour time variance = (12,000 – 10,000 ) X 10
Labour time variance = 2,000 X 10
Labour time variance = 20,000 ( Unfavorable )

Labour Rate Variance

Labour Rate variance = ( Actual Rate – Standard Rate) X Actual hours
Labour Rate variance = (9 – 10 ) X 12,000
Labour Rate variance = 1 X 12,000
Labour Rate variance = 12,000 ( Favorable)

Labour overall variance

Labour time variance 20,000 ( Unfavorable)
Labour Rate variance 12,000 (Favorable)
Overall variance 8,000 (Unfavorable)
2017(R)

Solution (I)
Material quantity variance
(Actual quantity – Standard Quantity ) X Standard price
(9,800 – 10,000) X 4
800 (FAV)

Material price variance

( Actual price – Standard price ) X Actual Quantity
(3.50 – 4.00) X 9,800
4,900(FAV)

Solution (II)
Labour time variance
Labour time variance = (Actual Hours – Standard hours) X Standard rate
(6,000 – 5,000 ) X 6.00
6,000 (Unfav)

Labour Rate Variance

Labour Rate variance = ( Actual Rate – Standard Rate) X Actual hours
(6.50 – 6.00) X 6,000
3,000 (Unfav)

Solution (III)
Factory overheads
Standard FOH (6,000 X 6.50) X 50% Rs. 19,500 (Hum ye cost expect kar rahe the)
(-) Actual FOH (13,500) ( Actual mai cost lagi)
FOH Variance (FAV) 6,000
Following are the entries to record variances
1.
Work in process (10,000 X 4) DR 40,000 Standard
Material quantity variance CR 800
Material price Variance CR 4,900
Material inventory (9,800 X 3.50) CR 34,300 Actual
(To Record Material variance)

2.
Work in process (5,000 X 6) DR 30,000 Standard
Labour time variance DR 6,000
Labour Rate Variance DR 3,000
Accrued Payroll (6,000 X 6.50) CR 39,000 Actual

3.
Work in process Dr 19,500 Standard
FOH Variance CR 6,000
Factory overheads CR 13,500 Actual

Following are the entries to Close variances

1.
Material quantity variance DR 800
Material price Variance DR 4,900
Cost of goods sold CR 5,700
2.
Cost of goods sold Dr 9,000
Labour time variance CR 6,000
Labour Rate Variance CR 3,000

3.
FOH Variance DR 6,000
Cost of goods sold CR 6,000

1.
Material quantity variance DR 800
Material price Variance DR 4,900
FOH Variance DR 6,000
Cost of goods sold CR 11,700
2.
Cost of goods sold Dr 9,000
Labour time variance CR 6,000
Labour Rate Variance CR 3,000
1.
Material quantity variance DR 800
Material price Variance DR 4,900
FOH Variance DR 6,000
Labour time variance CR 6,000
Labour Rate Variance CR 3,000
Cost of goods sold CR 2,700

When examiner ask to close cost of good sold

Cost of goods Dr 2,700
Expense and revenue summary Cr 2,700

Next topic
Foh Variances
1. Controllable variance OR Spending variance
2. Volume variance OR Idle capacity variance
Class room = Maximum capacity 50 Students
Budget is made on budgeted activity ( Units or hours )
Maximum units ki production, Maximum hours utilization
Budgeted units or budgeted capacity

Normal activity ( At an specific period, Expected capacity utilization )

1,000 units , 800 units
Actual production 700 units

Fixed Overheads/Cost : Rent, factory manager salary, supervisor salary.50,000, 30,000, 10,000
Variable overheads/Cost: Electricity =
One books Direct material cost Rs 200
2 books = 400
3 books = 600
4 books = 800

Controllable Variance
Variable overheads
Here we compare” Standard variable overheads at actual output” with “Actual variable overheads”
Standard variable overheads at actual output : is ka matlab hume ye daikhna hoga k jo bhi humara
actual output hai us pe variable overheads kitne hone chaye the
Standard variable overheads at actual out put = Actual out put X Per unit variable overhead rate
Per unit variable overhead rate : This rate is always calculated on the basis of normal out put

Step No 1. Variable overhead rate is calculated on the basis of normal output.

Step No 2 . This rate must be applied on actual output to find out standard variable overheads at
actual out put.

Factory overheads = Fixed overheads + Variable overheads

Variable overheads = Factory overheads – Fixed overheads.
Actual variable overheads = Actual factory overheads – Actual fixed overheads
Actual variable overheads = 18,480 – 15,000
Actual variable overheads = 3,480 ( is ka matlab humne 800 units banana per 3,480 k variable
overheads actual mai lagae hain )

Standard variable oveheads at actual out put = 800 X 7 = 5,600 ( is ka matlab 800 units banana per
5,600 k variable oveheads lagne chaiye the )

Controllable variance
Standard variable overheads at actual out put (800 X 7) 5,600
(-) Actual variable overheads (3,480)
Controllable variance (Favorable) 2,120
Other way to find controllable variance
Actual factory overheads 18,480 ( Fixed and variable both)
(-) Budgeted Allowance
Fixed overheads 15,000
Variable overheads (800 X 7) 5,600
Budgeted Allowance (20,600) ( Fixed and variable both)
Controllable variance (Favorable variance) 2,120

Volume variance/Idle capacity variance

(Actual output – Normal output) X Fixed overhead rate (This rate should be computed at normal output)
(800 – 1,0000 X 15
3,000 (Unfavorable variance)

Idle capacity variance (

1,000 units but 800 units

In B.com Only
Controllable variance/Spending variance
Volume variance / Idle Capacity Variance

2019(R) Q.8

First we have to find variable overheads and actual overheads Rate

Variable overheads Rate = Variable overheads at normal Direct Labour Hours/Normal DL Hours
Variable overheads Rate = 350,000/200,000 = Rs.1.75/DL Hour

Fixed Overheads Rate = Fixed overheads at normal Direct Labour hours/Normal DL Hours
Fixed Overheads Rate = 250,000 / 200,000 = Rs. 1.25/DL Hour

Overheads application Rate = Total Overheads at Normal DL Hours/Normal DL Hours

Overheads application Rate = 600,000 / 200,000 = Rs.3/DL Hour
Spending Variance
Actual factory overheads 584,000
(-) Budgeted Allowance
Fixed overheads 250,000
Variable overheads(190,000 X 1.75) 332,500
Budgeted Allowance (582,500)
Spending Variance ( Unfavorable) 1,500

Idle Capacity Variance

( Actual DL Hours – Normal DL Hours ) X Fixed FOH Rate
(190,000 – 200,000) X 1.25
12500 (Unfavorable variance)
This variance tells us how we are utilizing our available resources or capacity
2015(R)

We are estimating k hum 20,000 hours kam karenge aur pe FOH (30,000 + 90,000) = 120,000 honge aisa
hum expect kar rahe hain
FOH Application Rate:
Method #1
Fixed Overhead Rate = Estimated Fixed FOH/Estimated DL Hours = 30,000/20,000 =1.5/DL Hour
Variable Overhead Rate = Estimated Variable FOH/Estimated DL Hours = 90,000/20,000 = 4.5/DL Hour
FOH Application Rate 6.0/DL Hour

Method #2
Estimated Fixed FOH + Estimated Variable FOH
FOH Application Rate =
Estimated DL Hours

30,000 + 90,000
FOH Application Rate =
20,000

120,000
FOH Application Rate =
20,000
FOH Application Rate = 6/ DL Hour

Hum Rate nikalte hain budgeted data aur us ko actual pe apply karte hain to hume applied FOH Milta hai
aur phr us applied Foh ko compare kiya jata hai actual foh se. to ya to hum ne over apply kia hota hai ya
phr under apply kia hota hai. Agar applied ziada ho actual k muqable mai to wo over applied kehlata hai
aur agar applied kam ho actual k muqable mai to wo under applied kehlata hai.

Applied FOH = Actual DL Hours X FOH Application Rate

Applied FOH = 20,000 X 80% X 6
Applied FOH = 16,000 hours X 6
Applied FOH = 96,000

Over or Under Applied FOH

Applied FOH 96,000
(-) Actual FOH (86,000)
Overapplied FOH 10,000
2018(R)

1. Computation For Direct Material Actual Cost

If we want find actual cost then we have to add unfavorable variance and subtract favorable variance
from standard cost

If we want to find standard cost we have to add favorable variance and subtract unfavorable from actual
cost
Standard cost of Direct material 240,000
(+) Material price variance (Un favorable) 110,000
(-) Material quantity variance (Favorable) (25,000)
Actual cost of Direct material 325,000

Computation For Direct Labour Standard Cost

Actual cost of Direct Labour 500,000
(+) Direct Labour rate variance (Favorable) 65,000
(-) Direct Labour Efficiency variance (Unfavorable ) (21,000)
Standard cost of Direct Labour 544,000

Work in process DR 240,000

Material price Variance DR 110,000
Material quantity variance CR 25,000
Material inventory CR 325,000
(To Record Material variance)

Work in process DR 544,000

Labour efficiency Variance DR 21,000
Labour Rate variance CR 65,000
Accrued Payroll CR 500,000
(To Record Labour variance)