Standard Costing and Variance Analysis
Complete Notes for Competitive Exams (JKSSB, SSC, Banking, UGC NET)
Prepared by Home Academy – Conceptual, Exam-Oriented
1. Meaning of Standard Costing
Standard Costing is a cost accounting technique in which predetermined costs (standard costs) are set for materials, labour, and overheads, and then actual costs are compared with these standards.
If there is any difference between standard cost and actual cost, it is called variance.
Standard costing helps management control costs, measure efficiency, and improve productivity.
Definition
Standard costing is a method of cost accounting in which standard costs are predetermined and compared with actual costs to determine variances.
2. Objectives of Standard Costing
The main objectives are:
To control production costs.
To measure efficiency of workers and machines.
To identify wastage and inefficiencies.
To help management in cost reduction.
To assist in planning and decision making.
3. Features of Standard Costing
Standard costs are pre-determined estimates.
Actual costs are compared with standard costs.
Differences between them are called variances.
Variance analysis helps in taking corrective actions.
4. Standard Cost vs Actual Cost
| Basis | Standard Cost | Actual Cost |
|---|---|---|
| Meaning | Predetermined cost | Cost actually incurred |
| Purpose | Cost control | Cost recording |
| Nature | Estimated | Real |
5. Variance Analysis
Variance analysis is the process of analyzing the difference between standard cost and actual cost.
Formula
Variance = Standard Cost − Actual Cost
Variances help management determine whether performance is efficient or inefficient.
6. Types of Variances
The main variances in cost accounting include:
Material Variance
Labour Variance
Overhead Variance
Sales Variance
7. Material Cost Variance (MCV)
Material Cost Variance shows the difference between standard material cost and actual material cost.
Formula
Material Cost Variance = Standard Cost − Actual Cost
Example
Standard material cost = ₹10,000
Actual material cost = ₹11,000
Variance = ₹1,000 (Unfavourable)
8. Types of Material Variances
Material variances are divided into two main types.
Material Price Variance (MPV)
Material price variance shows the difference caused by change in price of material.
Formula
MPV = (Standard Price − Actual Price) × Actual Quantity
Example
Standard price = ₹50 per kg
Actual price = ₹55 per kg
Quantity = 100 kg
MPV = (50 − 55) × 100 = −₹500
This is Adverse Variance.
Material Usage Variance (MUV)
Material usage variance occurs when actual material usage differs from standard usage.
Formula
MUV = (Standard Quantity − Actual Quantity) × Standard Price
Example
Standard quantity = 100 kg
Actual quantity = 120 kg
Standard price = ₹50
MUV = (100 − 120) × 50 = −₹1,000
9. Labour Cost Variance (LCV)
Labour cost variance shows the difference between standard labour cost and actual labour cost.
Formula
LCV = Standard Labour Cost − Actual Labour Cost
Types of Labour Variances
Labour Rate Variance (LRV)
Occurs when actual wage rate differs from standard wage rate.
Formula
LRV = (Standard Rate − Actual Rate) × Actual Hours
Example
Standard wage = ₹100 per hour
Actual wage = ₹120 per hour
Actual hours = 50
LRV = (100 − 120) × 50 = −₹1,000
Labour Efficiency Variance (LEV)
Occurs when actual labour hours differ from standard hours.
Formula
LEV = (Standard Hours − Actual Hours) × Standard Rate
Example
Standard hours = 40
Actual hours = 50
Standard rate = ₹100
LEV = (40 − 50) × 100 = −₹1,000
10. Overhead Variance
Overhead variance shows difference between standard overhead cost and actual overhead cost.
Formula
Overhead Variance = Standard Overhead − Actual Overhead
Overheads are generally divided into:
Fixed overhead variance
Variable overhead variance
11. Favorable and Unfavorable Variance
Variances may be either favorable or unfavorable.
Favorable Variance
Occurs when actual cost is lower than standard cost.
This indicates efficient performance.
Unfavorable Variance
Occurs when actual cost exceeds standard cost.
This indicates inefficiency or wastage.
12. Advantages of Standard Costing
Standard costing offers several advantages.
It helps in cost control.
It improves efficiency and productivity.
It assists management in decision making.
It helps in performance evaluation.
It reduces wastage of resources.
13. Limitations of Standard Costing
Setting standards requires accurate estimation.
Unexpected market changes may affect standards.
It may create pressure on workers.
Not suitable for industries with frequent design changes.
Important Points for Competitive Exams
Standard cost is a predetermined cost.
Variance means difference between standard and actual cost.
Material cost variance = Standard Cost − Actual Cost.
Labour rate variance occurs due to difference in wage rate.
Labour efficiency variance occurs due to difference in working hours.
Favourable variance indicates efficient performance.
Unfavourable variance indicates inefficiency.
MCQ Questions for Competitive Exams
Question 1
Standard cost means:
A. Actual cost
B. Predetermined cost
C. Estimated profit
D. Selling price
Answer: B
Explanation: Standard cost is predetermined before production begins.
Question 2
Difference between standard cost and actual cost is called:
A. Budget
B. Variance
C. Profit
D. Overhead
Answer: B
Explanation: Variance analysis helps identify deviations in cost.
Question 3
Material price variance is caused by:
A. Change in material price
B. Change in labour hours
C. Change in production volume
D. Machine breakdown
Answer: A
Explanation: It occurs when actual price differs from standard price.
Question 4
Labour efficiency variance arises due to:
A. Change in wage rate
B. Change in working hours
C. Change in material price
D. Change in selling price
Answer: B
Explanation: It occurs when actual labour hours differ from standard hours.
Question 5
If actual cost is lower than standard cost, the variance is:
A. Adverse
B. Unfavourable
C. Favourable
D. Loss
Answer: C
Explanation: Lower actual cost indicates better efficiency.
Previous Year Exam Type Questions (JKSSB / SSC Pattern)
Question
Standard cost is:
A. Historical cost
B. Estimated cost predetermined before production
C. Market price
D. Selling price
Answer: Estimated cost predetermined before production.
Question
Variance means:
A. Profit
B. Loss
C. Difference between standard cost and actual cost
D. Selling price
Answer: Difference between standard cost and actual cost.
Quick Revision Table
| Concept | Key Idea |
|---|---|
| Standard Cost | Predetermined cost |
| Variance | Difference between standard and actual cost |
| Material Price Variance | Difference due to price change |
| Material Usage Variance | Difference due to material quantity |
| Labour Rate Variance | Difference in wage rate |
| Labour Efficiency Variance | Difference in labour hours |