I.

STANDARD COSTING
Standard costing is the predetermined cost based on a technical estimate for materials,
labour and overhead for a selected period of time and for a prescribed set of working
conditions.
COMPUTATION OF VARIANCES
The variance is the difference between the standard performance and the actual
performance. Where variances recorded are unfavourable, the concerned departmental
head is held responsible for it and he is asked to take corrective action into the matter.
An analysis of different variances is given below:
1. Material Variances:
a. Material price variance: difference between standard price and the actual
price of the material is the material price variance.
b. Material usage variance: difference between standard quantity of material
and actual quantity used is the material usage variance.
The material usage variance may further be sub- divided into:
i. Material mix variance: where two or more than two materials are used in
the manufacture of a product the difference between the standard
composition and the actual composition of material mix is material mix
variance. Such a situation arises in industries like textile, rubber,
chemical etc. where different materials in standard ratios or quantities are
mixed to produce a product.
ii. Material sub-usage variance: in material mix composition, where the total
quantity of actual mix is more or less than the total quantity of the
standard mix, the difference gives rise to sub-usage variance.
iii. Material yield variance: in process industries, input of certain material is
expected to yield a certain standard output. For instance, the mustard
seeds in an oil mill are expected to yield say 30% of the input seeds. If the
actual yield is greater or less than the standard 30% yield, it is material
yield variance. A higher yield indicates greater efficiency and vice versa.
Causes of Material Variances:
- Waste of materials in the production.
- Nature of material used poor quality.
- Poor trained – unskilled employees.
- Inefficient machinery / equipment.
FORMULARS OF MATERIAL VARIANCES
1. Material Cost Variance
(Standard Quantity x Standard Price) – (Actual Quantity x Actual Price)
= (SQ x SP) – (AQ x AP)
2. Material Price Variance
(Standard Price – Actual Price) x Actual Quantity used.
= (SP – AP) x AQ (SP – AP)
3. Material Usage Variance
(Standard Quantity – Actual Quantity x Standard Price)
= (SQ – AQ) x SP or SP (SQ – AQ)
i. Material Sub – Usage Variance
(Total Standard Quantity – Total Actual Quantity) x Total Standard Price Rate
Or = Usage Variance – Mix Variance = Sub-Usage Variance
ii. Material Mix Variance
(Standard Cost of Standard Proportion of Mix – Standard Cost of Actual Mix)
Or
(Standard Price x (Standard Proportion of Mix – Actual Mix)
iii. Material Yield Variance
(Standard Cost per Output x Standard Output – Actual Output)
Or
Standard Cost per Output x (Standard Loss – Actual Loss)

EXAMPLE
Suppose the standards fixed for a product are 10kg costing Kshs. 100 but on the
completion of the job the cost accounts reveal that the quantity consumed for that
product was 12kg costing Kshs. 126. Find out the variances of quantity and price of
the material
Quantity Rate Amount
Standard Cost 10kg 10/- per kg 100
Variances:
Prices 10.50 per kg 6
Usage 2kg 10per kg 20
 1. Material Cost Variance:
(SQ x SP) – (AQ x AP)
= (10 x 10) – (12kg x 10.50)
= Kshs. 26A
2. Material Price Variance
(SP – AP) x AQ
Kshs. 10 – 10.50 x 12kg
= Kshs. 6A
3. Material Usage Variance
(SQ – AQ) x SP
= (10kg – 12kg) x Kshs. 10
= Kshs. 20A
4. MCV = MPV + MUV
= Kshs. 26(A) = Kshs. 6(A) + 20(A)
NOTE: (A) Means Adverse
(F) Favourable
Where total quantities are the same
Find out material variance including material mix variances from the following:
Standard Actual
Material Kg Price Value Kg Price Value
A 100 2 200 90 2.20 198
B 50 5 250 60 4.50 270
150 450 150 468
1. Material Cost Variance (MCV)
= (SQ x SP) – (AQ x AP)
= 450 – 468
= 18(A)
2. MPV
= (SP – AP) x AQ
= A (2 – 2.20) x 90kg = 18(A)
= B (5 – 4.50) x 60kg = 30(F)
= 12(F)
3. MUV
= (SQ – AQ) x SP
 = A: (100 – 90) x 2 = 20(F)
= B: (50 – 60) x 5 = 50(A)
= 30A
4. Material Mix Variance
Standard Cost of Standard Mix – (Standard Cost of Actual Mix)
450 – (90kg x 2 + 60kg x 5) = 480
450 – 480 = 30(A)
Where mix ratio and total quantity is different.
From the following particulars calculate the following material variances:
1. Material Cost Variance
2. Material Usage Variance
3. Material Price variance
4. Material Mix Variance
5. Material Quantity or Sub – Usage variance

Standard Actual
Material Qty Kg Price Qty Kg Price
A 10 8 10 7
B 8 6 9 7
C 4 12 5 11
22 24
1. MCV = (SQ x SP) – (AQ x AP)
A = (10 x 8) – (10 x 7) = 10(F)
B = (8 x 6) – (9 x 7) = 15(A)
C = (4 x 12) – (5 x 11) = 7(A)
= 12A
2. Material Usage = SP (SQ – AQ)
A = 8(10 – 10) = Nil
B = 6(8 – 9) = 6(A)
C = 12(4 – 5) = 12A
= 18A
3. Material Price variance MPV = (SP – AP) AQ
A = (8 – 7) x 10 = 10(F)
B = (6 – 7) x 9 = 9(A)
 C = (12 – 11) x 5 = 5(F)
6F
4. Material Mix Variance
Standard Proportion of SQ of Mix – Actual Quantity
A = 10 x 24/22 = 10.9
B = 8 x 24/22 = 8.727
C = 4 x 24/22 = 4.37
A: 8 (10.9 – 10) = 7.20(F)
B: 6 (8.727 – 9) = 1.64(A)
C: 12 (4.37 – 5) = 7.56(A)
= 2.00A
5. Material Sub – Usage Variance:
Sub – usage variance is the net usage variance.
Sub usage variance = usage variance – mix variance
= 18(A) – 2(A) = 16(A)
II. METHOD OF FINDING SUB-USAGE VARIANCE BASED ON
INDIVIDUAL POSITION IS AS FOLLOWS:
(SQ – Standard Proportion of SQ) SP

A = (10 – 10.9) x 8 = 7.20 (A)

B = (8 – 8.73) x 6 = 4.36 (A)
C = (4 – 4.37) x 12 = 4.44 (A)
= 16.00 (A)
Relationships:
i. Material Price Variance + Material Usage = Material Cost
= 6F + 18A = 12A
ii. Material Mix Variance + Material Sub Usage Variance = Material Usage
= 2A + 16A = 18A
iii. Material Price Variance + Material Mix Variance + M. Sub Usage = M. Cost
= 6 (F) + 2(A) + 16(A) = 12(A)
iv. Material Usage Variance – Material Mix Variance = Sub – Usage Variance
= 18 (A) – 2(A) = 16(A)
Where mix ration is the same
Find out the material variance from the following
Standard Actual
Kgs Rate Kgs Rate Amount
X 80 5 400 100 4 400
Y 40 6 240 50 5 250
120 640 150 650
NOTE:
1. Material Cost Variance (MCV)
= (SP x SQ) – (AP x AQ)
= (640 – 650)
= Kshs. 10(A)

2. Material Price Variance

= (SP – AP) x AQ
X = (5 – 4) x 100kg = Kshs. 100(A)
Y = (6 – 5) x 50kg = Kshs. 50(F)
150(F)
3. Material Usage Variance (MUV)
(SQ – AQ) x SP
X = (80 – 100) x 5 = 100(A)
Y = (40 – 50) x 6 = 60(A)
160A
4. Material Sub Usage Variance
(SQ – AQ) x SP Rate
(120 – 150) x 640
120

(30 x 640) = 160A

120
SHOWING YIELD VARIANCE
Find out material variances including yield – variance from the following:
Standard Mix Actual Mix
Material X 120kg @ 5 = 600 X 112kg @ 5 = 560
Material Y 80kg @ 10 = 800 Y 88kg @ 10 = 880
Inputs 200kg 1,400 200kg 1,440
Less 30% 60kg - Loss 25% 50kg -
Yield 140kg 1,400 150kg 1,440
Solution:
Revised standard quantity on the basis of actual yield.
Standard mix for the actual yield:
X = 120 x 150 = 900kg RS Qty Rate Cost
140 7 129 @5 645

Y = 80 x 150 = 600 85.7 @ 10 857

140 7 1502

1. Material Cost Variance

(RSQ x SP) – (AQ x AP)
= 1502 – 1440
= 62F
2. Material Price variance
(SP – AP) x AQ
X = (5 – 5) x 112kg Nil = Nil
Y (10 – 10) x 88kg Nil
3. Material Usage variance
(RSQ – AQ) x SP
X = (900 – 112) x 5
7
= 82.86F or 85(F)
Y = (600 – 88) x 10
7
= 23A
4. Material Mix Variance
As the totals of standard and actual quantity are the same i.e. 200kgs in each case, the
standard proportion of standard quantities will remain unaffected.
(Standard Proportion of Mix) – Actual Mix) x Standard Rate
X = (120 – 112) x 5 = 40(F)
Y = (80 – 88) x 10 = 80A 40A
(Standard Cost of Standard Mix) – (Standard Cost of Actual Mix)
5. Material Yield Variance
Standard Cost per Output x (Standard Output – Actual Output)
Or Standard Cost per Output x (Standard Loss – Actual Loss)
Standard Rate = 1400 = Kshs. 10 per kg
140kg
Standard Rate (Standard Loss – Actual Loss)
Kshs. 10 (60kg – 50kg)
= 100F
Or Yield Variance = Kshs. 10 x (140 – 150) = 100A

LABOUR VARIANCES
FORMULARS
1. Labour Cost Variance
(Standard Time x Standard Rate) – (Actual Time x Actual Rate)
= (ST x SR) – (AT x AR)

2. Rate of Pay Variance or Wage Rate Variance

(Standard Rate – Actual Rate) x (Actual Time)
(SR – AR) x AT or AR (SR – AR)

3. Labour Efficiency Variance

i. Where actual output is different from standard output.
(Revised standard hours in terms of actual output.
a. (Standard Time – Actual Time) x Standard Rate
((ST – AT) x SR or SR (ST – AT)
b. (Standard Production – Actual Production) x Standard Rate Per Unit
4. Idle Time Variance
Idle Hours x Standard Hourly Rate
Note: This variance is always adverse.
5. Labour Mix Variance
 When the output are different (Standard Proportion – AT) Revised Standard
Hours
ii. When the output are the same:
(Standard cost of Standard Proportion of Mix) – (Standard Cost of Actual
Mix).
6. Labour Yield variance or (Net Efficiency Variance) in terms of Output
(Standard Yield)
(Revised Standard Yield – Actual Yield) x Standard Rate per Output
Or
Net Efficiency Variance
(ST – AT) x SR (Overall Position)
Causes:
- Poor trained – unskilled employees.
Question:
Calculate
i. Labour Cost Variance
ii. Labour Rate Variance
iii. Labour Efficiency Variance
iv. Labour Mix Variance from the following:

Standard Actual
Workman A 20Hrs @ Kshs. 3 60 Workman A 30Hrs @ 4 120
Workman B 20Hrs @ Kshs. 7 140 Workman B 30Hrs @ 6 180
40Hrs 200 60Hrs 300
1. Labour Cost Variance
(ST x SR) – (AT x AR)
= (200 – 3800)
= 100(A)
2. Labour Rate Variance
(SR – AR) AT
A. (3 – 4) x 30 = 30(A)
B. (7 – 6) x 30 = 30(F)
NIL
 3. Labour Efficiency
(ST – AT) x SR
A = (20 – 30Hrs) x 3 = 30(A)
B = (20 – 30) x 7 = 70(A)
100(A)
Or RST = 20/40 x 60 =
4. Labour Mix Variance
(Standard Cost of Standard Proportion of Mix) – (Standard Cost of Actual
Mix)
Or
a. SR (Standard Proportion – AT)
20 x 60 = 30Hrs (Standard Proportion)
40
= 3(30 – 30Hrs) = Nil
b. 20 x 60 = 30Hrs
40
= 7 x (30 – 30) = Nil
Question:
Find out different labour variances:
Labour Cost, Labour Rate, Labour Efficiency Variance
Standard Actual
Output: 1000 units Output: 1200 units
Rate of payment: Kshs. 6 per unit Wages paid with bonus 8,000/=
Time taken: 50Hrs Time taken: 40Hrs.
Solution:
The Standard Rate
(1000 x 6) = Kshs. 120per hour
50Hrs

Actual Rate = 8,000 = Kshs. 200 per hour

40Hrs

Standard hours for 1,200 units actually produced

50hrs x 1,200 = 60Hrs
1,000
 1. Labour Cost Variance
(SR x ST) – (AR x AT)
= 120 x 60hrs – (200 x 40)
= 7,200 – 8,000
= Kshs. 800(A)
2. Labour Rate Variance
(SR – AR) AT
= (120 – 200) x 40 = 3,200(A)
3. Labour Efficiency Variance
(ST – AT) x SR
= (60 – 40) x 120 = 2,400(F)
Labour Rate Variance = 3,200(A)
Labour Efficiency = 2,400(F)
Labour Cost Variance = 800(A)
Calculate the necessary variances from the data given of a manufacturing firm
producing product J with the standard direct labour cost of Ksh. 120 per unit whose
manufacture involves the following:
Type of Workers Hours Rate (Shs) Amount (Shs)
Male 30 2 60
Female 20 3 60
50 120
For the month of May 2022, 100 units of the product were produced, the
actual labour cost was as follows:
Type of Workers Hours Rate (Shs) Amount (Shs)
Male 3,200 1.50 4,800
Female 1,900 4.00 7,600
5,100 12,400

Solution
Type of Standard for 1,000 units Actual for 100 units
Workers
Hours Rate Amount Hours Rate Amount
(Shs) (Shs) (Shs) (Shs)
Male 3,000 2 6,000 3,200 1.50 4,800
Female 2,000 3 6,000 1,900 4.00 7,600
Total 5,000 12,000 5,100 12,400
 i. Labour Cost Variance = SC – AC
= 12,000 – 12,400 = Shs. 400 (A)

ii. Labour Rate Variance = (SR – AR) x AH

A = (2 – 1.50) x 3,200 = Shs. 1,600 (F)
B = (3 – 4) x 1,900 = Shs. 1,900 (A)
= Shs. 300 (A)
iii. Labour Efficiency Variance = (SH – AH) x SR
A = (3,000 – 3,200) x 2 = Shs. 400 (A)
B = (2,000 – 1,900) x 3 = Shs. 300 (A)
= Shs. 100 (A)
iv. Labour Mix Variance = RSH – AH x SR
A = (3,060 – 3,200) x 2 = Shs. 280 (A)
B = (2,040 – 1,900) x 3 = Shs. 420 (F)
= Shs. 140 (F)
OVERHEADS VARIANCES
Variable Overhead Variances:
This is the difference between the standard variable overhead cost for the production
achieved and the actual variable overhead incurred. In other words this is the
difference between the actual variable overheads incurred and the variable overheads
absorbed. This variance is simply the over or under absorption of overheads. This is
the sum of variable overhead expenditure variance and variable overhead efficiency
variance.
a. Variable Overhead Expenditure Variance
This is the difference between the actual overheads incurred and the allowed variable
overheads based on the actual hours worked
It is calculated as under:-
Actual Variable Overhead - V.O.A.R. x Actual Labour Hours
Where:
V.O.A.R. = Variable Overhead Absorption Rate
This variance may arise due to rise or fall in overhead expenditure as a result of some
unexpected changes.
b. Variable Overhead Efficiency Variance
This is the difference between the allowed variable overheads and the absorbed
variable overhead. It is calculated as under:-
V.O.A.R. (Actual hours - Standard hours)
The main cause of this variance is the difference between actual hours and standard
hours.
Example
Calculate the variable overhead variances from the information below:-
Standard cost per hour Shs. 8
Standard time per unit 5 hours
Actual production 220 units
Labour hours worked 1,200
Cost incurred Shs. 10,300
Answer
Variable Overhead Expenditure Variance
= Actual V.O.H. - V.O.H.A.R. x Actual labour hours.
= Shs. 10,300 - Shs. 8 (1,200)
= Shs. 10,300 - Shs. 9,600 = Shs. 700 A
Variable Overhead Efficiency Variance
= V.O.H.A.R. (Actual hours -Standard hours)
= Shs. 8 (1,200 - 1,100)
= Shs 8(100) = Shs. 800 A
Note:
Standard hours
= Standard hours per unit x units produced.
= 5 X 220 = 1100
Variable overhead cost variance
= Variable overhead expenditure variance + overhead efficiency variance.
= Shs. 700 A + Shs. 800 A
= Shs. 1,500A
Check
Variable Overhead Cost Variance = A.C. - S.C.
S.C. = S.C per unit x Units produced
S.C. per unit = Shs. 8 x 5
= Shs. 40
Total Standard Cost = Shs. 40 x 220
= Shs. 8,800
Variable O.H Cost Variance = Shs. 10,300 – Shs. 8,800
 = Shs. 1,500A
Fixed Overhead Variances
This is the difference between the standard cost of fixed overhead absorbed in the
production achieved, whether completed or not, and the fixed overhead attributed and
charged to that period. This simply represents under or over absorption. This is the
sum of fixed overhead expenditure variance and fixed overhead volume variance.
(a) Fixed Overhead Expenditure Variance
This is the difference between the budget cost allowance for production for a
specified control period and the actual fixed expenditure attributed and charged to that
period. It is calculated as under:
Actual expenditure - Budgeted expenditure
This variance arises due to the difference between actual level of activity and
budgeted expenditure

(b) Fixed Overhead Volume Variance

This is that portion of the fixed production overhead variance which is the difference
between the standard cost absorbed in the production achieved, whether completed or
not, and the budget cost allowance for a specified control period. This is the sum of
fixed overhead efficiency variance and fixed over-head capacity variance, It is
calculated as under:-
Standard cost per unit (Actual production – Budgeted Production
The main cause of this variance is the difference between actual level of production
and budgeted production.
C) Fixed Overhead Efficiency Variance
This is that portion of the fixed production overhead volume variance which is the
difference between the standard cost absorbed in the production achieved, whether
completed or not, and the actual labour hours worked, valued at the standard hourly
absorption rate it is calculated as under:-
F.O.A.R (Actual Hours – Standard Hours)
Or
Standard Cost per Unit (Actual Quantity - Standard Quantity)

Where:
F.O.A.R = Fixed Overhead Absorption Rate
 (c) Fixed Overhead Capacity Variance
This is that portion of the fixed production overhead volume variance which is due to
working at higher or lower capacity than standard. Capacity is often expressed in
terms of average direct labour' hours per day, and the variance is the difference
between the budget cost allowance and the actual labour hours worked, valued at the
standard hourly absorption rate. It calculated as under:-
F.O.A.R (Actual Hours – Budgeted Hours)
Or
Standard Cost per Unit (Budgeted Production – Standard Production)
Note:
Fixed Overhead Volume variance = Fixed Overhead Efficiency Variance + Fixed
Overhead Capacity variance
Example
Calculate the fixed overhead variances from the information set out below:-
Standard cost per hour = Shs. 15
Standard hours per unit = 2 hours
Budgeted Production = 400 units
Actual production = 360 units
Labour hours worked = 780 hours
Costs incurred = Shs. 13,800
Answer
Fixed Overhead Expenditure Variance
= Actual expenditure - Budgeted expenditure
= Shs. 13,800-Shs. 30(400)
= Shs. 13,800-Shs. 12,000
= Shs. 1,800 A
Note:
Budgeted expenditure = Standard hours per unit x Standard cost per hour
x Budgeted production
= 2.x Shs. 15 (400)
= Shs. 12,000
Fixed Overhead Volume Variance
= Standard cost per unit (Actual production – Budgeted production)
= Shs. 30 (360 - 400)
= Shs. 30 (40)
= Shs. 1200 A
Note:
Standard cost per unit = Shs. 15 x 2
= Shs.30
Fixed Overhead Efficiency Variance
= Standard cost per hour (Actual hours - Standard hours)
= Shs. 15 (780-720)
= Shs. 15 (60)
= 900A
Note:
Standard Hours = Standard hours per unit x units produced
= 2 x 360
= 720
Fixed Overhead Capacity Variance
= Standard Cost per Hour (Actual Hours – Budgeted Hours)
= Shs. 15(780 – 800)
= Shs. 15 (20)
= Shs. 300A
Note:
Budgeted Hours = Standard Hours per Unit x Budgeted Production
= 2 x 400
= 800
Check
Fixed Overhead Volume variance
= Fixed Overhead Efficiency Variance + Fixed Overhead Capacity variance
= 1,200 A = 900 A + 300 A

Total Fixed Overhead = A. C – S. C

= Shs. 13,800 – Shs. 10,800
= Shs. 3,000A
Note:
S.C = Standard Cost per Unit x Actual production
= Shs. 30 x 360
= Shs. 10,800
Check:
Total Fixed Overhead Cost Variance = Fixed Overhead Expenditure Variance +
Fixed Overhead Volume Variance
Shs. 3,000A = Shs. 1,800A + Shs. 1,200A
= Shs. 3,000A