Standard Costing and Variance Analysis, With Real Numbers
- The standard
- What actually happened
- Material variances
- Labour variances
- Overhead variances
- The reconciliation
- The question each variance answers
- Reading this month honestly
- Where standard costing stops being useful
- Where this fits
A variance is the difference between what something should have cost and what it did cost. Splitting that difference into its causes is the entire point, because a total overspend of ₹1,66,900 tells you nothing you can act on, while knowing that ₹64,000 of it came from paying more for material and ₹50,000 from using more of it sends you to two different people.
Here is one month, worked all the way through.
The standard
A workshop sets a standard cost per unit before the month starts:
| Element | Standard | ₹ per unit |
|---|---|---|
| Material | 4 kg at ₹250/kg | 1,000 |
| Labour | 3 hours at ₹180/hour | 540 |
| Variable overhead | 3 hours at ₹90/hour | 270 |
| Fixed overhead | 3 hours at ₹120/hour | 360 |
| Standard cost per unit | 2,170 |
Budgeted output is 1,000 units, so budgeted fixed overhead is ₹3,60,000 absorbed over 3,000 standard hours.
What actually happened
- Actual output: 950 units
- Material purchased and used: 4,000 kg costing ₹10,64,000, an actual rate of ₹266/kg
- Labour: 2,800 hours costing ₹5,26,400, an actual rate of ₹188/hour
- Variable overhead: ₹2,66,000
- Fixed overhead: ₹3,72,000
Standard cost of actual output is 950 × ₹2,170 = ₹20,61,500. Actual cost is ₹22,28,400. The total adverse variance is ₹1,66,900. Now split it.
Material variances
Standard quantity for actual output = 950 × 4 kg = 3,800 kg.
Price variance = (standard rate − actual rate) × actual quantity
= (₹250 − ₹266) × 4,000 = ₹64,000 adverse
Usage variance = (standard quantity − actual quantity) × standard rate
= (3,800 − 4,000) × ₹250 = ₹50,000 adverse
Total material variance ₹1,14,000 adverse. Check: standard ₹9,50,000 against actual ₹10,64,000. Agrees.
Note the convention. Price variance is valued at actual quantity, usage at standard rate. That is deliberate: it stops a price problem and a usage problem from contaminating each other, so each number can be owned by the person who can affect it.
Labour variances
Standard hours for actual output = 950 × 3 = 2,850 hours.
Rate variance = (₹180 − ₹188) × 2,800 = ₹22,400 adverse
Efficiency variance = (2,850 − 2,800) × ₹180 = ₹9,000 favourable
Total labour variance ₹13,400 adverse against a standard of ₹5,13,000 and actual of ₹5,26,400.
This pairing is the most informative in the whole analysis. The workshop paid above standard and got more done per hour. That is the signature of using more experienced or better-paid people, and it may well have been the right call.
Overhead variances
Variable overhead. Standard for actual output is 2,850 × ₹90 = ₹2,56,500; actual ₹2,66,000, so ₹9,500 adverse. Split it:
- Expenditure variance = (2,800 × ₹90) − ₹2,66,000 = ₹14,000 adverse
- Efficiency variance = (2,850 − 2,800) × ₹90 = ₹4,500 favourable
Fixed overhead. Absorbed is 2,850 × ₹120 = ₹3,42,000; actual ₹3,72,000, so ₹30,000 adverse. Split it:
- Expenditure variance = ₹3,60,000 budget − ₹3,72,000 actual = ₹12,000 adverse
- Volume variance = (2,850 − 3,000) × ₹120 = ₹18,000 adverse
The volume variance is the one people misread. It is not an overspend. It says the workshop made 950 units instead of 1,000, so ₹18,000 of fixed cost found no product to attach itself to. The cost was always going to be incurred.
The reconciliation
| Variance | ₹ | Direction |
|---|---|---|
| Material price | 64,000 | Adverse |
| Material usage | 50,000 | Adverse |
| Labour rate | 22,400 | Adverse |
| Labour efficiency | 9,000 | Favourable |
| Variable overhead expenditure | 14,000 | Adverse |
| Variable overhead efficiency | 4,500 | Favourable |
| Fixed overhead expenditure | 12,000 | Adverse |
| Fixed overhead volume | 18,000 | Adverse |
| Net | 1,66,900 | Adverse |
It ties back to the total. If yours does not, the error is nearly always in which quantity a variance was valued at.
The question each variance answers
| Variance | Question | Usually owned by |
|---|---|---|
| Material price | Did we buy well? | Purchasing |
| Material usage | Did we waste? | Production |
| Labour rate | Who did the work? | HR and production planning |
| Labour efficiency | How fast did they work? | Production |
| Overhead expenditure | Did we overspend on support costs? | Department heads |
| Fixed overhead volume | Did we make enough to absorb our fixed base? | Sales and planning |
Reading this month honestly
The largest single number is material price at ₹64,000 adverse, a 6.4% overspend on rate. Before treating that as a purchasing failure, the obvious question is whether the market moved. A variance against a standard set three months ago may be measuring the standard rather than the buyer.
Material usage at ₹50,000 adverse is the more actionable one. 4,000 kg consumed against 3,800 standard is 5.3% more material per unit, and that is waste, rework, or a standard that no longer reflects the process.
The interesting pairing is labour: paying 4.4% above rate and finishing 50 hours early. If those better-paid people also caused less material waste, the ₹22,400 was well spent. If material usage worsened at the same time, it was not. Variances are most useful read against each other rather than one at a time.
Where standard costing stops being useful
It assumes a repeatable process and a stable standard. In a job shop where every order differs, or where input prices move weekly, variances measure the staleness of the standard more than the performance of the month.
Revise standards deliberately and on a known cycle. A standard nobody believes produces variances nobody investigates, which is worse than not computing them.
Where this fits
- The lesson version: standard costing
- Fixed and variable costs, separated: break-even analysis
- What the margin should have been: profit margin vs markup
- Your own figures: break-even calculator
- Terms used here: accounting glossary