www.caazim.

org

www.caazim.org

Section D: Standard Costing And Variance Analysis

Designed to give you knowledge and application of:

D1.
D2.
D3.
D4.
D5.
D6.

Budgeting and standard costing

Basic variances and operating statements
Material mix and yield variances
Sales mix and quantity variances
Planning and operational variances
Behavioural aspects of standard costing

www.caazim.org

D1: Standard Costing and Variance Analysis

Learning outcomes
Explain the use of standard costs.

[2]

Outline the methods used to derive standard costs and discuss the

different types of cost possible. [2]

Explain the importance of flexing budgets in performance
management. [2]
Prepare budgets and standards that allow for waste and idle time. [2]
Explain and apply the principle of controllability in the performance
management system. [2]
Prepare a flexed budget and comment on its usefulness. [2]

Explain the use of standard costs

Meaning of standard cost (CIMA, London)
A predetermined cost which is calculated from management standards

of efficient operations and the relevant necessary expenditure

They are the predetermined costs on the technical estimate of material
labour and overheads for a selected period of time, and for a
prescribed set of working conditions
Components of
standard cost
Manufacturin
g / operation
costs

Factory
overheads

Administrati
ve expenses

Direct labour

Selling
expenses

Direct materials

www.caazim.org

Methods used to derive standard costs and types of standards

Continued
www.caazim.org

Usefulness of Standard cost

Usefulness of Standard cost

Planning

Control & Performance

Measurement

Decision-making

Valuation

Improvement & change

Building blocks for

budgeting
Act as benchmark for
comparison with actual
performance to evaluate
level of achievement
forms basis for
ascertaining the cost
,future availability & price of
the product
provides alternative
methods of valuing stock &
cost of production
impact the level of
motivation of employees

www.caazim.org

Continued
Types of standards
Ideal standard:
demands perfect implementation
not easily attainable
reasons: there are always chances
of unexpected and unwanted
events taking place such as
accidents, breakdowns etc.

Currently attainable standard:

emphasis on normality
allows deviations
extra ordinary efforts not
required to
implement the set standard

www.caazim.org

Continued
Standard cost of direct materials
Quality:
a comprehensive
decision has to be
made
for buying high or
low
quality direct
materials

Quantity:
once the quality is
decided the production
and
engineering department
sets the standard for
quantity of materials to
be purchased.

Price:
Standard may be set
after considering the
price levels in the
market and firms
bargaining position
vis--vis vendors

Waste:
Where the standard costing system is used, the standard is set for
wastage, against which the actual waste is compared.
Normally the waste is due to evaporation, shrinkage, etc.
The actual waste exceeds the standard waste in situations where the
material is handled and used inefficiently.

Continued
www.caazim.org

Continued
Standard cost of direct labour
The quantity standard for
direct labour is determined
jointly by various
departments considering:

complexity of the process

skill level of workers
nature of work
working conditions

Idle time:

Standard wage rate is determined by the

personnel department considering the skill
level needed from workers and the type of
work. The standard wage rate includes the
following:
compensation paid
health and life insurance
pension plan contribution
paid vacations
unemployment taxes
employers share of employees social
security plan

categorised as indirect labour

represents wastage caused by unproductive time
idle time variance adds to adverse the labour efficiency variance
allowance for idle time is not made as it could be avoided

Continued
www.caazim.org

10

Continued
Setting standard for overheads
Over head cost is

charged to production
on the basis of
machine-hour,
labour-hour, directwages etc.

Standards for fixed

cost are set taking

total fixed costs with
regard to the
budgeted capacity
utilisation.

Variable overhead

standards are set by

taking the same as a %
of material cost or based
on labour or machine
hours.

www.caazim.org

11

Basic variances
Variances

Cost related variances

Revenue related
variances (sales variance)

Favourable if
Actual cost < Standard
cost

Favourable if
Actual sales revenue >
Standard sales revenue

Variances can be split into two types:

Price difference: compare the actual price with the standard price for

actual quantity
Volume difference: compare the actual quantity with the standard
quantity
for standard price
Causes
of variances
Inaccurate recording of actual costs and

revenues
Random events
Operating efficiency
Setting inappropriate standard

www.caazim.org

12

Sales price and volume, Sales margin variances

Total sales value variance = Actual sales Budgeted (Standard) sales
Sales price variance

= Actual quantity (Actual selling price Standard

selling price)

Sales volume variance = Standard price (Actual quantity Standard quantity)

Under Absorption Costing:
Total sales profit variance = (Act profit margin Std profit margin) X Actual
sale Qty
= {(Act sales price std cost per unit) (Std sale price

std cost

per unit) X Actual sales Qty

Under Marginal Costing:

Sales Margin Variance = (Act Contribution margin std contribution margin) X
Act sales Qty

= {(Act price std variable cost) (std price std variable

cost)} X Act

sales Qty

Result under both will be the same

www.caazim.org

13

Direct material
Standard material cost for actual
Materials
total, cost
pricevariance
and usage=variances
production Actual
materials cost*
Actual material cost = actual usage of material out of current years
purchase + extent of opening stock consumed at std price (if theres
opening stock of material)
Direct material price variance
Actual price)

= Actual quantity X (Standard price

Direct material usage variance = Standard price X (Standard quantity for

Causes of Price variance:
actual production
Causes of Usage variance:
purchase price variations in
Actual quantity)
purchase of non-std material
market
Negligence in use
Purchase of non-std lots
Lack of training to workers
Quantity discounts
Pilferage of material
Variation in transport etc.
Inefficient production methods

www.caazim.org

14

Labour
Cost,cost
ratevariance
& Efficiency
variances
Direct
labour
= Standard
direct wages for production - Actual
direct wages paid
= (Standard labour hours for actual production
x Standard wages rate per hour) - (Actual labour
hours
x Actual wages rate per hour)
Direct labour rate variance = (Standard wages rate per hour - Actual wages
rate per hour)
x Actual labour hours
Direct labour efficiency
= (Standard labour hours for actual production
variance
Actual labour hours worked)
x Standard wages rate per hour
Idle time variance

= Hours lost x Standard wage rate per hour

= (Hours paid - Hours worked) x Standard wage
Causes of Rate variance:
rate per hour
Change in wage rates
Causes of Efficiency variance:
Different rates during seasons
Insufficient training
New worker paid at different
Lack of supervision
rate
Dissatisfied workers
Bad working conditions
www.caazim.org
Defective
machines

15

Example
The standard cost card of Supernova Plc is given below:
Standard cost/Unit
Raw material 65 kg at $4 per kg

260

Direct labour 16 hrs at $7.75/hour

124
384

Actual performance results for the year 20X6 reveals the following:
Actual results for the year 20x6
production
Direct material purchases

145 units
9,000 kg at a cost of $40,500

Opening stock direct material

1850 kg

closing stock direct material

1550 kg

Direct wages

$18,800 for 2,350 hours

Assume that, 300 units have been used during the year out of the opening
stock and issued at the standard price of raw material for the current year.
The managing director wants to know the reasons for variances in the
direct costs of the Company.

Continued
www.caazim.org

16

Continued
Answer
Total direct material cost variance = Standard materials cost for actual production
- Actual materials cost
Total material cost variance

= $37,700 $41,700

(W1 & W2)

= $4,000 (A)

Direct material price variance

= (Standard materials price - Actual materials price)

x Actual quantity

Material price variance

Material price variance

= $(4 4.5) x 9,000 kg

= $4,500 (A)

Direct material usage variance

= (Actual quantity consumed Standard quantity for actual

production) x Standard price
= (9,300 9,425) kgs x $4 per kg
= $500 (F)

Direct material usage variance

Direct material usage variance

Workings
W1
Standard material cost for actual production = 65 kg x 145 units x $4
= $37,700

W2
Actual material cost = Here, actual material consumed is more than the material
purchased during the year, i.e. 9,300 units (1,850 opening stock + 9,000 units purchased
during the year 1,550 units closing stock)
= (9,000 x 4.5) + (300 x 4) = $41,700

Continued
www.caazim.org

17

Continued
Direct labour cost variance
paid

= Standard direct wages for production - Actual direct wages

Direct labour cost variance

= $17,980 - $18,800
= $820 (A)

Direct labour rate variance

hour)

= (Standard wages rate per hour - Actual wages rate per

Direct labour rate variance

= $(7.75 - 8) x 2,350 hrs

= $587.50 (A)

x Actual labour hours

Direct labour efficiency variance = (Standard labour hours for actual production - Actual
labour
hours worked) x Standard wages rate per hour
Direct labour efficiency variance = (2,320 2,350) hrs x $7.75
= $232.50 (A)
Workings
W1
Standard labour cost for actual production = 16 hours x 145 units x $7.75
= $17,980
W2
Actual wage rate per hour
= $18,800/2350
= $ 8 per hour
www.caazim.org

18

Variable overhead total, expenditure and efficiency variances

Variable overhead total variance
hour

= Variable overhead absorbed

- Actual variable overhead
= (Variable overhead absorption rate per
x Standard hours for actual production)
- Actual variable overhead

Variable overhead expenditure variance = (Standard variable overhead rate

(this is rate variance)
Actual variable overhead rate)
Also called spending variance
x Actual hours worked
hours

= Standard variable overhead for actual

- Actual variable overhead

Variable overhead efficiency variance

(due to difference in hours)

= (Variable overhead absorbed

Standard Variable overhead)

= (Standard hours for actual production

- Actual hours) x Standard variable overhead
rate per hour
www.caazim.org

19

Example
Particulars
Budgeted variable production overheads
Budgeted units for the period
Labour hours per unit
Actual variable production overheads
Actual units produced
Actual labour hours

$
360,000
60,000
2
364,000
50,000
112,000

Answer
Variable overhead total variance = Variable overhead absorbed - Actual variable overhead
= (Variable overhead absorption rate per hour
x Standard hours for actual production)
- Actual variable overhead
Variable overhead total variance = ($3 x 100,000) $364,000
= $300,000 - $364,000
= $ 64,000 (A)
For calculation of standard hours for actual production refer (W1)
Variable overhead expenditure variance = (Standard variable overhead rate
(this is rate variance)
Actual variable overhead rate)
Also called spending variance
x Actual hours worked
= Standard variable overhead for actual hours
- Actual variable overhead
Variable overhead expenditure variance = 112,000 x (3 - 3.25)
= $28,000 (A)
For calculation of standard and actual overhead rate refer (W2) and (W3)

Continued
www.caazim.org

20

Continued
Variable Overhead Efficiency Variance = Variable Overhead Absorbed
Standard Variable Overheads
= Standard Variable Overhead per Hours
x (Standard Hours for Actual Productin Actual Hours)
= 3 x (100,000 112,000)
= 36,000 (A)

W1
Standard hours for actual production = Standard hours per unit x Actual production
= 2 x 50000
= 100,000 hours
W2
Standard variable overheads
Variable overhead absorption rate = ----------------------------------------------

W3
Actual absorption rate
--

Standard hours worked

360,000
= -----------------------60,000 x 2
= $3 per hour
Actual variable overheads
= -------------------------------------------------Actual hours worked
364,000
= -----------------------------112,000 Continued
= $3.25 per hour www.caazim.org

21

Continued

www.caazim.org

22

Fixed overhead total, expenditure and Volume variances

Under absorption costing all production costs (fixed or variable) are
absorbed as production costs. Hence Fixed Overheads variances would
arise. Hence, under absorption costing both the following will have to
be analysed:
Fixed overhead expenditure variance and
Fixed overheads volume variance
Under marginal costing, only variable manufacturing overheads are
considered as production costs. Hence theres no impact of change in
level of production on these overheads. Hence under marginal costing,
only one variance will have to be analysed:
Fixed overheads expenditure variance

Continued
www.caazim.org

23

Continued
Fixed overhead total variance

Where, Fixed overhead absorption rate

Fixed overhead expenditure variance

= (Standard hours for actual production

x Fixed overhead absorption rate)
- Actual expenditure on fixed overheads
=

Budgeted fixed overhead

Budgeted activity (e.g. Standard hours)

= Budgeted fixed overhead

- Actual expenditure on fixed overhead

Fixed Overhead Volume Variances (FOVV) = Budgeted fixed overheads

- (Fixed overhead absorption rate per hour
x Standard hours for actual production)
= (Budgeted hours - Standard hours required
for actual production)x Fixed overhead absorption
rate / Hr
Fixed overhead efficiency variance
rate
Fixed overhead capacity variance
overhead

= (Standard hours for actual production

- Actual hours worked) x Fixed overhead absorption
= Budgeted fixed overheads- (Actual hours x Fixed
absorption rate)
= (Budgeted hours Actual hours)
x Fixed overhead absorption rate
www.caazim.org

24

Example
Question.
A company uses absorption costing for both internal and external reporting
purposes as it
has a considerable level of fixed production costs. The following
information has been recorded for the past year:
Budgeted fixed production overheads
$2,500,000
Budgeted (Normal) activity levels:
Units
62,500 units
Labour hours
500,000 hours
Actual fixed production overheads
$2,890,350
Actual levels of activity:
Units produced
70,000 units
Labour hours
525,000 hours
Required:
(a) Calculate the fixed production overhead expenditure and volume
variances and briefly explain what each variance shows.
(5 marks)
(b) Calculate the fixed production overhead efficiency and capacity
variances and briefly explain what each variance shows.
(5 marks)
(10 marks)
Continued
(Paper 1.2 June 2003)25
www.caazim.org

Continued
Answer
(a)

Fixed Production Overhead Expenditure Variance

Fixed overhead variance

= (Actual expenditure on fixed overhead - Budgeted fixed overhead)

= $ (2,890,350 2,500,000)
= $390,350 (A)

This variance indicates that the company has spent more than originally budgeted.
Fixed Production Overhead Volume variance
Fixed Overhead Volume Variance

Working

= Fixed overhead absorption rate per hour

x (Budgeted hours Standard hours required for actual production)
= (560,000 500,000) hours x $5 per hour
= $300,000 (F)

W1
Standard hours required for actual activity
For that first we shall calculate
Budgeted hours per unit

= 500,000 hours/62,500 units

= 8 hours per unit.

Standard hours required for actual activity = Actual units x Budgeted hours per unit
= 70,000 units x 8 hours per unit
= 560,000 hours
W2

Budgeted Fixed Overhead

Fixed Overhead Absorption Rate (FOAR) = --------------------------------------------------------Budgeted Activity (Standard Hours)
FOAR = $2,500,000/500,000 hours
= $5
www.caazim.org

26

Fixed Production Overhead Efficiency Variance

Fixed Overhead Efficiency Variance = Fixed overheads absorption rate
x (Actual hours worked or paid
- Standard hours required for actual
production)
hours

= $5 x (525,000 560,000)
= $175,000 (F)

The variance shows that the labour was more efficient than originally
envisaged as it took less time than expected to achieve the production
of 70,000 units.
Fixed Production Overhead Capacity Variance
Fixed Overhead Capacity Variance

= (Budgeted hours Actual hours)

x Fixed overhead absorption rate
= (500,000 525,000) x $5
= $125,000 (F)

This variance shows that labour worked for more hours than was originally
budgeted thereby exceeding the budgeted capacity.

Continued

www.caazim.org

27

Continued
Total fixed overhead variance
$90,350 (A)
Expenditure variance
$390,350 (A)

Volume variance
$300,000 (F)

$2,890,350 minus 500,000 x $5 minus 560,000 x $5

Volume variance
$300,000(F)
Efficiency variance
$175,000 (F)
$2,800,000(F)
500,000 x 5

Capacity variance
$125,000 (F)

minus 525,000 x 5 minus

(560,000 x$5)
www.caazim.org

28

Produce full operating statements in both a marginal cost and a full

absorption costing environment, reconciling actual profit to budgeted profit

Absorption Costing

Marginal Costing

Operating income
depends on

Sales and production

i.e. any change in these
will cause operating
income to vary

Sales volume i.e.

change in production
volume will not affect
operating income

Changes

Fixed cost per unit varies

with change in volume

Total Fixed cost &

contribution per unit

Continued

www.caazim.org

29

Continued
Example
Reban Plc is a newly established manufacturing company. The following
information relating to the year ended 20X7 is provided:
Budgeted production
80,000 units
Actual production
70,000 units
Units sold during the year
50,000 units
$
Selling price per unit
200
Costs
Variable costs
8,400,000
(Of this 60% is manufacturing and 40% is selling and distribution
Fixed
costs
2,020,000
expenses)
(Of this 50% is manufacturing and 50% is selling and distribution
expenses)
It being the first year of operation, there is no inventory at the beginning of
the year. Actual input prices per unit and actual quantities per unit of the
product were equal to the standard. Being a cost accountant you are asked
to compute Rebans 20X6 incomes from operation using marginal costing
as well as absorption costing.

Continued

www.caazim.org

30

Continued
Answer 2
The income statement for 20X7 under marginal costing would
follows:
$
$
Sales (50,000 units x $200)
Less: Variable costs
Manufacturing expenses (W1)
3,600,000
Variable selling and distribution expenses
3,360,000
($8,400,000 x 0.40)
Contribution margin
Less: Fixed manufacturing cost
1,010,000
Fixed selling and distribution expenses
($2,020,000 x 0.50)
1,010,000
Operating income

be as
10,000,000

6,960,000
3,040,000

2,020,000
1,020,000

Note
If sales volume increases by 1,000 units, then variable costing operating
income will increase by the amount of the increase in contribution margin
3,040,000 / 50000 x 1000 = 60800

Continued

www.caazim.org

31

Continued
The operating income statement for 20X7 under absorption costing would
$
$
be as follows:
Sales ($50,000 x $200)
Less: Manufacturing costs
Variable cost
(50,000 x $72) (W1)
Fixed costs
(50,000 units x $12.625) (W2)
Add: Fixed overhead volume variance (A) (W2)
Cost of goods sold
Gross margin
Less: Selling expenses
Variable ($8,400,000 x 0.40)
Fixed ($2,020,000 x 0.50)
Operating income

10,000,000
3,600,000
631,250

4,231,250
126,250
4,357,500
5,642,500

3,360,000
1,010,000

4,370,000
1,272,500

The valuation (cost) of ending inventory under absorption costing is:

(70,000 50,000) x $86.43 (W3) = $1,728,600
The valuation (cost) of ending inventory under marginal costing is:
(70,000 50,000) x $72 = $1,440,000
Workings
W1
Variable manufacturing costs per unit = ($8,400,000 x 0.60)/70,000 units = $72 per unit
For 50,000 units manufacturing cost is 50,000 x $72 = $3,600,000

Continued

www.caazim.org

32

Continued
W2
Fixed overhead volume variance is the difference between the amounts of
the budgeted fixed
overhead and the fixed overhead applied First, calculate the budgeted fixed overhead rate
Budgeted fixed overhead
Budgeted fixed overhead rate = ----------------------------------Level of volume
= ($2,020,000 x 0.50)/80,000 units
= $12.625 per unit.
Second, calculate the production volume variance:
Fixed overhead budget

Fixed overhead applied

($2,020,000 x 0.50)
(70,000 x $12.625)
= $1,010,000
= $883,75
Production volume variance
Continued
$126,250
(A)
www.caazim.org

33

Continued
W3
Valuation of ending inventory
All variable cost of manufacturing + fixed cost of manufacturing / Actual
production
(8,400,000 x 0.6) + (2,020,000 x 0.5) / 70,000 = 86.43
The production volume variance here is the same amount as the total
under applied fixed overhead (i.e. fixed overhead variance) because the
question indicates that actual costs incurred are equal to standard or
budgeted amounts i.e. there is no fixed overhead spending variance.
Note that a production volume variance occurs only under absorption
costing because all fixed overhead costs incurred are written off as period
costs under marginal costing.

www.caazim.org

34

The effect of idle time and waste on variances including where idle time has
been budgeted for

Idle time:
If idle time is included in standard cost:

Idle time variance =(Standard idle time Actual idle time) x

Standard labour rate

If idle time is not included in standard cost:

Idle time variance = Actual Idle hours x Standard labour rate

Waste:
The material waste variance will get reflected in the yield variance
whether the actual waste is more or less than the standard.

www.caazim.org

35

ABC based variances

Variance analysis for
variable set-up overhead
cost
Total variance for
variable set-up
overhead costs

Variable overhead
(of an activity)
efficiency variance

Variable setup
overhead spending
variance

Actual costs
incurred flexible
budget costs

(Actual quantity
allocation base
budgeted QTY of
allocation base) x
budgeted
VOH/allocation base

Actual variable
cost/unit of
allocation base
budgeted variable
unit of allocation
base

Continued
www.caazim.org

36

Continued
Variance analysis for
variable set-up overhead
cost
Fixed overhead (w.r.t an activity)
variance or fixed overhead (w.r.t
an activity) spending variance

Production volume variance

for FOH costs (w.r.t an activity)

Actual costs incurred flexible

budget costs

Budgeted FOH costs FOH

allocated with budgeted input
allocated for actual output
units produced

Methods of investigating
Determining statistical
probability to chart out incontrol and out of control
distribution
Refer Self Examination Question

Setting predetermined
criteria

www.caazim.org

Statistical
decision
models

37

Section D: Standard Costing And Variance Analysis

Designed to give you knowledge and application of:
D1.
D2.
D3.
D4.
D5.
D6.

Budgeting and standard costing

Basic variances and operating statements
Material mix and yield variances
Sales mix and quantity variances
Planning and operational variances
Behavioural aspects of standard costing

www.caazim.org

38

D3:Material mix and yield variances

Learning outcomes
Calculate, identify the cause of, and explain mix and yield variances. [2]
Explain the wider issues involved in the changing mix e.g. cost, quality

and performance measurement issues. [2]

Identify and explain the interrelationship between price, mix and
yield.[2]
Suggest and justify alternative methods of controlling production
processes. [2]

Calculate, identify the cause of, and explain mix and yield
variances
Material mix variance (MMV) = (Standard mix of raw materials on actual
input
- Actual mix of raw materials on actual
input) x
Standard cost per unit of raw
materials.

= (Standard mix - Actual mix) x

Material yield
Standard
cost variance (MYV) = (Standard yield for actual mix Actual
yield or
per unit
actual mix) x Standard weighted
average cost
per unit
Material mix variance
Materialinyield
variance
of all&material
the mix
are part of
Material volume & quantity variance

Continued
www.caazim.org

40

Continued
Subset of material usage variance
Material mix
variance

Shows the effect on material cost due

to a change in the mix
(standard mix actual mix) x
standard cost per unit of output
Subset of material usage variance

Material yield
variance

Shows the effect on material cost

due to change in yield

(standard output actual output) x

standard cost per unit of output
www.caazim.org

41

Wider aspects of changing mix

Standard Material mix is the cheapest possible combination of materials (as

input) as per technical specifications per unit of output.
Such optimal mix may change due to material substitution or price changes.
The issues involved in changing mix are:
a) Relative prices, availabilities & technical features of input materials at the time
of selecting mix
b) Existence of alternative material
c) Planned yield to be considered on actual mix

www.caazim.org

42

Example
Destruction Ltd manufactures Centex explosive from Centive and Amex.
The
standard cost is:
kg

Centive

$/kg

10

Amex

10

30

Total for 1 batch

15

40

In a period, 80 batches of Centex were produced from 500 kg of Centive

and 730 kg of Amex. Actual prices were $2.45 per kg and $2.75 per kg
respectively.
Calculate Material usage variance, Material mix variance and Material yield
Variance and material price variance.
Material usage variance = (Standard quantity for actual production Actual
quantity) x Standard price
For Centive
= (400 - 500) x 2
= $200 (A)
For Amex
= (800 730) x 3
= $210 (F)
www.caazim.org

43

Material mix variance

Input

= (Actual quantity in standard mix

Actual quantity in actual mix)
x Standard cost of material
Actual quantity
Actual quantity
Difference
Standard

in standard mix

in actual mix

Variance

price

Centive

410

500

(90)

(180) (A)

Amex

820

730

90

270 (F)

1,230

1,230

Total

90 (F)

Material Yield Variance = (Standard yield from actual mix Actual yield from actual
mix)
x Standard price
= (1,230 1,200) x $2.67 per kg {80*15} & {40 /15}
= $80 (A)
W1 Standard quantity = Number of batches x Number of units per batch
For Centive = 80 batches x 5 kg per batch = 400 kg
For Amex = 80 batches x 10 kg per batch = 800 kg
W2 In order to ascertain actual quantity in standard mix apply standard ratio on
actual quantity
Accordingly, actual quantity in standard mix
For Centive = 5 / 15 x 1230 = 410
For Amex = 10 / 15 x 1230 = 820
www.caazim.org

44

Identify and explain the interrelationship between price, mix and yield
Relationship between
price, mix, yield
favourable price variance may cause
adverse yield variance and vise-versa
if material price is low due to inferior
quality

favourable mix may lead to poor

output (i.e. yield)

change in relative price might

influence change in mix and yield
Refer to Self Examination Question
www.caazim.org

45

Mix variance:
A favourable variance would suggest that a
higher proportion of a cheaper material was
used. This could be due to:
1. a decision to cut costs
2. greater availability of cheaper materials
3. Unavailability of other more expensive
materials
4. Costs of other materials having risen so it
was decided to use less of them
www.caazim.org

46

Yield variance:
An adverse variance would suggest that less
output has been achieved for a given input.
i.e. that the total input in volume is more
than expected for the output achieved. This
could be due to:
1. labour inefficiencies
2. higher waste
3. inferior materials
4. using a cheaper mix with a lower yield
www.caazim.org

47

JPP manufactures and exports a wide range of

writing paper and envelopes such as leather
journals, guest books, albums, diaries etc. The
products are made from the highest quality
handicraft paper.
It was decided in a board meeting, that the
companys operations will be reviewed on a
quarterly basis.
Therefore, Jacky, the management accountant,
has suggested to use the standard costing
system for performance analysis of each product.
The budgeted output and sales for the period
January to March 20X9 is 5,000 units.

www.caazim.org

48

The following standard data is provided for

the three month period.
Direct material per unit: Paper 1.5 kg @ $30 per kg
Ink and other material 0.25 kg @ $20 per kg
Direct labour per unit 3 hrs at $8 per hour
Selling price per unit
Fixed overheads

www.caazim.org

$45
$5
$24
$100
$50,000

49

Actual results for the period are as follows:

$

Selling price 4,850 units

533,500
Direct material: Paper 8,245 kg
243,228
Ink and other material 1,123 kg
21,337
Direct labour 17,072 hours
128,040
Fixed overheads
57,500
Note: the actual hours paid were 17,072, but
the employees worked for only 16,330 hours.

www.caazim.org

50

Required- calculate the following variances.

1. Materials price variance
2. materials usage variance
3. Material mix variance
4. Material yield variance
5. Direct labour efficiency variance
5. Direct labour rate variance
7. Fixed overhead variances
8. Sales price variance
9. Sales volume variance

www.caazim.org

51

D4: Sales mix and Quantity variances

Learning Outcomes
Calculate, identify the cause of, and explain sales mix and quantity

variances. [2]
Identify and explain the relationship of the sales volume variances with
the sales mix and quantity variances. 2]

Calculate, identify the cause of, and explain sales mix and
Quantity variances
Sales mix refers to the proportion of different products in the total sales.
The actual product-wise proportion in the total sales quantity may be
different than the budgeted mix and this may affect the profitability
positively or negatively.
Sales mix variance (SMV) = Budgeted contribution margin per unit x
(Actual
sales at actual mix- Actual sales at budgeted
mix)
According to the sales budget, the sales of products A and B were 800 and 1,200
units at a contribution margin of $5 and $8 respectively. However, the actual sales
of products A and B were 500 and 1,500 units.
The total budgeted sales would differ from the actual sales even though the total
number of units sold is the same. This is because of change in the sales mix.
Budgeted sales mix: 800: 1,200 = 2:3
Actual sales mix: 500: 1,500 = 1:3

Continued
www.caazim.org

53

Continued
Sales mix variance (SMV) = Budgeted contribution margin per unit x
(Actual sales at actual mix- actual sales at
budgeted mix)
Product A: $5 x (500 800) = $1,500 A
Product B: $8 x (1,500 1,200) = $2,400 F
Sales mix variance = $1,500 A + $2,400 F = $900 F
Due to favourable sales mix variance, actual profit will be $900 more
than the budgeted profit, which is beneficial for the company.

www.caazim.org

54

Sales Quantity variance

Sales quantity variance indicates the effect on profit of selling a different
total quantity from the budgeted total quantity
Sales Quantity variance (SQV) = ( Budgeted contribution margin per unit
x
(Actual sales at budgeted mixStandard
sales at budgeted mix)
According to the sales budget of 15,000 units, budgeted sales mix is 2:3 for
two products, X and Y. The actual sales of products X and Y are 4,000 and
12,000 units at $10 and $8 respectively. The variable costs are 60% of sales.

Actual sales at budgeted mix:

Product X: 16,000 x 2/5 = 6,400 units
Product Y: 16,000 x 3/5 = 9,600 units
Standard sales at budgeted mix:
Product X: 15,000 x 2/5 = 6,000 units
Product Y: 15,000 x 3/5 = 9,000 units
Here, total budgeted units are different from actual sales units. Sales
quantity variance will arise in such a case.

Continued
www.caazim.org

55

Continued
Sales Quantity variance (SQV) = (Budgeted contribution margin per unit x
(Actual sales at budgeted mixStandard
sales at budgeted
mix)
Product X: $4 x (6,400 6,000) = $1,600 F
Product Y: $3.20 x (9,600 9,000) = $1,920 F
Sales quantity variance = $1,600 F + $1,920 F = $3,520 F

A favourable sales quantity variance indicates that due to change in sales

quantity, actual profit is $3,520 more than the budgeted profit

www.caazim.org

56

Aspects of sales mix and quantity variances

Aspects of sales mix and quantity variances

Unit method

The main purpose behind this

method is to know the
proportion of unit sold in
each product

Revenue method

The main purpose behind this

method is to know the
proportion revenue obtained
from each product

Refer to the example given on page 395

www.caazim.org

57

Identify relationship between sales volume with mix & quantity

variances
Relationship between sales
volume with mix & quantity
variance
Sales volume variance is total of sales
mix & quantity variance

Sales mix variance will be favourable

when actual profit exceeds the
budgeted profit

Sales quantity variance will be

favorable only if actual sales exceed
budgeted sales

Continued
www.caazim.org

58

Continued

Sales Volume Variance(SVV) =Budgeted

contribution per unit x (Actual sales at actual mixBudgeted sale at budgeted mix)

=
Sales Mix Variance(SMV) =Budgeted
contribution per unit x (Actual sales at
actual mix-Actual sales at budgeted mix)

Sales Quantity Variance(SQV)

=Budgeted contribution per unit x (Actual
sales at Budgeted mix-Budgeted sales at
budgeted mix)

Refer to the Self-Examination Question

www.caazim.org

59

D4:Planning and operational variances

Learning outcomes
Calculate a revised budget
Identify and explain those factors that could and could not be

allowed to revise an original budget

Calculate planning and operational variances for sales, including

market size and market share materials and labour

Explain the manipulation issues in revised budgets

www.caazim.org

60

Reasons for revising budget

Emergence of
unforeseen and
unanticipated
situations

Changes in internal
factors. e.g.
production and sales
forecast

Changes in external
factors. e.g. market
trends, nature of
economy

www.caazim.org

61

Planning variances

Planning variances intend to quantify and analyse the extent to

which the original standard needs to be adjusted in order to reflect
changes in operating conditions between the current situation and that
envisaged when the standard was originally calculated.
Planning variance = (Original budgeted quantity Revised budgeted
quantity) x Standard margin

www.caazim.org

62

Operational variances

Operational variances indicate the extent to which attainable targets

(i.e., the adjusted standards) have been achieved.
Operational variance = (Revised budgeted quantity Actual
performance in quantity) x Standard margin

www.caazim.org

63

Importance of Adjusted Standards

Adjustment is needed by change in business environment

Variances are analysed with respect to revised standards that are attainable.
This is referred to as Ex-post Variance Analysis (Ex-post means after the facts)
Original budgets / standards are called Ex-ante (meaning beforehand), while
revised budget / standards are called Ex-post

www.caazim.org

64

Example
In a four week period Sigma Ltd budgeted to make and sell 9,000
units of its single product with a budget as follows:
Budgeted for one month period
$
Production and sales (9,000 units at $20 each)
Less: Variable costs (9,000 at $8 each)
Contribution
Less: Fixed cost
Profit

180,000
72,000
108,000
50,000
58,000

There was an external power line failure and three days production out of
20 days were lost. The actual results were:
$
Production and sales (8,000 units at $20 each)
160,000
Less: Variable costs (8,000 at $8 each)
64,000
Contribution
96,000
Less: Fixed costs
50,000
Profit
46,000

Continued
www.caazim.org

65

Continued

In the situation, the planning and operating variances will be as following:

With retrospection a more realistic revised (i.e. ex-post) budget for the period would have
been 9,000 units less standard production for three days i.e., 9,000 1,350 = 7,650 units.

Therefore the planning variance would be the original (i.e. ex-ante) budget less the revised
(i.e. ex-post) budget at the standard margin, i.e., (9,000 7,650) x $12 = $16,200 (A).
The operational variance, which is deemed to be the controllable portion, is the difference
between the more realistic ex-post budget and actual output at the standard margin i.e.,
(7,650 8,000) x $12 = $4,200 (F).
Traditionally,
Sales margin volume variance
= (Original budgeted quantity Actual sales volume) x Standard
margin
= (9,000 - 8,000) x $12
= $12,000 (A), which is equal to the summation of the planning
and operational variances above

www.caazim.org

66

Market size variances

This variance shows the expected additional contribution needed by an

organisation to maintain the same market size when actual sales for the
industry as a whole are more than the budgeted sales of the industry.
This is calculated as:
Market size variance =

Budgeted market
share percentage

Actual
industry sales
volume in
units

Budgeted
industry sales
volume in
units

www.caazim.org

Budgeted
average
contribution
margin per units

67

Market share variances

This variance shows the contribution lost as a result of not attaining the
expected market share or additional contribution on account achieving
an additional share in the market than budgeted.
This is calculated as:
Market share variance =

Actual market
share
percentage

Budgeted
market share
percentage

Actual
industry sales
X
volume in
units

www.caazim.org

Budgeted
average
contribution
margin per
unit

68

Continued
The budgeted sales for the Monta calio company for year 20X6 were:
Product
X
Y
Z

Units
20,000
18,000
12,000
50,000

Unit
contribution margin
$
15
8
6

Total
contribution
$
300,000
144,000
72,000
516,000

Unit
contribution margin
$
15
8
6

Total
contribution
$
240,000
140,000
132,000
512,000

And the actual sales were:

Product

X
Y
Z

Units

16,000
17,500
22,000
55,500

Budgeted and actual industry sales were 500,000 and 650,000 units.
Calculate :
Market size and Market share variances

Continued
www.caazim.org

69

Continued

Answer
b) Market size variance
Market size =

Budgeted
market share
percentage

Actual
industry
sales
volume in
units

Budgeted
industry
sales
volume in
units

Budgeted
average
contribution
margin per
unit

= 10% x (650,000 500,000) x $10.32

= $154,800 (F)

Continued
www.caazim.org

70

Continued
Workings
W2
Budgeted average contribution margin per unit

516,000/50,000 = $10.32
c) Market share
Market share =
Actual
market
share
percentage

Budgeted
market
share
percentage

Actual
industry
sales
volume in
units

Budgeted
contribution
per unit

Market share = (8.53846% - 10%) x 650,000 x 10.32

= $ 98040(A)

Continued
www.caazim.org

71

Continued
Workings

W3
Market percentages
Actual market share percentage = 55,500/650,000 x 100
= 8.53846%
Budgeted market share percentage = 50,000/500,000 x 100
=10%

www.caazim.org

72

Recap

Calculate a revised budget

Identify and explain those factors that could and could not be allowed to

revise an original budget

Calculate planning and operational variances for sales, including market

size and market share materials and labour

Explain the manipulation issues in revised budgets

www.caazim.org

73

Questions???

www.caazim.org

74

W1 Calculation of standard contribution per unit

$ $
Standard sales price
100
Direct material:
Paper
45
Ink and other material
5
Direct labour
Total cost per unit
(74)
Standard contribution
26

www.caazim.org

75

(i) Sales variances

Sales volume contribution variance = (Actual
sales - Budgeted sales) x Standard contribution
per unit (W1) = (4,850 units - 5,000 units) x $26
= $3,900 (A)

Sales price variance = (Actual selling price per

unit - Standard selling price per unit) x Actual
quantity sold = Actual sales - Actual sales at
standard price
= $533,500 - (4,850 units x $100)
= $48,500 (F)

www.caazim.org

76

(ii) Direct material variances

Direct material price variance = Standard
material price for actual quantity Actual
material cost
For paper = ($30 x 8,245 kg) $243,228 =
$4,122 (F)
For ink and other material = ($20 x 1,123 kg)
$21,337 = $1,123 (F)

www.caazim.org

77

Material mix variance = (Standard mix of raw materials on

actual input (W2) Actual mix of raw materials on actual
input) x Standard cost per unit of raw materials
For paper = (8,030 kg 8,245 kg) x $30 = $6,450 (A)
For ink and other material = (1,338 kg 1,123 kg) x $20
= $4,300 (F)
Material yield variance = (Standard yield for actual mix
(W2) Actual yield for actual mix (W3)) x Standard cost per
unit of raw material
For paper = (8,030 kg 7,275 kg) x $30 = $22,650 (A)
For ink & other material = (1,338 kg 1,212.50 kg) x $20
= $2,510 (A)

www.caazim.org

78

Workings
W2 Standard mix of raw material on actual input
Actual quantity of input (materials) = 8,245 kg + 1,123 kg
= 9,368 kg
Paper = 9,368 kg x (1.5/1.75) = 8,030 kg
Ink and other material = 9,368 kg x (0.25/1.75) = 1,338
kg
W3 Actual yield for actual mix
Standard quantity of materials for actual output = 4,850
units x 1.75 kg = 8,487.50 kg
Paper = 8,487.50 kg x (1.5/1.75) = 7,275 kg
Ink and other material = 8,487.50 kg x (0.25/1.75) =
1,212.50 kg

www.caazim.org

79

(iii) Direct labour variances

Labour rate variance = (Standard wages rate per hour
Actual wages rate per hour) x Actual labour hours =
($8 x 17,072 hrs) $128,040 = $8,536 (F)
Labour efficiency variance = (Standard labour hours
for actual production Actual labour hours worked) x
Standard rate per hour = ((3 hrs x 4,850 units)
16,330 hrs) x $8
= $14,240 (A)
Idle time variance = (Hours paid Hours worked) x
Standard wage rate per hour = (17,072 hrs 16,330
hrs) x $8 = $5,936 (A)

www.caazim.org

80

www.caazim.org

81