Standard Costing: Chapter Overview

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“Competition on dimensions other than price—on product features, support services, delivery time, or brand image,
for instance—is less likely to erode profitability because it improves customer value and can support higher prices.”
– Michael Porter
Strategic issues are increasingly becoming important, cost management has transformed from a traditional role of product costing
and operational control to a broader, strategic focus. Strategic Cost Management (SCM) requires that professional accountants
hold new skills that extend beyond their traditional practices. They must collaborate with corporate strategists in creating,
managing, and protecting value. SCM emphases on developing, implementing and monitoring strategies in order to enhance value
for the organization. Such a focus would not be possible without understanding the key role that Performance Management plays
in strategy and value creation. Syllabus links strategy, management control systems and performance management. The various
models of performance management, the strategy mapping process, as well as flowing performance measures in performance
management, are part of the curriculum.
standard costing
Planning & operational Variances
CHAPTER OVERVIEW
When the current environmental conditions are different from
Contemporary the anticipated environmental conditions (prevailing at the time
Behavioural Issues Standard Costing Business Environmet of setting standard or plans) the use of routine analysis of variance
for measuring managerial performance is not desirable / suitable.
The variance analysis can be useful for measuring managerial
Analysis of Advanced performance if the variances computed are determined on the basis
Variances Reconcilliation of Profit Reporting of Variances of revised targets / standards based on current actual environmental
• Planning and • Budgeted Profit
conditions.
• Variance In order to deal with the above situation i.e. to measure managerial
Operational variances to Actual Profit Investigation
• Variance Analysis (Absorption Techniques performance with reference to material, labour and sales variances,
in Activity Based Costing)
Environment • Budgeted Profit
• Possible it is necessary to compute the Planning and Operational Variances.
Interdependence
• Relevant Cost Approach to Actual Profit between Variances
to Variance Analysis (Marginal Costing) • Interpretation of
• Variance Analysis and • Standard Profit to Variances
Throughput Accounting Actual Profit
• Learning Curve-Impact A Planning An Operational Variance simply
on Variances Variance simply compares the actual results
Planning Variance
• Variance Analysis in compares a against the revised amount.

• Integration of
Advanced
Standard Costing with revised standard Operating Variances would be
Manufacturing
Environment Marginal Costing to the original calculated after the planning
- Service Industry standard. variances have been established
- Public Sector
Operational Variance
and are thus a realistic way of
Classification of assessing performance.
variances caused
by ex-ante budget Classification of variances
allowances being in which non-standard
ANALYSIS OF ADVANCED VARIANCES changed to an performance is defined as being
Variance analysis is examinable both at Intermediate Level (Cost ex post basis. that which differs from an ex
and Management Accounting) and at Final Level (Strategic Cost Also, known as a post standard. Operational
Management and Performance Evaluation). One main difference revision variance. variances can relate to any
in syllabus between the two papers is that the Final Level syllabus element of the standard product
includes analysis of advanced variances, as follows: specification.
Standard ex ante
Before the event. An ex ante budget or standard is set before a period
Planning and of activity commences.
Operational
Standard, ex post
Variances After the event. An ex post budget, or standard, is set after the end
of a period of activity, when it can represent the optimum achievable
Variance level of performance in the conditions which were experienced.
Advanced Thus, the budget can be flexed, and standards can reflect factors
Analysisi n
Environment/ such as unanticipated changes in technology and in price levels.
Activity Based
Services This approach may be used in conjunction with sophisticated cost
Costing and revenue modelling to determine how far both the plan and the
achieved results differed from the performance that would have been
Advanced expected in the circumstances which were experienced.
Variances
compared with
Actual Results Ex-ante Standard
=Total Variance
Variance
Learning Curve split into
Analysisa nd
Impact o n P
by nt O orti
Variances ble e
pe on
Accounting lla gem
ra U
tio n
ro
t n a na con
on Ma l M tr
Relevant Cost n C al an olla
r tio tion ag bl
em e b
Approacht o Po era en y
p t
Variance O
Analysis
Actual compared Ex-post Ex-post compared Ex-ante
Results Standard Standard Standard
with with
= Operational Variances = Planning Variances
(valued in Opportunity Cost terms)
The Chartered Accountant Student November 2019 07

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Direct Material Usage Variance Direct Labour Rate Variance
Traditional Variance
Traditional Variance Actual vs. Original Standard
Actual vs. Original Standard [Standard Rate – Actual Rate] × Actual
Time
[Standard Quantity – Actual Quantity] ×
Standard Price
Planning Variance Operational Variance

Planning Variance Operational Variance Revised Standard vs. Actual vs. Revised
Original Standard Standard
Revised Standard vs. Actual vs. Revised
Original Standard Standard [Standard Rate – Revised [Revised Standard Rate –
Standard Rate] × Revised Actual Rate] × Actual Time
[Standard Quantity – [Revised Standard Quantity Standard Time
Revised Standard Quantity] – Actual Quantity] ×
× Standard Price Revised Standard Price
Note:
Direct Labour Efficiency Operational Variance using Standard
Rate, and the Direct Labour Rate Planning Variance based on
Direct Material Price Variance Actual Hours can also be calculated. This approach reconciles
the Direct Labour Rate Variance and Direct Labour Efficiency
Traditional Variance Variance calculated in part.
Actual vs. Original Standard
[Standard Price – Actual Price] × Actual
The conventional Sales Volume Variance reports the difference
Quantity between actual and budgeted sales valued at the standard price
per unit. The variance just indicates whether sales volume is
greater or less than expected. It does not indicate how will sales
management has performed. In order to assess the performance
of sales management, market conditions prevailing during the
period should be taken into consideration.
Planning Variance Operational Variance
Revised Standard vs. Actual vs. Revised Accordingly, the sales volume variance can be sub-divided into
Original Standard Standard a planning variance (market size variance) and operational
[Standard Price – Revised [Revised Standard Price variance (market share variance).
Standard Price] × Revised – Actual Price] × Actual
Standard Quantity Quantity
A Planning Variance simply compares a revised standard to the
original standard. An Operational Variance simply compares
Note: the actual results against the revised amount. Controllable
Variances are those variances which arises due to inefficiency of
Direct Material Usage Operational Variance using Standard a cost centre /department. Uncontrollable Variances are those
Price, and the Direct Material Price Planning Variance based on variances which arises due to factors beyond the control of the
Actual Quantity can also be calculated. This approach reconciles management or concerned department of the organization.
the Direct Material Price Variance and Direct Material Usage
Variance calculated in part. Planning variances are generally not controllable. Where
a revision of standards is required due to environmental/
technological changes that were not anticipated at the time
Like Material Variances, here also Labour Efficiency and Wage Rate the budget was prepared, the planning variances are truly
Variances should also be adjusted to reflect changes in environmental uncontrollable. However, standards that failed to anticipate
conditions that prevailed during the period. known market trends when they were set will reflect faulty
standard-setting: it could be argued that these variances were
controllable at the planning stage.
Direct Labour Efficiency Variance

Variance Analysis in Activity-Based Costing
Variance analysis can be applied to activity costs (such as setup
Traditional Variance costs, product testing, quality testing etc.) to gain understanding
Actual vs. Original Standard into why actual activity costs vary from activity costs in the static
[Standard Time – Actual Time] × Standard budget or in the flexible budget.
Rate Interpreting cost variances for different activities requires
understanding whether the costs are output unit-level, batch
level, product sustaining, or facility sustaining costs2.
We use the similar track to variance analysis for activity-
Planning Variance Operational Variance based costing as for traditional costing. The price variance is
the difference between standard price and actual price for the
Revised Standard vs. Actual vs. Revised
Standard actual quantity of input used for each cost driver. The efficiency
Original Standard
variance measures the difference between the actual amount
[Standard Time – Revised [Revised Standard Time of cost driver units used, and the standard allowed to make the
Standard Time] × Standard – Actual Time] × Revised
Standard Rate output. We multiply the difference in quantities by the standard
Rate
price per cost driver to get the rupee value of the variance3.
08 November 2019 The Chartered Accountant Student

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devices, Nanotechnology, Semiconductors, Telecommunication
ABC approach is based on the assumption that the overheads apply the model somewhat differently. Now much of electronic
are basically variable (but variable with the delivery numbers industry is highly automated. A large part of manufacturing
and not the units output). The efficiency variance reports the process is computerized.
cost impact of undertaking more or less activities than standard,
and the expenditure variance reports cost impact of paying
more or less than standard for the actual activities undertaken4. In the high-technology environment that is emerging, many
costs that once were largely variable have become fixed,
most becoming committed fixed cost. Some high technology
Learning Curve- Impact on Variances manufacturing organizations have found that the two largest
Learning curve is a geometrical progression, which reveals variable costs involve materials and power to operate machines.
that there is steadily decreasing cost for the accomplishment In these companies, the emphasis of variance analysis is placed
of a given repetitive operation, as the identical operation is on direct materials and variable manufacturing overhead.
increasingly repeated. The amount of decrease will be less and
less with each successive unit produced. As more units are Much of the manufacturing labour consists of highly skilled
produced, people involved in production become more efficient experts/ operators/ programmers are largely committed
than before. Each additional unit takes less time to produce. The cost. Firms don’t want to take risk losing such highly trained
amount of improvement or experience gained is reflected in a personnel even during an economic downturn. The result is
decrease in man-hours or cost. Where learning takes place with less direct labour and more overhead. For these firms labour
a regular pattern it is important to take account of reduction in variances may no longer be meaningful because direct labour is a
labour hours and cost per unit. committed cost, not a cost expected to vary with output.
Automated manufacturing is unlikely to have much variation or Standard Costing in Service Sector
to display a regular learning curve. In less-automated processes, Standard Costing can be equally applicable for various types
however, where learning curves do occur, it is important to take of industries for example accountants, solicitors, dentists,
the resulting decline in labour hours and costs into account in hairdressers, transport companies and hotels. Service industries
setting standards, determining prices, planning production, or comprise a wide range of different businesses that differ in size
setting up work schedules. and types of service provided. Standard costing and variance
analysis is more tough to apply to service sector organizations
With the help of the learning curve theory the standard time of as major portion of their cost is comprised of overhead expenses
any batch or unit can be computed then compare the actual data rather than production expenses. While traditional variance
with the standard and compute the variances. analysis of overheads does not deliver very useful information
for overheads control purposes, application of activity based
Relevant Cost Approach to Variance Analysis costing can provide an effective basis for variance analysis of
Traditional approach to variance analysis is to compute overheads in service sector organizations although this may need
variances based on total actual cost for production inputs and significant time and effort in the implementation of a MIS.
total standard cost applied to the production output. This is
ambiguous, when inputs are limited. Failure to use limited inputs
McDonaldization5
properly leads not only to increased acquisition cost but also to
a lost contribution. Therefore, it is necessary to consider the lost McDonaldization is a process of rationalisation, which takes
contribution in variance analysis. When this approach is used, a task and breaks it down into smaller tasks. This is repeated
price or expenditure variances are not affected. until all tasks have been broken down to the smallest possible
level. The resulting tasks are then rationalised to find the
Variance Analysis and Throughput Accounting single most efficient method for completing each task. All
Variance analysis has no emphasis on the constrained resources. other methods are then deemed inefficient and discarded.
Instead, it is based on the efficiency and cost of operation of each
part of the manufacturing system, rather than the ability of the The impact of McDonaldization is that standards can be
entire system to generate a profit. Thus, a firm may find that it more accurately set and assessed. It can be easily ascertained
attains excellent efficiency and price variances by having long that how much time and cost should go into each activity.
manufacturing rounds and buying in large quantities. A system The principles can be applied to many other services, such as
based on constraint management will likely show very odd hairdressing, dentistry, or opticians' services.
results under a variance reporting system.
Standard Costing in Public Sector6
For example, when a terminal upstream from the constrained In order to cost control in public sector (e.g. street cleaning
resource runs out of work, a manager functioning under throughput refuse disposal and so on), regular variance analysis is required.
accounting system will shut it down in order to avoid the formation Actual unit costs should be calculated on a monthly basis and
of an unnecessary level of work-in-process inventory. However, compared with estimated unit cost. To achieve this comparison,
this will result into a negative labor efficiency variance, since the information needs to be maintained about the unit of service
terminal’s staff is not actively producing anything.
adopted. For example, statistics would be maintained on the
number of visits made and the number of hours worked. In
Throughput accounting does use variance analysis, but not the this example, time recording may be beneficial in providing the
ones used by a traditional system. Instead, its main emphasis is detailed information necessary for variance analysis. Actual
on tracking variations in the size of the inventory buffer placed monthly costs should be taken from the organisation’s financial
before the constrained resource, to confirm that the constraint management system and each month financial reports should be
is never halted due to an inventory shortage.
produced which offer an accurate image of budgeted vs actual
expenditure. These reports are must for budgetary control.
Variance Analysis in Advanced Manufacturing Environment/ Actual expenditure reported on financial systems may require
High-Technology Firms some modification to take account of:
The variance analysis generally applies to all types of ♦ Trade Payables (services used but bills unpaid)
organizations; however, high-technology firms like Audio ♦ Accruals (services used but bills yet to be received)
Technology, Automotive, Computer Engineering, Electrical ♦ Timing Differences (some costs are not incurred evenly over
and Electronic Engineering, Information Technology, Medical the year)

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Standard Marginal Costing Reconciliation Statement-II
Budgeted Profit to Actual Profit (Marginal Costing)
Standards and Variances can be calculated on the basis of marginal
costing. A standard marginal costing system incorporates
only costs which are variable to the product. Accordingly, the Budgeted Profit 
absorption of fixed costs, and the variances derived therefrom, (Budgeted Quantity × Standard Margin)
do not feature in a standard marginal costing system. When
Effect of Variances
Marginal Costing is in use there is no Overhead Volume
Variance, because Marginal Costing does not absorb Fixed Material Cost Variance
Overhead. Fixed Overhead Expenditure Variance is the only Material Price Variance 
variance for Fixed Overhead in a Marginal Costing system. It is
calculated as in an Absorption Costing system. Material Usage Variance
Material Mix Variance 
Material Yield Variance   
Reconciliation Of Profit
Labour Cost Variance
Generally, under variance analysis we compute various variances
from the actual and the standard/budgeted data. Sometimes all Labour Rate Variance 
or a few variances and actual data are made available and from Labour Idle Time Variance 
that we are required to prepare standard product cost sheet,
original budget and to reconcile the budgeted profit with the Labour Efficiency Variance
actual profit. Some important concepts are given below: Labour Mix Variance 
Reconciliation Statement-I Labour Sub-Efficiency Variance   
Budgeted Profit to Actual Profit (Absorption Costing) Variable Overhead Cost Variances
Variable Overhead Expenditure 
Budgeted Profit  Variance
(Budgeted Quantity × Standard Margin) Variable Overhead Efficiency Variance  
Effect of Variances Fixed Overhead Cost Variances
Material Cost Variance Fixed Overhead Expenditure Variance 
Material Price Variance  Fixed Overhead Volume Variance
Material Usage Variance Fixed Overhead Capacity Variance NA
Material Mix Variance  Fixed Overhead Efficiency Variance NA NA 
Material Yield Variance    Sales Contribution Variances
Labour Cost Variance Sales Contribution Price Variance 
Labour Rate Variance  Sales Contribution Volume Variance
Labour Idle Time Variance  Sales Contribution Mix Variance 
Labour Efficiency Variance Sales Contribution Quantity    
Variance
Labour Mix Variance 
Actual Profit 
Labour Sub-Efficiency Variance   
Variable Overhead Cost Variances
Variance
Variable Overhead Efficiency Variance  
Fixed Overhead Cost Variances
Fixed Overhead Expenditure Variance 
Fixed Overhead Volume Variance
Fixed Overhead Capacity Variance 
Fixed Overhead Efficiency Variance   
Sales Margin Variances (in terms of
Profit)
Sales Margin Price Variance 
Sales Margin Volume Variance
Sales Margin Mix Variance 
Sales Margin Quantity Variance    
Actual Profit 

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Reconciliation Statement-III Investigation Of Variances
Standard Profit to Actual Profit (Absorption Costing)
Variances focus attention on deviations, but all deviations
cannot be taken as ‘out of Control’ situations. However, variance
Standard Profit  investigation on the other hand may not be fruitful in any given
(Actual Quantity × Standard Margin) situation considering that it requires resources and thus a cost
Effect of Variances benefit analysis should be considered before undertaking
investigation.
Material Cost Variance
Material Price Variance  Investigating variances is a key step in using variance analysis as
part of performance management. “Interpretation may suggest
Material Usage Variance possible cause of variances but investigation must arrive at
Material Mix Variance  definite conclusions about the cause of the variance so that action
Material Yield Variance    to correct the variance can be effective.” There are behavioural
as well as technical consequences to the decision to investigate
Labour Cost Variance variances. If no variances are investigated, it may cease to be
Labour Rate Variance  motivated by the system which produce variances. Investigating
Labour Idle Time Variance  favourable and adverse variances may create positive behavioural
reinforcements, with implications for motivation, aspiration
Labour Efficiency Variance levels and inter-departmental relationships.
Labour Mix Variance  Factors to be Considered When Investigating Variance
Labour Sub-Efficiency Variance    Certain set of factors should be considered before undertaking
Variable Overhead Cost Variances the variance investigation of the actual performance against the
estimates set.
Variance
Variable Overhead Efficiency Variance  
Size: A standard is seen as an average of the estimates
Fixed Overhead Cost Variances and therefore small variations seen from the standard
Fixed Overhead Expenditure Variance  should be ignored and not investigated further. In
addition, organizations can establish limits and
Fixed Overhead Volume Variance
the variances seen beyond those limits should be
Fixed Overhead Capacity Variance  undertaken for further investigation.
Fixed Overhead Efficiency Variance   
Sales Margin Variance (in terms of
Profit)
Sales Margin Price Variance  Type of Variance: Adverse variance is given more
importance by the organization over favourable
Sales Margin Volume Variance
variances seen with regards to the estimates.
Sales Margin Mix Variance NA
Sales Margin Quantity Variance NA NA  
Actual Profit 
Cost: The costs associated with the undertaking of
the investigation should be lower than the benefits
associated with the investigation of variances for the
organization to undertaken the said investigation.
Pattern in Variance: The variances need to be

monitored over a period of time and if the variance of
a particular cost is seen to be worsening over time then
in that case the investigation in relation to the variance
needs to be undertaken.
Budgetary Process: In case the budgetary process is

uncontrollable and unrealistic then in that case the
investigation should be re-evaluating the budgetary
process rather than undertaking investigation of the
variances.

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Method Used for Investigating Variance7 of normal distribution theory. An observation of an average time
taken of 3 hrs. per unit of output is 2 standard deviations from
Simple Rule of Thumb Model the expected value, where, for a normal distribution,
It is based on arbitrary criteria such as investigating if the absolute Probability of Completing the Project in 3 hrs.
size of a variance is greater than a certain amount or if the ratio
of the variance to the total cost exceeds some predetermined x–μ
Z =
percentage. They are based on managerial judgement and do not σ
consider statistical significance.
3.00 - 2.50
Z =
0.25
Statistical Decision Model
For the statistical models, two mutually exclusive states are Z = 2.0
possible. First assumes that the system is 'In Control' and a P (Z = 2.0) = 0.9772
variance is simply due to random fluctuations around the
expected outcome. The second possible state is that the system is
in some way 'Out of Control' and corrective action can be taken Probability of Completing the Project in more than 3 hrs.
to remedy the situation.
An investigation is undertaken when the probability that P = 1 - 0.9772
an observation comes from an ‘In-Control’ distribution falls
= 0.0228
below some arbitrarily determined probability level.
A number of cost variance investigation models have been The shaded area illustrates that 0.0228 of the area under the curve
proposed that determine the statistical probability that a variance falls to the right of +2σ. Thus, the probability of actual time
comes from an ‘In Control’ distribution. taken per unit of output being 3 hrs. or more when the operation
is under control is 2.28%.
Determining
Probabilities
Probability
0.0228
Statistical 2
Control
Charts
Decision Models
(Costs vs Benefits) 2 .5 hrs 3 hrs
Time taken (hrs.)
It is likely that this observation comes from another distribution

and that the time taken for the week is out of control.
Statistical Control Charts
Determining Probabilities
Statistical quality control is used mainly for monitoring and
'In Control' state can be stated in the form of a known probability maintaining of the quality of products and services, but within
distribution such as a normal one. a standard costing framework, statistical control charts can be
Let’s take example, consider a situation where the standard time used to monitor accounting variances. For example, labour usage
required for a particular project has been derived from the average could be plotted on a control chart on an hourly basis for each
of a series of past experience made under 'close' supervision. The project. This process would consist of sampling the output from
average time is 2.5 hrs. per unit of output. We shall consider a project and plotting on the chart the mean usage of resources
that the actual observations were normally distributed with per unit for the sample output.
a standard deviation of 15 minutes. Suppose that the actual A control chart is a graphic presentation of a series of past
time taken for a week was 3,000 hrs. for output of 1,000 units. observations in which each observation is plotted relative to
Thus, average time taken was 3 hrs. per unit of output. We can pre-set points on the expected distribution. Only observations
determine the probability of perceiving an average time of 3 hrs. beyond specified pre-set control / tolerance limits are considered
or more when the process is under control through application for investigation. The control limits are set based on a series of

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past observations of a process when it is under control, and thus and includes the manager's time spent on investigation, the cost
working efficiently. It is assumed that the past observations can of interrupting the production process, and the cost of correcting
be represented by a normal distribution. the process. C is known with certainty.
The past observations are used to estimate the population The model requires an estimate of P, the probability that the
mean and the population standard deviation σ. Assuming that process is ‘Out of Control’. Bierman et al. (1961) have suggested
the distribution of possible outcomes is normal, then, when the that the probabilities could be determined by computing the
process is under control, we should expect probability that a particular observation, such as a variance,
comes from an 'In Control' distribution. It also considers that
68.27% of the observations to fall within the range μ+ σ from the
the 'In- Control' state can be expressed in the form of a known
mean;
probability distribution such as a normal distribution.
95.45% of the observations to fall within the range μ+ 2σ from
Let us assume that the incremental cost of investigating the
the mean;
labour efficiency variance in our example is R25. Assume also
99.8% of the observations to fall within the range μ+ 3σ from the that the estimated benefit B from investigating a variance and
mean. taking corrective action is R100.
For example, if control limits are set based on 2σ from the Investigate if
mean then this would show 4.55% (100% - 95.45%) of future
P > 25/ 100 or 0.25
observations would result from pure chance when the process
is under control. Therefore, there is a high probability that an Consider our example, the probability of an observation of 3 hrs
observation outside the 2σ control limits is out of control. (or larger) was 0.0228. The probability of the process being ‘Out
Usage Usage Usage of Control’ is one minus the probability of being ‘In Control’.
Project A Project B Project C Thus, P = 0.9772 (1 - 0.0228). We ascertained that the variance
+2 +2 +2 should be investigated if the probability that the process is ‘Out
+ + +
of Control’ is > 0.25.
– – –
–2 –2 –2 The process should therefore be investigated.
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 Possible Interdependence Between

Days Days Days
Variances
Above Figure shows three control charts, with the outer
horizontal lines representing a possible control limit of 2σ, so It is a term used to express the way in which the cause of one
that all observations outside this range are investigated. variance may be wholly or partially explained by the cause of another
variance. For control purposes, it might therefore be essential to look
For Project A the process is deemed to be in control because all at several variances together and not in isolation. Some examples of
observations fall within the control limits. interdependence between variances are listed below:
For Project B the last two observations suggest that the project
is out of control. Therefore, both observations should be
Use of cheaper material which is poorer quality, the
investigated. material price variance will be favourable, but this can
cause more wastage of materials leading to adverse usage
With Project C, the observations would not prompt an
variance.
investigation because all the observations are within the control
limits. However, the last six observations show a gradually Using more skilled labour to do the work will result in an
increasing usage in excess of the mean, and the process may be adverse labour rate variance, but productivity might be
out of control. Statistical procedures that consider the trend in higher as a result due to experienced labour.
recent usage as well as daily usage can also be used.
Changing the composition of a team might result in a
Statistical decision models have been extended to incorporate cheaper labour mix (favourable mix variance) but lower
the costs and benefits of investigation. productivity (adverse yield variance).
Decision rule to investigate if

Workers trying to improve productivity (favourable
PB > C efficiency variance) in order to get bonus (adverse rate
variance) might use materials wastefully in order to save
Where, time (adverse materials usage).
P is the probability that the process is ‘Out of Control’

Cutting sales prices (adverse sales price variance) might
B is the benefit associated with returning the process to its 'In- result in higher sales demand from customers (favourable
Control' state if the process is ‘Out of Control’. Benefit represents sales volume variance).
the cost saving that will arise through bringing the system back
under control and thereby avoiding variances in future periods. Similarly, favourable sales price variance may result in
adverse sales volume variance.
C is the cost will be incurred when an investigation is undertaken

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Interpretation of Variances Labour Rate Variance Labour Efficiency Variance
There can be a number of potential causes leading to variances ♦

Change in the ♦ Learning curve effect
composition of the upon the labour
in the operational costs
workforce can impact efficiency levels.
direct labour costs.
♦ Resource shortages
causing an unexpected
Material delay and lowering of
Variances labour efficiency levels.
♦ Using inferior quality of
Sales Labour material.
Volume Rate ♦ Introduction of new
Variance Variance machinery resulting in
improvement of labour
Interpretation productivity levels.
Fixed Overhead Variance Variable Overhead Variance

Labour
Sales Price ♦ Fixed Overhead ♦ Variable Overhead
Variance
Variance Expenditure Variance Expenditure Variance
(adverse) are caused by are often caused by
Overhead spending in excess of the changes in machine
Variances budget. running costs.
♦ Fixed Overhead Volume ♦ Variable Overhead
Variance is caused by Efficiency Variances-
changes in production Causes are similar to
volume. those for a direct labour
Material Price Variance Material Usage Variance efficiency variance.
♦ Might be caused due ♦ Purchase of inferior
to the use of a different quality material.
Sales Price Variance Sales Volume Variance
supplier. ♦ Implementation of better
♦ Order size can result in quality control. ♦ Higher discounts given ♦ Successful or
variance. ♦ Increased efficiency in to customers in order unsuccessful direct
♦ Any form of unexpected production can help in to encourage bulk selling efforts.
increase in buying costs bringing down wastage purchases. ♦ Successful or
such as higher delivery rate. ♦ The effect of low price unsuccessful marketing
charges. ♦ Changes made in the offers during a marketing efforts (for example, the
♦ Efficiency or inefficiency material mix. campaign. effects of an advertising
associated with the ♦ Careless way of handling ♦ Poor performance by campaign).
buying procedure material by production sales personnel. ♦ Unexpected changes in
adopted. department. ♦ Market conditions or customer preferences and
♦ Lack of appropriate ♦ Change in method of economic conditions buying patterns.
inventory control can production/ design. forcing changes in prices ♦ Failure to satisfy demand
result in emergency ♦ Pilferage of material across the industry. due to production
purchase of material from the production difficulties.
resulting in adverse department. ♦ Higher demand due to
variance. ♦ Poor inspection. a cut in selling prices, or
lower demand due to an
Labour Rate Variance Labour Efficiency Variance increase in sales prices.
♦ Unexpected increase in ♦ Improvement in work or
the pay rate of labour. productivity efficiency. Reporting Of Variances
♦ Level of experience of the ♦ Workforce mix can have Computation of variances and their reporting is not the final
labour can impact the an impact upon labour step towards the control of various elements of cost. It in fact
demands an analysis of variances from the side of the executives,
direct cost of labour. efficiency levels.
to ascertain the correct reasons for their occurrence. After
♦ Payment of bonuses ♦ Industrial action in knowing the exact reasons, it becomes their responsibility to
added to the direct relation to workforce. take necessary steps so as to stop the re-occurrence of adverse
labour costs. ♦ Poor supervision of the variances in future. To enhance the utility of such a reporting
system it is necessary that such a system of reporting should
workforce. not only be prompt but should also facilitate the concerned

SCMPE
managerial level to take necessary steps. Variance reports an organization's performance measurement system to be based
should be prepared after keeping in view its ultimate use and on an extensive range of quantitative and qualitative measures
its periodicity. Such reports should highlight the essential cost so as to encourage management to adopt a long-term view that is
deviations and possibilities for their improvements. In fact the aligned with an organization's strategic direction.
variance reports should give due regard to the following points:-
Ethics9
The concerned Variance analysis for evaluating performance can have strong
How close the actual ethical consequences. For example, standard costing methods
executives should be have been proposed for medicine as a means for improving
cost performance is with
informed about what performance. Interpretation of a favourable variance may
reference to standard be difficult because it either reflects insufficient treatment or
the cost performance compliance to guidelines. Most hospitals in various countries
cost performance.
should have been. are reimbursed as specified by the diagnostic related groups
(DRG). Each DRG has specified standard “length of stay”. If
a patient leaves the hospital early, the hospital is financial
impacted favourably but a patient staying longer than the
specified time costs the hospital money.
Reporting should be
The analysis and based on the principle
causes of variances. of management by
Standard Costing In Contemporary
exception.
Business Environment 10
Products Standard Production

not to be costs become is highly
The magnitude of outdated
variances should standardised automated
quickly
also be stated.
Often use ideal The emphasis is Analysis

Behavioural Issues8 on continuous
standards may not give
Variance analysis may encourage short-termism due to their improvement enough detail
inherent tendency towards short-term, quantified objectives and
results.
A negative perception of an organization's variance analysis
process can also encourage other sub-optimal behaviour among
employees such as attempts to include budget slacks. Reports may
arrive too
The behavioural issues connected with variance analysis could late to solve
be managed by participating employees during budget setting so
problems
that they do not assess the procedure as biased. It is also vital for
FORMULAE
Operating Profit Variance
Cost Variance Sales Margin Variance
Direct Material Direct Labour Fixed Overhead Variable Overhead Sales Margin Sales Margin
Variance Variance Variance Variance Price Variance Volume Variance
Price Usage Rate Efficiency Expenditure Volume Expenditure Efficiency

Variance Variance Variance Variance Variance Variance Variance Variance Sales Margin Sales Margin
Mix Variance Quantity Variance
Mix Yield Gang Sub-efficiency Capacity Efficiency

Variance Variance Variance Variance Variance Variance Market Size Market Share
Variance Variance

SCMPE
Sales Variances (Absorption Costing) Sales Variances (Marginal Costing)
Sales Margin Variance* Sales Contribution Variance

(Actual Margin) Less (Budgeted Margin) (Actual Contribution) Less (Budgeted
[(AQ × AM) – (BQ × SM)] Contribution) [(AQ × AC) – (BQ × SC)]
Sales Margin Price Sales Margin Volume Sales Contribution Price Sales Contribution Volume
Variance Variance Variance Variance
(Actual Margin) Less (Standard Margin) Less (Actual Contribution) Less (Standard Contribution) Less
(Standard Margin) (Budgeted Margin) (Standard Contribution) (Budgeted Contribution)
[(AM × AQ) – (SM × AQ)] [(SM × AQ) – (SM × BQ)] [(AC × AQ) – (SC × AQ)] [(SC × AQ) – (SC × BQ)]
Or [AQ × (AM – SM)] Or [SM × (AQ – BQ)] Or [AQ × (AC – SC)] Or [SC × (AQ – BQ)]
Sales Margin Mix Sales Margin Quantity Sales Contribution Mix Sales Contribution Quantity
Variance Variance Variance Variance
(Standard Margin) Less (Revised Standard Margin) (Standard Contribution) (Revised Standard
(Revised Standard Margin) Less (Budgeted Margin) Less (Revised Standard Contribution) Less (Budgeted
(AQ × SM) – (RAQ × SM) (RAQ × SM) – (BQ × SM) Contribution) Contribution)
Or SM × (AQ – RAQ) Or SM × (RAQ – BQ) (AQ × SC) – (RAQ × SC) (RAQ × SC) – (BQ × SC)
Alternative Formula Alternative Formula Or SC × (AQ – RAQ) Or SC × (RAQ – BQ)
[Total Actual Qty. (units) × [Average Budgeted Margin Alternative Formula Alternative Formula
{Average Standard Margin per unit of Budgeted Mix × [Total Actual Qty. (units) × [Average Budgeted Contribution
per unit of Actual Mix Less {Total Actual Qty. (units) {Average Standard Contribution per unit of Budgeted Mix ×
Average Budgeted Margin Less Total Budgeted Qty. per unit of Actual Mix Less {Total Actual Qty. (units) Less
per unit of Budgeted Mix}] (units)}] Average Budgeted Contribution Total Budgeted Qty. (units)}]
per unit of Budgeted Mix}]
Market Size Variance Market Share Variance

[Budgeted Market Share [(Actual Market Share % Market Size Variance Market Share Variance
% × (Actual Industry Sales – Budgeted Market Share [Budgeted Market Share [(Actual Market Share %
Quantity in units – Budgeted %) × (Actual Industry Sales % × (Actual Industry Sales – Budgeted Market Share
Industry Sales Quantity in Quantity in units) × (Average Quantity in units – Budgeted %) × (Actual Industry Sales
units) × (Average Budgeted Budgeted Margin per unit)] Industry Sales Quantity in Quantity in units) × (Average
Margin per unit)] units) × (Average Budgeted Budgeted Contribution per
Contribution per unit)] unit)]
* in terms of profit
Note: Note:
BQ = Budgeted Sales Quantity BQ = Budgeted Sales Quantity
AQ = Actual Sales Quantity AQ = Actual Sales Quantity
RAQ = Revised Actual Sales Quantity RAQ = Revised Actual Sales Quantity
= Actual Quantity Sold Rewritten in Budgeted Proportion = Actual Quantity Sold Rewritten in Budgeted Proportion
SM = Standard Margin SC = Standard Contribution
= Standard Price per Unit – Standard Cost per Unit = Standard Price per Unit – Standard Cost (variable) per Unit
AM = Actual Margin AC = Actual Contribution
= Actual Sales Price per Unit – Standard Cost per Unit = Actual Sales Price per Unit – Standard Cost (variable) per Unit
Market Size Variance Market Size Variance

Budgeted Market Share % × (Actual Industry Sales Quantity in units Budgeted Market Share % × (Actual Industry Sales Quantity in units
– Budgeted Industry Sales Quantity in units) × (Average Budgeted – Budgeted Industry Sales Quantity in units) × (Average Budgeted
Margin per unit) Or Contribution per unit) Or
(Budgeted Market Share % × Actual Industry Sales Quantity in units – (Budgeted Market Share % × Actual Industry Sales Quantity in units –
Budgeted Market Share % × Budgeted Industry Sales Quantity in units) Budgeted Market Share % × Budgeted Industry Sales Quantity in units)
× (Average Budgeted Margin per unit) Or × (Average Budgeted Contribution per unit) Or
(Required Sales Quantity in units –Total Budgeted Quantity in units) × (Required Sales Quantity in units – Total Budgeted Quantity in units) ×
(Average Budgeted Margin per unit) (Average Budgeted Contribution per unit)
Market Share Variance Market Share Variance
(Actual Market Share % – Budgeted Market Share %) × (Actual Industry (Actual Market Share % – Budgeted Market Share %) × (Actual Industry
Sales Quantity in units) × (Average Budgeted Margin per unit) Or Sales Quantity in units) × (Average Budgeted Contribution per unit) Or
(Actual Market Share % × Actual Industry Sales Quantity in units – (Actual Market Share % × Actual Industry Sales Quantity in units –
Budgeted Market Share % × Actual Industry Sales Quantity in units) × Budgeted Market Share % × Actual Industry Sales Quantity in units) ×
(Average Budgeted Margin per unit) Or (Average Budgeted Contribution per unit) Or
(Total Actual Quantity in units– Required Sales Quantity in units) × (Total Actual Quantity in units– Required Sales Quantity in units) ×
(Average Budgeted Margin per unit) (Average Budgeted Contribution per unit)
Market Size Variance + Market Share Variance
Market Size Variance + Market Share Variance
(Required Sales Quantity in units – Total Budgeted Quantity in (Required Sales Quantity in units – Total Budgeted Quantity in
units) × (Average Budgeted Margin per unit) Add units) × (Average Budgeted Contribution per unit) Add
(Total Actual Quantity in units– Required Sales Quantity in units) × (Total Actual Quantity in units– Required Sales Quantity in units) ×
(Average Budgeted Margin per unit) Equals to (Average Budgeted Contribution per unit) Equals to
(Total Actual Quantity in units – Total Budgeted Quantity in units) (Total Actual Quantity in units – Total Budgeted Quantity in units)
× (Average Budgeted Margin per unit) × (Average Budgeted Contribution per unit)
Sales Margin Quantity Variance Sales Contribution Quantity Variance

SCMPE
Market Size Variance
♦ Sales Price Variance is equal to Sales Margin/ Contribution
Price Variance. This is because, for the actual quantity sold, Budgeted Market Share % × (Actual Industry Sales Quantity in units –
standard cost remaining constant, change in selling price will Budgeted Industry Sales Quantity in units) × (Average Budgeted Price
have equal impact or turnover and profit/ contribution. per unit) Or
♦ Sales Margin Volume Variance is equal to Sales Volume (Budgeted Market Share % × Actual Industry Sales Quantity in units –
Variance × Budgeted Net Profit Ratio Budgeted Market Share % × Budgeted Industry Sales Quantity in units)
♦ Sales Contribution Volume Variance is equal to Sales × (Average Budgeted Price per unit) Or
Volume Variance × Budgeted PV Ratio (Required Sales Quantity in units –Total Budgeted Quantity in units) ×
(Average Budgeted Price per unit)
Market Share Variance
A Relation
Sales Margin Volume Variance in terms of Profit & Contribution (Actual Market Share % – Budgeted Market Share %) × (Actual Industry
Sales Quantity in units) × (Average Budgeted Price per unit) Or
Sales Margin Volume Standard Margin Per Unit × (Actual (Actual Market Share % × Actual Industry Sales Quantity in units –
Variance Quantity − Budgeted Quantity) Or Budgeted Market Share % × Actual Industry Sales Quantity in units) ×
Sales Margin Volume [Standard Contribution Per Unit (Average Budgeted Price per unit) Or
Variance − Standard Fixed Overheads Per (Total Actual Quantity in units– Required Sales Quantity in units) ×
Unit] × (Actual Quantity − Budgeted (Average Budgeted Price per unit)
Quantity) Or
Sales Margin Volume [Standard Contribution Per Unit Market Size Variance + Market Share Variance
Variance × (Actual Quantity − Budgeted
Quantity)] − [Standard Fixed (Required Sales Quantity in units – Total Budgeted Quantity in
Overheads Per Unit × (Actual units) × (Average Budgeted Price per unit) Add
Quantity − Budgeted Quantity)] Or (Total Actual Quantity in units– Required Sales Quantity in units) ×
Sales Margin Volume Sales Contribution Volume Variance (Average Budgeted Price per unit) Equals to
Variance − Fixed Overhead Volume Variance
Or (Total Actual Quantity in units – Total Budgeted Quantity in units)
Sales Contribution Sales Margin Volume Variance + × (Average Budgeted Price per unit)
Volume Variance Fixed Overhead Volume Variance
Sales Quantity Variance
Note: Production units equals to Sales units for both actual &
budget. Direct Material Variances
Direct Material Total Variance#
Sales Variances (Turnover or Value) [Standard Cost* Less Actual Cost]
(The difference between the Standard Direct Material Cost
Sales Variance of the actual production volume and the Actual Cost of
(Actual Sales ) Less (Budgeted Sales) Direct Material)
[(AQ × AP) – (BQ × SP)] [(SQ × SP) – (AQ × AP)]
Sales Price Variance Sales Volume Variance Direct Material Price Direct Material Usage Variance
(Actual Sales) Less (Standard Sales) Less Variance [Standard Cost of Standard
(Standard Sales) (Budgeted Sales) [Standard Cost of Actual Quantity for Actual Production
[(AP × AQ) – (SP × AQ)] [(SP × AQ) – (SP × BQ)] Quantity Less Actual Cost] Less Standard Cost of Actual
Or [AQ × (AP – SP)] Or [SP × (AQ – BQ)] (The difference between the Quantity]
Standard Price and Actual (The difference between the
Price for the Actual Quantity) Standard Quantity specified for
Sales Mix Variance Sales Quantity Variance actual production and the Actual
(Standard Sales) Less (Revised Standard Sales) Less Quantity used, at Standard
(Revised Standard Sales) (Budgeted Sales) Purchase Price)
[(SP – AP) × AQ] [(SQ – AQ) × SP]
(AQ × SP) – (RAQ × SP) (RAQ × SP) – (BQ × SP) Or Or
Or SP × (AQ – RAQ) Or SP × (RAQ – BQ) [(SP × AQ) – (AP × AQ)] [(SQ × SP) – (AQ × SP)]
Alternative Formula Alternative Formula
[Total Actual Qty. (units) [Average Budgeted Price per
× {Average Standard Price unit of Budgeted Mix × {Total Direct Material Yield Direct Material Mix
per unit of Actual Mix Less Actual Qty. (units) Less Total Variance Variance
Average Budgeted Price per Budgeted Qty. (units)}] [Standard Cost of Standard [Standard Cost of Actual
Quantity for Actual Quantity in Standard
unit of Budgeted Mix}]
Production Less Standard Proportion Less Standard
Cost of Actual Quantity in Cost of Actual Quantity]
Standard Proportion] (The difference between
(The difference between the the Actual Quantity in
Market Size Variance Market Share Variance Standard Quantity specified standard proportion and
[Budgeted Market Share % × [(Actual Market Share % for actual production and Actual Quantity in actual
(Actual Industry Sales Quantity in – Budgeted Market Share Actual Quantity in standard proportion, at Standard
units – Budgeted Industry Sales %) × (Actual Industry Sales proportion, at Standard Purchase Price)
Quantity in units) × (Average Quantity in units) × (Average Purchase Price)
Budgeted Price per unit)] Budgeted Price per unit)] [(SQ – RAQ) × SP] [(RAQ – AQ) × SP]
Or Or
[(SQ × SP) – (RAQ × SP)] [(RAQ × SP) – (AQ × SP)]
Note: Alternative Formula Alternative Formula
BQ = Budgeted Sales Quantity [Average Standard Price per [Total Actual Quantity (units)
AQ = Actual Sales Quantity
unit of Standard Mix × {Total × {Average Standard Price per
RAQ = Revised Actual Sales Quantity
Standard Quantity (units) unit of Standard Mix Less
= Actual Quantity Sold Rewritten in Budgeted Proportion
SP = Standard Selling Price per Unit
Less Total Actual Quantity Average Standard Price per
AP = Actual Selling Price per Unit
(units)}] unit of Actual Mix}]

SCMPE
Note: Direct Labour
SQ = Standard Quantity = Expected Consumption for Actual Output Idle Time Variance
AQ = Actual Quantity of Material Consumed
RAQ = Revised Actual Quantity = Actual Quantity Rewritten in [Standard Rate per Hour × Actual Idle
Standard Proportion Hours]
SP = Standard Price per Unit
AP = Actual Price per Unit (The difference between the Actual
(*) = Standard Cost refers to ‘Standard Cost of Standard Quantity for Hours paid and Actual Hours worked at
Actual Output’ Standard Rate)
(#) = Direct Material Total Variance (also known as material cost
variance) [(AH* – AH#) × SR]
Or
[(AH* × SR) – (AH# × SR)]
Material Purchase Price Variance
[Standard Cost of Actual Quantity – Note:
Actual Cost] SH = Standard Hours = Expected time (Time allowed) for Actual
(The difference between the Standard Output
Price and Actual Price for the actual AH* = Actual Hours paid for
quantity of material purchased) AH = Actual Hours worked
#
[(SP – AP) × PQ] RAH = Revised Actual Hours = Actual Hours (worked) rewritten in
Or Standard Proportion
[(SP × PQ) – (AP × PQ)] SR = Standard Rate per Labour Hour
AR = Actual Rate per Labour Hour Paid
(b) = Standard Cost refers to ‘Standard Cost of Standard Time for
Note: Actual Output’
PQ = Purchase Quantity ( )
a
= Direct Labour Total Variance (also known as labour cost
SP = Standard Price variance)
AP = Actual Price In the absence of idle time
Actual Hours Worked = Actual Hours Paid
Direct Labour Variances

Idle Time is a period for which a workstation is available for
Direct Labour Total Variancea production but is not used due to e.g. shortage of tooling,
[Standard Costb – Actual Cost] material, or operators. During Idle Time, Direct Labour Wages
(The difference between the Standard Direct are being paid but no output is being produced. The cost of this
Direct Labour Cost and the Actual Direct Labour
Labour can be identified separately in an Idle Time Variance, so that it is
Cost incurred for the production achieved)
Idle Time not ‘hidden’ in an adverse Labour Efficiency Variance.
[(SH × SR) – (AH* × AR)]
Variance
Some organizations face Idle Time on regular basis. In this
situation, the Standard Labour Rate may include an allowance
Direct Labour Rate Direct Labour Efficiency for the cost of the expected idle time. Only the impact of any
Variance Variance unexpected or abnormal Idle Time would be included in the Idle
[Standard Cost of Actual [Standard Cost of Standard
Time – Actual Cost] Time for Actual Production – Time Variance.
(The difference between the Standard Cost of Actual Time]
Standard Rate per hour and (The difference between the Fixed Production Overhead Variances
Actual Rate per hour for the Standard Hours specified for
Actual Hours paid) actual production and Actual Fixed Overhead Total Variance@
Hours worked at Standard Rate) (Absorbed Fixed Overheads) Less
[(SR – AR) × AH*] Or [(SH – AH#) × SR] Or
[(SR × AH*) – (AR × AH*)] [(SH × SR) – (AH# × SR)] (Actual Fixed Overheads)
Fixed Overhead Fixed Overhead

Direct Labour Mix Variance Direct Labour Yield Variance Expenditure Volume
Or Gang Variance Or Sub-Efficiency Variance Variance Variance
[Standard Cost of Actual Time [Standard Cost of Standard
Worked in Standard Proportion Time for Actual Production (Budgeted Fixed Overheads) (Absorbed Fixed Overheads)
– Standard Cost of Actual Time – Standard Cost of Actual Less Less
Worked] Time Worked in Standard (Actual Fixed Overheads) (Budgeted Fixed Overheads)
(The difference between Proportion]
the Actual Hours worked (The difference between the
in standard proportion and Standard Hours specified for Fixed Overhead Efficiency Variance
Actual Hours worked in actual actual production and Actual (Absorbed Fixed Overheads)
proportion, at Standard Rate) Hours worked in standard Less
[(RAH – AH#) × SR] Or proportion, at Standard Rate) (Budgeted Fixed Overheads for Actual
[(RAH × SR) – (AH# × SR)] (SH – RAH) × SR Or
Alternative Formula (SH × SR) – (RAH × SR) Hours#)
[Total Actual Time Worked Alternative Formula
(hours) × {Average Standard [Average Standard Rate per
Rate per hour of Standard Gang hour of Standard Gang × Fixed Overhead Capacity Variance
Less Average Standard Rate per {Total Standard Time (hours) (Budgeted Fixed Overheads for Actual
hour of Actual Gang@}] Less Total Actual Time Hours#)
@
on the basis of hours worked Worked (hours)}] Less
(Budgeted Fixed Overheads)
Or

SCMPE
Fixed Overhead Capacity Variance
Fixed Overhead Total Variance@
(Absorbed Fixed Overheads) Less (Budgeted Fixed Overheads for Actual Hours) – (Budgeted Fixed
(Actual Fixed Overheads) Overheads) Or
(Standard Fixed Overhead Rate per Hour × Actual Hours) –
(Standard Fixed Overhead Rate per Hour × Budgeted Hours) Or
Standard Fixed Overhead Rate per Hour × (Actual Hours –
Fixed Overhead Fixed Overhead Budgeted Hours)
Expenditure Volume
Variance Variance Fixed Overhead Volume Variance-I
(Budgeted Fixed Overheads) (Absorbed Fixed Overheads) (Absorbed Fixed Overheads) – (Budgeted Fixed Overheads) Or
Less Less (Standard Fixed Overhead Rate per Unit × Actual Output) –
(Actual Fixed Overheads) (Budgeted Fixed Overheads) (Standard Fixed Overhead Rate per Unit × Budgeted Output) Or
Standard Fixed Overhead Rate per Unit × (Actual Output –
Budgeted Output)
Fixed Overhead Calendar Variance
(Possible Fixed Overheads)
Less Fixed Overhead Volume Variance-II
(Budgeted Fixed Overheads) (Absorbed Fixed Overheads) – (Budgeted Fixed Overheads)
Or
(Standard Fixed Overhead Rate per Hour × Standard Hours for
Actual Output) – (Standard Fixed Overhead Rate per Hour ×
Fixed Overhead Capacity Variance Budgeted Hours)
(Budgeted Fixed Overheads for Actual Or
Hours#) Standard Fixed Overhead Rate per Hour × (Standard Hours for
Less Actual Output – Budgeted Hours)
(Possible Fixed Overheads) Or
Standard Fixed Overhead Rate per Hour × (Standard Hours per
Unit × Actual Output – Standard Hours per Unit × Budgeted
Fixed Overhead Efficiency Variance Output)
(Absorbed Fixed Overhead) Or
Less (Standard Fixed Overhead Rate per Hour × Standard Hours per
(Budgeted Fixed Overheads for Actual Unit) × (Actual Output – Budgeted Output)
Hours#) Or
Standard Fixed Overhead Rate per Unit × (Actual Output –
Budgeted Output)
# Actual Hours (Worked)
Note: Overhead Variances can also be affected by idle time. It is usually

Standard Fixed Overheads for Production (Absorbed) assumed that Overheads are incurred when labour is working, not
= Standard Fixed Overhead Rate per Unit × Actual Production in when it is idle. Accordingly, hours worked has been considered for
Units the calculation of Variable and Fixed Overheads Variances.
= Standard Fixed Overhead Rate per Hour × Standard Hours for
Actual Production
Budgeted Fixed Overheads Variable Production Overhead Variances
= It represents the amount of fixed overhead which should be spent
according to the budget or standard during the period Variable Overhead Total Variance@
= Standard Fixed Overhead Rate per Unit × Budgeted Production in
Units
(Standard Variable Overheads for
= Standard Fixed Overhead Rate per Hour × Budgeted Hours Production – Actual Variable Overheads)
Actual Fixed Overheads Incurred
Budgeted Fixed Overheads for Actual Hours
= Standard Fixed Overhead Rate per Hour × Actual Hours
Possible Fixed Overheads Variable Overhead Variable Overhead
= Expected Fixed Overhead for Actual Days Worked Expenditure (Spending) Efficiency Variance
Budgeted Fixed Overhead Variance (Standard Variable Overheads
= × Actual Days (Budgeted Variable Overheads for Production)
Budgeted Days
for Actual Hours#) Less
(@)
= Fixed Overhead Total Variance also known as ‘Fixed Overhead Cost Less (Budgeted Variable
Variance’ (Actual Variable Overheads) Overheads for Actual Hours#)
# Actual Hours (Worked)

Fixed Overhead Efficiency Variance
Note:
(Absorbed Fixed Overheads) – (Budgeted Fixed Overheads for Standard Variable Overheads for Production/Charged to
Actual Hours) Production
Or = Standard/Budgeted Variable Overhead Rate per Unit × Actual
Production (Units)
(Standard Fixed Overhead Rate per Hour × Standard Hours for = Standard Variable Overhead Rate per Hour × Standard Hours for
Actual Output) – (Standard Fixed Overhead Rate per Hour × Actual Production
Actual Hours) Actual Overheads Incurred
Or Budgeted Variable Overheads for Actual Hours
Standard Fixed Overhead Rate per Hour × (Standard Hours for = Standard Variable Overhead Rate per Hour × Actual Hours
Actual Output – Actual Hours) (@)
= Variable Overhead Total Variance also known as ‘Variable Overhead
Cost Variance’

SCMPE
Variable Overhead Efficiency Variance Variable Overhead Expenditure Variance

(Standard Variable Overheads for Production) – (Budgeted (Budgeted Variable Overheads for Actual Hours) – (Actual
Overheads for Actual Hours) Variable Overheads)
Or Or
(Standard Variable Overhead Rate per Hour × Standard Hours for (Standard Rate per Hour × Actual Hours) – (Actual Rate per Hour
Actual Output) – (Standard Variable Overhead Rate per Hour ×
Actual Hours) × Actual Hours)
Or Or
Standard Variable Overhead Rate per Hour × (Standard Hours for Actual Hours × (Standard Rate per Hour – Actual Rate per Hour)
Actual Output – Actual hours)
DECISION MAKING
Chapter Overview unit-based costs vary with respect to other cost drivers. In contrast,
the volume based approach combines the cost of these activities and
DECISION MAKING treat them as fixed costs since they do not vary with output volume.
Activity based costing provides a more accurate determination of
costs because it separately identifies and traces non- unit based costs
to products rather than combining them in a pool of fixed costs as
CVP Analysis Short-term Decision volume based approach does.
Making: Relevant Cost
• Activity Based CVP Concept
Analysis The Break-even can then be expressed as follows:
• CVP Analysis • Outsourcing Decision
under Conditions of
Break-even units = [Fixed costs + (Setup cost × Number of Setups)
• Sell or Further Processing
Uncertainly Decision + (Engineering Cost × Number of Engineering
• CVP Analysis in
Service and Non-
• Minimum Pricing Hours)]/ (Price - Unit Variable Cost)
Decision
Profit Organisations • Keep or Drop Decision
• CVP Analysis Just in • Product • Special Order Decision A comparison of the ABC break-even point with the conventional
Time Environment Mix Decision
break-even point reveals two important differences.
First, the fixed costs differ. Some costs previously identified as being
• Ethics fixed may actually vary with non-unit cost drivers, in this case setups
• Non-financial Considerations
and engineering hours.
Cvp Analysis11 Second, the numerator of the ABC break-even equation has two
CVP analysis involves analysing the interrelationships among non-unit-variable cost terms: one for batch-related activities and
revenues, costs, levels of activity, and profits. CVP analysis is useful one for product- sustaining activities.
for numerous decisions related to production, pricing, marketing,
cost structure, and many more. Although CVP analysis is most useful “The use of activity-based costing does not mean that CVP analysis
for planning, it can also be used to assist with controlling decisions is less valuable. In fact, it becomes more valuable, since it delivers
and evaluating decisions. more precise understandings concerning cost behaviour. These
understandings produce better decisions. CVP analysis within an
Consider a decision about choosing additional features of an existing activity-based framework, however, must be improved”.
product i.e. product modification. Different choices can affect selling
prices, variable cost per unit, fixed costs, units sold, and operating CVP Analysis - Conditions of Uncertainty
income. CVP analysis helps managers make product decisions by Cost-Volume-Profit analysis suffers from a limitation that it does not
estimating the expected profitability of these choices. consider adjustments for risk and uncertainty. A possible approach
by which uncertainty can be incorporated into the analysis is to
CVP Analysis apply normal distribution theory.
Activity Based
CVP Analysis under Conditions
of Uncertainty If the manager is comparing this product with other products then
CVP Analysis this approach will enable him or her to assess the risk involved for
CVP Analysis in CVP Analysis each product, as well as to compare the relative break-even points
Service and Non- in Just in Time and expected profits. The analysis can be changed to include fixed
Profit Organisations Environment cost, variable cost and selling price as uncertain variables. The effect
of treating these variables as uncertain will lead to an increase in the
Activity Based CVP Analysis standard deviation because the variability of the variable cost, fixed
Conventional CVP analysis assumes volume based measures. An cost and selling price will add to the variability of profits.
alternative approach is activity based costing. In an activity-based
costing system, costs are segregated into unit and non-unit-based Probability distributions play important role in providing decision-
categories. Activity-based costing acknowledges that some costs vary making information. It provides information that helps the decision
with units produced and some costs do not. However, while activity- maker better understand the risks and uncertainties associated with
based costing admits that non-unit- based costs are fixed with the problem. Ultimately, this information may assist the decision
respect to production volume changes, it also argues that many non- maker in reaching a good decision.

SCMPE
Example Therefore, the cost equation for Just in Time can be expresses as
The selling price of a product for the next accounting period is follows:
R110, and the variable cost is estimated to be R70 per unit. The Total Cost = Fixed Cost + (Unit variable Cost × Number
budgeted fixed costs for the period are R1,63,500. Estimated
sales for the period are 5,000 units, and it is assumed that the of Units) + (Engineering Cost × Number of
probability distribution for the estimated sales quantity is normal Engineering hours)
with a standard deviation of 125 units. The selling price, variable
cost and total fixed cost are assumed to be certain. What is the “Managers often use CVP analysis to guide other decisions, many
probability of profits being greater than R40,000? of them are of strategic nature due to tremendous potential of
The calculations are as follows: increase in the profitability and organisational effectiveness”
Expected Profit = Expected Sales Volume (5,000 units) ×
Contribution per unit (R40) – Short Run Decision Making
Fixed Costs (R163,500)
= R36,500
Standard Deviation = Standard Deviation of Sales Volume (125
units) × Contribution per unit R40
= R5,000 Based on
Probability for profit (R40,000): relevant costs

x–µ
Z = Small-scale
σó Referred to as
that
` 40,000 – ` 36,500 serve a larger
Z = decisions
` 5,000 purpose
Z = + 0.70
Probability Short Run
(Z = + 0.70) = 0.7580 Decision Making

Refer now following Figure
Immediate or Choosing
limited among
P(x < 40,000)
= 5000 frame
have
long-run
P(x > 40,000) = ?
consequences
Short-run decision making involves the act of choosing one course

40,000
of action among various feasible alternatives available. Short-
= 36,500 term decisions sometimes are referred to as tactical, or relevant,
decisions because they involve choosing between alternatives with
0 .70
an immediate or limited time frame.
Note: z = 0 corresponds Note: z = .70 corresponds
to x = 40,000
to x = = 36,500 Strategic decisions, on the other hand, usually are long term in nature
We see that a value of 40,000 corresponds to a value of Z = 0.70 because they involve choosing between different strategies that
on the standard normal distribution. Using the standard normal attempt to provide a competitive advantage over a long time frame.
probability table, we see that the area under the standard normal
curve to the left of Z = 0.70 is 0.7580. Thus, 1.000 – 0.7580 = Short run decisions involve evaluation of the costs and benefits of
0.2420 is the probability that profit will exceed 40,000. short term actions, such as whether to make a product or outsource,
whether to accept a special order, whether to keep or drop an
CVP Analysis in Service and Non-Profit Organisations unprofitable segment, and whether to sell a product as is or process
it further. If resources are limited, managers may also have to decide
CVP analysis can also be applied to decisions by service and non-
on the most appropriate product mix. While such decisions tend to
profit organisations. To apply CVP analysis in service and non-
be short run in nature, it should be emphasized that they often have
profit organisations, we need to focus on measuring their output,
long-run consequences.
which is different from tangible units sold by manufacturing and
merchandising companies.
Consider a second example, suppose that a company is thinking
about producing a component instead of buying it from suppliers.
CVP Analysis in Just in Time Environment The immediate objective may be to lower the cost of making the main
In a firm has implemented Just in Time, the variable cost per unit sold product. Yet this decision may be a small part of the overall strategy
is reduced, and fixed costs are increased. Direct labor is considered of establishing a cost leadership position for the firm. Therefore,
as fixed instead of variable. On the other hand, direct material vary short-run decisions often are small-scale actions that serve a larger
with production volume (unit- based variable cost) due to emphasis purpose12.
on total quality and long-term purchasing. Waste, scrap, and quantity
discounts are removed. Other unit-based variable costs, such as The tactical decision making approach just described emphasized
power and sales commissions, also exist. Further, the batch - level the importance of identifying and using relevant costs. But how do
variable is absent as in Just in Time, the batch is equal to one unit. we identify and define the costs that affect the decision?

SCMPE
Ethics
For a cost to be relevant to a decision it must be Ethics are moral principles that guide the conduct of individuals. By
their behaviour and attitude, managers set the company culture.
A future cost, i.e. related to the future.
Identify an
ethical decision Consider
by using obligations and
A differential Cost, i.e. its level must be different personal ethical responsibilities
standards of to those that
for each of the alternatives under consideration. honesty and will be affected
fairness. by decision.
Accordingly, only future costs can be relevant to decisions. However,

to be relevant, a cost must not only be a future cost but must also differ
from one alternative to another. If a future cost is the same for more
than one alternative, it has no effect on the decision. Such a cost is
irrelevant cost. The ability to identify relevant and irrelevant costs is Identify the Make a decision
consequences that is ethical
a vital decision making skill. of the decision and fair to those
and its effect affected by it13.
on others.
Non-Financial Considerations
With increase in competition, dynamic market changes and changing
needs of customers, non-financial information have gained relevance Some ethical problems can be can be avoided simply by using
in the decision-making process. Information to which monetary common sense and not focusing solely on the short term at the
value can be attached is in the nature of financial information. expense of long term.
Information of an organization like number of employees, employee
morale, customer satisfaction that cannot be expressed in monetary Firms with a strong code of ethics can create strong customer and
terms is termed non -financial in nature. Non- financial information employee loyalty. Furthermore, a firm that values people more than
is long term focused and ensures profitability and sustainability profit and is viewed as operating with integrity and honour is more
in long term for an organization thereby evaluating the internal likely to be a commercially successful business14.
performance of the company. Non- Financial information which a
company should focus that would turn out to be advantageous while Decision Making Model
making decisions for a company are:
An Application
Employee Customer Define The Problem Identify Alternatives

Quality • Due to economic down • Shut down the plant
Satisfaction Satisfaction
turn, it is not feasible • Operate the plant
to operate the plant at
the normal capacity,
Corporate
Environmental Intellectual at least during the
Social
Responsibility quarter
Factors Property
Intangible Competitor's Brand Total Relevant Costs &

Identify Costs, Benefits
Assets Movements Name Benefits
• Alt 1: <Costs> + Benefits
• Alt 1: Relevant <Costs>
• Alt 2: <Costs> + Benefits
+ Benefits
• Alt 2: Relevant <Costs>
Decisions made in a business rest on the balance between the + Benefits
perceived effects of financial and non-financial information. Following • Differential Cost
are Limitations of Non- Financial Information-
Limitations of Non- Financial Information

Assess Non-Financial Make Decision
• Time and Cost of the company involved. Factors • Operate the plant
• Subjective measurement – No proper of common • Interest of workers.
denominator to measure performance. • Re-establishment of the
• Improper measures will lead the companies to draw
market for the product.
attention on wrong objectives.
• Lack of Statistical Reliability – Possible chances of • Plant may get rusted.
error.
• Management Disintegration when excess of
measures and indications used by the company.

SCMPE
Some Applications Of Cvp Analysis and Outsourcing Decisions- Accept or Reject?
Cost Concepts
Short run decisions are many and varied but some of the more • If incremental • If incremental • If incremental
cost savings + cost savings + cost savings +
important ones, we shall look in this chapter include: opportunity
opportunity opportunity
costs < costs > costs are
incremental incremental = incremental
costs costs costs
Out-
sourcing • reject the • accept the • focus primarily
Decision outsourcing, outsourcing on qualitative
unless qualitative unless qualitative factors to
Product Sell or factors fiercely factors fiercely
Mix evaluate the
Further impact the impact the
Decision decision.
Process decision. decision.
Short
Run Qualitative Factors
Decisions While considering the decision to Outsourcing the management
should consider qualitative aspects like quality of goods, reliability of
Special Minimum suppliers, impact on the customers and suppliers etc.
Order Pricing
Decisions Decisions
A firm generally decides to outsource:
Keep or
Drop • If it costs less rather than to manufacture it internally;
Decisions • If the return on the necessary investment to be made to
manufacture is not attractive enough;
• If the company does not have the requisite skilled
Outsourcing Decision15
manpower to make;
Outsourcing decision is often called a ‘make or buy’ decision. It
involves a decision of whether to continue 'making' a product versus • If the concern feels that manufacturing internally will
‘buying’ it from an external firm. Outsourcing enables a firm to mean additional labour problem;
♦ reduce costs or • If adequate managerial manpower is not available to
♦ benefit from supplier efficiencies take charge of the extra work of manufacturing;
Outsourcing decision requires incremental analysis. The incremental
• If the component shows much seasonal demand
amounts are based on the difference in the cost of buying a product
or service compared to the cost of producing the item or providing the resulting in a considerable risk of maintaining
service in house. inventories;
• If transport and other infrastructure facilities are
adequately available;
• Incremental Costs are the additional
costs incurred from outsourcing. The • If the process of making is confidential or patented;
main cost is the purchase price of the • If there is risk of technological obsolescence for the
products or the cost of the services that
Incremental are being provided by external firms. component such that it does not encourage capital
Costs investment in the component.
• Incremental Cost Savings are reductions

of costs that will no longer be incurred Sell or Further Process
as a result of outsourcing. They are
often called avoidable costs because if a Sell or process further refers to a decision-making situation where
company outsources, it can 'avoid' certain an executive has to decide either to sell a component/ product/
costs. Variable product cost savings are raw material as it is or alternatively process it further by incurring
Incremental always incremental. Because they reduce
Cost Savings total costs, they cause profits to increase. additional expenses. For instance, sometime, a redundant material
In some circumstances, a portion of fixed lying in stores for a long time may be sold as scrap at a small value
costs can be saved such as equipment or may be thrown away as waste. This material may, however, be
rental costs or supervisor salaries that can converted into a product of higher saleable value by carrying out
be avoided.
some further operations or processes. On further processing the
component/product/raw material may not only be improved or
• Opportunity Costs are the costs reconditioned but will mostly fetch a higher sale value as well. Here
forgone as a result of selecting a different if the differential sales value is more than the further processing cost,
alternative. They are always incremental.
For example, if a company decides to then it is beneficial to process the product further otherwise sell it
Opportunity outsource, it is able to lease its factory without further processing. Such type of decision making problems
Costs space that the product being outsourced usually arise in the case of joint products.
no longer will occupy.

SCMPE
There are two rules to follow when ascertaining whether the further Decision - Keep or Drop?
processing is worthwhile:
• If incremental • If incremental • If incremental
Only the incremental costs and revenues of the cost savings > revenue lost = cost savings <
further process are relevant incremental incremental cost incremental
revenue lost savings revenue lost
The joint process costs are irrelevant - they are
already 'sunk' at the point of separation • the segment • qualitative • the segment
should be effects must be should not be
dropped, unless used to make dropped, unless
Qualitative Factors qualitative the decision. qualitative
Qualitative factors related to processing further decisions include characteristics characteristics
resource availability such as the readiness of employees to work extra fiercely impact fiercely impact
hours to further process the products and availability of materials the decision. the decision.
required for the processing. In addition, the influence on customers
that prefer the original product should also be considered, as sales to Qualitative Factors
these customers may be lost to competitors. Qualitative factors related to keep or drop decisions often include
considerations of employees that will be terminated if the product
Minimum Pricing Decisions is dropped, the effect a lay off might have on employees that are not
The minimum pricing approach is a useful method in situations terminated, effects of suppliers from which the materials needed for
where there is a lot of intense competition, surplus production the product will no longer be purchased, and the effect of customers
capacity, clearance of old inventories, getting special orders and/or who previously purchased the product being dropped.
improving market share of the product.
Special Order Decisions15
The minimum price should be set at the incremental costs of Special order decisions focus on whether a special priced order
manufacturing, plus opportunity costs (if any). should be accepted or rejected. These orders often can be attractive,
especially when the firm is operating below its maximum productive
For this type of pricing, the selling price is the lowest price that a capacity.
company may sell its product at usually the price will be the total
relevant costs of manufacturing. Price discrimination laws require that firms sell identical products at
the same price to competing customers in the same market. This law
Keep or Drop Decisions15 does not apply to
Another type of operating decision that management must make ♦ Noncompeting customers from the same market.
is whether to keep or drop unprofitable segments, such as product ♦ Potential customers in markets not ordinarily served.
lines, services, divisions, departments, stores, or outlets. Special order decisions are based on incremental analysis.
Incremental analysis enables managers to emphasis on the relevant
The decision is based on whether or not the segment’s revenue areas of a decision.
exceeds the costs directly traceable to the segment, including any
direct fixed costs. • Incremental Revenues are the additional
revenues generated from accepting the
• Incremental Revenue is the difference special order. The revenue can result
in revenue between the original sales from additional sales of products or from
revenue and the new revenue that is providing services.
expected to result due to dropping a
segment. Incremental • If the company is operating at less than
Revenue capacity, revenue of regular customers
Incremental • If dropping a product will cause will not be affected.
Revenue an increase in demand for another
product, the additional revenue for • If the company is operating at capacity, it
the other product should be taken into will have to give up some regular sales in
consideration. order to provide the special order.
• Variable costs associated with a segment • Incremental Costs are the additional
to be dropped are Incremental Cost costs incurred from accepting a special
Savings that cause profit to increase. order. Variable operating costs include
• Direct fixed costs related to a segment special packing, commissions, and
being dropped are avoidable if that shipping costs.
Incremental segment is dropped because they can be • Most often, a firm's recurring fixed costs
Cost Savings eliminated if the segment is dropped. will remain the same in total if a special
Incremental
Costs order is accepted.
• Opportunity Costs are common in • Occasionally the acceptance of a special
keep or drop decisions. They often arise order may cause additional fixed costs
due to rental of production space that such as special purpose tool, Inspection
will become vacant if the decision is Cost. In these cases, these additional
made to drop a product. Opportunity fixed costs are relevant and should be
Opportunity considered in an incremental analysis.
Costs costs are always incremental.

SCMPE
Decision - Accept or Reject? 10
Accounting: An Introduction, 6/E by Peter Atrill, Eddie McLaney, David Harvey;
11
Accounting: Concepts and Applications by W. Albrecht, James Stice, Earl Stice, Monte
Swain; Cost Management: A Strategic Emphasis by Blocher; Managerial Accounting,
• If incremental • If incremental • If incremental Hansen Mowen; Cost Accounting: A Managerial Emphasis, 13/e by Charles T. Horngren;
revenue < revenue = revenue > Cost Management: Accounting and Control by Don Hansen, Maryanne Mowen, Liming
incremental Guan; Essentials of Modern Business Statistics with Microsoft Excel by David R.
incremental cost cost incremental cost Anderson, Dennis J. Sweeney, Thomas A. Williams;
12
Managerial Accounting: The Cornerstone of Business Decision-Making by Maryanne M.
• reject the special • qualitative • accept the Mowen, Don R. Hansen, Dan L. Heitger;
order, unless effects must order, unless 13
Financial & Managerial Accounting by Carl S. Warren, James M. Reeve, Jonathan
qualitative be used to qualitative Duchac;
make the
14
Cost Management: Accounting and Control by Don Hansen, Maryanne Mowen, Liming
characteristics characteristics Guan;
decision. fiercely impact
fiercely impact 15
Managerial Accounting: The Cornerstone of Business Decision-Making by Maryanne M.
the decision. the decision. Mowen, Don R. Hansen, Dan L. Heitger; http://www.unf.edu/;
16
Management Accounting for Business By Colin Drury
Dangers of Concentrating Excessively on a Short- • For previous capsule, final students may refer
Run Time Horizon16 November 2017 Journal.
• Intermediate students may also refer pages 17 to 20
♦ It is vital that the information presented for of this capsule for quick reference of ‘Cost Variance’
decision-making relates to the appropriate time
formulae.
horizon.
♦ If inappropriate time horizons are selected there
is a risk that misleading information will be
presented.
♦ Long-term considerations should always be taken
into account when special pricing decisions are
being evaluated.
♦ The effect of accepting a series of successive
special orders over several periods constitutes a
NATIONAL LEVEL
♦
long-term decision.
If demand from normal business is considered
CA STUDENTS TALENT SEARCH 2019
to be permanently insufficient to utilize existing
capacity, then a long-term capacity decision is
required.
♦ This decision should be based on a comparison
of the relevant revenues and costs arising from Organized by Board of Studies, ICAI
using the excess capacity for special orders with Platform for CA Students to showcase their hidden talent in below areas
the capacity costs that can be eliminated if the
capacity is reduced.
Product Mix Decision

Many times, the management has to take a decision
whether to produce one product or another instead. Quiz
Generally, decision is made on the basis of contribution
of each product. Other things being the same the product
which yields the highest contribution is best one to
produce. But, if there is shortage or limited supply of Instrumental
certain other resources which may act as a key factor like Music Elocution
for example, the machine hours, then the contribution is
linked with such a key factor for taking a decision.
Nukkad
For example, in an undertaking the availability of machine Drama
capacity is limited and the machine hours required for
one unit of the two products are different. In such cases
the contribution is to be linked with the machine hour On 20th December, 2019
and the product which yields the highest contribution per
machine hour is to be preferred for taking decision. in INDORE (Madhya Pradesh)
Sources / References:
1
CIMA Article (Feb. 2010) by David Harris;
2
Cost Accounting: A Managerial Emphasis, 13/e by Charles T.
Horngren, p275;
3
Managerial Accounting: An Introduction to Concepts, Methods and
Uses by Michael W. Maher, Clyde P. Stickney, Roman L. Weil, p 362;
4
Performance Operations by Robert Scarlett, p119;
5
www.mcdonaldization.com/whatisit.shtml;
6
Costing and Pricing Public Sector Services: Essential Skills for the
Public Sector (2011) by Jennifer Bean, Lascelles Hussey;
7
Management and Cost Accounting by Colin M. Drury;
8
Managerial Accounting: A Focus on Ethical Decision Making by Steve
Jackson, Roby Sawyers, Greg Jenkins;
9
Cornerstones of Financial and Managerial Accounting (2011) by
Jay Rich, Jeff Jones, Dan L. Heitger, Maryanne Mowen, Don Hansen,
Standard Costing: A Managerial Control Tool, p 1020;

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SCMPE

• Variance Analysis in compares a against the revised amount.

The Chartered Accountant Student November 2019 07

Planning Variance Operational Variance

Direct Labour Efficiency Variance

08 November 2019 The Chartered Accountant Student

The Chartered Accountant Student November 2019 09

10 November 2019 The Chartered Accountant Student

Pattern in Variance: The variances need to be

Budgetary Process: In case the budgetary process is

The Chartered Accountant Student November 2019 11

It is likely that this observation comes from another distribution

12 November 2019 The Chartered Accountant Student

1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 Possible Interdependence Between

Decision rule to investigate if

P is the probability that the process is ‘Out of Control’

The Chartered Accountant Student November 2019 13

There can be a number of potential causes leading to variances ♦

Fixed Overhead Variance Variable Overhead Variance

14 November 2019 The Chartered Accountant Student

Products Standard Production

Often use ideal The emphasis is Analysis

Cost Variance Sales Margin Variance

Price Usage Rate Efficiency Expenditure Volume Expenditure Efficiency

Mix Yield Gang Sub-efficiency Capacity Efficiency

The Chartered Accountant Student November 2019 15

Sales Margin Variance* Sales Contribution Variance

Market Size Variance Market Share Variance

Market Size Variance Market Size Variance

16 November 2019 The Chartered Accountant Student

The Chartered Accountant Student November 2019 17

Direct Labour Variances

Fixed Overhead Fixed Overhead

18 November 2019 The Chartered Accountant Student

Note: Overhead Variances can also be affected by idle time. It is usually

# Actual Hours (Worked)

The Chartered Accountant Student November 2019 19

Variable Overhead Efficiency Variance Variable Overhead Expenditure Variance

20 November 2019 The Chartered Accountant Student

Short-run decision making involves the act of choosing one course

The Chartered Accountant Student November 2019 21

Accordingly, only future costs can be relevant to decisions. However,

Employee Customer Define The Problem Identify Alternatives

Intangible Competitor's Brand Total Relevant Costs &

Limitations of Non- Financial Information

22 November 2019 The Chartered Accountant Student

• Incremental Cost Savings are reductions

The Chartered Accountant Student November 2019 23

24 November 2019 The Chartered Accountant Student

Product Mix Decision

The Chartered Accountant Student November 2019 25

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