ACCA Applied Knowledge · Management Accounting

Variance calculations and analysis: formula sheet

Full chapter guide

Key formulas

Standard cost per unit: Σ (standard quantity × standard price) for materials, labour and overheads; Overheads use the standard absorption rate per unit or per hour.
Standard cost of actual output: Actual units produced × standard cost per unit; Use actual output, not budgeted output. This is the flexed budget cost.
Total cost variance: Standard cost of actual output − Actual cost; Positive = favourable, negative = adverse. Apply separately to materials, labour and overheads.
Flexed variable cost: Budgeted variable cost per unit × actual units; Fixed costs are not flexed in a flexed budget.
Sales variance direction: Actual profit or revenue − Standard or flexed figure; Higher than standard is favourable. For costs, lower than standard is favourable.
Material price variance: (Actual quantity × standard price) − (Actual quantity × actual price); Equivalent to AQ × (SP − AP). Positive = Favourable, negative = Adverse. AQ is the quantity purchased if inventory is held at standard cost, or the quantity used if the price variance is measured on usage.
Material usage variance: (Standard quantity for actual output − actual quantity used) × standard price; Equivalent to (SQ − AQ) × SP. Positive = Favourable, negative = Adverse. Always valued at standard price.
Standard quantity for actual output: Actual units produced × standard quantity per unit; Use actual output, not budgeted output. This is the most common source of lost marks.
Total material cost variance: (Standard quantity for actual output × standard price) − (Actual quantity × actual price); Equals the price variance plus the usage variance, when price is measured on the quantity used.
Labour rate variance: (Actual hours paid × standard rate) − (Actual hours paid × actual rate); Same as actual hours paid × (standard rate − actual rate). Positive is favourable, negative is adverse.
Labour efficiency variance: (Standard hours for actual output − actual hours worked) × standard rate; Positive is favourable (fewer hours used), negative is adverse.
Standard hours for actual output: Actual units produced × standard hours per unit; Always based on actual output, not budgeted output.
Total labour cost variance: (Standard hours for actual output × standard rate) − actual labour cost; Equals the rate variance plus the efficiency variance when there is no idle time.
Idle time variance: (Hours paid − Hours worked) × Standard rate per hour; Always adverse. Uses the standard rate, not the actual rate.
Labour rate variance (with idle time): (Hours paid × Standard rate) − Actual cost of hours paid; Based on hours paid. Positive is favourable, negative is adverse.
Labour efficiency variance (with idle time): (Standard hours for actual output − Hours worked) × Standard rate per hour; Based on hours worked, not hours paid.
Total labour variance check: (Standard hours for actual output × Standard rate) − Actual cost of hours paid = Rate + Idle time + Efficiency; Use it to check your three answers. Mind the signs.
Standard hours for actual output: Actual units produced × Standard hours per unit; Flex to actual output, not budgeted output.
Variable overhead expenditure variance: (Actual hours × standard rate per hour) − actual variable overhead cost; Positive result = favourable (actual cost is lower). Negative = adverse. Use the hours that actually drive the overhead, normally actual hours worked.
Variable overhead efficiency variance: (Standard hours for actual output − actual hours) × standard variable overhead rate per hour; Positive = favourable (fewer hours used than allowed). Negative = adverse.
Standard hours for actual output: Actual units produced × standard hours per unit; Always based on actual output, not budgeted output.
Total variable overhead variance: (Actual output × standard variable overhead cost per unit) − actual variable overhead cost; Equals the expenditure variance plus the efficiency variance. Use it as a check.
Fixed overhead expenditure variance: Budgeted fixed overhead − Actual fixed overhead; Positive = favourable (F). Negative = adverse (A). Used under both absorption and marginal costing.
Standard fixed overhead absorption rate per unit: Budgeted fixed overhead ÷ Budgeted output (units); If the question gives budgeted hours, the rate can be per hour instead.
Fixed overhead volume variance (absorption costing): (Actual output − Budgeted output) × Standard fixed overhead rate per unit; Actual output above budget = favourable (F). Below budget = adverse (A). Not used in marginal costing.
Total fixed overhead variance: (Actual output × Standard rate per unit) − Actual fixed overhead; Equals expenditure variance + volume variance, taking account of F or A signs.
Marginal costing rule: Fixed overhead variance = expenditure variance only; Fixed overhead is not absorbed, so there is no volume variance.
Sales price variance: (Actual price − Standard price) × Actual units sold; Positive result is favourable. Alternative: Actual revenue − (Actual units × Standard price).
Sales volume variance (units): (Actual units sold − Budgeted units) × Standard profit per unit; Use standard profit under absorption costing. Positive result is favourable.
Sales volume variance (marginal costing): (Actual units sold − Budgeted units) × Standard contribution per unit; Use when the question uses marginal costing or gives contribution per unit.
Total sales margin variance: Sales price variance + Sales volume variance; Equals actual profit on sales less budgeted profit, using standard costs.
Direction rule: Higher price or higher volume = Favourable (F); lower = Adverse (A); This applies to sales variances only. Cost variances work the other way round.
Operating statement (absorption costing): Budgeted profit ± sales variances ± cost variances = actual profit; Favourable variances add to profit. Adverse variances reduce it.
Sales volume variance (profit basis): (Actual units sold − budgeted units) × standard profit per unit; Absorption costing uses standard profit per unit. Marginal costing uses standard contribution per unit.
Sales price variance: (Actual price − standard price) × actual units sold; Higher actual price is favourable.
Material price variance: (Standard price − actual price) × actual quantity purchased or used; Use quantity purchased if materials are valued at standard on purchase. Read the question.
Material usage variance: (Standard quantity for actual output − actual quantity used) × standard price; Using less than standard is favourable.
Labour rate variance: (Standard rate − actual rate) × actual hours paid; Lower actual rate is favourable.
Labour efficiency variance: (Standard hours for actual output − actual hours worked) × standard rate; Fewer hours than standard is favourable.
Idle time variance: Idle hours × standard rate (always adverse); Efficiency is then calculated on hours worked, not hours paid.
Variable overhead variances: Expenditure: (standard rate × actual hours) − actual cost. Efficiency: (standard hours − actual hours) × standard rate; Efficiency uses the same hours difference as labour efficiency.
Fixed overhead variances: Expenditure: budgeted − actual fixed overhead. Volume: (actual output − budgeted output) × standard fixed overhead per unit; Volume applies in absorption costing only. It is favourable when output exceeds budget.
Sign rule: Actual cost lower than standard = F. Actual revenue higher than standard = F; Reverse for adverse.

Quick revision

Variance = difference between standard and actual, with a favourable or adverse label.
Favourable (F) increases profit. Adverse (A) reduces profit.
Flex the standard to actual output before comparing.
Material price variance = (standard price − actual price) × actual quantity purchased.
Material usage variance = (standard quantity for actual output − actual quantity used) × standard price.
Labour rate variance = (standard rate − actual rate) × actual hours paid.
Labour efficiency variance = (standard hours for actual output − actual hours worked) × standard rate.
Idle time variance = idle hours × standard rate, and it is always adverse.
Fixed overhead expenditure variance = budgeted fixed overhead − actual fixed overhead.
Sales price variance = (actual price − standard price) × actual units sold. Sales volume variance = (actual units − budgeted units) × standard profit per unit.
Operating statement starts at budgeted profit, adds or subtracts each variance, and ends at actual profit.
Variances can be linked, such as cheap materials causing a poor usage variance.

Common mistakes

Comparing actual cost with the original budget without flexing. Fix: Always restate the standard cost for actual output first. Budgeted output is only used to flex.
Getting favourable and adverse the wrong way round. Fix: Ask whether profit rises. Costs below standard are favourable. Revenue above standard is favourable.
Using budgeted output instead of actual output to find the standard quantity. Fix: Always multiply actual units produced by standard quantity per unit. Budgeted output is only needed for flexing the budget, not for these variances.
Valuing the usage variance at the actual price. Fix: Value the usage difference at the standard price only. The price effect belongs in the price variance.
Valuing the efficiency variance at the actual rate. Fix: Efficiency is a quantity variance. Always use the standard rate.
Using budgeted output to find standard hours. Fix: Use actual units produced × standard hours per unit.
Using the actual rate to value idle time. Fix: Variances in hours use the standard rate. Idle time variance = idle hours × standard rate.
Calculating efficiency on hours paid. Fix: When idle time is given, use hours worked for efficiency. Hours paid is only for rate and idle time.
Using budgeted hours or budgeted output to find standard hours. Fix: Always multiply actual units produced by standard hours per unit. Variances use flexed, actual-output standards.
Using the actual overhead rate in the efficiency variance. Fix: Efficiency is a hours difference valued at the standard rate. The actual rate belongs only in the expenditure variance, through actual cost.

Exam tips

Read for the word actual output or units produced. It tells you what to flex to.
In multiple response questions on standards, check each option against the four definitions. Words like perfect or no waste point to ideal.
For number entry, give the figure only unless asked for F or A, and check the required sign and rounding.
Use the cost card layout to avoid missing an element such as variable overhead.
Spend no more than about two minutes on a Section A variance question; flag it and return if stuck.
Check the question for inventory details. Whether price is measured on purchases or usage changes the quantity you use.
In multiple response and number entry questions, give the label (A or F) if asked. A correct number with the wrong sign may score nothing.
Do the standard quantity calculation first on scrap paper. It is needed for every usage variance question.