Fundamentals of Financial and Cost Accounting · Application of Cost Accounting for Business Decisions

Standard Costing and Variance Analysis for CMA Foundation

Updated 10 October 2026 · Fact-checked

Standard costing sets a pre-decided cost per unit and compares it with the actual cost. The difference is a variance. You calculate material, labour and overhead variances using standard and actual price, quantity and hours. Favourable (F) means actual cost is lower than standard; adverse (A) means it is higher.

Understand Standard Costing and Variance Analysis

A standard cost is a carefully planned cost for one unit of output, set before production starts. It covers material, labour and overhead. Think of it as the target cost the business expects to achieve under normal, efficient conditions.

Standard costing is the technique of setting these standards, recording actual costs, and comparing the two. The difference is called a variance. A variance that increases profit is favourable (F). A variance that reduces profit is adverse (A).

Variances are split into price and quantity parts. For material, you ask: did we pay more per kg (price), or did we use more kg (usage)? For labour, did we pay more per hour (rate), or did workers take more hours (efficiency)? This split shows management who is responsible and what to fix.

Standard costing is different from budgetary control. A budget is a total plan for a department or the whole business, covering a period. A standard is a unit-level cost. Budgets control total spending and standards control cost per unit, but both compare actual with planned and both use variances. Standards are often the building blocks of budgets.

Variances are tools for management by exception. Small variances are ignored. Large ones are investigated, and the cause is traced to a person, a supplier or a process.

Key formulas to remember

Material Cost Variance (MCV): MCV = (SQ × SP) − (AQ × AP); SQ is standard quantity for actual output. Positive result is F, negative is A.
Material Price Variance (MPV): MPV = AQ × (SP − AP); If the variance is computed at the time of purchase, AQ is the quantity purchased. Otherwise AQ is the quantity used. Follow what the question states; if it says nothing and purchases equal usage, the two are the same.
Material Usage Variance (MUV): MUV = SP × (SQ − AQ); SQ is standard quantity for actual output. AQ is the quantity used. Valued at standard price.
Check for material: MCV = MPV + MUV; Works when the quantity purchased equals the quantity used. Use this to verify your answers.
Labour Cost Variance (LCV): LCV = (SH × SR) − (AH paid × AR); SH is standard hours for actual output. AH paid is the hours the workers were paid for, including idle hours.
Labour Rate Variance (LRV): LRV = AH paid × (SR − AR); Uses hours paid. AH paid = AH worked + idle hours.
Labour Efficiency Variance (LEV): LEV = SR × (SH − AH worked); Uses hours actually worked, not hours paid. AH worked = AH paid − idle hours.
Idle Time Variance: Idle time variance = Idle hours × SR; Always adverse (A). Idle hours = AH paid − AH worked.
Check for labour: LCV = LRV + LEV + Idle time variance; LRV uses hours paid and LEV uses hours worked. If there is no idle time, the idle time variance is zero.
Variable Overhead Cost Variance: VOH variance = (SH × Standard rate per hour) − Actual variable overhead; Standard rate = budgeted variable overhead ÷ budgeted hours.
Fixed Overhead Cost Variance: FOH cost variance = (Actual output × Standard rate per unit) − Actual fixed overhead; This is absorbed overhead minus actual overhead. Positive is F.
Fixed Overhead Expenditure Variance: Budgeted fixed overhead − Actual fixed overhead; Positive is F.
Fixed Overhead Volume Variance: Absorbed fixed overhead − Budgeted fixed overhead; Equals standard rate × (actual output − budgeted output). Positive (over-absorption) is F.
Check for fixed overhead: FOH cost variance = Expenditure variance + Volume variance; (Budgeted − Actual) + (Absorbed − Budgeted) = Absorbed − Actual. Use this to verify your overhead answers.

How to solve Standard Costing and Variance Analysis questions

Use the same routine for every variance question. Tabulate standard and actual first, then apply the formula.

1Read what is asked: material, labour or overhead, and which variance.
2Find actual output. All standards must be scaled to actual output, not budgeted output.
3Calculate standard quantity (or hours) for actual output = standard per unit × actual units.
4Write standard and actual price, quantity and rate in two columns so nothing is mixed up. For labour, note hours paid, hours worked and idle hours separately.
5Apply the formula. Use standard minus actual for cost variances (and absorbed minus budgeted for fixed overhead volume) so a positive answer is F and a negative is A.
6Label each answer F or A.
7Verify with the check: price + usage = cost variance for material; rate + efficiency + idle time = cost variance for labour; expenditure + volume = cost variance for fixed overhead.
8Check the option list for the matching figure and sign.

Quickest way: Standard minus actual, then check the total

When to use it: Use in any MCQ asking for one material or labour variance when quantities and prices are given.

Compute standard quantity for actual output first.
For a material price variance, take the difference in price and multiply by AQ purchased if computed at purchase, otherwise AQ used. For a labour rate variance, multiply by hours paid.
For usage or efficiency, take the difference in quantity or hours (quantity used, hours worked) and multiply by the standard price or rate.
For cost variances, do standard minus actual. For fixed overhead volume, do absorbed minus budgeted. In every case positive is F, negative is A.
If two options differ only by sign, recheck the direction using common sense: paid more or used more means adverse.

Common mistakes in Standard Costing and Variance Analysis

Using budgeted output instead of actual output to find standard quantity.
The standard per unit is given and students multiply it by the planned units in the question.
Fix: Always scale standards to actual units produced before comparing with actual quantities.
Reversing the sign and calling an adverse variance favourable.
Students write Actual − Standard for some formulas and Standard − Actual for others.
Fix: Use standard (or absorbed) minus actual (or budgeted) in the forms given on this page, so positive is always F, then confirm by logic: higher actual cost means adverse.
Valuing usage variance at actual price.
Both price and usage involve price, so students mix them.
Fix: Price variance uses AQ purchased if computed at purchase, otherwise AQ used. Usage variance uses quantity used and the standard price.
Using hours paid for efficiency variance when idle time is given.
The question gives both hours paid and hours worked.
Fix: Rate variance uses hours paid. Efficiency variance uses hours worked. Idle time variance is idle hours × standard rate. Add all three to match the labour cost variance.
Treating standard costing and budgetary control as the same thing.
Both compare actual with planned figures.
Fix: Remember: standards are per unit costs; budgets are total amounts for a period and department.

Worked examples

Example 1

Standard material for 1 unit of a product is 4 kg at ₹50 per kg. In a month, 1,000 units were made. Actual material purchased and used was 4,200 kg at ₹48 per kg. Find the material price variance and material usage variance.

Show the solution

Standard quantity for actual output = 1,000 × 4 = 4,000 kg.
Material price variance = AQ × (SP − AP) = 4,200 × (50 − 48) = 4,200 × 2 = ₹8,400 F.
Material usage variance = SP × (SQ − AQ) = 50 × (4,000 − 4,200) = 50 × (−200) = ₹10,000 A.
Check: standard cost = 4,000 × 50 = ₹2,00,000. Actual cost = 4,200 × 48 = ₹2,01,600. MCV = ₹1,600 A.
MPV + MUV = 8,400 F − 10,000 A = ₹1,600 A. This matches.

Answer: Material price variance is ₹8,400 F and material usage variance is ₹10,000 A.

Example 2

Standard time for 1 unit is 3 hours at ₹40 per hour. In a month, 500 units were produced. Workers were paid for 1,600 hours at ₹42 per hour, and all hours were worked. Find the labour rate variance, labour efficiency variance and labour cost variance.

Show the solution

Standard hours for actual output = 500 × 3 = 1,500 hours.
Labour rate variance = AH paid × (SR − AR) = 1,600 × (40 − 42) = 1,600 × (−2) = ₹3,200 A.
Labour efficiency variance = SR × (SH − AH worked) = 40 × (1,500 − 1,600) = 40 × (−100) = ₹4,000 A.
Standard cost = 1,500 × 40 = ₹60,000. Actual cost = 1,600 × 42 = ₹67,200.
Labour cost variance = 60,000 − 67,200 = ₹7,200 A.
Check: 3,200 A + 4,000 A = ₹7,200 A. This matches.

Answer: Labour rate variance is ₹3,200 A, efficiency variance is ₹4,000 A and labour cost variance is ₹7,200 A.

Example 3

Standard time for 1 unit is 3 hours at ₹40 per hour. In a month, 500 units were produced. Workers were paid for 1,600 hours at ₹42 per hour. Of these, 50 hours were idle. Find the labour rate, idle time, efficiency and labour cost variances.

Show the solution

Standard hours for actual output = 500 × 3 = 1,500 hours.
Hours worked = 1,600 − 50 = 1,550 hours.
Labour rate variance = AH paid × (SR − AR) = 1,600 × (40 − 42) = ₹3,200 A.
Idle time variance = 50 × 40 = ₹2,000 A.
Labour efficiency variance = SR × (SH − AH worked) = 40 × (1,500 − 1,550) = 40 × (−50) = ₹2,000 A.
Standard cost = 1,500 × 40 = ₹60,000. Actual cost = 1,600 × 42 = ₹67,200. Labour cost variance = ₹7,200 A.
Check: 3,200 A + 2,000 A + 2,000 A = ₹7,200 A. This matches.

Answer: Labour rate variance is ₹3,200 A, idle time variance is ₹2,000 A, efficiency variance is ₹2,000 A and labour cost variance is ₹7,200 A.

Exam tips

Most questions ask for one variance only. Compute just that one and use the check formula only if time remains.
Watch the sign options. Often two options show the same number with F and A, so direction decides the marks.
Read for idle time. If hours paid differ from hours worked, the question is testing the idle time treatment.
Learn definitions too: standard cost, variance, favourable and adverse, and the difference between standard costing and budgetary control are common theory MCQs.
Use simple multiplication and keep the positive-is-favourable habit. It saves time on every question.

Practice questions from Application of Cost Accounting for Business Decisions

Standard Costing and Variance Analysis in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Standard Costing and Variance Analysis: frequently asked questions

What is the difference between standard costing and budgetary control?

Standard costing fixes a cost per unit for material, labour and overhead and analyses variances per unit of output. Budgetary control fixes total targets for a department or business for a period. Standards are detailed unit figures, while budgets are overall plans.

What is the formula for material price and usage variance?

Material price variance = AQ × (SP − AP), where AQ is the quantity purchased if computed at purchase, otherwise the quantity used. Material usage variance = SP × (SQ − AQ), using quantity used. Here SQ is the standard quantity for actual output. When purchases equal usage, their sum equals the material cost variance.

How do I calculate labour rate and efficiency variance?

Labour rate variance = AH paid × (SR − AR), using hours paid. Labour efficiency variance = SR × (SH − AH worked), using hours worked. SH is standard hours for actual output. If there is idle time, add the idle time variance = idle hours × SR (always adverse) to reach the labour cost variance.

How do I know if a variance is favourable or adverse?

Compare standard cost with actual cost. If actual cost is lower, the variance is favourable. If actual cost is higher, it is adverse. Using the forms on this page gives a positive answer for favourable.