CMA Intermediate · Cost Accounting
Standard Costing and Variance Analysis for CMA Inter Cost Accounting
Standard costing sets a predetermined cost for each unit of output and compares it with actual cost. The difference is a variance. You solve problems by computing each variance from a fixed formula, marking it Favourable or Adverse, then reconciling the total with the difference between standard and actual profit or cost.
What this chapter covers
This chapter is about control. A standard cost is what a product should cost under defined, efficient conditions. Once you have standards, you compare them with actual results and split the gap into variances. Each variance points to a cause, such as a higher purchase price, wasted material, idle labour or lower sales volume, and to a person who can act on it.
The chapter moves in a fixed pattern. You start with concepts and how standards are set. Then you take each cost element in turn: material, labour, variable overhead and fixed overhead. For material, labour and variable overhead, each element has a price-type variance (price, rate or spending) and a quantity-type variance (usage or efficiency). Fixed overhead is handled differently, through expenditure and volume variances, because it is compared on budgeted, absorbed and actual figures. Sales variances follow similar price and volume logic, applied to revenue or margin. The last topic ties everything together by reconciling the variances to actual and budgeted profit.
This chapter links to much of the rest of Cost Accounting. It builds on cost sheets, material, labour and overhead accounting, and on marginal costing. It also leads into Management Accounting, where budgetary control and performance measurement use the same variance thinking. Once you master the pattern here, many other chapters feel easier.
Variance problems are numerical, formula-driven and highly scoring if you are systematic. A full 14-mark question can often be solved almost mechanically, and step marks are given even if one number goes wrong. The chapter also feeds the compulsory MCQ section, where short questions ask for one variance, its sign or a missing figure from a relationship. Because the same method repeats across materials, labour, variable overheads and sales, the effort you put in pays back many times over.
Standard Costing and Variance Analysis: topics in the order to study them
- 1Standard Costing: Concepts and Setting StandardsYou need the meaning of standards, types of standards and how they are set before any variance makes sense.
- 2Material Cost VariancesIt is the cleanest example of the price versus quantity split, and the later elements copy its logic.
- 3Labour Cost VariancesIt mirrors material (rate for price, efficiency for usage) and adds idle time and, in some problems, mix and yield.
- 4Variable Overhead VariancesIt uses the same rate and efficiency pattern, applied to a recovery base such as labour hours.
- 5Fixed Overhead VariancesIt is harder because it uses budgeted, absorbed and actual figures, with volume, capacity and calendar effects, so study it after the simpler elements.
- 6Sales Variances: Turnover and Margin MethodsYou apply the price and volume logic to revenue and profit, and you must learn which method the question asks for.
- 7Variance Reconciliation, Interrelationship and DisposalIt joins all variances into one statement and needs every earlier topic as input.
How to prepare Standard Costing and Variance Analysis
Treat this chapter as one pattern repeated across elements, not as a pile of unrelated formulas. Build the pattern first, then practise it under exam conditions.
- Read the concepts topic once and write down the types of standards and the steps in setting them in your own words.
- Learn one master layout: Standard Cost for Actual Output, Actual Quantity at Standard Price, Actual Cost. It applies to material, labour and variable overhead. Derive price and usage (or rate and efficiency) variances from it instead of memorising each formula.
- Repeat the same layout for labour and variable overhead, noting only what changes (rate, hours, idle time). For fixed overhead, do not use this layout. Use budgeted, absorbed and actual fixed overhead to find expenditure and volume variances.
- Solve every problem in a fixed format: workings table first, then each variance with its formula, a figure and an F or A label.
- Do sales variances by both turnover and margin methods, and write which method you are using at the top of the answer.
- Practise reconciliation questions where you start from budgeted profit, add or subtract each variance and arrive at actual profit, and check that the total ties.
- Finish with timed past-style questions and a short set of MCQs on signs, relationships and missing figures.
Common mistakes in Standard Costing and Variance Analysis
Using the wrong quantity in a formula, such as budgeted output instead of actual output.
Fix: Always compute standard quantity or hours for actual output first, and use that in every usage and efficiency variance.
Getting the sign wrong and labelling a variance F instead of A.
Fix: Ask the plain question: did this help profit? If yes, it is F. Write the label next to every figure.
Mixing hours paid with hours worked in labour variances.
Fix: Use hours paid for the rate variance, hours worked for efficiency, and show idle time separately.
Confusing budgeted fixed overhead with absorbed fixed overhead.
Fix: Write both figures in your workings table and remember that absorbed overhead is based on standard hours or units for actual output.
Mixing turnover and margin methods in sales variances.
Fix: Underline the method required, state it at the top, and keep the same method for the whole answer.
Skipping the check that variances add up to the total variance.
Fix: Spend the last two minutes verifying that sub-variances sum to the total; this catches most arithmetic errors.
Last-day revision: Standard Costing and Variance Analysis
- Variance = difference between standard and actual; mark it Favourable (F) or Adverse (A).
- For costs, actual cost lower than standard is F; for sales and profit, actual higher than standard is F.
- Material Cost Variance = Standard cost for actual output − Actual cost.
- Material Price Variance = Actual Quantity × (Standard Price − Actual Price).
- Material Usage Variance = Standard Price × (Standard Quantity for actual output − Actual Quantity).
- Labour Rate Variance = Actual Hours Paid × (Standard Rate − Actual Rate).
- Labour Efficiency Variance = Standard Rate × (Standard Hours for actual output − Actual Hours Worked).
- Idle Time Variance = Idle Hours × Standard Rate; it is adverse (a loss), shown separately from efficiency variance.
- Fixed Overhead Cost Variance = Absorbed fixed overhead − Actual fixed overhead.
- Fixed Overhead Expenditure Variance = Budgeted fixed overhead − Actual fixed overhead.
- Sales Value (Turnover) Variance = Actual sales − Budgeted sales; split into Sales Price Variance and Sales Volume Variance. Under the margin method, use profit (margin) instead of sales value.
- In reconciliation, the sum of the variances must equal the gap between standard and actual figures; if not, recheck.
Standard Costing and Variance Analysis practice questions
- Standard for one unit of a product at Surat Textiles: 5 hours at ₹40 per hour. In a month, 800 units were produced, with 4,200 hours worked …
- Kaveri Plastics buys material at a standard price of Rs 50 per kg and computes the price variance at the time of purchase. In a month it bou…
- Under the turnover (value) method of sales variance analysis, the sales value variance is the difference between:
- Standard labour cost for output of a product at Indore Tools: 600 hours at ₹30 = ₹18,000. Actual: 640 hours paid at ₹29 = ₹18,560, of which …
- Sharma Components budgeted to sell 2,000 units at Rs 50 per unit. It actually sold 2,200 units at Rs 48 per unit. What is the sales price va…
- Budgeted fixed overhead of Rao Components for a month is ₹4,80,000 and budgeted output is 12,000 units, requiring 24,000 standard machine ho…
- In standard costing, a standard that is set on the assumption of efficient operations with allowance for normal wastage, normal machine brea…
- Standard labour rate for a job is ₹60 per hour. Actual wages paid to workers at Pune Fabricators were ₹1,26,000 for 2,000 hours worked. What…
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
Is standard costing a high-scoring chapter in CMA Inter Cost Accounting?
It is one of the more reliable numerical chapters because the method is fixed and step marks are available. It can also appear in the compulsory MCQ section. Treat it as a priority if you want dependable marks.
Do I need to memorise every variance formula?
Not as isolated formulas. Learn the master layout of standard cost, actual quantity at standard price and actual cost, then derive the price and usage variances for material, labour and variable overhead from it. Fixed overhead works differently: learn it through budgeted, absorbed and actual figures, giving expenditure and volume variances. Keep a short list for special items such as idle time.
Which topic should I study first in this chapter?
Start with concepts and setting standards, then material variances. Material gives you the price and quantity pattern that labour and variable overhead repeat. Leave fixed overhead and reconciliation until you are comfortable with that pattern.
How should I present a variance answer for step marks?
Begin with a clear workings table for standard and actual figures. Then show each variance with its formula, the substituted values, the result and an F or A label. Finish with a check or reconciliation total.