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Accounting 3% exam weight

Standard Costing

Part of the CMA Foundation study roadmap. Accounting topic accoun-012 of Accounting.

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Standard Costing

🟢 Lite — Quick Review (1h–1d)

Rapid summary for last-minute revision before your exam.

Standard Costing predetermines standard costs for material, labour, and overheads under efficient operating conditions, then compares actuals against them to surface variances. A variance is the gap: (Standard × Standard) − (Actual × Actual), and it is Favourable (F) when standard cost exceeds actual cost, otherwise Adverse (A).

Variance typeFormula
Material Price(SP − AP) × AQ
Material Usage(SQ − AQ) × SP
Labour Rate(SR − AR) × AH
Labour Efficiency(SH − AH) × SR
Fixed Overhead(SR × SH for AO) − Actual FOH

SQ = Standard Quantity for Actual Output, SH = Standard Hours for Actual Output. CMA Foundation Paper 2A / 3A routinely asks a 5-mark variance computation and a 1-mark MCQ on types of standards (Ideal vs Currently Attainable vs Basic).

🟡 Standard — Regular Study (2d–2mo)

Standard content for students with a few days to months.

Definition and purpose

Standard Costing is a control technique where scientifically predetermined costs replace historical actuals for direct material, direct labour, and overhead. It serves three functions: cost control (variances highlight waste), inventory valuation at standard, and performance evaluation under Responsibility Accounting.

Types of standards

Standards are not all the same, and CMA examiners test this distinction.

  • Ideal Standard — assumes perfect conditions, no waste, no idle time. Theoretical; rarely achieved.
  • Basic Standard — held unchanged over long periods; used to study trend, not current efficiency.
  • Currently Attainable Standard — set for efficient but realistic operating conditions. The most operationally useful and the one most variance analysis assumes.

Material and labour variance formulas

Material Cost Variance decomposes into Price (using Actual Quantity) and Usage (using Standard Price). Mixing the multipliers is the single most common error.

For material:

  • Material Price Variance = (SP − AP) × AQ
  • Material Usage Variance = (SQ for AO − AQ) × SP

For labour:

  • Labour Rate Variance = (SR − AR) × AH
  • Labour Efficiency Variance = (SH for AO − AH) × SR

Fixed overhead variance

The Fixed Overhead Variance splits into Expenditure Variance (Budgeted FOH − Actual FOH) and Volume Variance (Standard Rate × Standard Hours for AO − Budgeted FOH). The volume variance captures the difference between capacity absorbed and capacity provided.

Exam pattern (CMA Foundation)

A typical 5-mark question gives actual and standard data for material/labour and asks you to compute the four variances in a single table. A 1-mark MCQ tests whether a Favourable variance always means efficiency — it does not; cheap material bought may yield a favourable price but adverse usage.

🔴 Extended — Deep Study (3mo+)

Comprehensive coverage for students on a longer study timeline.

Sales variances and the full control framework

Sales Volume Variance and Sales Value Variance extend the model to revenue, linking cost control with marketing performance. Together, material, labour, overhead, and sales variances form the complete cost and revenue control grid taught at the CMA Foundation level.

Worked micro-example — material variances

Standard for 1 unit: SP = ₹40, SQ = 5 kg. Actual production = 100 units, so SQ for AO = 500 kg. Actual: AP = ₹36, AQ = 520 kg.

  • Material Price Variance = (40 − 36) × 520 = ₹2,080 F
  • Material Usage Variance = (500 − 520) × 40 = ₹800 A
  • Material Cost Variance = 2,080 F − 800 A = ₹1,280 F

Notice how the favourable price variance partially absorbed the adverse usage variance. Reporting only the net figure hides this trade-off, which is why standard costing decomposes variances rather than presenting a single total.

Common traps

  • Sign convention: a variance is Favourable when actual cost is less than standard. Reversing the subtraction gives the wrong sign.
  • Responsibility allocation: price variances belong to the purchase department; usage/efficiency variances to the production supervisor. Reporting must respect this.
  • Inventory at standard: stock in financial accounts is valued at standard cost; the closing stock variance is transferred to the Costing Profit & Loss Account, not left in product cost.
  • Unsuitable contexts: job-work, custom contracts, and R&D-driven work cannot be standardised meaningfully; absorption costing or job costing fits better.

Practice prompts

  1. Given SP = ₹50, SQ = 4 kg, AP = ₹45, AQ = 410 kg for output of 100 units, compute Price, Usage, and total Material Cost Variances.
  2. Explain why a favourable Material Price Variance arising from cheaper purchases can coexist with an adverse Material Usage Variance, and how Responsibility Accounting assigns each variance to the correct manager.

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