Standard Costing

🟢 Lite — Quick Review (1h–1d)

Rapid summary for last-minute revision before your exam.

Standard Costing sets predetermined unit costs for direct materials, direct labour and overheads, then measures performance by comparing actual results against those standards. Every difference is a variance that must be analysed, explained and, ideally, controlled.

Must-know formulas (all variances use Standard Price/Rate unless stated):

Material Price Variance = (Standard Price − Actual Price) × Actual Quantity
Material Usage Variance = (Standard Quantity for Actual Output − Actual Quantity) × Standard Price
Labour Rate Variance = (Standard Rate − Actual Rate) × Actual Hours
Labour Efficiency Variance = (Standard Hours for Actual Output − Actual Hours) × Standard Rate
Fixed Overhead Variance = Absorbed Fixed Overhead − Actual Fixed Overhead

For ICAN, expect a 15-mark question asking you to compute material and labour variances from a given data table and reconcile standard with actual cost of production.

🟡 Standard — Regular Study (2d–2mo)

Standard content for students with a few days to months.

Setting the Standards

A standard cost is a scientifically predetermined cost of producing one unit. Standards are derived from engineering studies, time-and-motion analysis, supplier price quotations and budgeted overhead absorption rates. Three levels exist: ideal standards (perfect conditions, no wastage), currently attainable standards (allow for normal spoilage and realistic efficiency) and basic standards (held unchanged for years as a benchmark). ICAN favours attainable standards because they motivate rather than demotivate.

Computing the Four Core Variances

Variance	Formula	Cause investigated
Material Price	(SP − AP) × AQ	Purchasing department
Material Usage	(SQ − AQ) × SP	Production / engineering
Labour Rate	(SR − AR) × AH	Personnel / wages office
Labour Efficiency	(SH − AH) × SR	Foreman / production

Each variance is split into Favourable (F) or Adverse (A). A common exam trap: candidates use SP instead of AP when isolating the material usage variance — usage must always be valued at standard price.

Overhead and Sales Variances

Fixed Overhead Variance has three sub-parts: Expenditure, Volume and Capacity. The Sales Volume Variance values the difference between actual and budgeted sales units at standard contribution margin, separating volume from price effects on profit.

Disposition of Variances

ICAN expects you to know how to dispose of variances at year-end: write them off to Cost of Sales, apportion between Cost of Sales and closing inventories, or carry them forward to the next period — each method produces a different reported profit figure.

🔴 Extended — Deep Study (3mo+)

Comprehensive coverage for students on a longer study timeline.

Edge Cases and Inter-Relationships

Material and labour variances interact: poor-quality material (favourable usage) usually triggers excess labour time (adverse efficiency), and vice versa. Recognising these cross-effects is what separates a pass from a distinction answer. In process-costing environments, material is further split into Mix Variance and Yield Variance, which isolate whether the fault lies in recipe formulation or in conversion efficiency.

Common Mistakes

Mixing ideal and attainable standards mid-calculation — pick one basis and apply it throughout.
Attributing non-controllable variances to operational managers — the principle of controllability means a purchasing manager should not be charged with a price variance caused by an unexpected import-duty change.
Forgetting to reconcile total standard cost absorbed into production with total actual cost incurred; the reconciliation statement is routinely worth 4–5 marks in ICAN Paper 3.
Treating the fixed overhead volume variance as controllable — it arises from capacity utilisation, not spending.

Worked Micro-Example

Actual output: 1,000 units. Standard per unit: 4 kg @ ₦50, 3 hrs @ ₦200. Actual: 4,200 kg costing ₦218,400; 2,900 hrs costing ₦609,000.

Material Price Variance = (50 − 218,400/4,200) × 4,200 = (50 − 52) × 4,200 = ₦8,400 A
Material Usage Variance = (4,000 − 4,200) × 50 = ₦10,000 A
Labour Rate Variance = (200 − 609,000/2,900) × 2,900 = (200 − 210) × 2,900 = ₦29,000 A
Labour Efficiency Variance = (3,000 − 2,900) × 200 = ₦20,000 F

Net adverse total = ₦27,400, which is reconciled against the actual cost of production.

Practice Prompts

Given a process-cost scenario with three raw materials, compute the mix and yield variances and comment on operational causes.
A factory’s fixed overhead absorption rate is based on 5,000 standard hours. Actual hours worked are 4,200 and actual expenditure exceeds budget by ₦180,000. Calculate expenditure, capacity and efficiency variances and identify the responsible manager.

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Standard Costing