cost & variance analysis

© Tata McGraw-Hill Publishing Company Limited, Management Accounting © Tata McGraw-Hill Publishing Company Limited, Management Accounting © Tata McGraw-Hill Publishing Company Limited, Management Accounting © Tata McGraw-Hill Publishing Company Limited, Management Accounting

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19-19-11

Chapter 19Chapter 19

Cost Variances AnalysisCost Variances Analysis

© Tata McGraw-Hill Publishing Company Limited, Management Accounting© Tata McGraw-Hill Publishing Company Limited, Management Accounting© Tata McGraw-Hill Publishing Company Limited, Management Accounting© Tata McGraw-Hill Publishing Company Limited, Management Accounting

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19-19-22

COST VARIANCES ANALYSIS

Material Variances

Overhead Variances

Labour Variances

Standard Cost Accounting


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Variance analysis is a control technique. The control process involves comparison of actual costs (AC) with the standard costs (SC). Variances represent the difference between actual cost (AC) and standard cost (SC). They basically relate to performance deviations. If AC is less than SC, it is a sign of efficiency and the difference is termed ‘favourable’/‘positive’. If it is more than SC, it is a sign of inefficiency and the difference is referred to as ‘unfavourable’/‘negative’.

As controlling devices, variances help to assign responsibility for deviations and, thus, to control cost. For this purpose, they are classified as controllable and uncontrollable. If a variance can be traced with the responsibility of a particular segment, it is said to be controllable. If a variance arises from causes beyond the control of responsible individuals, it is said to be uncontrollable. This distinction is extremely important for managerial control.


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Cost VarianceCost Variance

The cost variances relate to the costs of a manufacturing enterprise. The three elements of the costs of such

an enterprise are:

1. Material Cost Variance (MCV)1. Material Cost Variance (MCV)

2. Labour Cost Variance (LCV)2. Labour Cost Variance (LCV)

3. Overhead Cost Variance (OCV)3. Overhead Cost Variance (OCV)


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Material Cost VariancesMaterial Cost Variances

Material cost variance is the difference between the standard cost of materials and the cost of materials actually incurred.

MCV on Per Unit Basis

MCV = (SQ × SP × AO) – (AQ × AP × AO)

MCV on Aggregate Basis

MCV = (TSMC – TAMC)Where,

SQ = Standard usage of materials per unit

SP = Standard price of materials per unit

AO = Actual output in units

TSMC = Total standard cost of actual output

AQ = Actual usage of materials per unit

AP = Actual price of materials per unit

TAMC = Total actual cost incurred


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Example 1

Compute the material cost variance (MCV) from the following information.

Particulars Standard Actual

Material usage per unit (kgs)

Price per kilogram (Rs)

Actual units produced

2

14

2.2

15

100

Solution

MCV = (SQ × SP × AO) – (AQ × AP × AO)

= (2 × Rs 14 × 100) – (2.2 × Rs 15 × 100) = Rs 2,800 – Rs 3,300 = Rs 500 (unfavourable/Adverse)


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i) Material Price Variancei) Material Price Variance

Material price variance is the difference between the actual price paid for purchase of material and the standard price.

When actual price exceeds standard price, the variance is unfavourable (U/A); favourable variance (F) results when standard price is greater than actual price. There will be no variance if both the prices are equal.

Material Price Variance = (SP – AP) × AQ

For the facts, in Example 1, the MPV would be:

(Rs 15 – Rs 14) × 220 kgs = Rs 220 (unfavourable/A).

Responsibility for MPV

Material price variance is mainly the responsibility of the purchase officers who are in charge of making the entire purchases of the firm.


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ii) Material Usage/Quantity ii) Material Usage/Quantity Variance (MUV)Variance (MUV)

MUV = [(SQ × AO) – (AQ × AO)] × SP Material Usage Variance = [(SQ × AO) – (AQ × AO)] × SP

For Example 1, the MUV would be:

= [(2 × 100) – (2.2 × 100)] × Rs 14 = Rs 280 (unvarouable).

Since the actual consumption of materials is more than the standard quantity required for producing 100 units of output, the MUV is unfavourable.

Responsibility for MUV

The overall responsibility for this variance lies with the production personnel.

Material usage variance occurs when actual usage of materials differs from standard usage.


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Graphical Presentation of Graphical Presentation of Material VariancesMaterial Variances

Pri

ce

in

Ru

pe

es

pe

r k

g

Quantity (in kgs)

Figure 1: Material Variances

Price variance (Re 1 × 200 kgs) = Rs 200

Standard cost

(200 kgs × Rs 14) = Rs 2,800

100 200 2200

14

15

12

10

8

6

4

2

0

Qu

antity varian

ce

(20 kgs ×

Rs 14) =

Rs 280 P

ric

e i

n R

up

ee

s p

er

kg

Quantity (in kgs)

Figure 2: Modified Material Variances

Price variance (Re 1 × 220 kgs) = Rs 220

Standard cost

(200 kgs × Rs 14) = Rs 2,800

100 200 2200

14

15

12

10

8

6

4

2

0

Qu

antity varian

ce

(20 kgs ×

Rs 14) =

Rs 280


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ii.a) Material Mix Sub-Variance ii.a) Material Mix Sub-Variance (MMSV)(MMSV)

MMSV = (Standard mix of actual total quantity of material used) – (Actual mix of actual quantity of material used) × SR.

For the sake of abbreviation, standard mix may be referred to as revised standard quantity (RSQ) and actual mix (AM). Accordingly,

MMSV = (RSQ – AQ) × SR.

Material mix sub-variance is the difference between the standard mix and the actual mix input/quantities of all grades of material

actually used and their corresponding standard price.


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Example 2

A manufacturing company uses the following standard mix of their compound in one batch of its production line:

50 kgs of material X at the standard price of Rs 2.

30 kgs of material Y at the standard price of Rs 3.

20 kgs of material Z at the standard price of Rs 4.

The actual mix was as follows:

60 kgs of material X

40 kgs of material Y

10 kgs of material Z.

Determine the MMSV.


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Solution

The determination of MMSV involves the following steps:

1. Standard proportion (mix) of materials X, Y and Z (5:3:2) or (50:30:20).

2. Actual total quantity used, 110.

3. Standard mix of actual quantity used (RSQ) by using the following criterion:

(Total actual quantity used) × (Standard proportion of each type of material)

Where

X = 110 kgs × 5/10 = 55 kgs

Y = 110 kgs × 3/10 = 33 kgs

Z = 110 kgs × 2/10 = 22 kgs

MMSV = (RSQ – AQ) × SP

X (55 – 60) × Rs 2 = Rs 10 (unfavourable)

Y (33 – 40) × Rs 3 = Rs 21 (unfavourable)

Z (22 – 10) × Rs 4 = Rs 48 (favourable)

Net MMSV = Rs 17 (favourable)


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ii.b) Material Yield Sub-Variance ii.b) Material Yield Sub-Variance (MYSV)(MYSV)

MYSV on Inputs Basis

MYSV = (Actual input - Standard input) × Weighted average standard input price.

MYSV on Output Basis

MYSV = (Standard yield – Actual yield) × Standard material cost per unit of finished output.

MYSV = (Standard loss of final product in units – Actual loss of final product of units) × Standard material cost unit of finished output..

Material usage variance can be more appropriately designated as material yield sub-variance.


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Example 3

In a chemical manufacturing company, 80 per cent is the standard yield expected of actual inputs; 50 units of inputs are introduced in the process and actual final production achieved is 38 units. The standard price per unit of input is Rs 8. Determine the material yield sub-variance by various methods.

Solution

(a) Output basis:

(i) (Standard yield – Actual yield) × Standard material cost per unit of finished output = [40 (0.80 × 50) – 38] × Rs 10 ( Rs 8 × 100/80) = Rs 20 (unfavourable)

(ii) (Standard loss – Actual loss) × (Standard material per unit of finished output) = (10 – 12) × Rs 10 = Rs 20 (unfavourable).

(b) Input basis:

(Actual input – Standard input) × Standard input price = [50 – 47.5 (38 × 10)/8] × Rs 8 = Rs 20 (unfavourable)


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2) Labour Cost Variance (LCV)2) Labour Cost Variance (LCV)

Labour cost variance is the difference between the standard labour costs and the actual labour costs.

LCV on Per Unit Basis

LCV = (SH × SR × AO) – (AH × AR × AO) (on per unit basis)

LCV on Aggregate Basis

LCV = (TSLC – TALC)

WhereSH = Standard labour hours required per unitSR = Standard wage rate per hourAO = Actual output achieved during the periodAH = Actual labour hours spent per unitAR = Actual wage rate per hourTSLC = Total standard labour cost of actual outputTALC = Total actual labour cost of actual output


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Example 4

From the following information, compute the labour cost variance (LCV).

Particulars Standard Actual

Labour-hours per unit

Wage rate (Rs)

Actual units produced

4

2.5

5

3

100

Solution

LCV = [(SH × SR × AO) – (AH × AR × AO)]

= (4 × Rs 2.5 × 100) – (5 × Rs 3 × 100) = Rs 500 (unfavourable/A)


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i) Labour Rate Variance (LRV)i) Labour Rate Variance (LRV)

Labour rate variance is the difference between the actual wage rate and the standard wage rate.

Labour Rate Variance = (SR – AR) × AH × AO.

In Example 4,

LRV = (Rs 2.5 – Rs 3.0) × 5 × 100 = Rs 250 (unfavourable).

Responsibility for LRV

The departmental executives may be held responsible only for that portion of the LRV which arises due to employment of wrong grades of labour.


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ii) Labour Efficiency ii) Labour Efficiency Variance (LEV)Variance (LEV)

Labour efficiency variance is a function of the difference between the hours workers should have consumed in actual production

and the actual hours worked and the standard wage rate.

Labour Efficiency Variance = [(SH × AO) – (AH × AO)] × SR

In Example 4,

LEV will be: [(4 × 100) – (5 × 100)] × Rs 2.5 = Rs 250 (unfavourable).

Labour efficiency variance can be sub-divided into

(1) Idle time variance

(2) Labour revised efficiency variance consisting of

Labour mix sub-variance and Labour yield sub-variance.


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(a) Idle Time Variance

Idle Time Variance = (Idle time in hours × Standard wage rate)

This variance represents that segment of the LEV which arises due to the standard cost of those actual hours for which the workers have been paid but during which they remain idle due to non-availability of raw materials, breakdown of machines, failure of power and such other abnormal circumstances.


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Assume in Example 4 that the number of idle time hours during the period was 110. The idle time variance would be unfavourable by Rs 275 (110 hours × Rs 2.5). The workers, in fact, actually worked only for 390 hours, the standard hours allowed for which were 400. Clearly, the workers are more efficient and not inefficient. The earlier conclusion has just got reversed. The revised LEV is Rs 25 favourable [(390 hours – 400 hours) × Rs 2.5]. Thus, it is useful to segregate idle time variance from the total LEV:

Idle time variance

Labour efficiency variance (revised)

Total labour efficiency variance

Rs 275 (unfavourable)

25 (favourable)

250 (unfavourable)

This form of presentation of reporting LEV is certainly more useful to the management for controlling future costs and initiating control action compared to the single figure of the total LEV of Rs 250.


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b) Labour Revised b) Labour Revised Efficiency Variance Efficiency Variance

LEV = [Standard mix of actual labour hours worked (RSH) – Actual mix of actual hours worked (AH)] × SR.

i) Labour Mix Sub-Variance

LMSV = (Revised Standard Hours – Actual Labour Hours Spent per unit) x Standard Wage Rate Per Hour.

ii) Labour-Yield Sub-Variance (Output Basis)

LYSV = Actual Yield – Standard Yield) x Standard labour cost per finished unit.

Labour-Yield Sub-Variance (Input Basis)

LYSV = (TAH – TSH) x Weighted Average Standard Rate Per Hour.

Labour revised efficiency variance is a function of the difference between the actual labour mix and the standard labour mix and the

standard wage rate.


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Example 5

The standard labour – mix for producing 100 units a of product is:

4 skilled men @ Rs 3 per hour for 20 hours

6 unskilled men @ Rs 2 per hour for 20 hours

But due to shortage of skilled men, more unskilled men were employed to produce 100 units. Actual hours paid for were:

2 skilled men @ Rs 4 per hour for 25 hours

10 unskilled men @ RS 2.50 per hour for 25 hours.

Compute the labour mix variance.

Solution

The data can be presented as follows:

Category of

workers

Standard Actual

Number

Hours

Total hours

SR TSLC Number

Hours Total hours

AR TALC

Skilled

Unskilled

Total

4

6

20

20

80

120

200

3

2

2.4

240

240

480

2

10

25

25

50

250

300

4

2.5

2.75

200

625

825


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LCV = TSLC – TALC = Rs 480 – Rs 825 = Rs 345 (unfavourable)

(a) LRV = (SR – AR) × AH)

(i) Skilled = (Rs 3 – Rs 4) × 50 = Rs 50 (unfavourable)

(ii) Unskilled = (Rs 2 – Rs 2.5) × 250 = Rs 125 (unfavourable)

Total LRV = Rs 175 (unfavourable)

(b) LEV = (SH – AH) × SR

(i) Skilled = (80 – 50) × Rs 3 = Rs 90 (favourable)

(ii) Unskilled = (120 – 250) × Rs 2 = Rs 260 (unfavourble)

Total LEV = Rs 170 (unfavourable)

Total LEV can be split into: (a) Labour mix sub-variance, and (b) Labour yield sub-varinace


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Labour Mix Sub-Variance

To determine the labour mix sub-variance (LMSV), we are required to calculate the values of revised standard hours for two grades of labour. The revised standard hours for skilled and unskilled labourers respectively would be: Actual total hours × Proportion of skilled hours to the total standard hours.

= (300 × 80)/200 = 120 hours (skilled)

= (300 × 120)/200 = 180 hours (unskilled)

LMSV = (RSH – AH) × SR

(i) Skilled = (120 – 50) × Rs 3 = Rs 210 (favourble)

(ii) Unskilled = (180 – 250) × Rs 2 = Rs 140 (unfavourble)

Total LMSV = Rs 70 (favourable)

The residual LEV should be Rs 240 (unfavourable).


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Labour Yield Sub-Variance

Like the material yield sub-variance, it is determined after taking away the materials mix sub-variance. The basis of computation of labour yield sub-variance (LYSV) would be to find out how many more or less than the total absolute standard hours (and not their break-up) are used in making the actual production (here 100 units). Here, the number of standard hours required are 200; the actual hours worked are 300. The difference is to be multiplied by the weighted average standard rate. Symbolically

LYSV = (TSHs – TAHs) × Weighted average SR = (200 – 300) × Rs 2.4 = Rs 240 (unfavourable)

The above method of determining the LYSV is based on the input basis. The LYSV like the MYSV can be determined on the output basis also. The formula is:

(Standard yield in units expected from the actual hours worked-Actual yield) Standard labour cost per unit

In 300 hours, the standard yield should be 150 units because in 200 hours, the expected yield is 100 units.

LEV = LMSV = Rs 70 (favourable)

LYSV = Rs 240 (unfavourble)

= Rs 170


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3) Overhead Variances3) Overhead VariancesA) Variable overheads

Variable overheads cost variance (VOCV) (unit basis) or VOCV (aggregate basis)

(a) Variable overheads spending variance (VOSV)(b) Variable overheads efficiency variance (VOEV)

For confirmation, VOCV)

[(AH × AO × AVOR ) – (SH × AO × SVOR )TAVOC – TSVOC[TAVOC – (TAH × SVOR )](TAH – TSH ) × SVOR per hourVOEV + VOSV

(B) Fixed overheads

Fixed overheads cost variance (FOCV ) (output basis)

or FOCV (times basis)(a) Fixed overheads spending variance (FOSV)(b) Volume variance (output basis) (VV)

[TAFOC – (SFOR per unit × AO )][TAFOC – (SFOR per hour × SH × AO )]TAFOC – BFOC[(NO – AO ) × SFOR per unit]

i.Fixed overheads efficiency (FOEV)

ii.Calender variance

iii.Capacity variance (CV)

For confirmation, FOCY

[(TAH – TSH ) × SFOR per hour]

(AD – SD) × SFOD

[(TAH – TNH ) × SFOR per hour]

FOSV + VV

or

FOSV + FOEV + Calender variance + CV


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Example 6

The following is an extract of some relevant data of Hypothetical Ltd relating to its variable factory overheads.

Standard hours allowed (per unit)

Standard costs allowed per direct labour-hour

Actual production (units)

Actual direct labour-hours

Actual overheads incurred

2

Rs 3

80

165

518

Determine the VOCV

Solution

VOCV = (Rs 6* × 80) – Rs 518 = Rs 480 – Rs 518 = Rs 38 (unfavourable)

*Rs 6 = (SHs × SVOC per hour) = 2 × Rs 3

Rs 38 (unfavourable) VOCV can be either due to overspending over the standard budget or due to more hours taken by the workers

from the standard hours allowed.

Accordingly, VOCV can be split up into two sub-variances: (a) Variable factory overhead efficiency variance (VFOEV); (b) Variable

factory overhead spending variance (VFOSV).


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(1) Variable Factory Overhead Efficinecy Variance (VFOEV)

VFOEV = [(AO × SHs per unit) – AHs] × SVFOR

= (80 × 2 – 165) × Rs 3 = Rs 15 (unfavourable)

(2) Variable Factory Overhead Spending Variance (VFOSV)

(Actual hours worked) × (Standard variable overhead rate per hour) – (Actual variable factory overhead costs)

= (165 × Rs 3) – Rs 518 = Rs 23 (unfavourable)

Thus

VFOV = VFOEV + VFOSV: Rs 38 = Rs 15 + Rs 23 (all unfavourable).


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Example 7

The following data relate to the fixed overheads of a company for a month:

1. Actual fixed overheads incurred, Rs 530.2. Budgeted fixed overheads, Rs 5003. Normal level of activity for the period, 100 units or 200 hours4. Standard hours allowed, 2 hours per unit5. Actual production, 90 units6. Actual hours worked, 190 hours

Determine the fixed overhead variances.

Solution

FOCV = Rs 530 – (Rs 5 × 90) = Rs 80 (unfavourable)SFOR = Rs 500 ÷ 100 units = Rs 5 per unitAlternatively (on hourly basis): FOCV = Rs 530 – (Rs 2.5 × 2 × 90) = Rs 80 (unfavourable)SFOR = Rs 500 ÷ 200 hours = Rs 2.5 per hour

The FOCV (Rs 80) can be split into three sub-variances: (i) Fixed factory overhead spending variance, (ii) Fixed factory overhead efficiency variance and (iii) Volume variance.


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Fixed Factory Overhead Spending Variance (FOSV)

FOSV = (Actual fixed overhead costs) – (Budgeted fixed costs)= Rs 530 – Rs 500 = Rs 30 (unfavourable)

Fixed Overhead Efficiency Variance (FOEV)

FOEV = [(AO × SHs per unit) – AHs] × SFOR (per hour)= (90 × 2 – 190) × Rs 2.5 = Rs 25 (unfavourable)

Volume Variance

Volume variance = (SHs – AHs) × SFOR = (200 – 190) × Rs 2.5 = Rs 25 (unfavourable)


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Overheads cost variance (OCV )

or OCV (hours basis)

[TAOC – (SOR per unit × AO)]

[TAOC – (SOR per hour × SH per unit × AO)]

(A) Two-variance method

Controllable expenditure varianceVolume variance

[TAOC – (BFOC + SVOC per unit × AO )](NO – AO) × SFOR per unit

(B) Three-variance method

(i) Spending variance(ii) Efficiency variance(iii) Capacity variance

[TAOC – (BFOC + SVOC per hour × TAH)][TAH – TSH ) × SOR per hour](NH – TAH ) × SFOR per hour

(C) Four-variance method

(i) Spending variance(ii) Variable efficiency variance(iii) Fixed efficiency variance(iv) Capacity variance

As B(i) above(TAH – TSH ) × SVOR per hour(TAH – TSH ) × SFOR per hourAs B(iii) above

(D) Five-variance method

(i) Fixed spending variance(ii) Variable spending variance(iii) Variance efficiency variance(iv) Fixed efficiency variance(v) Capacity variance

TAFOC – TBFOC(AVORPH – SXORPH ) × TAHAs C (ii) aboveAs C (iii) aboveAs C (iv) above


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Where,AVOR Actual variable overheads (per hour or per unit, as the case may be)SVOR Standard variable overheads (per hour or per unit, as the case may be)TAVOC Total actual variable overheads incurredTSVOC Total standard variable overhead costsSFOR Standard fixed overheads rate (per unit or per hour, as the case may

be)TAFOC Total actual fixed overheads costBFOC Budgeted fixed overheads costNO Normal output in unitsAD Actual daysSD Standard/budgeted days for which production was scheduledSFOD Standard fixed overheads cost per dayTNH Total normal hours capacityTAOC Total actual overheads cost (TAVOC + TAFOC)SOR Standard overheads rate (per unit or per hour, as the case may be)


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Example 8

SK Industries Ltd uses a standard cost system. The budget relating to overheads for the month of January of the current year is as follows:

Normal capacity: 22,000 direct labour-hours, or 11,000 production units

Budgeted overheads at normal (100%) capacity:

Fixed expenses, Rs 33,000 or Rs 1.50 per hour

Variable expenses, Rs 22,000 or Re 1 per hour

Standard overhead rate, Rs 2.50 per hour

Standard overhead rate, Rs 5 per unit

For the month of January, actual facts were:

Actual hours worked, 21,000

Standard hours allowed for actual production of 10,900 units, 21,800

Actual overheads incurred, Rs 54,700 (Fixed Rs 33,490 + Variable Rs 21,210)

Compute the overhead variances under the various methods.


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Solution

Total overhead variance = (Actual overheads incurred – Standard overhead cost charged to production) = Rs 54,700 – (21,800 SHs × Rs 2.50, SOR per hour = Rs 54,500) = Rs 200 (unfavourable)

1. Two-variance method

(a) Controllable variance: Actual overheads incurred – Budgeted overheads at actual production = Rs 54,700 – Rs 54,800* = Rs 100 (favourable)

* Fixed overheads Rs 33,000+ Variable overheads (10,900 × Rs 2) 21,800

54,800

(b) Volume variance: (Normal capacity in units – Actual production) × SFOR per unit = (11,000 – 10,900) × Rs 3 = Rs 300 (unfavourable)Alternatively, (Normal capacity in hours-Standard hours allowed for actual production) × SFOR per unit = (22,000 – 21,800) × Rs 1.50 = Rs 300 (unfavourable)

Summary:

(a) Controllable variance+ (b) Volume varianceTotal overhead variance

= Rs 100 (favourable)300 (unfavourable)

200 (unfavourable)


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2. Three-variance method

(a) Spending variance = Actual overheads incurred-Budgeted overheads at AHs = (Rs 54,700 – Rs 54,000*) = Rs 700 (unfavourable)

*Budgeted overheads costs – Fixed overheads Rs 33,000

+ Variable overheads (AHs × SVOR per hour) 21,000

54,000

(b) Efficiency variance = (SHs – AHs) × SOR per hour (21,800 – 21,000) × Rs 2.50 = Rs 2,000 (favourable)

(c) Capacity variance = (SHs – AHs) × SFOR per hour = (22,000 – 21,000) × Rs 1.50 = Rs 1,500 (unfavourable)

Summary

(a) Spending variance

+ (b) Efficiency variance

+ (c) Capacity variance

Total overhead variance

Rs 700 (unfavourable)

2,000 (favourable)

1,500 (unfavourable)

200 (unfavourable)


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3. Four-variance method:

(a) Spending variance

Efficiency variance:

(b) Fixed = (SHs – AHs) × SFOR

= (21,800 – 21,000) × Rs 1.50

(c) Variable = (21,800 – 21,000) × Re 1

(d) Capacity variance


Rs 700 (unfavourble)

1,200 (favourable)

800 (favourable)


200 (unfavourable)

4. Five-variance method:

(a) Fixed spending variance

(Rs 33,490 – Rs 33,000)

(b) Variable spending variance

(AVORPH – SVORPH) × AH

(Rs 1.01 – Re 1.00) × 21,000

(c) Fixed efficiency variance

(d) Variable efficiency variance

(e) Capacity variance


Rs 490 (unfavourble)

210 (unfavourable)

1,200 (favourable)

800 (favourable)


200 (unfavourable)


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Standards Cost AccountingStandards Cost Accounting

1. (a) (i) Purchase of materials (AP > SP):

Materials Inventory A/c Dr

Materials Price Variance A/c Dr

To Suppliers/Cash

(ii) (AP < SP)

Materials Inventory A/cDr

To Materials Price Variance A/c

To Suppliers/Cash

Recording Variances (Accounting Procedure)


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(b) (i) Usage of materials: (AQ > SQ)

Work-in-process A/c Dr

Materials Usage Variance A/cDr

To Materials Inventory A/c

(ii) (SQ < AQ)

Work-in-process A/cDr


To Materials Usage Variance A/c

(iii) (SQ = AQ)




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2. (a) (i) Accruals of direct labour (AR > SR)

Direct labour payroll Dr

Labour rate variance Dr

To Accrued payroll

(ii) (SR < AR)

Direct labour payrollDr

To Accrued payroll

To Labour rate variance

(iii) (SR = AR)

Direct labour payrollDr

To Accrued payroll


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b)(i) Actual hours used: (AH > SH)


Labour efficiency variance A/cDr

To Direct labour payroll

(ii) (AH < SH)

Work-in-process A/c Dr


To Labour efficiency variance

(iii) (AH = SH)




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Standard Accounting Procedure for Completed Products

Finished product (at standard cost)Dr

To Work-in-process (at standard costs)

When goods are sold to customers the following two entries will be required:

1. Debtors A/cDr

To Sales (at selling price)

2. Cost of goods sold (at standard cost) Dr

To Finished cost inventory (at standard cost)

cost & variance analysis

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