Cost Variances

Analyzing the difference between the actual cost actually required for producing products and standard cost set as a goal brings the cost data effective for the control. Cost Variances can be divided into three according to the purpose:

Variance in direct material cost

Price Variance = actual consumed amount x (standard price - actual price)
Quantity Variance = standard price x (standard consumed amount - actual consumed amount)

Variance in direct labor cost

Labor rate Variance = actual labor hours x (standard labor rate - actual labor rate)
Time Variance = standard labor rate x (standard labor hours - actual labor hours)

Variance in manufacturing indirect cost

Operation capacity Variance = (standard labor hours x standard indirect cost rate) - allowable budget for standard labor hours
Budget Variance = allowable budget for standard labor hours - actual indirect cost

The possible causes of variation in direct material cost include market fluctuations, failed negotiation of the price, and poor selection of materials. In addition, the variation in direct labor cost is caused by the raise incurred during period, the personnel assignment without considering the standard labor rate, and etc. These also bring the variation in manufacturing indirect cost. Thus it is important to analyze Cost Variances, identify the main causes, and use the result for the subsequent control activities.


Related term: Actual Cost,Standard Cost