Standard Costing and Variance Analysis — common mistakes

A common mistake is confusing the quantities. For the price variance, always use the 'Actual Quantity Purchased'. For the usage variance, use the 'Actual Quantity Used' in production. These may be different if the business changes its stock levels of raw materials.

For sales variances, the logic is reversed compared to cost variances. A higher actual price or volume is good for the business, so a positive result is Favourable (F). For cost variances, a higher actual cost is bad, so a positive result from (Standard - Actual) is Favourable (F).

A standard is a cost per unit (e.g., $5 of material per product). A budget is a total planned cost or revenue for a period (e.g., $50,000 material budget for the month). Budgets are often built using standards (Standard Cost per unit x Budgeted Volume).

Standards should be reviewed regularly, typically annually. They may need to be updated more frequently if there are significant and long-term changes in prices, technology, or production methods. Using out-of-date standards produces meaningless variances.

Responsibility is usually assigned to the manager who has the most control over the cost. For example, the Purchasing Manager is responsible for the material price variance, while the Production Manager is responsible for the material usage and labour efficiency variances.