AAT LEVEL 4
Association of Accounting Technicians (AAT)
Example Course Materials
LESSON 2
Variance Calculation – Materials and Labour
On completing this lesson you should be able to:
üü Identify the variances in a standard absorption costing system and a standard marginal costing system
üü Calculate materials total, price and usage variances
üü Calculate labour total, rate and efficiency variances
Introduction
Standard costing is a useful tool for monitoring and measuring performance because it allows actual costs to be compared to
expected or standard costs. This comparison will highlight any variances arising between the expected results and the actual
results. These variances need to be analysed so that future activities can be controlled effectively.
This lesson is concerned with the calculation of variances for direct materials and direct labour. This is a key assessment
topic.
Variance calculations
In a standard costing system all units of output are valued at their standard cost. This means that cost of production and cost
of sales will be based on standard costs. It is highly probable that when the actual costs of production are determined that
these will be different to the standard costs. This will result in a variance.
Variances are expressed in monetary terms and denoted as either adverse or favourable.
Where the actual cost is lower than the standard cost the variance will be favourable (F). Where the actual cost is
higher than standard cost the variance will be adverse (A).
It is not sufficient merely to calculate a variance. For it to have any usefulness it must be denoted as either favourable or
adverse.
Variances can be calculated for a variety of costs however the Financial Performance unit only examines cost variances
relating to direct materials, direct labour, variable overheads and fixed overheads.
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AAT LEVEL 4
Association of Accounting Technicians (AAT)
Example Course Materials
The variances for a standard absorption costing system will differ from those for a marginal costing system.
The diagram on the next page shows how the variances for a standard absorption costing system are related.
Direct materials
Material
price
Material
usage
Direct labour
Labour
rate
Fixed overheads
Labour
efficiency
Fixed
overhead
volume
Fixed
overhead
capacity
Fixed
overhead
expenditure
Variable overheads
Variable
overhead
expenditure
Variable
overhead
efficiency
Fixed
overhead
efficiency
In a standard marginal costing system the only fixed overhead variance that would be calculated is the fixed overhead
expenditure variance. This is because the other fixed overhead variances are based on the standard absorption rate and this
is not a feature of marginal costing.
Variances are calculated by comparing what the production output should have cost with what it actually cost. This can be
done for each of the areas of direct materials, direct labour and overheads. These are known as total variances which can
then be broken down or sub-divided even further.
Each of the variances in the diagram will now be calculated using the example product Zog. All of the examples in this lesson
will be based on the standard cost card from lesson 1 which is reproduced here.
Standard cost card - Zog
Quantity
Cost
Total unit cost £
Material RM2
4 kg
£1.20 per kg 4.80
Labour – grade II
1.2 hrs
£8.00 per hr
9.60
Overheads1.2 hrs£15.0018.00
Total standard cost per unit32.40
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AAT LEVEL 4
Association of Accounting Technicians (AAT)
Example Course Materials
Direct material variance
The direct material variance is calculated to quantify the effect on profit of a difference between the actual material cost and
the standard material cost. The resulting variance can then be analysed to quantify how much of the difference is due to a
change in price and how much is due to a change in the quantity of material used.
The total material variance is calculated as:
Standard material cost for actual production
less
Actual material cost
When calculating the standard cost or standard quantity it is always the standard for the actual output.
Example –Direct materials variance
The standard cost for a Zog was calculated assuming an output of 5,000 units. During the last production period the actual
output was 5,600 units.
22,960 kg of material was used at a total cost of £28,700.
Required
Calculate the direct material variance.
Solution
This variance is the difference between what the material cost should have been for producing 5,600 units and the actual
material cost.
Each unit of Zog requires 4kg of material at £1.20 per unit. This is a standard material cost of £4.80 per Zog. As the actual
number produced was 5,600 units the standard material cost for actual production is calculated as 5,600 units x £4.80 =
£26,880
The actual cost of materials has been supplied, i.e. £28,700
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AAT LEVEL 4
Association of Accounting Technicians (AAT)
Example Course Materials
£
Standard material cost for actual production
26,880
5,600 units x 4kg x £1.20
Actual cost of materials
28,700
Direct materials variance1,820
A
The variance is adverse because the actual cost of the materials was greater than the expected standard cost.
The total variance can be sub-divided into the material price variance and the material usage variance. The material price
variance identifies how much of the variance has occurred because of a change in the material price paid from the expected
material price. The material usage variance identifies the effect of using more or less material than expected.
When added together the material price variance and material usage variance should total the direct material variance so this
can be used to check that the calculations have been performed correctly.
Material price variance
The material price variance is concerned with any change between the expected material purchase price and the actual
material purchase price. It is based on the actual quantity of material used. This ensures that the only measurement is of the
change in price.
The material price variance calculation is:
Actual quantity used at standard price
less
Actual quantity used at actual price
Example –Direct materials variance
The standard cost for a Zog was calculated assuming an output of 5,000 units. During the last production period the actual
output was 5,600 units.
22,960 kg of material was used at a total cost of £28,700.
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AAT LEVEL 4
Association of Accounting Technicians (AAT)
Example Course Materials
Required
Calculate the material price variance.
Solution
As this variance is only concerned with the difference in price it is calculated using the actual quantity of material used, i.e.
22,960 kg.
From the information provided the actual cost of 1 kg of material can be calculated as £1.25 per kg (£28,700 ÷ 22,960 kg).
£
Actual quantity at standard price
27,552
22,960 kg x £1.20
Actual cost of materials
28,700
Material price variance
1,148 A
The variance is adverse because the price of 1 kg of material has increased from £1.20 to £1.25
The variance can also be calculated as:
(£1.25 - £1.20) x 22,960 kg = £1,148 A
Material usage variance
The material usage variance is concerned with the amount of material that has been used in the production process
compared with the amount of material that should have been used. The variance is calculated using the standard material
cost to ensure that the only measurement is of the quantity of material.
The material usage variance is calculated as:
Standard quantity for actual production at standard price
less
Actual quantity for actual production at standard price
Example – Material usage variance
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AAT LEVEL 4
Association of Accounting Technicians (AAT)
Example Course Materials
The standard cost for a Zog was calculated assuming an output of 5,000 units. During the last production period the actual
output was 5,600 units.
22,960 kg of material was used at a total cost of £28,700.
Required
Calculate the material usage variance.
Solution
This variance is concerned with the quantity of material used. This means that the standard material usage for the actual
production needs to be calculated.
Each Zog requires 4 kg of material. To produce 5,600 Zogs requires 22,400 kg of material (5,600 x 4kg). If this is compared
to the actual quantity of material used (22,960 kg) it can immediately be seen that the quantity used is higher than expected
and so this indicates that the variance will be adverse.
£
Standard quantity for actual production at standard price
26,880
5,600 units x 4 kg x £1.20
Actual quantity of material used at standard cost
27,552
22,960 kg x £1.20
Material usage variance
672
A
The variance can also be calculated as:
(22,400 kg – 22,960 kg) x £1.20 = £672 A
To confirm that the variance calculations for price and usage are correct they should, when added together, equal the direct
material variance.
£1,148 A + £672 A = £1,820 A
A useful way of remembering how to calculate variances is to use the mnemonic PAUS.
Price variances are based on
Actual quantities, but
Usage variances are based on
Standard prices
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