How are material and labour cost variances calculated and interpreted, and what might cause a favourable or adverse variance?
Standard costing and the calculation of direct material and direct labour cost variances, splitting each into its price (rate) and usage (efficiency) elements, identifying whether each variance is favourable or adverse, and explaining possible causes.
A focused answer to the SQA Higher Accounting standard costing content, covering the direct material total, price and usage variances and the direct labour total, rate and efficiency variances, the favourable or adverse rule, and the likely causes of each variance.
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What this dot point is asking
The SQA wants you to compare actual costs against a standard (a predetermined target cost) and explain the differences. You must calculate the direct material and direct labour variances, split each into a price element and a usage element, state whether each is favourable or adverse, and suggest plausible causes.
What standard costing does
A standard cost is a carefully set target for the cost of one unit, built from standard quantities and standard prices. Actual costs almost never match exactly, and the gap is a variance. By analysing variances, managers find out where performance differed from plan, who or what was responsible, and what action to take. The aim is control: spotting problems early and reinforcing good performance.
Material variances
The price variance isolates the effect of the price paid per unit of material; the usage variance isolates the effect of how much material was used. Keeping price at standard and using standard prices in the usage calculation stops the two effects contaminating each other.
Labour variances
Interpreting variances
A variance figure means little until its cause is found. An adverse material price variance might mean a supplier raised prices or a cheap deal was lost; a favourable usage variance might mean less wastage or better-quality material. Variances are often linked: buying cheaper, lower-grade material can give a favourable price variance but an adverse usage variance if more is wasted, so they must be judged together rather than in isolation.
Try this
Q1. Standard price £5 per kg, actual price £4.60, actual quantity 2,000 kg. Calculate the price variance and label it. [2 marks]
- Cue. (£5.00 - £4.60) x 2,000 = £800 favourable.
Q2. Standard hours for output 3,000, actual hours 3,200, standard rate £10. Calculate the efficiency variance and label it. [2 marks]
- Cue. (3,000 - 3,200) x £10 = £2,000 adverse.
Q3. Suggest one cause of a favourable material usage variance. [1 mark]
- Cue. Less wastage than expected, better-quality material, or more skilled operators reducing offcuts.
Exam-style practice questions
Practice questions written in the style of SQA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
SQA Higher style6 marksThe standard for a product is 4 kg of material at £3 per kg. Actual production used 4,200 kg costing £11,760 to make 1,000 units. Calculate the material price variance and the material usage variance, and state whether each is favourable or adverse.Show worked answer →
Standard usage for 1,000 units = 1,000 x 4 kg = 4,000 kg. Standard price £3 per kg.
Material price variance = (standard price - actual price) x actual quantity. Actual price = £11,760 / 4,200 = £2.80 per kg. Variance = (£3.00 - £2.80) x 4,200 = £0.20 x 4,200 = £840 favourable, because the actual price was below standard (2 marks).
Material usage variance = (standard quantity - actual quantity) x standard price = (4,000 - 4,200) x £3 = -200 x £3 = £600 adverse, because more material was used than the standard allowed (2 marks).
Net material total variance = £840 favourable - £600 adverse = £240 favourable (2 marks). Markers reward both sub-variances with the correct favourable or adverse label and the net total.
SQA Higher style4 marksA labour rate variance is adverse and the labour efficiency variance is favourable. Suggest one likely cause of each and explain how they might be linked.Show worked answer →
An adverse labour rate variance suggests workers were paid more per hour than standard, perhaps because more skilled, higher-paid staff were used (1 mark).
A favourable labour efficiency variance suggests the work took fewer hours than standard, perhaps because those skilled workers were quicker (1 mark).
The two may be linked: using higher-paid, more skilled workers raised the rate (adverse) but they worked faster, saving hours (favourable), so the decision had offsetting effects that should be judged together (2 marks). Markers reward a cause for each variance and a sensible link.
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Sources & how we know this
- SQA Higher Accounting Course Specification — SQA (2023)