Standard costing and variance analysis

Standard costing sets predetermined costs for materials, labour and overheads, then compares actual costs with standards and investigates the differences (variances). A variance is favourable when actual cost is below standard (or actual profit above standard) and adverse when it is above. Worked example: the standard material cost for a job is 100,000 but actual cost is 110,000 — an adverse variance of 10,000 that must be explained, perhaps by a price rise (material price variance) or by waste (material usage variance). Standards are not guesses: they are carefully set from past data, time study and expected efficiency, and they serve as budgets, control tools and performance measures.