Standard Costing Variance Analysis
From Material Price to Final Profit Variance — Accountability & Prevention
Why Standard Costing & Variance Analysis Matters
Standard costing sets predetermined benchmarks for materials, labour, and overhead, empowering finance teams to measure performance gaps in real time. By categorizing variances—material, labour, variable/fixed overhead, sales price/volume, and overall profit—organizations can pinpoint exactly where and why costs deviate from expectations. Clear accountability (e.g., purchasing managers own price variances, production managers own usage variances) ensures prompt, targeted corrective actions. Proactive strategies—like competitive bidding, lean manufacturing practices, incentive-based pay, and zero-based budgeting—help prevent most unfavourable variances before they occur. Embedding variance dashboards and cross-functional root-cause workshops cements a culture of continuous improvement aligned with corporate financial goals.
Key Variances & Responsible Owners
Material Variances
Price Variance: (AP – SP) × AQ — Purchasing Manager
Usage Variance: (AQ – SQ) × SP — Production Manager
Labour Variances
Rate Variance: (AR – SR) × AH — HR Manager / Payroll Supervisor
Efficiency Variance: (AH – SH) × SR — Production Supervisor
Overhead Variances
VOH Spending: (AVOR – SVOR) × AH — Cost Accountant
VOH Efficiency: (AH – SH) × SVOR — Industrial Engineer
FOH Spending: AFH – BFH — Plant Manager & CFO
FOH Volume: (AV – BV) × FR/unit — Operations Director
Sales & Profit Variances
Sales Price: (ASP – SSP) × AV — Sales Manager
Sales Volume: (AV – BV) × CM/unit — Demand Planning Team
Profit Variance: AP−BP — CFO
Proactive Prevention Strategies
- Competitive bidding & long-term contracts for stable material pricing
- Lean manufacturing (5S, Kaizen) and SOPs to reduce scrap and usage variances
- Market-based wage benchmarking and incentive schemes to optimize labour costs
- Zero-based budgeting and rolling forecasts to control fixed overheads
- Dynamic pricing tools and contractual price escalators for sales variances
- Integrated dashboards and cross-functional root-cause workshops for continuous improvement
Interactive Variance Calculator