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Company determines some amount of cost in advance before production of the product. This cost in advance is called as standard cost. In other words standard cost is ‘should be cost’ . This is the cost that company should ideally be incur. However actual cost differs than standard cost and variance arises. These variances can be good or bad also called as favourable or unfavourable variances.

If actual total cost incurred is more than predetermined standard cost then such type of cost variance is called as unfavourable variance. Similarly if actual total cost incurred is less than predetermined standard cost then such type of cost variance is called as favourable variance.

Total Cost of the product basically comprised of total material cost plus total labour cost plus total other overhead expenses.

In case of material cost if actual quantity used is more than predetermined standard quantity that means there is adverse variance. This variance is called as material usage variance.

Similarly if actual price per quantity is more than pre determined price then also there is adverse variance. This variance is called as material price variance.

Variance also arises due to difference in material mix actually used as compared to standard.

Similar type of variances also arises in case of Labour Cost with different names.

In this series we will learn how to calculate material cost and labour cost variances with the help of derived formulae.