--- title: "Cost variance analysis from standard and actual" subject: "Engineering Economics" chapter: 1 key: "semester_6/engineering_economics:cost-variance-analysis-9000-units" source: https://www.bctengineer.com/q/semester_6/engineering_economics/cost-variance-analysis-9000-units site: BCT Engineering --- # Cost variance analysis from standard and actual Engineering Economics · Chapter 1: Introduction - Asked in: 2068 Jestha, 10 marks - Video: [Cost Variance | Theory + Numerical | Economics | 2019.2018.2017.2016.2011 PU/TU/KU/PoU](https://www.youtube.com/watch?v=W9bWYDQGCqQ) — Sudip Dhakal - Answer checked by Claude Opus 5.5 (high effort) on 2026-10-14 - Page: https://www.bctengineer.com/q/semester_6/engineering_economics/cost-variance-analysis-9000-units - Whole chapter: https://www.bctengineer.com/md/semester_6/engineering_economics/chapter-1 ## Question Perform cost variance analysis. | | Standard (Rs) | Actual (Rs) | |---|---|---| | Production (Units) | 9,000 | 8,000 | | Direct Labour (Hours) | 72,000 | 60,000 | | Direct Labour cost (Rs.) | 756,000 | 600,000 | | Fixed overhead cost (Rs.) | 900,000 | 810,000 | | Variable overhead cost (Rs.) | 684,000 | 630,000 | ## Short answer Labour variance: Rs 72,000 F (rate Rs 30,000 F, efficiency Rs 42,000 F). Fixed overhead: Rs 10,000 A. Variable overhead: Rs 22,000 A. Labour well-controlled; overhead spending above standard. ## Answer #### Standard rates (from the standard column) - Standard hours per unit = 72,000 / 9,000 = 8 h - Standard labour rate = 756,000 / 72,000 = Rs 10.50 per hour - Fixed overhead rate = 900,000 / 72,000 = Rs 12.50 per hour (budgeted fixed overhead Rs 900,000) - Variable overhead rate = 684,000 / 72,000 = Rs 9.50 per hour Actual output = 8,000 units, so **standard hours for actual output (SH) = 8,000 × 8 = 64,000 h**. Actual hours AH = 60,000 h. #### 1. Direct labour variances | Variance | Calculation | Rs | |---|---|---| | Rate variance | (SR − AR) × AH = (10.50 − 10.00) × 60,000 | 30,000 F | | Efficiency variance | (SH − AH) × SR = (64,000 − 60,000) × 10.50 | 42,000 F | | **Total labour cost variance** | Std cost for actual output 672,000 − actual 600,000 | **72,000 F** | #### 2. Fixed overhead variances Absorbed FOH = 64,000 × 12.50 = 800,000; actual = 810,000. | Variance | Calculation | Rs | |---|---|---| | Expenditure | Budgeted 900,000 − actual 810,000 | 90,000 F | | Capacity (volume) | (AH − budgeted hours) × rate = (60,000 − 72,000) × 12.50 | 150,000 A | | Efficiency | (SH − AH) × 12.50 = 4,000 × 12.50 | 50,000 F | | Volume variance | 150,000 A + 50,000 F | 100,000 A | | **Total FOH variance** | Absorbed 800,000 − actual 810,000 | **10,000 A** | #### 3. Variable overhead variances Std VOH for actual output = 64,000 × 9.50 = 608,000; actual = 630,000. | Variance | Calculation | Rs | |---|---|---| | Expenditure | AH × SR − actual = 60,000×9.50 − 630,000 = 570,000 − 630,000 | 60,000 A | | Efficiency | (SH − AH) × 9.50 = 4,000 × 9.50 | 38,000 F | | **Total VOH variance** | 608,000 − 630,000 | **22,000 A** | (F = favourable, A = adverse.) **Answer: Labour 72,000 F (rate 30,000 F, efficiency 42,000 F); fixed overhead 10,000 A; variable overhead 22,000 A.** Overall, labour is well controlled, but overhead spending is above the standard. ## Check yourself The answer's key points as multiple-choice questions, with the correct option and why. 1. Standard hours for actual output of 8,000 units are: A. 60,000 h B. 8,000 x 8 = 64,000 h C. 8,000 x 9 = 72,000 h D. 72,000 h Answer: B. Standard is 8 h per unit. (Key point: Standard hours for actual output) 2. Labour rate variance = (SR - AR) x AH = A. 4,000 x 10.50 = 42,000 F B. (10.50 - 10.00) x 64,000 = Rs 32,000 F C. (10.50 - 10.00) x 60,000 = Rs 30,000 F D. (10.00 - 10.50) x 60,000 = 30,000 A Answer: C. Actual hours are paid Rs 0.50 less than standard rate. (Key point: Labour rate variance) 3. Labour efficiency variance = (SH - AH) x SR: A. 4,000 x 10 = Rs 40,000 F B. 12,000 x 10.50 = Rs 126,000 F C. 4,000 x 12.50 = 50,000 F D. 4,000 x 10.50 = Rs 42,000 F Answer: D. Fewer actual hours than standard for the output is favourable. (Key point: Labour efficiency) 4. Capacity variance for fixed overhead is: A. (60,000 - 72,000) x 12.50 = Rs 150,000 A B. (64,000 - 60,000) x 12.50 = 50,000 F C. 900,000 - 810,000 = 90,000 F D. (64,000 - 72,000) x 12.50 = 100,000 A Answer: A. Actual hours fell short of budgeted hours. 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