What is a Standard Cost Variance?

A standard cost variance is the difference between a standard cost and an actual cost. This variance is used to monitor the costs incurred by a business, with management taking action when a material negative variance is incurred. The standard from which the variance is calculated may be derived in several ways. For example:

The standard cost of a component is based on the expected purchasing volume under a specific contract with a supplier.
The standard cost of labor is based on a time and motion study, adjusted for down time.
The standard cost to operate a machine is based on expected capacity levels, utility costs, and scheduled maintenance charges.

Problems with a Standard Cost Variance

A standard cost variance can be unusable if the standard baseline is not valid. For example, a purchasing manager may negotiate a high standard cost for a key component, which is easy to match. Or, an engineering team assumes too high a production volume when calculating direct labor costs, so that the actual labor cost is much higher than the standard cost. Thus, it is essential to understand how standard costs are derived before relying upon the variances that are calculated from them.

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Types of Standard Cost Variances

There are many types of standard cost variances, including the following:

Fixed overhead spending variance. This variance is the difference between the actual fixed overhead expense incurred and the budgeted fixed overhead expense. The formula for this variance is as follows:
Actual fixed overhead - Budgeted fixed overhead = Fixed overhead spending variance
Labor rate variance. This variance measures the difference between the actual and expected cost of labor. The formula is as follows:
(Actual rate - Standard rate) x Actual hours worked = Labor rate variance
Purchase price variance. This variance is used to discover changes in the prices of goods and services. It can be used to spot instances in which the purchases being made differ in price from your planning levels. The formula is:
(Actual price - Standard price) x Actual quantity = Purchase price variance
Variable overhead spending variance. This variance is the difference between the actual and budgeted rates of spending on variable overhead. The formula is as follows:
Actual hours worked x (Actual overhead rate - standard overhead rate)
= Variable overhead spending variance