AQA A-Level Accounting: Standard costing and variance analysis (7127) – Revision Notes

For full explanations and the long worked example, use the standard costing study guide.

These notes cover section 3.11, Standard costing and variance analysis, of the AQA A-level Accounting (7127) specification, version 1.1 (October 2026), for A-level exams from June 2019 onwards. The course is untiered and this section is assessed on Paper 2. All businesses and figures are invented.

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3.11 Key terms

Term	Meaning
Standard cost	Predetermined cost of one unit, set in advance from expected quantities and prices
Standard cost card	Build-up of the standard cost: quantity × price for materials, hours × rate for labour
Variance	Difference between a standard (or budgeted) figure and the actual figure
Variance analysis	Calculating variances, splitting them into price and quantity parts, and explaining causes
Favourable (F)	Increases profit compared with standard
Adverse (A)	Reduces profit compared with standard
Management by exception	Managers investigate only significant variances
Standard quantity / standard hours	Quantity or hours that actual output should have used

Variance formulas

Variance	Formula	Usually answerable
Materials price	(SP − AP) × AQ	Buyer / purchasing
Materials usage	(SQ − AQ) × SP	Production supervisor
Total materials	SQ × SP − actual cost	–
Labour rate	(SR − AR) × AH	Personnel / pay setting
Labour efficiency	(SH − AH) × SR	Production supervisor
Total labour	SH × SR − actual cost	–
Sales price	(AP − SP) × actual units sold	Sales manager
Sales volume	(actual units − budgeted units) × standard contribution per unit	Sales manager

S = standard, A = actual, P = price, Q = quantity, R = rate, H = hours. With costs written “standard minus actual”, a positive answer is F. With sales written “actual minus standard”, a positive answer is F.

Value the sales volume variance at standard contribution when fixed costs appear as a separate line in the reconciliation. If the question gives a standard profit per unit to use, use that.

Method in steps: calculating variances

1. Find actual unit price (actual cost ÷ actual kg) and actual rate (actual wages ÷ actual hours).
2. Find SQ = actual output × standard kg per unit, and SH = actual output × standard hours per unit.
3. Price and rate variances: difference in price × actual quantity or hours.
4. Usage and efficiency variances: difference in quantity × standard price or rate.
5. Check: price + usage = total materials; rate + efficiency = total labour.
6. Label every variance F or A.

Method in steps: reconciliations

Cost reconciliation

1. Start with standard cost of actual output (plus budgeted fixed overheads if included).
2. Add adverse cost variances; deduct favourable ones.
3. End with actual cost. Check it against the actual figures given.

Profit reconciliation

1. Start with budgeted profit.
2. Sales volume variance, then sales price variance.
3. Materials price and usage, labour rate and efficiency, then any fixed overhead difference.
4. Add favourable variances; deduct adverse ones (two columns help).
5. End with actual profit, calculated separately as a check.

Small worked reminder

Standard: 2 kg at £8 per kg per unit. Output 600 units. Actual: 1 150 kg costing £9 545.

AP = 9 545 ÷ 1 150 = £8.30          SQ = 600 × 2 = 1 200 kg
Price = (8.00 − 8.30) × 1 150 = £345 A
Usage = (1 200 − 1 150) × 8.00 = £400 F
Total = 9 600 − 9 545 = £55 F  (check: 400 F − 345 A)

A likely link: better material (price A) cut waste (usage F).

Sales: budget 1 500 units at £40, standard contribution £15. Actual 1 620 units at £38.

Sales price  = (38 − 40) × 1 620 = £3 240 A
Sales volume = (1 620 − 1 500) × 15 = £1 800 F
Net effect of the price cut = £1 440 A

The extra 120 units did not make up for the lower price, so on these figures the cut reduced profit. A judgement should also consider market share and whether the higher volume will last.

Interpreting a variance: what to write

For each significant variance, give three things:

1. The figure and direction, for example “labour efficiency £600 A: 40 hours more than standard”.
2. A cause that matches the direction: slower trainees, machine breakdowns or poor material for adverse efficiency; experienced staff or new equipment for favourable.
3. A consequence or action: who is answerable, whether it is controllable, whether the standard needs updating, and what it means for profit.

Must-know distinctions

• Price v usage: price uses actual quantity; usage uses standard price.
• Rate v efficiency: rate uses actual hours; efficiency uses standard rate.
• Fixed budget v standard cost of actual output: cost variances are always measured against the standard for what was actually produced.
• Sales price v sales volume: price uses actual units sold; volume uses standard contribution.
• Cost v profit reconciliation: adverse variances are added to cost but deducted from profit.
• Controllable v uncontrollable: a national price rise or pay award is not the buyer’s or supervisor’s fault; the standard may need revising.
• Significant v insignificant: small variances may not justify the cost of investigation.

Linked variances

Decision	Pattern
Cheaper material	Price F, usage A, labour efficiency A
Better material	Price A, usage F, labour efficiency F
Cheaper, less skilled labour	Rate F, efficiency A, materials usage A
More skilled labour	Rate A, efficiency F, materials usage F
Lower selling price	Sales price A, sales volume F
Higher selling price	Sales price F, sales volume A

Advantages and disadvantages in brief

Advantages: control through responsibility; management by exception; standards feed budgets and pricing; clear targets that can motivate; simpler inventory valuation; makes managers examine methods.

Disadvantages: costly to set up and maintain; standards date quickly; suits repetitive production, not one-off work or many services; tight or imposed standards demotivate; can encourage behaviour that helps one variance and harms others; information arrives after the event; ignores non-financial factors such as quality.

Quick self-test

1. Define standard cost.
2. Standard: 4 kg at £3 per kg per unit. Output 500 units. Actual: 2 100 kg costing £6 090. Calculate the materials price and usage variances.
3. Standard: 0.5 hours at £12 per hour per unit. Output 1 000 units. Actual: 480 hours costing £6 000. Calculate the labour rate, efficiency and total variances.
4. What does your answer to question 3 show about total variances?
5. Budget: 2 000 units at £25; standard contribution £8. Actual: 1 900 units at £26. Calculate the sales price and sales volume variances.
6. Materials usage variance £450 A; standard price £5 per kg; standard quantity 3 000 kg. How many kg were used?
7. Who is usually answerable for the materials price variance?
8. Budgeted profit £18 000. Variances: sales volume £1 200 F, sales price £2 000 A, total materials £500 A, total labour £300 F. Calculate actual profit.
9. “A favourable variance is always good news.” True or false? Give a reason.
10. Give one cause that explains labour rate A together with labour efficiency F.
11. In a cost reconciliation, is a favourable variance added or deducted?

Answers

1. A predetermined cost for one unit of output, set in advance from expected quantities and prices.
2. AP = 6 090 ÷ 2 100 = £2.90. Price = (3.00 − 2.90) × 2 100 = £210 F. SQ = 2 000 kg; usage = (2 000 − 2 100) × 3 = £300 A. Total £90 A.
3. AR = 6 000 ÷ 480 = £12.50. Rate = (12 − 12.50) × 480 = £240 A. SH = 500; efficiency = (500 − 480) × 12 = £240 F. Total = 6 000 − 6 000 = nil.
4. A nil total can hide two significant variances that offset each other.
5. Price = (26 − 25) × 1 900 = £1 900 F. Volume = (1 900 − 2 000) × 8 = £800 A.
6. 450 ÷ 5 = 90 kg extra, so 3 090 kg.
7. The buyer or purchasing manager (unless prices rose across the market).
8. 18 000 + 1 200 − 2 000 − 500 + 300 = £17 000.
9. False. A favourable materials price variance from cheap material may cause larger adverse usage and efficiency variances.
10. Using more skilled, higher-paid staff who work faster.
11. Deducted from standard cost.

Where marks are usually lost

• Calculating standard quantity or standard hours from budgeted output, not actual output.
• Using actual price in the usage variance, or standard quantity in the price variance.
• Valuing sales volume at selling price, ignoring the variable cost of the extra units.
• Missing F or A labels, or calling a cost saving adverse.
• Adding adverse variances to profit, or getting the direction wrong in a cost reconciliation.
• A reconciliation that does not end on the actual figure, with no check made.
• Giving a cause for a variance that does not match its direction (for example, “cheap material” for an adverse price variance).
• Treating each variance in isolation when the data show a clear link.
• Listing advantages and disadvantages with no judgement for the business in the question.

Official syllabus

AQA A-level Accounting (7127) specification, version 1.1, October 2026, for A-level exams June 2019 onwards (AQA). Section 3.11 Standard costing and variance analysis.