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

This study guide teaches 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 qualification is linear and untiered. Section 3.11 is examined on Paper 2, which assesses sections 1–3, 8–13 and 17–18. All businesses and figures below are invented.

Course links: AQA A-level Accounting hub and the printable checklist. Afterwards, condense the topic with the revision notes, test yourself with the practice questions, and find your weak spots with the free diagnostics.

This topic builds on two others. Budgeting introduces flexed budgets and simple variances; section 3.11 splits those variances into their causes. Marginal costing explains variable cost and contribution, which you need to value the sales volume variance.

What this topic covers

Spec content (3.11)	What you must be able to do
The purpose, advantages and disadvantages of a standard costing system	Explain standard cost and variance analysis; evaluate the system
Calculation and interpretation of variances	Calculate and explain materials (price and usage), labour (rate and efficiency) and sales (price and volume) variances
The interrelationship between variances	Explain how one cause can create several variances, some favourable and some adverse
Preparing statements to reconcile budgeted and actual figures	Reconcile budgeted and actual cost, and budgeted and actual profit

1. Standard costing: purpose and terms

A standard cost is a predetermined cost of one unit of output, set in advance from expected quantities and prices under planned working conditions. It is built up on a standard cost card: the standard quantity of material at a standard price, plus the standard hours of labour at a standard rate.

Variance analysis compares actual results with standards, measures each difference, splits it into a price element and a quantity element, and explains the causes so that managers can act.

• Favourable (F): the difference increases profit (cost below standard, revenue above budget).
• Adverse (A): the difference reduces profit.

The purpose of standard costing is control. Managers set targets, measure performance against them, and investigate only the significant differences. This is management by exception.

Advantages

• Control and responsibility. Each variance can be traced to a manager: the buyer for materials price, the production supervisor for usage and efficiency, the personnel function for pay rates, the sales manager for price and volume.
• Management by exception. Managers spend time only on significant variances.
• Planning. Standards provide the unit costs for budgets and help with pricing and quotations.
• Motivation. Agreed, attainable standards give staff a clear target.
• Inventory valuation. Inventory can be valued at standard cost, which simplifies record keeping.
• Cost awareness. Setting standards makes managers examine methods and find waste.

Disadvantages

• Cost and time to set and update standards, and to calculate and investigate variances.
• Out-of-date standards. Prices and methods change, so old standards produce misleading variances.
• Unsuitable for some businesses. Standards suit repetitive production of identical units, not one-off jobs or many services.
• Demotivation. Standards that are too tight produce constant adverse variances; standards imposed without consultation are resented.
• Wrong behaviour. A buyer chasing a favourable price variance may buy poor material that causes adverse usage and efficiency variances elsewhere.
• Timing. Variances are reported after the period, so problems may already have cost money.
• Non-financial factors such as quality, delivery and customer satisfaction are not measured.

2. Calculating variances

Use one business throughout. Brackwell Joinery Ltd makes garden benches.

Standard cost card, per bench	£
Timber: 12 kg at £2.50 per kg	30.00
Labour: 3 hours at £14.00 per hour	42.00
Standard variable cost	72.00
Standard selling price	150.00
Standard contribution	78.00

Budget: 800 benches; fixed overheads £40 000. Budgeted profit = 800 × £78 − £40 000 = £22 400.

Actual: 850 benches made and sold at £146 each. Timber used 10 400 kg, costing £27 040. Labour 2 450 hours, costing £35 525. Fixed overheads £41 200.

Work out actual unit prices first: timber £27 040 ÷ 10 400 = £2.60 per kg; labour £35 525 ÷ 2 450 = £14.50 per hour.

Materials variances

Price variance = (standard price − actual price) × actual quantity
               = (2.50 − 2.60) × 10 400 = £1 040 A

Usage variance = (standard quantity for actual output − actual quantity) × standard price
  Standard quantity = 850 × 12 = 10 200 kg
               = (10 200 − 10 400) × 2.50 = £500 A

Total materials variance = standard cost of actual output − actual cost
               = (850 × 30) − 27 040 = 25 500 − 27 040 = £1 540 A   (1 040 A + 500 A)

The price variance uses actual quantity. The usage variance uses standard price, so it measures the quantity effect alone. Standard quantity is always for the actual output, not the budgeted output.

Labour variances

Rate variance       = (standard rate − actual rate) × actual hours
                    = (14.00 − 14.50) × 2 450 = £1 225 A

Efficiency variance = (standard hours for actual output − actual hours) × standard rate
  Standard hours    = 850 × 3 = 2 550 hours
                    = (2 550 − 2 450) × 14.00 = £1 400 F

Total labour variance = (850 × 42) − 35 525 = 35 700 − 35 525 = £175 F   (1 225 A + 1 400 F)

The total labour variance is small, but it hides two large variances pulling in opposite directions. That is why the total is split.

Sales variances

Sales price variance  = (actual price − standard price) × actual units sold
                      = (146 − 150) × 850 = £3 400 A

Sales volume variance = (actual units sold − budgeted units) × standard contribution per unit
                      = (850 − 800) × 78 = £3 900 F

The volume variance is valued at standard contribution, not selling price, because each extra bench also carries £72 of standard variable cost. This page keeps fixed overheads as a separate line, so standard contribution makes the profit reconciliation add up. If a question gives a standard profit per unit and asks you to use it, follow the question.

Interpreting the variances

• Materials price £1 040 A: timber cost 10p a kg more. Possible causes: a supplier price rise, a better grade of timber, or an urgent purchase at short notice. A general price rise is outside the buyer’s control.
• Materials usage £500 A: 200 kg more timber than standard. Possible causes: a warped batch, careless cutting, or untrained staff.
• Labour rate £1 225 A: 50p an hour more. Possible causes: a pay award not built into the standard, overtime premiums, or more skilled staff.
• Labour efficiency £1 400 F: 100 hours saved. Possible causes: new jigs, experienced staff, or good-quality timber that was easy to work.
• Sales price £3 400 A and sales volume £3 900 F: a £4 price cut may have won the extra 50 sales. Together they add £500 to profit, so the cut paid off, just.

3. The interrelationship between variances

Variances are not independent. One decision often shows up in several places, which is why you should look at the pattern before blaming a manager.

Cause	Likely variances
Cheaper, lower-grade materials	Materials price F; materials usage A (more waste); labour efficiency A (harder to work)
Higher-grade materials	Materials price A; materials usage F; labour efficiency F
Less skilled, lower-paid staff	Labour rate F; labour efficiency A; materials usage A (more mistakes)
More skilled, higher-paid staff	Labour rate A; labour efficiency F; materials usage F
Selling price cut	Sales price A; sales volume F (if demand responds)
Selling price rise	Sales price F; sales volume A
Bulk buying for a discount	Materials price F; may raise storage costs and wastage

At Brackwell, labour rate A with efficiency F fits better-paid, more skilled staff. The adverse usage does not fit that story, so it needs a separate investigation. The general rule: a favourable variance is not automatically good news, and an adverse one is not automatically a failure. Judge the variances together, and against their effect on profit.

4. Reconciliation statements

Budgeted cost and actual cost

To reconcile cost, start from the standard (budgeted) cost of the actual output. Comparing the original budget for 800 benches with actual cost for 850 would mix volume with efficiency.

Brackwell Joinery Ltd: cost reconciliation	£	£
Standard cost of actual output: 850 × £72 + £40 000 fixed overheads		101 200
Materials price variance	1 040 A
Materials usage variance	500 A
Labour rate variance	1 225 A
Labour efficiency variance	1 400 F
Fixed overhead expenditure (£41 200 − £40 000)	1 200 A
Net adverse cost variances		2 565 A
Actual cost (27 040 + 35 525 + 41 200)		103 765

Adverse cost variances are added to standard cost; favourable ones are deducted.

Budgeted profit and actual profit

Actual profit = £124 100 revenue − £27 040 − £35 525 − £41 200 = £20 335.

Brackwell Joinery Ltd: profit reconciliation	£ F	£ A	£
Budgeted profit			22 400
Sales volume variance	3 900
Sales price variance		3 400
Materials price variance		1 040
Materials usage variance		500
Labour rate variance		1 225
Labour efficiency variance	1 400
Fixed overhead expenditure		1 200
Totals	5 300	7 365	2 065 A
Actual profit			20 335

In a profit reconciliation, favourable variances are added and adverse ones deducted: the opposite way round from a cost reconciliation. Always check that your final line equals the actual profit you calculated separately. If it does not, a variance is wrong.

Interpretation for the directors: profit fell £2 065 short of budget even though volume beat budget. The main problems were timber (£1 540 A in total) and the labour pay rate. The efficient workforce recovered most of the extra pay. Managers should check whether the timber price rise will last; if it will, the standard should be updated.

Common errors

• Using budgeted output instead of actual output for standard quantity or standard hours.
• Mixing prices: the usage and efficiency variances use standard price or rate.
• Valuing the sales volume variance at selling price instead of standard contribution (or the standard profit the question gives).
• Using budgeted units in the sales price variance; it uses actual units sold.
• Leaving out F or A, or labelling a cost saving “adverse”.
• Adding adverse variances to budgeted profit in a profit reconciliation.
• Interpreting each variance alone and missing the link between, for example, cheap materials and poor efficiency.
• Listing causes without a judgement when a question asks you to evaluate.

Next steps

• Revision notes
• Practice questions
• Budgeting study guide for flexed budgets
• AQA A-level Accounting exam preparation
• Free 10-minute diagnostics

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.