OxfordAQA A-Level Accounting: Standard costing and variance analysis (9615)

This study guide teaches section 3.2.1 Standard costing and variance analysis of the OxfordAQA International AS and A-level Accounting (9615) specification, Version 1.2, for International AS exams May/June 2025 onwards and International A-level exams May/June 2026 onwards. Section 3.2.1 is International A-level only. The specification assesses it on Paper 4: Accounting for analysis and decision making, and A-level papers also draw on skills from the AS course. All amounts are in dollars and every business is invented.

Links: course hub · printable checklist · free 10-minute diagnostics. When you finish here, shorten the topic into the revision notes and test yourself on the practice questions.

Two AS topics feed straight into this one. Budgeting compares a budget line with the actual figure; here you split each difference into its causes. Marginal costing gives you contribution per unit, which values the sales volume variance below.

What 3.2.1 covers

Content (3.2.1)	What you must be able to do	Level
Purpose, advantages and disadvantages of a standard costing system	Use the terms standard cost and variance analysis; argue for and against the system	International A-level only
Calculation and interpretation of variances	Work out and interpret materials (price and usage), labour (efficiency and rate) and sales (volume and price) variances	International A-level only
The interrelationship between variances	Show how variances add up, and how one cause can drive several of them	International A-level only
How to prepare statements and the use of accounting techniques to reconcile budgeted and actual figures	Reconcile budget and actual cost; reconcile budget and actual profit	International A-level only

These six variances are the full list in the specification. Overhead variances are not listed, so this guide treats fixed overheads as a single line.

The purpose of standard costing

A standard cost is the planned cost of making one unit, fixed before production starts. It is set by deciding how much material and how much labour time one unit should need under efficient working, and what each kilogram or hour should cost. The figures are set out on a standard cost card.

Variance analysis is the process of comparing what actually happened with those standards. Each difference is measured in dollars, broken down into a price part and a quantity part, labelled and then explained.

• A favourable (F) variance makes profit higher than the standard predicted.
• An adverse (A) variance makes profit lower.

The purpose is control. Standards give each manager a target. Variance reports show where results drifted from plan, so attention goes to the large or persistent differences rather than to every line of the accounts. This approach is called management by exception.

Advantages

• Responsibility is clear. Each variance points to a person: buying prices to the purchasing manager, usage and efficiency to production supervisors, pay rates to whoever agrees wages, and sales price and volume to the sales team.
• Managers save time. Small variances can be ignored; only significant ones are investigated.
• Better budgets and prices. Standard unit costs feed directly into budgets and quotations.
• Targets can motivate when staff help to set them and see them as fair.
• Simpler records. Inventory can be held at standard cost.
• Waste is exposed. Setting standards forces a close look at how each unit is made.

Disadvantages

• Expensive to run. Setting standards, collecting actual data and investigating variances all take staff time.
• Standards go stale. If supplier prices or methods change and the card is not updated, the variances mislead.
• Limited fit. Standards work for repeated, identical output. A firm doing one-off jobs, or a service with very varied tasks, struggles to set them.
• Behaviour can suffer. Over-tight standards produce a stream of adverse results that demoralise staff, and managers may chase their own favourable variance at the expense of another department.
• Information arrives late. Variances are known after the period ends.
• Narrow focus. Quality, delivery times and customer satisfaction are not measured.

Calculating the six variances

Worked example 1: Ollerby Rugs

Ollerby Rugs makes one hand-tufted rug.

Standard cost card, per rug	Dollars
Wool: 6 kg at 9.00 per kg	54.00
Labour: 2.5 hours at 16.00 per hour	40.00
Standard variable cost	94.00
Standard selling price	160.00
Standard contribution	66.00

Budget for the quarter: 1,200 rugs; fixed overheads 52,000. Budgeted profit = (1,200 × 66) − 52,000 = 79,200 − 52,000 = 27,200.

Actual for the quarter: 1,150 rugs made and sold at 166 each (revenue 190,900). Wool used 7,050 kg, costing 61,335. Labour worked and paid 2,760 hours, costing 45,816. Fixed overheads 52,000, exactly as budgeted.

Step 1: actual unit prices. Wool 61,335 ÷ 7,050 = 8.70 per kg. Labour 45,816 ÷ 2,760 = 16.60 per hour.

Step 2: flex the standard to actual output (1,150 rugs). Standard wool = 1,150 × 6 = 6,900 kg. Standard hours = 1,150 × 2.5 = 2,875 hours.

Materials variances

Materials price  = (standard price − actual price) × actual quantity
                 = (9.00 − 8.70) × 7,050 = 2,115 F
Materials usage  = (standard quantity − actual quantity) × standard price
                 = (6,900 − 7,050) × 9.00 = 1,350 A
Total materials  = 1,150 × 54 − 61,335 = 62,100 − 61,335 = 765 F

Labour variances

Labour rate        = (standard rate − actual rate) × actual hours
                   = (16.00 − 16.60) × 2,760 = 1,656 A
Labour efficiency  = (standard hours − actual hours) × standard rate
                   = (2,875 − 2,760) × 16.00 = 1,840 F
Total labour       = 1,150 × 40 − 45,816 = 46,000 − 45,816 = 184 F

Sales variances

Sales price   = (actual price − standard price) × actual units sold
              = (166 − 160) × 1,150 = 6,900 F
Sales volume  = (actual units sold − budgeted units) × standard contribution
              = (1,150 − 1,200) × 66 = 3,300 A

The volume variance is valued at standard contribution because each rug not sold also saves 94 of standard variable cost; only 66 of profit is lost. Since fixed overheads sit on their own line, this makes the profit reconciliation balance. Where a question supplies a standard profit figure per unit and asks for it, use that instead.

Interpreting Ollerby’s variances

• Wool price 2,115 F: wool cost 30 cents a kilogram less. Perhaps a new supplier, a bulk discount, or a lower grade of yarn.
• Wool usage 1,350 A: 150 kg more than the standard allowed. Possible causes are breakage of weaker yarn, careless cutting or a faulty tufting gun.
• Labour rate 1,656 A: 60 cents an hour above standard. Overtime premiums, a pay rise not yet built into the card, or more experienced tufters on a higher grade.
• Labour efficiency 1,840 F: 115 hours saved. Experienced staff, better tools or simpler designs.
• Sales price 6,900 F, sales volume 3,300 A: a 6 price rise cost 50 sales, but net sales variances are 3,600 F, so the rise was worth it this quarter.

A good answer gives a likely cause and says who is answerable, then judges whether the variance matters.

The interrelationship between variances

Variances link in two ways.

1. They add up. Price plus usage equals the total materials variance. Rate plus efficiency equals the total labour variance. Ollerby’s wool total of 765 F hides a 2,115 F price variance and a 1,350 A usage variance. A small total can conceal two large variances pulling in opposite directions, which is why the split is made. The arithmetic also lets you work backwards from given variances.

2. One cause can create several variances.

Decision or event	Variances it tends to produce
Buying cheaper, poorer material	Materials price F; materials usage A; labour efficiency A, as poor material is slower to work
Buying premium material	Materials price A; usage F; efficiency F
Using less experienced, lower-paid staff	Labour rate F; efficiency A; materials usage A from mistakes
Using skilled, higher-paid staff	Labour rate A; efficiency F; usage F
Raising the selling price	Sales price F; sales volume A if customers buy less
Cutting the selling price	Sales price A; sales volume F if demand responds
Poor-quality output reaching customers	Sales volume A as orders are lost

At Ollerby, cheaper wool (price F) fits the extra wool used (usage A). The higher pay rate (A) fits the hours saved (F). So a favourable variance is not automatically good news, and blaming the production supervisor for usage may be unfair if the buyer chose the yarn. Look at the whole pattern and at the net effect on profit.

Worked example 2: working backwards at Cheriton Paints

Cheriton Paints’ standard is 3 litres of pigment base per tin at 4.50 per litre. It made 800 tins. Its variances were usage 270 A and price 492 F. Find the actual litres used and actual cost.

Standard quantity       = 800 × 3 = 2,400 litres
Usage 270 A             → extra litres = 270 ÷ 4.50 = 60
Actual quantity         = 2,400 + 60 = 2,460 litres
Price 492 F             → saving per litre = 492 ÷ 2,460 = 0.20
Actual price            = 4.50 − 0.20 = 4.30 per litre
Actual cost             = 2,460 × 4.30 = 10,578
Check: total = 2,400 × 4.50 − 10,578 = 10,800 − 10,578 = 222 F = 492 F − 270 A

Reconciliation statements

Budgeted and actual cost

Ollerby’s original budget for materials and labour was 1,200 × 94 = 112,800. Actual cost for those items was 61,335 + 45,816 = 107,151. Most of the 5,649 gap is simply that fewer rugs were made, so first flex the budget to the actual output, then bring in the cost variances.

Ollerby Rugs: reconciliation of budgeted and actual cost	Dollars	Dollars
Budgeted cost of materials and labour (1,200 × 94)		112,800
Less: reduction because output was 50 rugs lower (50 × 94)		(4,700)
Standard cost of actual output (1,150 × 94)		108,100
Materials price variance	(2,115) F
Materials usage variance	1,350 A
Labour rate variance	1,656 A
Labour efficiency variance	(1,840) F
Net cost variances		(949) F
Actual cost		107,151

In a cost reconciliation, adverse variances are added (they raise cost) and favourable ones are subtracted.

Budgeted and actual profit

Actual profit = 190,900 − 61,335 − 45,816 − 52,000 = 31,749.

Ollerby Rugs: reconciliation of budgeted and actual profit	F	A	Dollars
Budgeted profit			27,200
Sales volume variance		3,300
Sales price variance	6,900
Materials price variance	2,115
Materials usage variance		1,350
Labour rate variance		1,656
Labour efficiency variance	1,840
Totals	10,855	6,306	4,549 F
Actual profit			31,749

For profit it works the other way round: favourable variances increase the figure and adverse ones reduce it. Always calculate actual profit independently and check that the statement arrives at it. If fixed overheads had differed from budget, the difference would go in as one extra line.

Commentary: profit beat budget by 4,549. The price rise did most of the work. The production variances nearly cancel, but the wool usage figure needs a look: if the cheaper yarn is causing waste, the buyer and the production supervisor should agree a grade together.

Common errors

• Flexing to budgeted output instead of actual output when finding standard quantity or hours.
• Putting the actual price into the usage formula, or the actual rate into the efficiency formula; quantity differences are always priced at standard.
• Pricing lost or extra sales at the full selling price.
• Using budgeted units in the sales price variance instead of actual units sold.
• Forgetting to mark variances F or A, or labelling a saving as adverse.
• Treating a favourable variance as proof of good management without checking its knock-on effects.
• In a cost reconciliation, starting from the original budget and skipping the volume adjustment.

Official syllabus

OxfordAQA International AS and A-level Accounting (9615) specification, Version 1.2, for International AS exams May/June 2025 onwards and International A-level exams May/June 2026 onwards, published by OxfordAQA. Section 3.2.1, Standard costing and variance analysis.