Standard costing and variance analysis: worked examples

Five variances, one production run, every number shown. This is the full mechanical walkthrough most textbook explanations skip past.

A furniture shop's standard cost for one batch of 500 chairs: 2 lbs of hardwood per chair at a standard $4.00/lb, and 0.5 labor hours per chair at a standard $22.00/hour, with overhead applied at $6.00 per standard labor hour. Actual results for the batch: 1,050 lbs of hardwood purchased and used at $3.20/lb actual, and 270 labor hours worked at $22.50/hour actual, with $1,900 of actual overhead incurred.

($4.00 − $3.20) × 1,050 lbs = $0.80 × 1,050 = $840 favorable. The shop found hardwood at 80 cents under standard cost per pound — a real saving, worth investigating why (a new supplier, a bulk discount, a lower grade) before assuming it repeats next batch.

(1,000 lbs allowed − 1,050 lbs actual) × $4.00 = −50 × $4.00 = $200 unfavorable. The shop used 50 more pounds than the standard allows for 500 chairs — worth checking against the material price variance above: cheaper wood that produced more waste or rework would show exactly this pattern, a favorable price variance paired with an unfavorable quantity variance.

($22.00 − $22.50) × 270 hours = −$0.50 × 270 = $135 unfavorable. Workers on this batch were paid, on average, 50 cents an hour above standard — a more senior crew than budgeted, an overtime premium, or a wage increase not yet reflected in the standard rate are the usual suspects.

(250 hours allowed − 270 hours actual) × $22.00 = −20 × $22.00 = $440 unfavorable. The crew took 20 hours longer than standard allows — worth checking whether the same crew driving the unfavorable material quantity variance above also drove this one; a batch running behind on efficiency and over on material usage together often points to one underlying cause (a new or undertrained crew) rather than two unrelated problems.

(250 hours allowed × $6.00) − $1,900 actual = $1,500 applied − $1,900 actual = $400 unfavorable. Overhead applied based on the standard hours the batch should have taken fell $400 short of what was actually spent — a gap worth splitting further into spending and volume components on a job where overhead is a large enough cost to warrant it; see the predetermined overhead rate calculator for that fuller breakdown.

Note the numbers above differ slightly from the hero graphic's illustrative figures — the hero shows a larger, separately illustrative production run; the table here is the exact math for the specific 500-chair batch and inputs worked through step by step in this section.

A net $335 unfavorable variance, on its own, says little. Read alongside each other, these five numbers tell a specific, actionable story: cheaper material ($840 F) came with real costs attached — more waste ($200 U material quantity), slower work ($440 U labor efficiency), and a pricier crew ($135 U labor rate) — that together outweighed the material saving. The overhead shortfall ($400 U) adds a separate signal worth checking on its own terms. Reporting only the net total would hide every one of these individual causes; reporting all five, together, is what actually points at what to fix next batch — likely starting with whether the cheaper material or the crew change is the real driver behind both the quantity and efficiency misses.