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How do I compare standard cost with actual cost in manufacturing?
Compare the expected cost of each unit, set from standard material quantities, labour hours and rates, with what you actually spent. The difference is a variance, split into price, usage or efficiency, and volume or overhead effects so each cause is visible.
Formulas in words:
- Material price variance: (actual price minus standard price) x quantity bought.
- Material usage variance: (actual quantity minus standard quantity) x standard price.
- Labour efficiency variance: (actual hours minus standard hours) x standard rate.
It matters because a total variance alone does not say what to fix.
Commonly misread:
- Treating a favourable variance as good when it came from poor quality material or skipped steps.
- Leaving standards unchanged for years.
Review standards at least once a year.
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