To gain strong command over Variance Analysis & Standard Costing (US CMA Part 1 & ACCA. foundation. Management Accounting), you must follow a fixed thinking sequence. Examiner does NOT test calculations alone — it tests logic, linkage, cause–effect, and responsibility.
Below is a step-by-step mastery framework + must-remember bullet points exactly aligned with CMA exam thinking.
STEP 1️⃣ Fix the BIG PICTURE (Most Important)
Always remember this flow:
Standard Cost → Actual Cost → Variance → Cause → Responsibility → Control
If you miss cause or responsibility, you lose CMA marks even if calculation is right.
STEP 2️⃣ Memorize the VARIANCE TREE (Visual Logic)
A. Material Variances
Material Cost Variance
├── Price Variance
└── Quantity (Efficiency) Variance
├── Mix Variance
└── Yield Variance
B. Labor Variances
Labor Cost Variance
├── Rate Variance
└── Efficiency Variance
C. Overhead Variances
Variable OH
├── Spending Variance
└── Efficiency Variance
Fixed OH
├── Spending (Budget) Variance
└── Volume Variance
STEP 3️⃣ Standard CMA FORMULAS (Don’t Overthink)
Material
- Price Variance = AQ × (AP − SP)
- Quantity Variance = SP × (AQ − SQ)
Labor
- Rate Variance = AH × (AR − SR)
- Efficiency Variance = SR × (AH − SH)
Variable Overhead
- Spending = AH × (AR − SR)
- Efficiency = SR × (AH − SH)
Fixed Overhead
- Spending = Actual FOH − Budgeted FOH
- Volume = Budgeted FOH − Applied FOH
🔑 Exam Tip: CMA often gives partial data → derive missing figures.
STEP 4️⃣ RESPONSIBILITY MATRIX (CMA Favorite)
| Variance | Responsible |
|---|---|
| Material Price | Purchasing |
| Material Quantity | Production |
| Labor Rate | HR / Labor market |
| Labor Efficiency | Production |
| Variable OH Spending | Department manager |
| Fixed OH Volume | Capacity utilization |
⚠️ Exam trap: Uncontrollable ≠ Not reported
STEP 5️⃣ UNDERSTAND FAVOURABLE vs UNFAVOURABLE LOGIC
Cost Variance
- Actual < Standard → Favorable
- Actual > Standard → Unfavorable
But…
- Favorable ≠ Good (quality may suffer)
- Unfavorable ≠ Bad (volume increase)
🔑 CMA tests interpretation, not emotion.
STEP 6️⃣ MASTER MIX & YIELD (High-Scoring Area)
When used?
- Multiple materials
- Standard mix exists
Logic
- Mix variance → Input proportions
- Yield variance → Output efficiency
🔑 Yield variance uses total input & output relationship
STEP 7️⃣ FLEXIBLE BUDGET THINKING (Critical)
Always ask:
- Is variance due to price or efficiency?
- Should cost change with activity?
Variable cost → Flexible budget
Fixed cost → Static budget
STEP 8️⃣ LINK VARIANCES TO EACH OTHER (CMA Logic)
- Labor efficiency ↓ → Variable OH efficiency ↓
- Poor material quality → Labor efficiency variance
- High sales volume → Fixed OH volume variance (Favorable)
Examiner loves cause–effect chains.
STEP 9️⃣ PRACTICE “THINK FIRST – CALCULATE LATER”
Before calculation, ask:
- What variance?
- What changed? (Rate, quantity, time, volume?)
- Who controls it?
- Is it controllable?
- Short-run or long-run issue?
STEP 🔟 LAST-DAY REVISION CHECKLIST
✔️ Variance tree
✔️ Responsibility mapping
✔️ Favorable vs unfavorable logic
✔️ Flexible vs static budget
✔️ Mix vs yield clarity
✔️ Cause–effect linkages
FINAL CMA EXAM STRATEGY
- Eliminate irrelevant numbers
- Focus on standard allowed vs actual used
- Watch capacity level in fixed OH
- Never assume favorable = good
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1️⃣ SALES VARIANCES (VERY HIGH EXAM WEIGHT)
A. Sales Value Variance
Sales Value Variance
= Actual Sales – Budgeted Sales
B. Sales Price Variance
= AQ × (AP – SP)
➡️ Controlled by Marketing / Market conditions
C. Sales Volume Variance
= SP × (AQ – SQ)
SALES MIX & SALES YIELD (Multi-product)
Sales Mix Variance
- Caused by change in sales proportions
= (Actual Mix – Standard Mix) × Standard Contribution / Price
Sales Yield Variance
- Caused by total quantity change
= (Actual Total Qty – Standard Total Qty) × Weighted Avg Contribution
🔑 CMA logic
- Mix → WHAT was sold
- Yield → HOW MUCH was sold
2️⃣ MIX VARIANCE vs YIELD VARIANCE (INPUT SIDE)
MATERIAL MIX VARIANCE
- Wrong proportions of materials
MATERIAL YIELD VARIANCE
- Difference between actual output vs expected output
🔑 Key CMA Link
- Poor material mix → Poor yield → Labor efficiency variance
3️⃣ COST VARIANCES: ABSORPTION vs VARIABLE COSTING ⭐⭐⭐
A. Under VARIABLE COSTING
Only variable production costs are inventoried
Variances calculated for:
- Direct material
- Direct labor
- Variable overhead
✔️ NO fixed overhead volume variance
B. Under ABSORPTION COSTING
Fixed Overhead Variances exist:
- Spending (Budget) variance
- Volume variance
Income difference caused by:
Change in inventory × Fixed OH rate
🔑 CMA Exam Rule
- Inventory ↑ → Absorption profit ↑
- Inventory ↓ → Variable profit ↑
4️⃣ TWO-WAY VARIANCE ANALYSIS
Used when:
- Single cause focus
- Simpler control
Example: Direct Material
Material Cost Variance
= Price Variance + Quantity Variance
✔️ Common in intro questions
5️⃣ THREE-WAY VARIANCE ANALYSIS (CMA FAVORITE)
A. Variable Cost (DM / DL / VOH)
Total Variance
= Rate (Spending) Variance
+ Efficiency Variance
B. Sales Variance (Contribution Approach)
Sales Value Variance
= Sales Price Variance
+ Sales Volume Variance
🔑 CMA prefers contribution-based sales variance
6️⃣ FOUR-WAY VARIANCE ANALYSIS ⭐⭐⭐⭐
A. Variable Cost – 4 Way
Total Variance =
Rate Variance
+ Mix Variance
+ Yield Variance
+ Efficiency Variance
B. Sales – 4 Way (Advanced CMA)
Sales Value Variance =
Sales Price Variance
+ Sales Mix Variance
+ Sales Quantity Variance
+ Sales Yield Variance
🔑 Used in multi-product + limiting factor questions
7️⃣ ABSORPTION COSTING – FULL VARIANCE STRUCTURE
Total Absorption Cost Variance
├── Variable Cost Variance
│ ├── Rate
│ └── Efficiency
└── Fixed OH Variance
├── Spending
└── Volume
8️⃣ EXAM TRAPS YOU MUST AVOID 🚫
❌ Mixing contribution & absorption sales variance
❌ Ignoring mix when multiple products exist
❌ Assuming favorable = good
❌ Missing fixed OH volume variance in absorption costing
❌ Using budgeted instead of standard data
9️⃣ LAST-DAY REVISION BULLETS (MEMORIZE)
✔️ Mix → Proportion
✔️ Yield → Quantity
✔️ Absorption → Inventory effect
✔️ Variable → Sales driven profit
✔️ 2-way = Cost focus
✔️ 3-way = Rate + Efficiency
✔️ 4-way = Deep CMA analysis
🔟 CMA EXAM STRATEGY
- Identify single vs multi-product
- Identify absorption or variable
- Identify input side or output side
- Choose 2 / 3 / 4-way analysis
- THEN calculate
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CAUSES & REMEDIES FOR UNFAVORABLE, FAVOURABLE VARIANCES....
This is a classic US CMA Part 1 theory-plus-logic area.
CMA MCQs often ask “Which of the following is MOST likely cause?” or
“What corrective action should management take?”
Below is a complete cause → effect → remedy matrix, written exactly in CMA exam language.
1️⃣ MATERIAL VARIANCES
A. UNFAVOURABLE Material PRICE Variance (MPV)
(Actual price > Standard price)
Causes
- Purchase in small quantities (loss of bulk discount)
- Supplier price increase
- Poor vendor negotiation
- Rush / emergency purchase
- Higher freight or handling cost
- Change in supplier
Remedies (Management Accountant)
- Long-term supplier contracts
- Better vendor evaluation
- Centralized purchasing
- Economic order quantity (EOQ)
- Standard price revision (if permanent)
B. FAVOURABLE Material PRICE Variance
Causes
- Bulk purchase discounts
- Lower-quality material purchased
- Favorable market conditions
- Strong negotiation
⚠️ CMA trap: Favorable MPV may cause unfavorable efficiency variance
Remedies
- Quality inspection controls
- Link purchasing with production feedback
- Life-cycle costing review
C. UNFAVOURABLE Material EFFICIENCY (Quantity) Variance (MQV)
(Actual quantity > Standard quantity)
Causes
- Inferior quality material
- Excess scrap or spoilage
- Poor supervision
- Inaccurate standards
- Machine inefficiency
- Untrained labor
Remedies
- Improve material quality
- Strengthen production controls
- Revise standards
- Employee training
- Better maintenance
D. FAVOURABLE Material EFFICIENCY Variance
Causes
- Higher quality material
- Skilled labor
- Better production methods
- Improved technology
⚠️ May increase material price variance
Remedies
- Cost–benefit analysis
- Continuous improvement benchmarking
2️⃣ LABOUR VARIANCES
A. UNFAVOURABLE Labour RATE Variance (LRV)
(Actual rate > Standard rate)
Causes
- Overtime premium
- Use of skilled labor instead of standard
- Wage rate increase
- Labor union pressure
- Poor labor scheduling
Remedies
- Better workforce planning
- Control overtime
- Use standard skill mix
- Wage renegotiation (long run)
B. FAVOURABLE Labour RATE Variance
Causes
- Use of lower-skilled workers
- Lower wage rates
- Reduced overtime
⚠️ May cause unfavourable efficiency variance
Remedies
- Balance skill level vs productivity
- Monitor quality output
C. UNFAVOURABLE Labour EFFICIENCY Variance (LEV)
(Actual hours > Standard hours)
Causes
- Poor training
- Low morale
- Inferior material
- Machine breakdown
- Poor supervision
Remedies
- Training programs
- Motivation & incentives
- Maintenance planning
- Quality input control
D. FAVOURABLE Labour EFFICIENCY Variance
Causes
- Skilled workforce
- Automation
- Good supervision
- Better work methods
Remedies
- Standard revision
- Best-practice sharing
3️⃣ VARIABLE OVERHEAD VARIANCES
A. UNFAVOURABLE Variable OH SPENDING Variance
Causes
- Higher indirect material cost
- Higher utility rates
- Inflation
- Inefficient purchasing
Remedies
- Cost control systems
- Budget revision
- Energy efficiency initiatives
B. FAVOURABLE Variable OH SPENDING Variance
Causes
- Cost-saving measures
- Lower indirect material prices
- Efficient resource usage
⚠️ Check for quality compromise
Remedies
- Sustainability analysis
- Standard reset if permanent
C. UNFAVOURABLE Variable OH EFFICIENCY Variance
Causes
- Poor labor efficiency
- Idle time
- Machine downtime
- Poor scheduling
🔑 Linked to labor efficiency variance
Remedies
- Improve production scheduling
- Preventive maintenance
- Workflow redesign
D. FAVOURABLE Variable OH EFFICIENCY Variance
Causes
- Improved labor productivity
- Automation
- Better capacity utilization
Remedies
- Process standardization
- Capacity planning
4️⃣ FIXED OVERHEAD VARIANCES
A. UNFAVOURABLE Fixed OH SPENDING Variance
Causes
- Higher fixed costs (rent, salaries)
- Poor budget estimation
- Unexpected repairs
- Inflation
Remedies
- Budgetary control
- Long-term cost contracts
- Review fixed cost structure
B. FAVOURABLE Fixed OH SPENDING Variance
Causes
- Cost-cutting
- Deferred maintenance
- Lower fixed expenses
⚠️ Deferred costs may hurt future periods
Remedies
- Life-cycle costing
- Prevent cost deferral distortion
C. UNFAVOURABLE Fixed OH VOLUME Variance
Causes
- Low production volume
- Underutilized capacity
- Reduced demand
🔑 Capacity issue, not cost control
Remedies
- Increase demand
- Capacity rationalization
- Outsourcing excess capacity
D. FAVOURABLE Fixed OH VOLUME Variance
Causes
- High production volume
- Better capacity utilization
⚠️ May increase inventory (absorption costing)
Remedies
- Inventory management review
- Avoid overproduction
5️⃣ SALES VARIANCES
A. UNFAVOURABLE Sales PRICE Variance
Causes
- Price discounts
- Intense competition
- Poor pricing strategy
Remedies
- Market analysis
- Value-based pricing
- Cost leadership review
B. FAVOURABLE Sales PRICE Variance
Causes
- Strong brand
- Market demand
- Effective sales strategy
Remedies
- Demand sustainability analysis
C. UNFAVOURABLE Sales VOLUME Variance
Causes
- Lower demand
- Poor marketing
- Supply constraints
Remedies
- Improve marketing mix
- Expand distribution
- Product redesign
D. FAVOURABLE Sales VOLUME Variance
Causes
- Strong demand
- Successful promotions
- Market expansion
⚠️ Check capacity & margin impact
Remedies
- Capacity expansion planning
- Margin protection strategies
🔑 CMA EXAM GOLDEN RULES
✔️ Favorable ≠ Good
✔️ Unfavorable ≠ Bad
✔️ Variances are signals, not judgments
✔️ Always link cause → responsibility → corrective action
🎯 LAST-DAY MEMORY HACK
- Price/Rate → Purchasing / HR
- Efficiency → Production
- Spending → Department manager
- Volume → Capacity utilization
- Sales → Marketing
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CASE-BASED QUESTIONS (mini caselets) on standard costing, variances, absorption vs variable costing, and sales variances.
Each case tests cause–effect–responsibility–decision, exactly like the real exam.
📌 CASE 1: Material Price & Efficiency (Linked Variances)
Case:
ABC Ltd. experienced a favourable material price variance after switching to a new supplier. However, production reported an unfavourable material efficiency variance in the same month.
Question:
Which is the MOST likely explanation?
Options:
A. Purchasing negotiated better prices without affecting quality
B. Production inefficiency due to poor supervision
C. Lower-quality material increased usage
D. Standard quantity was set too high
✅ Answer: C
CMA Logic:
Favourable price often comes from lower-quality inputs, which increase usage → unfavourable efficiency. CMA loves this linkage.
📌 CASE 2: Labour Rate vs Labour Efficiency
Case:
XYZ Manufacturing used lower-paid temporary workers to reduce costs. The company reported a favourable labour rate variance but an unfavourable labour efficiency variance.
Question:
What is the best interpretation?
A. Labour standards were inaccurate
B. Temporary workers lacked skills
C. Overtime premium increased
D. Production volume increased
✅ Answer: B
CMA Logic:
Lower wages → favourable rate
Lower skill → unfavourable efficiency
Favourable ≠ good (key exam theme).
📌 CASE 3: Variable Overhead Efficiency Variance
Case:
During a period of machine breakdowns, a company reported an unfavourable variable overhead efficiency variance.
Question:
Which variance is MOST likely also unfavourable?
A. Fixed overhead spending variance
B. Sales price variance
C. Labour efficiency variance
D. Fixed overhead volume variance
✅ Answer: C
CMA Logic:
Variable OH efficiency is driven by labour hours → linked directly to labour efficiency variance.
📌 CASE 4: Fixed Overhead Volume Variance
Case:
A firm operated at 70% of practical capacity due to weak demand. Fixed costs were exactly as budgeted.
Question:
Which variance will occur?
A. Favourable spending variance
B. Unfavourable spending variance
C. Favourable volume variance
D. Unfavourable volume variance
✅ Answer: D
CMA Logic:
Low capacity utilization → unfavourable FOH volume variance
This is a capacity issue, not cost control.
📌 CASE 5: Absorption vs Variable Costing (Profit Difference)
Case:
Inventory increased during the year. Fixed manufacturing overhead was ₹10 per unit.
Question:
Compared to variable costing, absorption costing profit will be:
A. Lower by ₹10 per unit
B. Higher by ₹10 per unit
C. Equal
D. Lower due to higher fixed costs
✅ Answer: B
CMA Logic:
Inventory ↑ → fixed OH deferred in inventory → absorption profit higher.
📌 CASE 6: Sales Mix Variance
Case:
A company sells Products A and B. Product A has a higher contribution margin. Actual sales shifted toward Product B.
Question:
Impact on sales variances?
A. Favourable sales mix variance
B. Unfavourable sales mix variance
C. Favourable sales yield variance
D. No impact
✅ Answer: B
CMA Logic:
Selling more of lower-margin product → unfavourable mix.
📌 CASE 7: Sales Price vs Sales Volume
Case:
To increase market share, management reduced selling prices. Sales units increased significantly.
Question:
Which combination is MOST likely?
A. Favourable price, unfavourable volume
B. Unfavourable price, favourable volume
C. Both favourable
D. Both unfavourable
✅ Answer: B
CMA Logic:
Price cut → unfavourable price variance
Higher units → favourable volume variance
📌 CASE 8: Management Action (Remedy Question)
Case:
The firm reports recurring unfavourable material efficiency variances due to excessive scrap.
Question:
What is the BEST corrective action?
A. Renegotiate material prices
B. Increase selling price
C. Improve production supervision and training
D. Ignore variance as uncontrollable
✅ Answer: C
CMA Logic:
Efficiency issues → production control, not purchasing or pricing.
📌 CASE 9: Fixed OH Spending Variance
Case:
Actual fixed overhead exceeded budget due to unplanned equipment repairs.
Question:
Which variance occurred and who is responsible?
A. Volume variance – Production
B. Spending variance – Management
C. Efficiency variance – HR
D. Spending variance – Marketing
✅ Answer: B
CMA Logic:
Unexpected fixed cost → spending variance, responsibility = management.
📌 CASE 10: Big CMA Integrative Case (Elimination Type)
Case:
A company reports:
- Favourable labour rate variance
- Unfavourable labour efficiency variance
- Unfavourable variable OH efficiency variance
Question:
Which is the MOST reasonable conclusion?
A. Labour standards are too strict
B. Use of unskilled labour reduced wages but productivity
C. Sales demand declined
D. Fixed overhead was overabsorbed
✅ Answer: B
CMA Logic:
Low wage → favourable rate
Low productivity → unfavourable efficiency
VOH efficiency follows labour hours.
🎯 HOW CMA EXPECTS YOU TO ANSWER CASE QUESTIONS
- Identify variance type
- Identify cause (price / rate / efficiency / volume)
- Link related variances
- Identify responsibility center
- Choose most logical, not emotional answer
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ILLUSTRATION on Reverse Ratio (Back-calculation) in Variance Analysis.
These questions are very common and very tricky because CMA gives variances first and asks you to reconstruct standards or actuals.
🔁 WHAT IS “REVERSE RATIO” IN CMA?
👉 Instead of calculating variance from data,
you calculate data from variance.
CMA tests:
- Logical rearrangement
- Understanding of formulas
- Not blind memorization
🔹 ILLUSTRATION 1: MATERIAL PRICE VARIANCE (Reverse)
Case:
A company reports a Material Price Variance of ₹4,000 Unfavourable.
Actual quantity of material purchased = 8,000 kg.
Standard price = ₹20 per kg.
Question:
What was the Actual Price per kg?
Step-by-step CMA Logic:
Formula:
Material Price Variance = AQ × (AP − SP)
Substitute:
4,000 (U) = 8,000 × (AP − 20)
Solve:
AP − 20 = 0.50
AP = ₹20.50 per kg
✅ Answer: ₹20.50 per kg
🔑 CMA tip:
Unfavourable → Actual price higher than standard.
🔹 ILLUSTRATION 2: MATERIAL EFFICIENCY VARIANCE (Reverse)
Case:
Material Efficiency Variance = ₹3,600 Favourable
Standard price = ₹30 per kg
Actual quantity used = 1,100 kg
Question:
What was the Standard Quantity allowed?
Solution:
Formula:
Material Efficiency Variance = SP × (AQ − SQ)
Since variance is Favourable, AQ < SQ
3,600 = 30 × (SQ − 1,100)
SQ − 1,100 = 120
SQ = 1,220 kg
✅ Answer: Standard Quantity = 1,220 kg
🔹 ILLUSTRATION 3: LABOUR RATE VARIANCE (Reverse)
Case:
Labour Rate Variance = ₹1,500 Unfavourable
Actual hours worked = 750 hours
Standard rate = ₹18 per hour
Question:
Find the Actual Labour Rate.
Solution:
Formula:
LRV = AH × (AR − SR)
1,500 = 750 × (AR − 18)
AR − 18 = 2
AR = ₹20 per hour
✅ Answer: ₹20 per hour
🔹 ILLUSTRATION 4: LABOUR EFFICIENCY VARIANCE (Reverse)
Case:
Labour Efficiency Variance = ₹2,400 Unfavourable
Standard rate = ₹16 per hour
Standard hours allowed = 1,500 hours
Question:
What were the Actual Hours Worked?
Solution:
Formula:
LEV = SR × (AH − SH)
2,400 = 16 × (AH − 1,500)
AH − 1,500 = 150
AH = 1,650 hours
✅ Answer: Actual hours = 1,650
🔹 ILLUSTRATION 5: VARIABLE OVERHEAD SPENDING VARIANCE (Reverse)
Case:
Variable OH Spending Variance = ₹900 Favourable
Actual hours = 300 hours
Standard VOH rate = ₹6 per hour
Question:
What was the Actual VOH Rate per hour?
Solution:
Formula:
VOH Spending Variance = AH × (AR − SR)
Favourable → Actual < Standard
900 = 300 × (6 − AR)
6 − AR = 3
AR = ₹3 per hour
✅ Answer: ₹3 per hour
🔹 ILLUSTRATION 6: FIXED OVERHEAD VOLUME VARIANCE (Reverse)
Case:
Fixed OH Volume Variance = ₹10,000 Unfavourable
Budgeted Fixed OH = ₹50,000
Standard production = 10,000 units
Question:
What was the Actual Production (units)?
Solution:
FOH rate per unit:
50,000 ÷ 10,000 = ₹5 per unit
Formula:
FOH Volume Variance = FOH Rate × (Actual − Standard units)
Unfavourable → Actual < Standard
10,000 = 5 × (10,000 − Actual)
10,000 − Actual = 2,000
Actual = 8,000 units
✅ Answer: Actual production = 8,000 units
🔑 CMA EXAM SHORTCUT FOR REVERSE QUESTIONS
1️⃣ Identify variance type
2️⃣ Write standard formula
3️⃣ Replace variance with ₹ value + F/U logic
4️⃣ Solve algebraically
5️⃣ Sanity-check direction (F or U)
🚨 COMMON CMA TRAPS
❌ Forgetting sign (F vs U)
❌ Using SH instead of AH
❌ Mixing absorption & variable concepts
❌ Using budgeted instead of standard figures
🎯 FINAL EXAM TIP
If CMA gives variance first → STOP → Write formula → Think direction → THEN calculate
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