Sunday, December 28, 2025

How to gain command over topic Variance Analysis or Standard Costing?

 

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:

  1. What variance?
  2. What changed? (Rate, quantity, time, volume?)
  3. Who controls it?
  4. Is it controllable?
  5. 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

  1. Identify single vs multi-product
  2. Identify absorption or variable
  3. Identify input side or output side
  4. Choose 2 / 3 / 4-way analysis
  5. 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


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

  1. Identify variance type
  2. Identify cause (price / rate / efficiency / volume)
  3. Link related variances
  4. Identify responsibility center
  5. 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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