Choose the correct basis and interpret favourable variances
Separate actual activity from the standard allowed for actual output, and keep favourable or adverse labels tied to the type of variance.
Section 4.2 · Standard costing
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. Topic 4.2 teaches standard costing, the listed material, labour, fixed-overhead and sales variances, their causes and relationships, and evidence-based business decisions. Practice is self-checked, not an official Cambridge grade. Full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use Topic 2.1–2.2 cost behaviour, contribution and absorption-costing ideas. In each question, identify the period, actual output, budget and standard before calculating a variance.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
A cost variance is favourable when actual cost is…
What you will learn
- Identify the actual and standard quantities used
- Explain favourable and adverse labels for cost and revenue
- Distinguish price, usage, rate, efficiency and volume
Flex the standard for actual output
For a usage or efficiency variance, standard quantity or hours allowed is the amount that should be used for the actual output. Multiply the standard input per unit by actual output. This keeps the comparison focused on input use rather than the effect of producing a different quantity.
For example, if each unit should use 3 kg and actual output is 800 units, standard quantity for actual output is 2,400 kg. Do not compare actual usage directly with a master budget for 1,000 units unless output was 1,000 units.
Favourable describes direction, not overall value
A cost variance is favourable when actual cost is below the relevant standard cost; it is adverse when actual cost is higher. A revenue variance is favourable when actual revenue exceeds its standard comparison; it is adverse when lower.
Use the variance name and label together. A favourable price variance and an adverse usage variance can occur at the same time. Their net cost effect does not show whether the cheaper purchase caused the extra usage, so investigate rather than assume.
Pause and explain
Sales revenue is below the standard amount. How should the revenue variance be labelled?
Worked example
A product standard allows 2.5 hours per unit. Actual output is 600 units and actual hours are 1,570. Find the standard hours allowed and state the efficiency direction.
Show the worked solution
- Standard hours allowed = 2.5 × 600 = 1,500 hours.
- Actual hours are 70 above the allowed hours.
- Extra labour hours increase cost at the standard rate, so the efficiency variance is adverse.
Answer Standard hours allowed are 1,500; actual hours exceed this by 70, giving an adverse labour-efficiency direction.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Standard material use is 1.2 kg per unit. Actual output is 750 units and actual usage is 920 kg. Calculate the excess or saving in quantity.
Give me a hint
First calculate the standard quantity allowed for 750 units.
Compare my reasoning
- Allowed quantity = 1.2 × 750 = 900 kg.
- Actual usage is 920 kg.
- Actual usage exceeds the allowed quantity by 20 kg.
Usage is 20 kg above the standard allowed for actual output; at a positive standard price this is an adverse usage variance.
Look for these in your work
- Calculate 900 kg allowed
- Compare with actual 920 kg
- Interpret excess usage as adverse cost direction
A business planned 4,000 units but produced 3,600. Standard input is 5 hours per unit; actual input is 18,400 hours. Find hours allowed and state the direction.
Give me a hint
Recalculate the allowance using actual output.
Compare my reasoning
- Allowed hours = 3,600 × 5 = 18,000.
- Actual hours are 400 above the allowance.
- Using extra hours increases cost, so the efficiency direction is adverse.
18,000 hours were allowed; 400 extra hours were used, an adverse efficiency direction.
Look for these in your work
- Use actual output
- Allowed hours correct
- Label extra cost as adverse
A manager reports 'variance = +$600' without a name or label. Explain why the report is incomplete.
Give me a hint
The sign depends on subtraction order and the activity being measured.
Compare my reasoning
- The report needs the variance type, such as price or usage.
- It should state whether the amount is favourable or adverse under the chosen convention.
- The basis and period should be clear so the comparison can be interpreted.
A bare signed number is ambiguous. Name the variance, state its favourable/adverse direction and show the period and comparison basis.
Look for these in your work
- Variance name required
- Favourable/adverse meaning required
- Basis and period identified
Common mistakes
- Using budgeted output instead of actual output
- Calling any positive number favourable without considering whether it is a cost or revenue
- Adding variances before checking that they use compatible bases
What can you explain now?
Actual output is 500 units and the standard is 4 kg per unit. Which quantity is used in a usage variance?
Compare with the explanation
2,000 kg allowed for actual output
Usage compares actual quantity with the standard quantity allowed for the actual output.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
Why is a standard usage or efficiency comparison flexed to actual output?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.