Cost Accounting and Variance Analysis for CPA BAR
By SimplyCPA · 11 October 2026
On this page (7)
- Costing systems: Job order costing for unique jobs; process costing for continuous, identical units; activity-based costing allocates overhead using the activities that drive cost.
- Absorption vs variable costing: Absorption includes fixed manufacturing overhead in inventory; variable costing expenses it. Income differs when inventory levels change.
- Material variances: Price = AQ × (AP − SP); quantity = SP × (AQ − SQ).
- Labour variances: Rate = AH × (AR − SR); efficiency = SR × (AH − SH).
- Reading variances: Favourable isn't always good — a favourable price variance from cheap, poor-quality materials can cause an unfavourable quantity variance.
Where it's tested
Cost accounting, budgeting and variance analysis sit in Area I (Business Analysis) of the Business Analysis and Reporting (BAR) Discipline. Expect calculations and interpretation in both multiple-choice questions and simulations.
Costing systems
- Job order costing — costs accumulated by job (custom furniture, audits, construction). Overhead applied using a predetermined rate.
- Process costing — costs accumulated by department and spread over equivalent units (refining, beverages). Weighted-average and FIFO methods differ in how they treat opening work in process.
- Activity-based costing (ABC) — overhead assigned through activity cost pools (set-ups, inspections, orders) using cost drivers. More accurate when products consume overhead differently.
Absorption vs variable costing
| Absorption (required for GAAP and tax) | Variable (internal use) | |
|---|---|---|
| Fixed manufacturing overhead | Product cost (in inventory) | Period cost (expensed) |
| Production > sales | Higher income | Lower income |
| Production < sales | Lower income | Higher income |
The income difference = change in inventory units × fixed overhead per unit.
Standard cost variances: worked example
Standard: 2 kg of material at $5/kg and 0.5 hours of labour at $20/hour per unit. Actual output 1,000 units, using 2,100 kg bought at $4.80/kg, and 520 labour hours at $21/hour.
| Variance | Formula | Calculation | Result |
|---|---|---|---|
| Material price | AQ × (AP − SP) | 2,100 × ($4.80 − $5.00) | $420 F |
| Material quantity | SP × (AQ − SQ) | $5 × (2,100 − 2,000) | $500 U |
| Labour rate | AH × (AR − SR) | 520 × ($21 − $20) | $520 U |
| Labour efficiency | SR × (AH − SH) | $20 × (520 − 500) | $400 U |
(F = favourable, U = unfavourable. Standard quantities are for actual output: 1,000 × 2 kg = 2,000 kg; 1,000 × 0.5 = 500 hours.)
Interpretation: cheaper material saved $420 but caused $500 of extra usage — possibly lower quality. That may also explain the extra labour hours.
Overhead variances
- Variable overhead spending = actual variable overhead − (actual hours × standard rate).
- Variable overhead efficiency = standard rate × (actual hours − standard hours allowed).
- Fixed overhead budget (spending) = actual fixed overhead − budgeted fixed overhead.
- Fixed overhead volume = budgeted fixed overhead − fixed overhead applied (standard hours allowed × fixed rate). It reflects capacity use, not cost control.
Flexible budgets
Compare actual results with a budget flexed to the actual level of activity, not the original static budget. The static-to-flexible difference is the sales volume variance; the flexible-to-actual difference is the flexible budget variance, which the price and efficiency variances above break down.
See also contribution margin and break-even analysis.