ANALYSIS OF VARIANCES Control is a very important function of management.

Through control management ensures that performance of the organization conforms to its plans and objectives. Analysis of variances is helpful in controlling the performance and achieving the profits that have been planned. The deviation of the actual cost or profit or sales from the standard cost or profit or sales is known as variance. When actual cost is less than standard cost or actual profit is better than standard profit it is known as favourable variance and such a variance is usually a sign of efficiency of the organization. On the other hand, when actual cost is more than the standard cost or actual profit or turnover is less than standard profit or turnover it is called unfavourable or adverse variance and is usually an indicator of inefficiency of the organization. The favourable and unfavourable variances are also known as credit and debit variances respectively. Variances of different items of cost provide the key to cost control because they disclose whether and to what extent standards set have been achieved. Another way of classifying the variances may be controllable and uncontrollable variances. If a variance is due to inefficiency of a cost centre (i.e individual or department), it is said to be controllable variance. Such a variance can be corrected by taking a suitable action. for example, if actual quantity of material used is more than the standard quantity, the foremen concerned would be responsible for it. But if excessive use is due to defective supply of materials or wrong settings of standards, the purchasing department or cost accounting department would be responsible for it. On the other hand, an uncontrollable variance does not relate to an individual or department but it arises due to external reasons like increase in prices of materials. This type of variance is not controllable and no particular individual can be held responsible for it. There are a number of reasons which gives rise to variances and the analysis of variances will help to locate the reason and person or department responsible for a particular variance. The management need not pay attention to items or departments proceeding according to standards laid down. It is only in case of unfavourable items that the management had to exercise control. This type of management technique is known as management by exception. This type of technique is considered as an efficient way of exercising control because management cannot devote their limited time to every item. The deviation of total actual cost from total standard cost is known as total cost variance.

It is a net variance which is the aggregate of all variances relating to various elements of cost, both favourable and unfavourable. Analysis of variances may be done in respect of each element of cost and sales, viz; 1.Direct Material Variances, 2. Direct Labour Variances, 3. Overhead Variances, 4. Sales Variances. Material Variances: In case of materials, the following may be the variances. a. Material cost Variance. b. Material Price Variance. c. Material usage or Quantity Variance d. Material mix Variance e. Material yield Variance. The following chart shows the division and subdivision of material variances.: Material cost Variances

Material Price Variance

Material usage or Quantity Variance

Material mix variance Now we proceed to define these variances one by one.

Material yield variance

a. Material Cost Variance (MCV) : It is the difference between the standard cost of materials allowed (as per standards laid down) for the output achieved and the actual cost of materials used. Thus it may be expressed as Material cost Variance = Standard cost of Materials for actual output Actual cost of materials used or or Material cost Variance = Material price variance + Material mix variance + material yield variance Material cost Variance = Material Price variance + Material usage or Quantity variance.

In order to calculate cost variance, it is necessary to know: 1. Standard quantity of materials which should have been required (as per standards set) to produce actual output. Thus, standard quantity of material is: Actual output standard quantity of materials per unit. Note: In order to find out standard quantity of materials specified, actual output (and not standard output) is to be multiplied by standard quantity of material per unit. 2. Standard price per unit of materials 3. Actual quantity of materials used. 4. Actual price per unit of materials. b. Material Price Variance (MPV): It is that portion of the material cost variance which is due to the difference between the standard cost of materials used for the output achieved and the actual cost of materials used. In other words, it can be expressed as: Material Price Variance: Actual usage (Standard unit price Actual unit price) Here, Actual usage = Actual quantity of material (in units) used. Standard unit price = Standard price of material per unit. Actual unit price = Actual price of material per unit. c. Material usage ( or Quantity) Variance (MQV): It is that portion of the material cost variance which is due to the difference between the standard quantity of materials specified for the actual output and the actual quantity of materials used. it may be expressed as: Material usage Variance: Standard price per unit (Standard quantity Actual quantity) d. Material Mix Variance (MMV): It is that portion of the material usage variance which is due to the difference between standard and the actual composition of a mixture. In other words, this variance arises because the ratio of materials being changed from the standard ratio set. It is calculated as the difference between the standard price of standard mix and standard price of actual mix. In case of materials mix variance, two situations may arise:

i)

Actual weight of mix and the standard weight of mix do not differ. such a case, Standard Unit Cost (Standard Quantity Actual Quantity) or Standard Cost of Standard mix Standard cost of Actual mix. If the standard is revised due to shortage of a particular type of material, the material mix variance is calculated as follows: Standard unit cost (Revised standard quantity Actual quantity) or Standard cost of Revised standard mix Standard cost of actual mix.

material mix variance is calculated with the help of the following formula;

ii)

Actual weight of mix differs from the standard weight of mix. In such case, material Total weight of Actual mix Standard cost of (revised) Standard mix _ Standard cost of Actual mix

mix variance is calculated as follows: Total weight of (revised) Standard mix The formula is necessitated to adjust the total weight of standard mix to the total weight of actual mix which is more or less than the weight of standard mix. e) Material Yield (or Sub-usage) variance (MYV): It is that portion of the material usage variance which is due to the difference between the standard yield specified and the actual yield obtained. This variance measures the abnormal loss or saving of materials. This variance is particularly important in case of process industries where certain percentage of loss of materials is inevitable. If the actual loss of materials differs from the standard loss of materials, yield variance will arise. Yield variance is also known as scrap variance. This loss may result in the following two situations: i) When standard and actual mix do not differ. In this case, yield variance is calculated with the help of the following formula: Yield variance = Standard rate (Actual yield Standard yield) where Standard rate = Standard cost of Standard mix Net Standard output (i.e. Gross output - Standard loss) When actual mix differs from standard mix, in such a case, formula for the calculation of yield variance is almost the same, but since the weight of actual mix differs from that of the standard mix, a revised standard mix is to be calculated to adjust the standard mix in proportion to the actual mix and the standard rate is to be calculated from the revised standard mix as follows:

Standard rate

= Standard cost of Revised Standard Mix Net Standard output

Formula for yield variance in such a case is: Yield variance = Standard rate (Actual yield - Revised standard yield) Illustration 1. The standard cost of chemical mixture is as under: 8 tons of material A at Rs 40 per ton. 12 tons of material B at Rs 60 per ton. Standard yield is 90% of input. Actual cost for a period is as under: 10 tons of material A at Rs 30 per ton. 20 tons of material B at Rs 68 per ton. Actual yield is 26.5 tons Compute all material variances. SOLUTION:
Raw materials (1) A B Total Loss Standard cost (2) 8 12 20 2 18 (3) (4) 40 320 60 720 1040 1040 Actual cost (5) (6) (7) 10 30 300 20 68 1360 30 1660 3.5 26.5 1660 Revised standard cost Tons Rate Total (8) 12 18 30 3 27 (9) (10) 40 480 60 1080 1560 1560 (3) x (5) 400 1200 Standard cost of actual mix Tons Rate Total Tons Rate Total

1600

a. Material cost variance: Standard cost of materials - Actual cost of Actual materials = Rs 1,040 26.5 18 b. Material price Variance: Actual usage (Standard price Actual price) Materials A : 10 tons (Rs 40 - Rs 10) = Rs 100 (F) Materials B: 20 tons (Rs 60 - Rs 68) = Rs 160 (A) Rs 60 (A) - 1660 = Rs 1531 Rs 1660 = Rs 129 (A)

c. Material Usage Variance:

Standard price (Standard usage Actual Usage) Material A : Rs 40 (8 26.5 tonnes 10 tonnes) = 18 Material B : Rs 60 ( 12 26.5 tonnes 20 tonnes) = Rs 140 (A) 18 d. Material Mix Variance: = Standard cost of Revised Standard mix Standard cost of Actual mix = Rs 1560 Rs 1600 = Rs 40 (A) e. Yield Variance: Standard Rate per unit ( Actual Yield Standard Yield) = Rs 1560 (26.5 tonnes 27 tonnes) = Rs 29 (A) 27 Verification: Materials cost Variance = Materials Price Variance + Materials Usage Variance Rs. 129 unfav = Rs. - 60 Rs. 69 = Rs. 129 unfav Materials Usage Variance = Materials Mix variance + Materials Yield variance Rs 69unfav = Rs 40 Rs 29 = Rs 69 unfav Illustration 2: The standard material cost for 100 kg of chemical D is made up ofChemical A 30 kg @ Rs 4/- per kg Chemical B - 40 kg @ Rs 5/- per kg Chemical C 80 kg @ Rs 6/- per kg In a batch, 500 kg of chemical D was produced from a mix ofChemical A 140kg at a cost of Rs 588 Chemical B - 220 kg at a cost of Rs 1056 Chemical C - 440 kg at a cost of Rs 2860 Calculate all variances in the actual cost per 100 kgs of chemical D over the standard cost. Solution: We are to find out the variance in relation to the actual cost per 100 kgs of chemical D, so actual consumption of chemical A, B, and C is to be reduced relating to output of 100 kgs of chemical AFor 500 kgs of chemical D = 140 kgs of chemical A Rs 69 (A) Rs 71(F)

 For 100 kgs of chemical D = 140 x 100 = 28 kgs of chemical A 500 Similarly Chemical B = 220 x 100 = 44 kgs 500 Chemical C = 440 x 100 = 88 kgs 500 Actual rate per kg is as follows: Chemical A Rs 588 / 140 = Rs 4.20 Chemical B Rs 1,056 / 220 = Rs 4.80 Chemical C Rs 2,860 / 440 = Rs 6.50
Chemical A B C Loss Standard cost Kgs 30 40 80 150 50 100 Rate Total 4 120 5 200 6 480 800 800 Actual cost Kgs 28 44 88 160 60 100 Revised standard cost Rate Total 4 128 5 213 6 512 853 853 Standard cost of Actual mix 112 220 528 Rate Total Kgs 4.20 117.60 32 4.80 211.20 42 6.50 572.00 85 900.80 160 53 900.80 106

860

1. 2.

MCV = SC AC = Rs 800 Rs 900.80 = Rs 100.80(A) MPV = AQ (SP - AP) A = 28 (Rs 4 Rs 4.20) = Rs B = 44 (Rs 5 Rs 4.80) = Rs 5.60 (A) 8.80 (F)

C = 88 ( Rs 6 Rs 6.50) = Rs 44.00 (A) Rs 40.80(A) 3. MQV = SP (SQ - AQ) A = Rs 4 (30 28) = Rs 8 (F) B = Rs 5 (40 44) = Rs 20(A) C = Rs 6 (80 88) = Rs 48 (A) Rs 60 (A) 4. 5. MMV = Sc of RSM Sc of AM = Rs 853 - Rs 860 = Rs 6 (A) MYV = SR per unit (AY SY) = Rs8 (100 100) = Rs 53 (A)

Illustration 3. The standard cost of a certain chemical mixture is: 40% material A at Rs 40 per ton

60% material B at Rs 30 per ton A standard loss of 10% is expected in production: Actual cost of materials used is: 90 tons material A at a cost of Rs 42 per ton 160 tons material B at a cost of Rs.28 per ton. Actual output is 230 tons. Prepare a statement showing the standard cost of output and the variances that emerge. Solution: Working notes:
Material A B Loss Standard Cost Tons 100 150 250 25 225 Rate 40 30 Total 4,000 4,500 8,500 8,500 Actual Cost Tons 90 160 250 20 230 Rate 42 28 Total 3,780 4,480 8,260 8,260 8,400 Standard cost of Actual mix 3600 4800

(1) MCV = SC AC = Rs 8500 230 - Rs 8,260 = Rs 8689 Rs 8,260 = Rs 429(F) 225 (2) MPV = AQ ( SP AP) A = 90 ( Rs 40 Rs 42) B = 160 (Rs 30 Rs 28) (3) MQV = SP (SQ AQ) A = Rs 40 100 230 - 90 225 B = Rs 30 150 230 160 = Rs 200 (A) = Rs 489 (F) = = Rs 180 (A) Rs 320 (F) Rs 140 (F)

225

289 (F)

(4) MMV = Standard cost of Standard mix - Standard Cost of actual Mix = Rs 8500 Rs 8400 = Rs 100 (F) (5) MYV = Standard Rate per unit (AY SY) = 8,500 ( 230 225) = Rs 189 (F) 225 Statement of Standard and Actual Cost Input - 250 tons Standard Cost of Actual Output 230 tons @ Variances: 1) Materials Price variance Fav. 2) Materials Mix Variance Fav. 3) Materials Yield variance Fav. Actual Cost Verification: Actual cost 90 tons @ Rs 42 = Rs 3,780 160 tons @ Rs 28 = Rs 4,480 8,260 Illustration:- XYZ company manufactures a product ABC by mixing three raw materials. For every 100 kg of ABC 125 kg raw materials are used. In April 1998, there was an output of 5,600 kg of ABC. The standard and actual particulars of April 1998 are as follows: Raw material Mix % I II III 50 30 20 Standard Price per kg. Rs 40 20 10 Mix % 60 20 20 Actual Price per kg Rs 42 16 12 Cr. Rs 140 Cr. Rs 100 Cr. Rs 189 Cr. 429 8,260 225 Output 230 tons Rs 8,500 = Rs 8,689

Calculate all variances

Soln: Material I II III Total Loss Standard Cost Kgs 3,500 2,100 1,400 7,000 Price 40 20 10 Total 1,40,000 42,000 14,000 1,96,000 Actual cost Kgs 4,200 1,400 1,400 7,000 1,400 Price 42 16 12 Standard cost of Total Actual mix 1,76,400 1,68,000 22,400 28,000 16,800 14,000 2,15,600 2,10,000 2,15,600

(5,600 125/100) 1,400 (7,000 25/125) 5,600

1,96,000 5,600

MCV = SC AC = Rs 1,96,000 Rs. 2,15,600 = Rs. 19,600 (A) MPV = AQ( SP AP) I = 4,200 (Rs 40 Rs 42) = Rs 8,400 (A) II = 1,400 (Rs 20 Rs 16) = Rs 5,600 (F) III = 1,400 (rs10 Rs 12) = Rs 2,800 (A) Rs 5,600 (A) MQV = SP (SQ AQ) I = Rs 40 (3,500 -4,200) = Rs 28,000 (A) II = Rs 20 (2,100 1,400) = Rs 14,000 (F) III = Rs 10(1,400 -1,400) = Rs 14,000 (A) MMV = SC of SM SC of AM = Rs 1,96,000 Rs 2,10,000 = Rs 14,000 (A) MYV = Nil.

Labour Variances: Labour variances can be analysed as follows: a. b. c. d. e. f. g. a. Labour cost Variance (LCV) Labour Rate (of pay) Variance (LRV) Total Labour Efficiency Variance (TLEV) Labour Efficiency Variance (LEV) Labour Idle Time Variance (LITV) Labour Mix Variance or Gang Composition Variance (LMV or GCV) Labour Yield Variance or Labour Efficiency Sub-Variance (LYV or LESV) These variances are like material variances and can be defined as follows: Labour Cost Variance: It is the difference between the standard cost of labour allowed ( as per standard laid down) for the actual output achieved and the actual cost of labour employed. It is also known as wages variance. This variance is expressed as: Labour cost Variance = Standard cost of labour Actual cost of labour. b. Labour Rate (of pay) Variance: It is that portion of the Labour cost variance which arises due to the difference between standard labour cost of standard time for actual out put and standard cost of actual time paid for. It is calculated as: Rate of pay variance = Actual time taken ( Standard rate Actual rate) c. Total Labour Efficiency Variance (TLEV): It is that part of labour cost variance which arises due to the difference between standard labour cost of standard time for actual output and standard cost of actual time paid for. It is calculated as: Total Labour Efficiency Variance = Standard Rate ( Standard Time for actual output Actual time paid for) Total Labour Efficiency Variance is calculated only when there is abnormal idle time. d. Labour Efficiency variance: It is that portion of labour cost variance which arises due to the difference between the standard labour hours specified for the output achieved and the actual labour hours spent. It is expressed as: Labour Efficiency variance = Standard rate ( Standard Time for actual output Actual time worked).

Here standard time for actual output means time which should be allowed for the actual output achieved. Actual time worked means actual labour hours spent minus abnormal idle hours. e. Labour Idle Time Variance:- Calculated only when there is abnormal idle time. It is that portion of labour cost variance which is due to the abnormal idle time workers. The variance is shown separately to show the effect of abnormal causes affecting production like power failure, breakdown of machinery, shortage of materials etc. While calculating labour efficiency variance, abnormal idle time is deducted from actual expended to ascertain the real efficiency of the workers. Labour idle time variance is expressed as: Idle time Variance = Abnormal Idle time Standard Rate Total Labour Cost Variance = Labour rate of Pay Variance + Total Labour Efficiency Variance Total Labour Efficiency Variance = Labour Efficiency Variance + Labour Idle Time Variance. Labour Efficiency Variance can be split into: 1. 2. Labour Mix variance or Gang Composition Variance Labour Yield variance or Labour Efficiency Sub- Variance

f) Labour Mix Variance or Gang Composition variance. It is like materials mix variance and is a part of labour efficiency variance. This variance shows to the management as to how much of the labour cost variance is due to the change in the composition of labour force. It is calculated as follows: i) If there is no change in the standard composition labour force and total time expended is equal to the total standard time, the formula is Labour Mix Variance = St Cost of St. Composition (for actual time taken) St. Cost of Actual Composition (for actual time worked) ii)If the standard composition of labour force is revised due to shortage of a particular type of labour and the total time expended is equal to the total standard time, the formula is: Labour Mix Variance = St. Cost of revised St. Composition( for Actual time taken) St. Cost of Actual Composition ( for Actual time worked) iii) formula isIf the total actual time of labour differs from the total standard time of labour, the

Total time of Actual Labour Composition = Total Time of St Composition) Labour Composition iv) If the standard is revised and the total actual time of labour differs from the total Labour Mix Variance Total time of Actual Labour Composition = Total time of Revised St Labour Composition g) Labour Yield Variance. It is like material yield variance and arises due to the difference between yield that should have been obtained by actual time utilized on production and actual yield obtained. It can be calculated as follows: St. Labour Cost per unit [Actual Yield in units _ St Yield in units expected from the actual time worked on production] Illustration: A gang of workers usually consists of 10 men, 5 women and 5 boys in a factory. They are paid at standard hourly rates of Rs. 1.25, re 0.80 and Re. 0.70 respectively. In a normal working week of 40 hours the gang is expected to produce 1,000 units of output. In a certain week, the gang consisted of 13 men, 4 women, and 3 boys. Actual wages were paid at the rates of Rs 1.20, Re 0.85 and Re 0.65 respectively. Two hours per week were lost due to abnormal idle time and 960 units of output were produced. Calculate various labour variances. Solution: 1) Labour Cost Variances(LCV) = Standard Cost for Actual Output ActualCost of Labour. St. Cost of Revised St. Composition - ( St cost of actual Composition) St cost of St. Composition - ( St. Cost of Actual

standard time of labour, the formula for calculation of labour mix is:

960 Rs 800 - Rs 838 = Rs 768 Rs 838 1,000

= Rs 70 (A)

2) Labour Rate Variance (LRV) = Actual time (Standard rate - Actual Rate) Men = 520( Rs 1.25 Rs 1.20) Boys = Rs 26 (F) Women = 160 (Re. 0.80 Re 0.85) = Rs. 8 (A) = 120 (Re. 0.70 Re. 0.65) = Rs 6 (F) Rs 24 (F) 3) Total Labour Efficient Variance(TLEV) = Standard Rate ( Standard Time for Actual output Actual Time paid for) Men = Rs 1.25 (384 -520) = Rs 170.00 (A) Women = Re. 0.80 (192 160) = Rs 25.60 (F) Boys = Re. 0.70 (192 120) = Rs. 50.40 (F) Rs. 94.00 (A) 4) Labour Efficiency Variance (LEV) = Standard Rate ( Standard Time for actual output Actual Time worked) Men Boys = Rs 1.25 (384 494) = Re. 0.70 (192 114) = Rs 137.50 (A) = Rs. 32.00 (F) = Rs. 54.60 (F) Rs 50.90 (A) Women = Re. 0.80 (192 152)

Composition

Standard Cost Hours@ 40 per

Actual Costt Hours@ 40 per

Standard Cost for Hours@ person Rate Amt

Standard Cost for worked Hours@ 40 per person 494 152 114 Rate 1.25 .80 .70 Amt 617.50 121.60 79.80 818.90

Standard Time for actual output(96% of Std) 384 192 192 768

Revised standard Mix Actual Time

person Rate Amt person Rate Amt 40 per

Men Women Boys

400 200 200 800

1.25 0.80 0.70

500 160 140 800

520 160 120 800

1.20 0.85 0.65

624 136 78 838

380 190 190 760

1.25 0.80 0.70

475 152 133 760

Labour Idle Time Variance (LTV) = Idle Time Standard Rate Men Women Boys = 26 =8 =6 Rs 1.25 = Rs 32.50 (A) 4.20 (A) Re 0.80 = Rs 6.40 (A) Re 0.70 = Rs Rs. 43.10 (A)

6. Labour Mix Variance (LMV) = Standard Cost for revised standard Mix - Standard Cost for Actual Mix( Actual time Worked) = Rs 760 Rs 818.90 = Rs. 58.90 (A) 6. Labour Yield Variance (LYV) = Standard Cost per unit (Actual output - Standard Output for actual time taken) = Rs 800 960 - 760 Hours 1,000 units 800 = Re 0.80 ( 960 -950) = Rs 8 (F) Materials & Labour Variances Illustration1.: Trishul Industries turns out only one article, the prime cost standards for which have been established as follows: Per Completed piece Material 5 lbs @ Rs 4.20 Labour 3 hours @ Rs 3/However, 5,120 pieces were actually completed Purchases for the month of July 1998 amounted to 30,000 lbs of material at the total invoice price of Rs 1,35,000 Production records for the month of July 1998 showed the following actual results. Materials requisitioned and used Direct labour- 15,150 hours Calculate appropriate material and labour variances. Solution a. Material cost variance St unit cost of material Actual output - Actual cost of material Rs. 21 5,120 pieces Rs 1,35,000 25,700 lbs 30,000 lbs = Rs 1,07,520 - Rs 1,15,650 = Rs 8130 Adverse b. Material Price variance Actual Usage (Standard Unit Price Actual Unit Price) = 25,700 lbs Rs. 4.20 - Rs. 1,35,000 30,000 = 25,700lbs ( Rs 4.20- Rs 4.50) = Rs 7,710 Adverse 25,700 lbs. Rs 48,480 Rs 21 Rs 9

The production schedule for the month of july, 1998 required completion of 5,000 pieces.

c. Material Usage Variance Standard unit price ( Standard Usage Actual Usage) Re. 4.20 (5,120 5 lbs 25,700 lbs) = Rs 420 (25,600 lbs 25,700 lbs) = Rs 420 Adverse d. Labour Cost Variance Standard Labour Cost per unit x Actual output- Actual Cost of Labour Rs. 9 x 5,120 pieces Rs 48,480 =Rs 46,080 Rs 48,480 = Rs 2,400 Adverse e. Labour Rate of Pay Variance Actual Time ( Standard Rate Actual Rate) 15,150 hours Rs 3 Rs 48,480 15,150 = Rs 45,450 Rs 48,480 = Rs 3,030 Adverse f) Labour Efficiency Variance Standard Rate ( Standard Time - Actual Time) Rs3 (5,120 x 3 hours 15,150 hours) = Rs 3(15,360 15,150) = Rs. 630 Favourable. Illus. 2: In a factory the budgeted and actual figures of the cost of materials and direct labour incurred in the production during the month of January are as under: Actual Units of finished goods produced Materials: Units Cost of materials per unit Total Cost of materials Direct labour hours( 2 units of finished goods in one hour) Wages Total Direct labour cost Soln: Materials Price Variance: Actual Usage ( Standard Unit price - Actual Unit Price) 1,82,000 Units (Re. 0.50 Re. 0.52) = Rs 3,640 Unfav. 47,000 Rs.98,700 50,000 Rs. 1,00,000 Rs 2.10 per hour Rs 2.00 per hour 1,82,000 Re. 0.52 94,640 2,00,000 Re. 0.50 1,00,000 90,000 Budgeted 1,00,000

Material Usage Variance Standard unit price ( Standard Usage Actual Usage) Re 0.50 ( 90,000 units @ 2 units of material 1,82,000 units) Re. 0.50 ( 1,80,000 Units 1,82,000 units) = Rs 1,000 Unfav Note. Budgeted units of materials for 1,00,000 budgeted units of finished product are 2,00,000 units, so budgeted units of material for 1 unit of finished product are 2 [ i.e., 2,00,000/1,00,000] e. Labour Rate of Pay Variance Actual Time ( Standard Rate Actual Rate) 47,000 hours( rs 2.00 Rs. 2.10) = Rs. 4,700 Unfav. Labour Efficiency Variance Standard Rate ( Standard Time - Actual Time) Rs2 90,000 hours - 47,000 hours 2 Verification: Standard cost for 90,000 units of actual output: Material cost for 90,000 units@ 2 units of material per unit of finished product@ Re.0.50 per unit of material Labour cost for 90,000 units@ 2 units of finished goods in one hour i.e. 45,000 hours@ Rs 2 per labour hour Total Standard cost Variances: Material price variance Material Usage Variance Labour Rate of Pay variance Labour Efficiency Variance Actual cost of Material and Labour( Rs 94,640 + Rs 98,700) Rs 3,640 Unfav. 1000 Unfav 4,700 Unfav 4,000 Unfav 13,340 1,93,340 90,000 1,80,000 90,000 Rs = Rs. 4,000 Unfav

Illus 3. From the following records of Bonuscrew Ltd. you are required to compute the material and labour variances. 1 tonne of material input yields a standard output of 1 lakh units.

Number of employees is 200 The standard wage rate per employee per day is Rs 6. Standard price of material is Rs 20 per kg. Actual quantity of material issued by production department 10 tonnes Actual price of material is Rs 21 per kg. Actual output is 9 lakh units Actual wage rate per day is Rs 6.50 Standard daily output per employee is 100 units. Total number of days worked is 50 Idle time paid for and included above is day Soln: Material variances: a) Material cost variance: Standard cost of materials Actual cost of materials or Standard quantity Standard unit cost Actual quantity Actual unit cost. = 9,000 kilos Rs 20 - 10,000 kilos Rs 21 = Rs. 1,80,000 Rs 2,10,000 = Rs 30,000 Adverse. Standard quantity for 1,00,000 units is 1 tonne or 1,000 kilos so standard quantity for 9,00,000 units is 9,000 kilos. b) Material price variance: Actual quantity ( standard unit price Actual Unit price) 10,000 kilos( Rs 20 Rs 21) = Rs 10,000 Adverse. c) Material usage variance: Standard unit cost ( Standard quantity Actual Quantity) Rs 20 ( 9000 kilos 10000 kilos) = Rs. 20,000 Adverse Labour Variances: a) Labour cost variance: Standard cost of labour Actual cost of labour or Standard Time Standard Rate Actual Time Actual Rate = 9,000 man days x Rs 6 10,000 mandays x Rs 6.50 = Rs 54000 Rs. 65,000 = Rs 11000 Adverse

Standard time for 100 units is 1 manday, standard time for actual output of 9,00,000 uits is 9,000 mandays. Every employee has worked for 50 days, so 200 employees have actually worked for 10,000 mandays (i.e. 50 x 200) b) Labour Rate Variance: Actual Time( Standard Rate Actual rate) 10,000 mandays ( Rs 6 Rs 6.50) = Rs 5,000 Adverse. c) Labour Efficiency Variance: StandardRate ( Standard Time Actual Time) Rs 6 ( 9000 mandays 9,900 mandays) = Rs 5,400 Adverse. Here actual time is that time which is worked in the factory. Idle time of 200 workers @ day per worker has not been utilized on production. So this time has been excluded from 10,000 mandays worked to get the actual time utilized. d. Idle time variance: Idle time Standard Rate 100 man days Rs 6 = Rs 600 Adverse Every worker has not worked for day, so idle time for 200 workers is 100 man days. Wages Revision variance Sometimes it becomes necessary to calculate wages revision variance to show to the management the effect of revision on account of award settlement with trade unions. It is calculated as follows: Standard labour cost of Actual output at original standard rate _ standard labour cost of actual output at current standard rate.

OVERHEAD VARIANCE Overhead cost variance can be defined as the difference between the standard cost of overhead allowed for the actual output achieved and the actual overhead cost incurred. In other words, overhead cost variance is under or over absorption of overheads. The formula for the calculation is: Overhead cost Variance Actual output St. Overhead rate per unit - Actual Overhead cost or St. hours for Actual output St. Overhead rate per hour actual Overhead cost

Overhead cost variance can be classified as: 1. 2. Variable overhead Variance Fixed Overhead Variance

1.Variable Overhead Variance It is the difference between the standard variable overhead cost allowed for the actual output achieved and the actual variable overhead cost. This variance is represented by expenditure variance only because variable overhead cost will vary in proportion to production so that only a change in expenditure can cause such variance. It is expressed as: Actual output St. Variable overhead rate Actual Variable overheads or Standard hours for actual output St. Variable overhead rate per hour Actual variable Overheads Some accountants also find out variable overhead efficiency variance just like labour efficiency variance. Variable overhead efficiency variance can be calculated if information relating to actual time taken and time allowed is given. In such a case variable overhead variance can be divided into two parts as given below. a) Variable Overhead expenditure variance = Actual hours worked Standard variable or Actual hours ( St. Variable overhead rate per hour Actual Variable overhead rate per hour) Variable overhead expenditure variance is calculated in the same way as labour rate variance is calculated. b) Variable Overhead Efficiency variance = St. time for actual production St. variable overhead rate per hour Actual hours worked St. variable overhead rate per hour or St. Variable Overhead rate per hour ( St. hours for Actual Production Actual Hours) Variable overhead efficiency variance resembles labour efficiency variance and is calculated like labour efficiency variance 2.Fixed Overhead Variance. It is that portion of total overhead cost variance which is due to the difference between the standard cost of fixed overhead allowed for the actual output achieved and the actual fixed overhead cost incurred. The formula for the calculation of this variance is Actual output St. fixed overhead rate per unit Actual Fixed overheads or St. Hours produced St Fixed overhead rate per hour Actual Fixed Overheads (St. Hours Produced = Time which should be taken for actual output i.e. St. time for Actual output overhead rate per hour - Actual variable overhead

This variance is further analysed as under: a) Expenditure Variance. It is that portion of the fixed overhead variance which is due to the difference between the budgeted fixed overheads and the actual fixed overheads incurred during a particular period. It is expressed as: Expenditure Variance = Budgeted Fixed Overheads - Actual Fixed Overheads Expenditure Variance = Budgeted Hours St. Fixed overhead rate per hour Actual Fixed Overheads b) Volume Variance. It is that portion of the fixed overhead variance which arises due to the difference between the standard cost of fixed overhead allowed for the actual output and the budgeted fixed overheads for the period during which the actual output has been achieved. The variance shows the over or under absorption of fixed overheads during a particular period. If the actual output is more than the budgeted output, there is over recovery of fixed overheads and the volume variance is favourable and vice versa if the actual output is less than the budgeted output. This is so because fixed overheads are not expected to change with the change in output. This variance is expressed as: Volume variance = Actual output St. Rate - Budgeted Fixed Overheads Standard Rate ( Actual Output Budgeted Output) or Volume Variance = St. Rate per hour ( St Hours produced Actual Hours) Standard hours produced means number of hours which should have been taken for the actual output as per the standard laid down. Volume variance can be further subdivided into three variances as given below. i) Capacity variance. It is that portion of the volume variance which is due to working at higher or lower capacity than the budgeted capacity. In other words this variance is related to the under and over utilisation of plant and equipment and arises due to idle time, strikes and lockout, breakdown of the machinery, power failure, shortage of materials and labour, absenteeism, overtime changes in number of shifts. In short the variance arises due to more or less working hours than the budgeted working hours. It is expressed as: Capacity Variance = Standard Rate ( Revised Budgeted Units Budgeted Units) Capacity Variance = Standard Rate ( Revised Budgeted Hours Budgeted Hours) ii) Calendar Variance: It is that portion of the volume variance which is due to the difference between the number of working days in the budget period and the number of actual working days in the period to which the budget is applicable. If the actual working days are or or

more than the standard working days, the variance will be favourable and vice versa if the actual working days are less than the standard days. It is calculated as: Calendar Variance = Increase or decrease in production due to more or less working days at the rate of budgeted capacity St. rate per unit iii) Efficiency Variance. It is that portion of the volume variance which is due to the difference between the budgeted efficiency of production and the actual efficiency achieved. This variance is related to the efficiency of the workers and plant and is calculated as: Standard Rate per unit [Actual production (in units) - Standard Production (in units)] or Standard rate per hour ( Standard hours produced Actual hours) Here, standard production or hours means budgeted production or hours adjusted to increase or decrease in production due to capacity or calendar variance. Suppose, budgeted production is 10,000 units, 5% capacity is increased and factory works for 27 days instead of 25 days during the month. Standard production in this case should be 11,340 units calculated as follows: Revised Budgeted Production = 10,000 units x 27 25 Production increased due to 55 increase in capacity = 10,800 x 5/100 = 540 units Production increased due to 2 more working days is: Within 25 days, St production is 10,000 units Within 2 days, production should be 10000 x 2 = 800 units 25 Hence, total standard output is 10,000 + 540 + 800 = 11,340 units Suppose further that actual output is 10,600 units and standard fixed overheads rate is Rs 2 per unit. In such a case, efficiency variance will be: Standard Rate( Actual production Standard production) Rs 2 (10,600 units 11,340) = Rs 1,480 Unfavourable Total Overhead Cost variance can be analysed as follows: = 10,800 units

Total Overhead Cost Variance

Fixed Overheads Variance Volume Variance

Variable Overheads Variance Expenditure Variance or Level Variance or Budget Variance

Capacity Variance

Calendar Variance

Efficiency Variance

Two Variance and Three Variance Methods of Analysis of Overhead Variances Analysis of overhead variance can also be made by two variance and three variance methods. the analysis of overhead variance by expenditure and volume is called two variance analysis. when the volume variance is further analysed to know the reasons of change in output, it is called three variance analysis. Change in output occurs due to: i) variance ii) iii) i) ii) iii) Change in number of working days giving rise to calendar variance Change in the level of efficiency resulting into efficiency variance. Expenditure variance Volume variance further analysed into: a) Capacity variance b) Calendar variance, and c) Efficiency variance. Change in capacity i.e. change in working hours per day giving rise to capacity

Thus, three variance analysis includes:

Illustration 1. From the following data calculate overhead variances: Budgeted Output Number of working days Fixed overheads Variable overheads There was an increase of 5% in capacity. 15000 units 25 Rs 30,000 Rs 45,000 Actual 16,000 units 27 Rs.30,500 Rs 47,000

Solution

1)

Total overhead cost variance Actual units St. rate - Actual Overheads Cost 16,000 units ( Rs 2 + Rs 3) ( Rs 30,500 + Rs 47,000) = Rs 80,000 Rs 77,500 = Rs 2,500 Favourable Standard rate = Standard overhead Standard output

Standard rate : Fixed : Rs 30,000 = Rs 2 15,000 - Variable: Rs 45,000 = Rs 3 15,000 Actual Overhead cost = Fixed Overheads + Variable overheads = Rs 30,500 + rs 47,000 = Rs 77,500 2) Variable overhead Expenditure Variance Actual units St. rate - Actual Variable overheads Cost 16000 x Rs 3 Rs 47000 = Rs 1000 Favourable 3) Fixed Overhead variance Actual units Standard rate ( Fixed Overheads) Actual Fixed Overheads 16,000 x Rs 2 - Rs 30,500 = Rs 1500 Favourable 4) Volume Variance Actual units x Standard rate Budgeted Fixed overheads 16,000 x Rs 2 - Rs 30,000 = Rs 2000 Favourable 5) Expenditure variance Budgeted Fixed Overheads Actual Fixed Overheads = Rs 30,000 Rs 30,500 = Rs 500 Unfavourable 6) Capacity Variance Standard rate ( Revised Budgeted Units Budgeted Units) Budgeted units for 25 days = 15000 units Budgeted units for 27 days = 15000 x 27 = 16,200 units 25 Revised budgeted units after 5% increase in capacity = 17,010 i.e. 16,200 + 5/100 16,200 Capacity variance = Rs 2 ( 17010 - 16200) = Rs 1620 Favourable

7) Calendar Variance Increase or decrease in production due to more or less working days x St rate per unit Within 25 days, St, production = 15000 units Within 2 days (27 25) production will be increased by 15000 2 25 Calendar Variance = 1200 units Rs 2 = Rs 2400 favourable 8) Efficiency Variance St. Rate ( Actual Production St. Production) Standard Production Budgeted production Production increased due to increase in capacity Production increased due to two more working days = 15,000 units = 810 units = 1,200 units 17,010 units = 1200 units

Efficiency variance = Rs 2 (16000 units 17,010units) = Rs 2(-1,010 units) = Rs 2,020 Unfav Illustration 2. From the following data, calculate overhead variances: Overheads Output per man hour in units Number of working days Man hours per day Budgeted 3,75,000 2 25 5,000 Actual 3,77,500 1.9 27 5,500

Soln: Variance relate to fixed overhead variances, because overheads are to be treated as fixed when question is silent about their nature whether fixed or variable. We proceed to find out standard output, standard rate and actual output which are not given in the question. Standard working days = 25 Standard man hours per day = 5,000 Standard output per man hour = 2 Standard output = 25 x 5,000 x 2 = 2,50,000 units Standard Fixed overheads = 3,75,000 Standard Rate per unit Actual working days Actual man hours per day = Rs 3,75,000 Standard Overheads = Rs. 1.50 2,50,000 Standard Output = 27 = 5,500

Actual output per man hour = 1.9 Actual output = 27 x 5500 x 1.9 = 2,82,150 units. 1) Fixed overhead variance

Actual output x Standard rate - Actual overheads 2,82,150 x 1.50 Rs 3,77,500 = Rs 4,23,225 Rs 3,77,500 = Rs 45,725 Favourable 2) Expenditure Variance Budgeted Overheads 3).Volume variance Actual output x Standard Rate - Budgeted Overheads 2,82,150 units x Rs 1.50 - Rs 3,75,000 = Rs 4,23,225 - Rs 3,75,000 = Rs 48,225 Fav. 4.)Capacity variance Standard Rate ( Revised Budgeted Units - Budgeted units) Revised Budgeted Units Actual Budgeted Units Actual Working days Standard output per man hour Budgeted units = 27 = 5,500 =2 Revised man hours due to increase in capacity - Actual Overheads Rs 3,75,000 Rs 3,77,500 = Rs. 2,500 Unfavourable

Revised budget units = 27 x 5,500 x 2 = 2,97,000 units = 27 x 5,000 x 2 = 2,70,000 units = Rs 40,500 fav. Capacity Variance = Rs 1.50 ( 2,97,000 - 2,50,000) 5) Calendar Variance Within 25 days, budgeted production = 2,50,000 units Within 2 more working days, production will increase by = 2,50,000 x 2 = 20,000 units 25 Calendar Variance 6) Efficiency Variance Standard Rate ( Actual Production - Standard Production) Standard production, i.e. number of units which should have been produced if there had been no increase or decrease in efficiency. Budgeted Output Production increased due to increase in capacity Production increased due to 2 more working days Standard Output = = = 2,50,000 units 27,000 units 20,000 units 2,97,000 units = 20,000 units x Rs 1.50 = Rs 30,000 Fav

Efficiency Variance = Rs 1.50 ( 2,82 150 units - 2,97,000)

= Rs 1.50 (-14,850 units) Rs 22,275 unfav Efficiency variance can be calculated as follows; Actual working days Actual man hours per day Actual man hours = 27 x 5,500 Standard output per man hour Actual output per man hour Total loss of output due to inefficiency: Actual man hours x loss of output per hour = 1,48,500 man hours x .1 unit = 14,850 units Efficiency variance = - 14,850 x Standard rate = - 14,850 x Rs 1.50 = Rs 22,275 Unfav Verification Fixed overhead variance Rs 45,725 Fav Rs 45,725 Fav = = Volume variance + Expenditure Variance = Rs 48,225 ( Favourable) - Rs 2,500 ( Unfavourable) Rs 45,725 Fav = Capacity Variance + calendar Variance Rs 22,275 ( Unfavourable) = Rs 48,225 Favourable = Rs 48225 Favourable Illustration 3. S.V.Ltd has furnished you the following data: Budgeted Number of working days Production in units Fixed overheads 31,500. Calculate: i) Efficiency variance ii) Capacity variance iii) Calendar variance iv) Volume variance v) Expenditure variance and vi) Total overhead variance Soln: 25 20,000 30,000 Actual 27 22,000 31,000 + Efficiency Variance + Rs 30,000 ( Favourable) = 27 = 5,500 =1,48,500 = 2 units = 1.9 units

Loss of output or inefficiency per man hour = 2 1.9 = .1 unit

Volume variance -

Rs 48,225 ( Favourable) = Rs 40,500 (Favourable)

Budgeted fixed overhead rate is Re. 1.00 per hour. In july 1998 the actual hours worked were

Budgeted fixed overheads Budgeted fixed overhead rate per hour Therefore, budgeted hours[ Rs 30000 / Re.1] Budgeted production in units Therefore standard time per unit 30,000 20000 Standard rate per unit Budgeted overhead i.e. Budgeted output i) Efficiency Variance

Rs 30,000 Re. 1.00 30,000 hours 20,000 1.50 hours Rs 30,000 20,000 Rs1.50

Standard overhead rate per hour ( Standard hours for actual output Actual hours worked) Re. 1.00 ( 33,000 31,500) = Rs 1,500 favourable ( Standard hours for actual output = 22,000 units@ 1.5 hours = 33,000 hours) ii) Capacity variance Standard rate per hour ( Actual hours worked - Budgeted hours for 27 days) Re 1.00 ( 31,500 - 32,400) = Rs 900 adverse (Budgeted hours for 25 days are 30,000 therefore budgeted hours for 27 days are 32,400 i.e. iii) Calendar variance (Actual working days - Standard working days) 30,000 27 25

Standard Overheads Standard number of days

Rs 1.50 ( 22000 - 20000) = Rs 3000 Favourable Volume variance Standard rate per unit ( Actual output - Standard output) Rs 1.50 ( 22,000 - 20,000) = Rs 3,000 fav Expenditure variance Budgeted overheads - Actual overheads Rs 30000 Rs 31,000 Rs 1000 Adverse iv) Total overhead variance Standard overheads for actual output - Actual overheads Rs 1.50 x 22,000 - Rs 31,000 = Rs 2000 favourable

Illustration 4: A factory operates a system of standard costs for a given four week period budgeted for production of 2,000 units. Actual production was 1,800 units. Costs releating to that period were as under. Standard Fixed Overheads Variable Overheads Semi-variable Overheads 80,000 40,000 15,000 Actual 74,000 38,000 14,700

Semi-variable Overheads are 60% fixed and 40% variable Prepare a variance statement to be presented before the management SOLN: A) Fixed overhead variance 1) Volume variance Actual units x Standard Rate - Budgeted units x Standard Rate = 1,800 x Rs 40 2,000 x Rs 40 = Rs 8,000 Unfav. Standard Rate = Standard Fixed Overheads Standard output 2) Expenditure Variance Budgeted Fixed Overheads - Actual Fixed Overheads = Rs 80,000 - Rs 74,000 = Rs 6,000 Fav. B) Variable Overhead Variance Expenditure Variance Actual units x Standard rate - Actual variable overheads = 1,800 x Rs 20 - Rs 38,000 = Rs 2,000 Unfav. /b/bc/ ( Standard Rate = /f ( Standard Variable Overheads, Standard output) = Rs 40,000 2,000 = Rs 20 = Rs 80,000 2,000 = Rs 40

Semi variable Overhead variance Standard Semi-variable Overheads = Rs15,000

Fixed 60%

= Rs 15,000 60%

= Rs 9,000 = Rs 6,000 = Rs 8,820

Variable 40% = Rs 15,000 40%

Actual Semi-variable Overheads = Rs 14,700 Fixed 60% ( assumed) = Rs 14700 60% Variable 40% ( assumed) = Rs 14700 1) Semi variable volume variance 40% = Rs 5,880

Actual units Standard rate ( Fixed portion) - Budgeted units Standard Rate 1,800 Rs 4.50 - Rs 2,000 Rs 4.50 = Rs 900 Unfav St. Rate = St. Semi variable (Fixed portion) = Rs 9000 St. Output 2) Semi- variable Expenditure variance Budgeted Semi-variable Overheads ( fixed portion) Actual semi-variable Overheads ( fixed portion) 2,000 = Rs 4.50

= Rs 9000 Rs 8,820 = Rs 180 Fav 3). Semi variable expenditure variance ( Variable portion) Actual units Standard Rate - Actual semi-variable expenditure = 1,800 Rs 3 - Rs 5,880 = Rs 480 Unfav. St.Rate = St. Semi variable (Variable portion) = Rs 6000 St. Output 2,000 = Rs 3.00

Variance Statement Standard Overheads for actual output of 1,800 units Fixed Overheads Rs 80,000 1,800 = Rs

Rs 2,000 Variable overheads Rs 40,000 1,800

72,000 36,000 13,500 1,21,500

= Rs 2,000 Semi-variable overheads Rs 15,000 1,800 = Rs 2,000 Total Standard Overheads Variances (A) Fixed overhead variance 1) Volume Rs 8,000 Unfav

2,000 Unfav 2,000 Unfav

2) Expenditure Rs 6,000 Fav (B) Variable Overheads variance -Expenditure ( C ) Semi-Variable Overheads Variance: Fixed: 1) Volume 2) Expenditure 900 Unfav 180 Fav 720 Unfav Variable : Expenditure Actual Overheads 480 Unfav

1,200 Unfav 1,26,700 Unfav

Sales Variances
The analysis of variances will be complete only when the difference between the actual profit and standard profit is fully analysed. It is necessary to make an analysis of sales variance to have a complete analysis of profit because profit is the difference between sales and cost. Thus, in addition to the analysis of cost variances i.e. materials cost variance, labour cost variance, and overheads cost variance, an analysis of sales variances should be made. Sales variances may be calculated in two different ways. These may be computed so as toshow the effect on profit or these may be calculated to show the effect on sales value. the first method of calculating sales variances is profit method of calculating sales variances and the second is known as value method of calculating sales variances. sales variances showing the effect on profit are more meaningful, so these could be calculated first. Profit Method of Calculating Sales Variance The sales variances according to this method can be analysed as:

1)

Total sales margin Variance(TSMV) Actual profit - Budgeted profit or Actual Quantity of sales Actual Profit per unit - Budgeted Quantity of Sales Budgeted Profit per unit

2)

Sales margin variance(SMV) It is that portion of total salesmargin variance which arises due to the number of articlessold being more or less than the budgeted quantity of sales. It is calculated as: St. Profit per unit (Actual quantity of Sales - Budgeted quantity of Sales) Sales margin variance due to the volume can be divided into two parts as given below:

i) ii)

Sales margin variance due to sales mixture Sales margin variance due to sales quantities Sales Margin Variance (SMV) due to Sales mixture (SM) It is that portion of sales margin variance due to volume which arises because of different proportion of actual sales mix. It is taken as the difference between the actual and budgeted quantities of each product of which the sales mixture is composed, valuing the difference of quantities at standard profit. It is calculated as given below: St. profit per unit (Actual quantity of sales Standard proportion for actual sales) or Standard profit Revised Standard profit Sales Margin Variance (SMV) due to Sales Quantities (SQ) It is that portion of sales margin variance due to volume which arises due to the difference between the actual and budgeted quantity sold of each product. It is calculated as: St. profit per unit (Standard proportion for actual sales Budgeted quantity of sales) or Revised Standard Profit - Budgeted Profit. Value Method of Calculating Sales Variances Sales variances calculated according to value method show the effect on sales value and enable the sales manager to know the effect of the various sales efforts on his overall sales value figures. Sales variances according to this method may be as follows:

1)

Sales Value Variance (SVV). It is the difference between the standard value and the Sales Value Variance = Actual value of sales Budgeted Value of Sales 1. Sales Value variance arises due to one or more of the following reasons.

actual value of sales effected during a period. It is calculated as:

i) ii) iii) iv) 2.

Actual selling price may be higher or lower than the standard price. This is Actual quantity of goods sold may be more or less than the budgeted quantity of Actual mix of various varieties sold may differ from the standard mix. This is Revised standard sales quantity may be more or less than the budgeted of sales. Sales Price Variance (SPV) It is that portion of the sales value variance which

expressed in sales price variance. sales. This is expressed in sales volume variance. expressed in sales mix variance This is expressed in sales quantity variance. arises due to the difference between actual price and standard price specified. The formula for calculation of this variance is: Sales Price Variance = Actual Quantity sold ( Actual Price Standard Price) 3. Sales Volume Variance (S. Vol. V.): It is that portion of the sales value variance which arises due to the difference between actual quantity of sales and standard quantity of sales It is calculated as: Sales Volume Variance = St. Price ( Actual Quantity of sales - Budgeted Quantity of sales) Sales volume variance can be divided into two parts as follows: a) Sales Mix Variance(SMV) It is a part of sales volume variance and arises due to the difference in the proportion in which various articles are sold and the standard proportion in which various articles were to be sold. It is calculated as: Sales Mix Variance = St. Value of actual mix St. value of revised St. mix b) b) Sales Quantity Variance (SQV) It is a part of sales volume variance and arises due to the difference between revised standard sales quantity and budgeted sales quantity. It is calculated as: St. Selling Price ( Revised St. Sales Quantity Budgeted sales quantity)

Illustration: From the following particulars calculate all sales variances according to (A) Profit method B) Value Method

Product Quantity X Y Solution units 3,000 2,000

Standard Cost per unit Rs 10 Rs 15 Price per unit Rs 12 Rs 18 Quantity units 3,200 1,600

Actual Cost per unit Rs 10.50 Rs 14.00 Price per unit Rs 13 Rs 17

A) Profit Method 1. Total sales margin Variance = Actual Profit - Budgeted Profit = Rs 12,800 - Rs 12,000 = Rs 800 (F) 2. Sales Margin Variance due to selling price = Actual Qty of sales ( Actual sale price per unit - Budget sales price per cent) X = 3,200 (Rs 13 Rs 12) = Rs 3,200 (F) Y = 1,600 (Rs 17 Rs 18) = Rs 1,600 (A) 1,600 (F) 3. Sales Margin Variance due to volume = Standard profit per unit( Actual Quantity of sales - Budgeted Quantity of sales) X = Rs 2 ( 3,200 3,000) = Rs 400 (F) Y = Rs 3 ( 1,600 2,000) = Rs 1,200 (A) 800 (A) 4. Sales Margin Variance due to sales mix = Standard profit per unit ( Actual Quantity of sales - Standard proportion for actual sales) X = Rs 2 ( 3,200 2,880) Y = Rs 3 ( 1,600 1,920) = Rs 640 (F) = Rs 960 (A) 320 (A) 5. Sales Margin Variance due to sales quantity St. profit per unit (Standard proportion for actual sales Budgeted quantity of sales) X = Rs 2 ( 2,880 3,000) = Rs 240 (A) Y = Rs 3 ( 1,920 2,000) = Rs 240 (A) Rs 480 (A) WORKING Budgeted
Product Qty Price Value Cost profi Total Qty

TABLE

Actual
Pric Value Cost Profit Total Std. pro- Std value Std value

units

profit units

ce

per unit

profit portion for Actual sales 2880 48003 5

of actual Mix 38,400

of revised Std mix 34,560 2880 12

3,000 12

36,000 10

6,000 3,200 13 41,600 10.50 2.50 8,000

2,000 18

36,000 15

6,000 1,600 17 27,200 14.00 3.00 4,800

1,920 48002

28,800

34,560 1920 18

5,000

72,000

12,000 4,800

68,800

5 12,800 4,800

67,200

69,120

B. Value Method Sales Value Variance = Actual value of sales Budgeted Value of Sales = Rs 68,800 Rs 72,000 = Rs 3,200 (A) Sales Price Variance = Actual Quantity of sales ( Actual Price Standard Price) X = 3,200 ( Rs 13 Rs 12) Y = 1,600 (Rs 17 Rs 18) = Rs 3,200 (F) = Rs 1,600 (A) 1,600 (F) Sales Volume Variance = St. Price ( Actual Quantity of sales - Budgeted Quantity of sales) X = Rs 12 (3,200 3000) Y = Rs 18 (1,600 2,000) = Rs 2,400 (F) = Rs 7,200 (A) 4,800 (A) Sales Mix Variance = St. Value of actual mix St. Value of revised St. mix Rs 67,200 Rs 69,120 = Rs 1,920 (A) Sales Quantity Variance sales quantity) X = Rs 12 (2,880 3000) Y = Rs 18 (1,920 2,000) = Rs 1,440 (A) = Rs 1440(A) 2,880 (A) = St. Selling Price ( Revised St. Sales Quantity Budgeted

STANDARD COSTING

Introduction:One of the fundamental functions of management accounting is facilitating managerial control. Management control is the process of evaluating performance and, if, necessary, applying corrected measures so that performance takes place according to plans. Planning is the first prerequisite for making control effective. The major aspect of managerial control is cost control. Hence it is very important to plan and control costs. Standard costing is a technique which helps management to control costs and business operations. it aims at eliminating wastes and increasing efficiency in performance through setting up standards or formulating cost plans. Historical Costing: Cost accounting was initially developed to meet the informational requirements about cost. The financial accounts could provide only a historical data. The ascertainment of cost on the basis of historical information was considered useful in the beginning. Historical costing refers to the ascertainment and recording of actual costs after these have been incurred. The amounts spent on material, labour and overheads are recorded and these expenses totalled together give a figure of cost of providing a particular product. Historical cost accounting is not considered sufficient to supply required information for taking managerial decisions. it is not preceded by planned costs which are a must for effective cost control. The emphasis of management on using cost as control device has brought the emergence of standard costing. The technique of standard costing has been developed because of change in emphasis from cost ascertainment to cost control. Meaning of Standard costing and Standard cost:The word Standard means a bench-mark or yard stick. The standard cost is a predetermined cost which determines in advance what each product or service should cost under given circumstances. In the words of Backer and Jacoben, Standard cost is the amount the firm thinks a product or the operation of a process for a period of time should cost, based on certain assumed conditions of efficiency, economic conditions and other factors. The costing terminology of Chartered Institute of management Accountants, London defines standard costs as a predetermined cost which is calculated from managements standards of efficient operation and the relevant necessary expenditure. They are the predetermined costs on technical estimate of material, labour and overhead for a selected period of time and for a prescribed set of working conditions. A standard cost is a planned cost for a unit of product or service rendered.

The technique of using standard costs for the purpose of cost control is known as standard costing. In the words of Brown and Howard, standard costing may be defined as a technique of cost accounting which compares the standard cost of each product or service with actual cost to determine the efficiency of the operation so that any remedial action may be taken immediately. The terminology of cost accountancy defines standard costing as the preparation and use of standard costs, their comparison with actual costs, and the analysis of variance to their causes, and points of incidence. The standard costing has been defined by the London institute of Cost and works accountants as an estimate cost, prepared in advance of production or supply correlating a technical specification of material, and labour to the price and wage rates estimated for the same period within a prescribed set of working conditions. Standard costing is a system of costing which is designed to find out how much should be the cost of a product under the existing conditions. The actual cost can be ascertained only when production is undertaken. The predetermined cost is compared to the actual cost and a variance between the two enables the management to take necessary corrective measures. Steps involved in standard costing: The technique of standard costing involves the determination of cost beforehand. The cost is based on technical information after considering the impact of current conditions. Cost ascertainment is not based on a guess work. The impact of possible factors on cost is studied before setting the standards. The standards are set as per existing conditions of work. With the change in condition, the standard cost too can be modified so as to make it more realistic. The standards may be divided according to the elements of cost. The standard cost is divided into standards of materials, labour and overheads. The subdivision of standards will be moreuseful for cost control purposes. The actual cost is recorded when incurred. The standard cost is compared to the actual cost. The difference between the costs is known as variance. The variances are calculated element wise. The management can take corrective measures to set things right. From the above discussion it is clear that standard costing involves the following steps.: 1.The determination of standard cost. 2.The recording of actual cost. 3.The comparison between standard cost and actual cost. 4. The finding out of variance.

5.

The reporting of variance so as to find out inefficiency and take necessary

corrective measures. The technique of standard costing is complementary to the ordinary costing system. The standard costs will be of no use if they are not compared with actual costs. The basic purpose of standard costing is to determine efficiency or inefficiency in manufacturing a particular product. This will be possible only if both standard costs and actual costs are given side by side. Though standard costing system will be useful for all types of commercial and industrial undertakings but it will be more useful in those undertakings where production is standardized. It will be of less use in job costing system because every job has different specifications and it will be difficult to determine standard costs for every job. Advantages of Standard Costing Standard costing is a very important managerial tool for cost control. The chief advantages of standard costing are summarized as follows: 1. Standards set provide yardsticks against which actual costs are compared to ascertain efficiency or inefficiency of actual performance. Thus, standard costing helps in exercising cost control and provides information which is helpful in cost reduction 2. Analysis of variances will assist to single out inefficiency and locate persons who are responsible for unfavourable variances. Thus, analysis of variances will fix the responsibility for inefficiencies. 3. The principle of management of exception can be successfully applied by the concerns which follow technique of standard costing. Management has got limited time and it need not burden itself with respect to those activities of the concern which proceed according to standard performance. It is only in case of below or above standard performance that they have to concentrate their attention. 4. Setting standards require detailed study of various operations so that they may be made efficient. This method results in improvements of methods of production of sales, with resultant lower costs. for example setting of standards or labour may require the use of time and motion study, with consequent improvement in the performance of labour. 5. Standard costing provides a valuable guidance to the management in the formulation of price and production policies. It helps management in preparing price lists, planning production of new products and furnishing cost estimates at higher levels. 6. Standard costs and predetermined costs are useful in planning and budgeting.

7. Standard costing makes all the executives cost conscious which increases efficiency and productivity all round. All executives are motivated to achieve the standard performance. 8. Standard costing makes the work of valuation of inventory easier because the inventory is valued at predetermined costs. 9. An effective delegation of authority is possible because top executive may safely delegate responsibility by telling the persons concerned what standard performance they have to achieve. Disadvantages or Limitations of Standard Costing 1. The technique of standard costing may not be applicable in case of small concerns because establishment of standards requires high degree of skill. Thus , fixation of standards may prove costly which a small organization may not afford. For example, fixation of standard time may need a costly process of time and motion study.. 2. For fixing responsibilities, variances should be segregated into controllable and uncontrollable variances because executives can be made responsible for controllable variances which arise from their action. But the division of variances into controllable and uncontrollable variances is a difficult task. 3. The technique of standard costing may not be effective in the industries which deal with non-standardised products and the jobs which change according to customers requirements. In such cases standards are to be frequently revised so as to render them comparable with actual results. 4. It is very difficult to establish standard costs of material, labour and overhead. So sometimes inaccurate and out of date standards are set which do more harm than any benefit as they provide wrong yardsticks. If the standard set is very high, its non achievement results in frustration and a built up of resistance from the employees. On the other hand, if the standard set is very low it will be easily achieved without putting any extra effort.