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By - ANKIT KUMAR JAIN
MEANING OF STANDARD COSTING
• C.I.M.A (London) has defined standard cost as “ a pre-determined cost which is calculated from management‟s standard of efficient operations and the relevant necessary expenditure. It may be used as a basis for determination of prices and cost control through variance analysis”
MEANING AND DEFINATION OF STANDARD COSTING TECHNIQUE According to C.I.M.A (London), standard costing is defined as “ The preparation and use of standard costs, their comparison with actual costs and the analysis of variances to their causes and point of incidence.” Wheldon has defined it in the following words: “ Standard Costing is a method of ascertaining costs whereby statistics are prepared to show (a) The standard cost; (b) the actual cost; and (c) the difference between these costs, which is teremed as variance.”
Objectives of Standard Costing
• To Establish Control.
• To Set Standard for various Elements of cost. • To Fix Responsibility.
• To Make Budgetary Control more Effective.
• Best use of Production capacity. • Ease in Managerial Decisions. • Facilities Budget Formation. • Increase in Profits. 4 . • Facilities Quality Control. • Knowledge of Worker‟s Efficiency. • Detection of Efficient or Idle Centers.Advantages of Standard Costing Technique • Increase in Efficiency. • Helps in Stock Valution. • Best use of Material.
• Necessity of Budgetary Control. • Morale of Employees Lowered. 5 .Limitation of Standard Costing • Determination by the Experts. • Determination of Standard Cost is difficult in this age of inflation. • Unsuitable in some Industries.
It is related to past. It is an actual or incurred cost.Standard v/s Historical Costing Standard Costing It is a predetermined cost. It is an ideal cost. cannot be used for cost control. It is used to ascertain the profit or loss incurred during a particular period. Historical costing It is recorded after production. It is a future cost. it can be used for cost control. It is used for the measurement of operational efficiency of the enterprises. 6 .
past experience. • It is used where standard • It is not accurate as it is based on costing is in operation. • It is used for a specific use i.Standard Cost v/s Estimated Cost Standard Cost Estimated Cost • It is scientifically used & it is a • It is used as statistical data and it regular system based upon is based on lot of guess work. • It is more accurate than estimated cost.e. • Its object is to ascertain „what the • Its object is to ascertain. • It is continuous process of fixing sale price. to maximize. estimation & survey. is not in operation. 7 . costing & take into account all • It is used where standard costing the manufacturing process. „what cost will be‟? the cost should be‟? • Its purpose is planning and • It is used for effective cost ascertainment of cost for fixing control & to take proper action sale price.
Classification of Variances variances Direct Material Variances Direct Labour Variances 8 .
Direct Material Variance Direct Cost Variance (MCV) Material Price Variance (MPV) Material Usage Variance (MUV) Material Mix Variance (MMV) Material Yield Variance (MYV) 9 .
Direct Labour Variance Direct Cost Variance Rate Variance Efficiency Variance Idle Time Variance Mix Variance Yield Variance 10 .
AQM = Actual Quantity Mix. 11 . SQM = Standard Quantity Mix.ABBREVATIVES used in Direct Material Variance SP = Standard Price per unit of material. SY = Standard Yield from actual input. TSC = Total Standard Cost for Actual Output TAC = Total Actual Cost. AP = Actual Price per unit of material. SR = Standard Rate per unit of material. AY = Actual Yield. AQ = Actual Quantity of material used. RSQ = Revised Standard Quantity. SQ = Standard Quantity of material to be used for actual output.
I. London “Material cost variance is the difference between the standard cost of direct materials specified for the output achieved and the actual cost of direct material used. London “Material usage variance is that portion of the material cost variance which is due to the difference between the standard quantity specified and the actual quantity used.According to C.” MPV = ( SP – AP ) * AQ Material Usage Variance .” MCV = ( SP * SQ ) – ( AP * AQ ) or ( TSC – TAC ) TSC = Actual Output * SR Material Price Variance .M..Direct Material Variance Material Cost Variance .I.A.A.M.According to C..According to C.M.I.A.MCV = MPV + MUV 12 . London “Material price variance is that portion of the material cost variance which is due to the difference between the standard price specified and the actual price paid.” MUV = ( SQ – AQ ) * SP Varification ..
of Particular Material Total Std. Qty. When total quantity of materials actually used is equal to the total standard quantity.” Any one of the following situations may be there as regards material mix: 1. London “Mix variance is the portion of the direct material usage variance which is due to the difference between the standard and actual composition of mixture. material mix variance is calculated. First Situation : MMV = ( SQM – AQM ) * SP Second Situation : MMV = ( RSQ – AQ ) * SP RSQ ( Revised Standard Quantity) RSQ = Total Actual Qty. When total quantity of materials actually used is not equal to the total standard quantity. or 3. therefore material mix variance is not to be calculated. When total quantity of materials actually used is not equal to the total standard quantity. as the mixture ratio is same. Qty. Consumed * Std.M. but mixture ratio is same. Material Mix Variance – According to C.A. of all the Materials 13 . and also the mixture ratio differs. 2. but the mixture ratio differs.I. In the first and second cases only.. In the third case.
@ Rs. 20 per kg. 12 per kg. 100 ( F ) Here. 18 per kg.Example 1. @ Rs. @ RS. Material B 65 kg. SQM = Standard Quantity Mix & AQM = Actual Quantity Mix For Material A : ( 50 – 60 ) * Rs. 125 kg. 20 = Rs. 100 ( A ) For Material B : ( 75 – 65 ) * Rs. Actual Mix used was Material A 60 kg. 10 = Rs. (F) means Favorable (+) & (A) means Adverse (-) 14 . Material B 75 kg. 10 per kg. @ Rs. 125 kg. SolutionMMV = ( SQM – AQM ) * SP Here. 200 ( F ) Rs.Calculate Material Mix Variance Standard Mix for one Unit of product „X‟ is: Material A 50 kg.
@ Rs.Calculate Material Mix Variance Standard Mix for one unit of Product „X‟ is : Material A 50 kg. 12 per kg. RSQ for Material B = 130 kg * 75/125 = 78 kg. Qty. 125 kg. Qty. of Particular Material Total Std. 160 (F) 15 Rs. Actual Mix used was : Material A 60 kg. 130 kg. 80 (F) . @ Rs. 10 = Rs. 20 = Rs. 18 per kg.Example 2 . In such case RSQ will be calculated as follows: MMV = ( RSQ – AQ ) * SP RSQ = Total Actual Qty. of all the Material RSQ for Material A = 130 kg * 50/125 = 52 kg. 10 per kg. Consumed * Std. @ Rs. Material B 70 kg. Material B 75 kg. 20 per kg. MMV for Material A = ( 52 – 60 ) * Rs. 80 (A) MMV for Material B = ( 78 – 70 ) * Rs. Solution – Here actual used (130 kg) & standard Mix (125 kg) are different also the actual mix ratio (6:7) differs from the standard mix ratio (2:3). @ Rs.
Total quantity of material consumed and standard quantity are not equal. MSUV = ( SQ – RSQ ) * SP 16 . This variance is also known Material Revised Usage Variance or Material Quantity Variance. When these quantities are given. Total quantity of material consumed and standard quantity are not equal. 2. but mix ratios are equal. this variance will be the same as material yield variance. There can be two possibilities : 1. there may arise material sub-usage variance. It should be noted that material sub-usage variance is calculated only when quantity of wastage or output is not given. but mix ratios are also different. Material Sub-usage Variance – When a product is produced from a mixture of two or more kinds of material.
London “Material yield variance is that portion of direct material usage variance which is due to the difference between the standard yield and the actual yield obtained” MYV = ( AY – SY ) * SR SR = Total cost of Standard Mix Net Standard Output Verification : MUV = MMV + MYV MUV = MMV + MSUV MCV = MPV + MMV + MYV 17 .A.I.M.. Material Yield Variance – According to C.
300 kg. @ Rs.3 Calculate Material Sub-usage Variance : Standard Mix Material A 100 kg. Actual Mix 120 kg. 100 (A) MSUV for Material B = ( 150 – 180 ) * Rs. @ Rs. but material mix ratio ( 2 : 3 ) is same. 250 kg. Therefore. MSUV for Material A = ( 100 – 120 ) * Rs. 300 (A) Rs. 5 = Rs. Therefore. 18 . 10 per kg. RSQ for each material has been calculated as follows : Material Sub-Usage Variance = ( SQ – RSQ ) * SP RSQ = Total Actual Mix * Particular Standard Mix Material / Total Standard Mix RSQ for Material A = 300 * 100 / 250 = 120 kg RSQ for Material B = 300 * 150 / 250 = 180 kg AQ and RSQ of each material is same. Material B 150 kg. 10 = Rs. Solution – Here total of standard mix (250 kg) and actual mix (300 kg) are different. 180 kg. 7 per kg. 400 (A) Some authors use AQ in place of RSQ in the above formulate because RSQ and AQ are equal. @ Rs. 9 per kg.Example. 5 per kg. @ Rs.
TAC = Rs. 4 Material Y 400 kgs. @ Rs. 4800(given) 19 .Example 4 – Calculate Material Variance from the following details availableStandard Actual for 10 Mixes Material X 40 kgs. @ Rs.First of all standards will be set for 10 mixes as follows : Standard for 10 Mixes Actual for 10 Mixes Material X : 40 * 10 * 6 = Rs 2400 600 * 4 = Rs 2400 Material Y : 60 * 10 * 4 = Rs 2400 400 * 6 = Rs 2400 Total 1000 kgs Rs 4800 1000 kgs Rs 4800 Loss 200 kgs 300 kgs Output 800 kgs 700 kgs (i) Calculation of Material Cost Variance (MCV) : MCV = TSC – TAC TSC = Actual Output * SR SR = Total Cost of Standard Mix / Net Standard output SR = 4800/800 = Rs. 4 Material Y 60 kgs. 6 per unit. TSC = 700 * 6 = Rs. 6 Material X 600 kgs. @ Rs. 6 Process Loss 20% Process Loss 30% Solution . @ Rs. 4200.
1. 500 (F) Rs. 4. 1.500 (A) MUV for Material Y = ( 525 – 400 ) * 4 = Rs.200 – Rs. 800 (A) Rs. 4.800 ) = Rs. SQ = Standard Particular Material Mix / Standard Output * Actual Output SQ for actual output for material X = 400 / 800 * 700 = 350 kgs SQ for actual output for material Y = 600 / 800 * 700 = 525 kgs MUV for Material X = ( 350 – 600 ) * 6 = Rs. 1. 600 (A) (ii) Calculation of Material Price Variance (MPV) MPV = ( SP – AP ) * AQ MPV for Material X = ( 6 – 4 ) * 600 = Rs. 400 (F) (iii) Calculation of Material Usage Variance (MUV) MUV = ( SQ – AQ ) * SP Here.000 (A) 20 .200 (F) MPV for Material Y = ( 4 – 6 ) * 400 = Rs.MCV = ( Rs.
(iv) Calculation of Material Mix Variance (MMV) MMV = ( SQM – AQM ) * SP MMV for Material X = ( 400 – 600 ) * 6 = Rs. 800 (F) Rs.200 (A) MMV for Material Y = ( 600 – 400 ) * 4 = Rs. 1. 400 (A) (v) Calculation of Material Yield Variance (MYV) MYV = ( AY – SY ) * SR MYV = ( 700 – 800 ) * 6 = 600 (A) Verification : MCV = MPV + MMV + MYV 600 (A) = 400 (F) + 400 (A) + 600 (A) 21 .
Actual time means hours obtained on subtracting abnormal idle-time hours from labour hours actually paid for. 22 . London.” LRV = ( Standard rate per hour – Actual rate per hour ) Labour Efficiency Variance . “Labour Rate Variance is that portion of labour cost variance which is due to the difference between standard rate specified and actual rate paid. etc.According to C. Labour Usage Variance.I.M. London.Direct Labour Variance Labour Cost Variance . “Labour Efficiency Variance is that portion of labour cost variance which is due to the difference between standard labour hours for output achieved and actual labour hours spent. London.According to C.M. Labour Spending Variance. “Labour Cost Variance is the difference between standard cost of labour specified and actual cost of labour employed.M. LEV = ( Standard Time – Actual Time ) * Standard rate per hour Here.I.A.I.A.” it is also known as Labour Time Variance. Labour Quantity Variance.” LCV = ( Total Standard Labour Cost – Total Actual Labour Cost ) Labour Rate Variance – According to C.A.
This idle time is possible due to many reasons. yield from Std.Labour Idle Time Variance – Idle time variance is that portion of labour cost which arises due to abnormal idle time of the workers specified. LITV = ( Abnormal Idle Time * Standard rate per hour ) Varification .LCV = LRV + LEV + LITV Labour Yield Variance . mix Total standard time Standard rate per unit = Std. etc. LYV = ( Actual Yield – Standard Yield ) * Standard rate per unit Here. workers sitting free because of machine break-down. power failure. mix 23 . cost of standard mix / Std. Standard Yield = Total actual time * Std. it should be noted that this variance always shows adverse position.When the actual yield is less or more than the standard yield. such as. yield from Std. it gives rise to labour yield variance.
yield from Std.000 units Actual production (AY) = 4. Solution . actual hours during the month 180.000 hours * 4.000 180 * 140 = 25.000 units less standard loss 20%.600 units SR = Standard cost of standard mix / Standard yield from standard mix 24 .000 units – 20% (1.200 Total 300 60. of workers Total Hr Actual hour No.000 units / 60.200 units. 1 per hour 140 workers Budgeted hours for one month 200. 3 per hour 160 workers Unskilled 120 workers @ Rs.000 300 54.000 Labour Yield Variance = ( AY – SY ) * SR per unit Standard Yield (SY) = Total actual time * Std.000) = 4. of worker Total Hr Skilled 200 * 180 = 36.Example – 5 Calculate Labour Yield Variance from the following details : Standard Actual Skilled 180 workers @ Rs.200 units Calculation of Standard Hours Calculation of Actual Hours Budgeted hours No. Actual production 4.000 180 * 160 = 28. mix Total standard time SY = 54.000 hours = 3. Budgeted production 5.Standard production (yield) = 5.800 Unskilled 200 * 120 = 24.
1 = Rs. 33 = Rs.32. 19.32.000 hours * Rs.000 Total = Rs.800 (F) 25 .000 hours * Rs.000 = Rs.08.000 Unskilled workers = 24. 3 = Rs.200 – 3.000 SR = Rs.000 / 4.600 ) * Rs. 24. 1. 33 LYV = ( 4. 1.Standard Wages : Skilled workers = 36. 1.
unskilled. Labour Mix Variance . rate per hour. ) Thus. 2. a standard mix ratio is specified for various type of workers. children. RST ( Revised Standard Time ) RST = Total actual time * Standard time of particular labour Total standard time of all the labour 26 . First Situation LMV = ( Standard time mix – Actual time mix ) * Std. women.Different types of workers are generally required in a production. When the totals of standard labour mix and actual labour mix are same but the two mix ratios are different. etc. When the totals of standard labour mix and actual labour mix are different but the two mix ratios are also different. skilled. etc. It can be calculated in following two situations : 1. When the totals of standard labour mix and actual labour mix are different but the two mix ratios are same. labour mix variance arises. men. e.. But in actual practice it is not possible to follow this standard because of some difficulties ( such as non-availability of desired type of workers.g. Second Situation LMV = ( RST – Actual Time ) * Standard rate per hour Here. there will be no labour mix variance. keeping in view the production efficiency of the factory and to control the labour cost. It is also known as Gang Composition Variance.
000 Hours As the total of standard labour time mix (15. The other details are as follows .000 (A) LMV for Grade B workers = ( 10.000 hours) is same. rate per hour LMV for Grade A workers = ( 5.Example 6 – The budget of labour hours for the week ending June 30. 1 per hour 180 workers @ Rs.000 (F) Total = Rs.000 ) * Rs.000 Hours 15. Standard Actual Grade A 100 workers @ Rs.000 Hours 180 * 50 = 9.000 (A) 27 . 2.000 – 6. therefore situation first is applicable Labour Mix Variance = ( Standard time mix – Actual time mix ) * Std.000 Hours 120 * 50 = 6.000 – 9. 1. 3 per hour 120 workers @ Rs. but standard labour mix ratio (1 : 2) and actual labour mix ratio (2 : 3) are different.000 Hours Total 15.000 ) * Rs. 2011 is of 50 hours.50 per hour The actual production is for 50 hours during the week.000 Hours Grade B workers 200 * 50 = 10. 1. 1 = Rs. Solution Calculation of Standard Time Calculation of Actual Time Grade A workers 100 * 50 = 5.000 hours) and actual labour time mix (15. 3. 3 = Rs.50 per hour Grade B 200 workers @ Rs. Calculate Labour Mix Variance. 2.
500 (F) Total = Rs. 1.000 Hours 16.000 (A) 28 .000 = 5.000 = 11. SolutionCalculation of Standard Time Calculation of Actual Time Grade A workers 100 * 50 = 5.Example – 7 In above Example No.500 hours) are different. 3 = Rs. 1.000 Hours 210 * 50 = 10.000 Hours 120 * 50 = 6.000 / 15.500 * 5.500 Hours Total 15.500 (A) LMV for Grade B workers = ( 11.000 / 15.000 Hours Grade B workers 200 * 50 = 10. then calculate labour mix variance.500 – 6.500 ) * Rs.000 ) * Rs.000 hours) and actual labour time mix (16.000 – 10. 1 = Rs. 6 let assumed that the actual number of grade B workers is 210 in place of 180.500 Hours As the totals of standard labour time mix (15. and standard labour mix ratio (1 : 2) and actual labour mix ratio (60 : 105) are also different.500 hours RST for Grade B workers = 16. therefore second situation applicable Labour Mix Variance = ( RST – AT ) * SR RST = Total actual time * Standard time of particular labour Total standard time of all the labour RST for Grade A workers = 16.000 hours LMV for Grade A workers = ( 5.500 * 10.
6 = Rs. 35 (A) 29 . 7 = Rs. 5 (A) (iii) Labour Efficiency Variance = ( Standard time – Actual time ) * SR per hour LEV for A = ( 20 hours – 27 hours ) * Rs. Solution – (i) Labour Cost Variance = Total Standard labour Cost – Total Actual Labour Cost LCV = ( Rs. 200 – Rs. 270 ) = Rs. 3 – Rs. 120 Workman B : 20 hours @ Rs. 200 55 hours Rs. 14 (A) Rs. 70 (A) (ii) Labour Rate Variance = ( Std. 3 = Rs. 4 = Rs. 150 40 hours Rs. 21 (A) LEV for B = ( 20 hours – 22 hours ) * Rs. 270 In actual production. rate per hr – Actual rate per hr ) * Actual time LRV for A = ( Rs. 7 = Rs. 3 hours (included in above) have been lost on account of machine breakdown. 7 – Rs. 30 (A) LRV for B = ( Rs. 60 30 hours @ Rs. 4 ) * 30 hours = Rs.Example – 8 Calculate Direct Labour Variance from the following : Standard Actual Workman A : 20 hours @ Rs. 6 ) * 25 hours = Rs. 3 = Rs. 25 (F) Rs. 140 25 hours @ Rs.
30 (A) 30 . 35 (A) + Rs. 70 (A) = Rs. 7 per hour = Rs.(iv) Labour Idle time Variance = Idle time * Standard Rate per hour LITV for A = 3hours * Rs. 3 per hour = Rs. 9 (A) LITV for B = 3 hours * Rs. 5 (A) + Rs. 30 (A) Verification – Labour Cost Variance = Labour rate Variance + Labour Efficiency Variance + Labour Idle time Variance Rs. 21 (A) Rs.
Kansbahal 31 .Module I Faculty: J. IIPM-School of Management.Rai.
IIPM-School of Management.Rai. Kansbahal 32 .Module I Faculty: J.
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