Standard Costing

 Standard cost :-
 Pre-determined cost
 Based on technical estimate for material labour and overhead for a selected period
 Determine with each product or service should cost under certain circumstances

 Standard Costing :-
 Used in industry where production is repetitive
 Preparation of standard cost and applying them to measure variations from actual
cost
 To maintain maximum efficiency
 Standard cost – Actual cost

 Importance :-
 Determine standard cost
 Measure actual cost to find variance
 To make analysis

 Disadvantages :-
 Require high level of skills
 Revise Continuously

 Variance :-
 Standard Cost – Actual Cost
 Positive – Favourable (F)
 Negative – Unfavourable/ Accrual (A)

 Variance Analysis :-
 Detailed examination of each variance between actual and expected costs.
 Determine why budgeted costs are not met.
 Analyse new product or process

 Material Variances :-
 Material Cost variance
 Material Price variance
 Material Usage variance
 Material Cost variance
 Revised std. Qty.
= Standard cost – Actual cost
= Actual qty (Std. price – Actual price)
= Std. price (Std. qty – Actual qty.)
= Material Price variance + Material Usage variance
= (Total Actual qty. / Total Std. qty.) X std. qty.

 Labour Variances :-
 Labour Cost variance = Standard cost – Actual cost
 Labour Efficiency variance = Std. rate (Std. Hrs – Actual Hrs)
  Labour Rate variance
 Labour Mix variance
 Labour Yield Variance
 Idle Time variance
 Revised std. hrs.
= Actual hrs. (Std. Rate – Actual Rate)
= ( Revised std. hrs. – Actual hrs. ) x Std. hrs
= ( Std hrs. – Revised std. hrs. ) X std. Labour Rate per unit
= Idle Time X STD. rate
= (Total Actual hrs. / Total Std. hrs) X std. hrs.

BUDGETARY CONTROL

 Budget :

Financial statement, prepared to a definite period of time, of policy to be pursued during that
period for the purpose of attaining a given objective.

 An estimate prepared in advance for the period to which it applies.

 Finished products, forward programmes of future operations and expected results.
 Estimated in terms of money or quality.
 Include Objective to attend and policy to pursue

 Objectives:
 Perform evaluation of business activities
 Profit maximization
 Defining responsibilities
 Helps to lower production cost
 Minimum wastage of time, money, energy.

 Limitations:
 Personal bias
 Success depends on workers efficiency
 Leads to restriction on freedom of work
 Budget forecast may be proven wrong by the business situations.

 Budgeting:
 Technique related to formulate, implement and evaluating budget
 Preparation of comprehensive operating and financial plans for specific interval of time

 Objective:
 Future forecasting
 Increase managerial efficiency
 Fixing standards
 Cost control and cost reduction
  Comparative performance evaluation

 Budgetary control:
Establishment of budgets relating the responsibilities of executives to the requirement of a
policy and the continuous comparison of actual with budgeted results, either to secure by an
individual action the objectives of that policy or to provide basis for its revision.

 Types of budgets:

 Based on flexibility:

1. Fixed budget
 Objectives and targets are fixed.
 Established for a specific activity
 Shirt period
 For fixed expenses
 Not adjusted to actual level of activity attained at the time of comparison between adjusted
and actual results

2. Flexible budget:
 Adjustment possible
 Designed to change with fluctuations
 A basis for comparison for any level of activity
 For various level of productions

 Based on sales and marketing

1. Sales budget – Total sales in terms of quantity or money.

2. Selling and distribution budget – Selling and distribution cost for selling no. of quantities
considered in sales budget
3. Advertising cost budget – Intention of incurring advertising cost in to increase the sales by
advertising the product

 Based on production

1. Production budget -
 Forecast of production for budget period
 Production in terms of quantity and money

2. Purchase budget:
 Forecast of quantity and value of direct and indirect material required
 Material budget

 Personnel budget:
 Labour budget
  Indicates the requirement of personnel or labour force either direct or indirect to confirm to
sales forecast and the production of budget

 Financial budget:

1. Cash budget:
 Estimate of expected cash receipts and expected cash payment, whether of revenue or
capital nature: operating or non-operating
 Summary of future cashbook
 Disclose both cash in hand and cash at bank.

2. Capital expenditure budget:

 Plan of proposed investment in fixed assets
 Based on forecast of capital expenditures
 Related to sales production cash budget

3. Research and development budget :

 Related to research and development
 Need prior approval

4. Overhead cost budget - overhead incurred

5. Surplus budget – revenue >expenses during budgeted time.
6. Deficit budget – expenses > revenue during budgeted time
7. Balanced budget – revenue= expenses during budgeted time

8. Master budget – After all functional budgets are prepared individually and are co-ordinated with ach
over, master budget can be incorporating all the above budgets.

 Zero Balance Budgeting:

 Joins planning, budgeting, and review each other.
 Emphasize on rationality of each stern of expense in current budget.
 Each manager has to justify his entire budget request each period in details from scarth.
 Justify aspects of budget taking zero as a base.
 Cash budget
Particulars Jan feb march april

1.Opening bank balance

2.Estimated cash
receipts
1. Cash sales
2. Interest
3. Issue of shares
4. debentures
5. Bank loans
6. Sales of assets

3. Total cash balance

(a+b)

4. Estimated cash
payments

1. Cash purchases
2. Payment to
supplier
3. Wages
4. Manufacturing
expenses
5. Commission
6. Rent, dividends,
taxes
7. Interest on loans
8. Drawings
Total

CLOSING BALANCE

FLEXIBLE BUDGET
 Particulars 50% 60% 80% 100%

Fixed expenditure (A)

1. Management
salaries
2. Rent and taxes
3. Sundry off taxes
4. depreciation
Total

Semi variable expenses

(B)

1. maintenance
2. Indirect labour
3. Selling and
distribution
expenses
4. Salesman salary
Total

Variable expenses
(C)
1. Direct expenses
2. Direct material
3. Direct labour
4. Variable
overheads

Total cost ( A+B+C)

Profit/Loss (e-d)