under (a) Partial Plan, (b) Single Pian and () Dual Plan Disposition of Cost Variances | Advantages of Std Costing |. Disadvantages of Std Costing 5. Standard Costing & Budgetary Control - retationship ‘operating cost calculated from Management's standards of efficient operation ang ‘unit cost of the product, component or service produced in a period. it ‘of material and labour expected to be used, (b) prices expected to be paki for materials and a year, and (c) Factory Expenses applicable to production based on good performance and eek abour nwolved n determining al cots by reference to source documents (our ob Cards, ec. substan i from to perlod and are of ite use In decision-making, The unit costs sar Ga day and reo ro use He sas deprtnent in seting Sting Prices. sts ‘ok known until after the completion of @ month or even a longer period. But in to be calculated even before the production begins. Historical Costs do not of efficiency, Standard Costs are well suited Be ted ty Tim ae tee wercaerat Scanned with CamScanner— Paduka's Students’ Handbook on Cost and Management Accounting - For CA Inter 13.1.3 Uses of Standard Costs a: —— ‘Stancard Costs are used in the following applications '& Control: Standards provide a benchmark, which serve two purposes ~ shows fore Pricing Decisions: Standard Costs faiitate pricing decisions as also for decisions Involving submis responding to tenders, et. since cost is pre-determined based on acceptable standards of effiency. °" % Witten, 3. Variance Analysis: Identification and measurement of variances from standards Is possible with Cost, with a view to improve performance or to revise the standards, wherever applicable, Ue oF tant 4 Management by Exception: By analysing the variances, the decision-maker can focus On signifant Standards and take corrective action. Managers can concentrate on crteal areas of activy waa ea fen eran 9, reported. Hence Standard Costs faciltate control by exception. Inventory Valuation: Standard Costs are used to value Inventory, where actual gures are not avaiable Rare a ee, moet Cat forthe Responatity Carre, Cre sa, te 6. ‘ensure that Actual Costs do not exceed the Standards / Targets set. r budgeting and performance evaluation. Variances can ty 7. Performance Evaluation: Standard Costs are useful for traced to the concemed Manager / Person / Responsibility Centre. 18.1.4 Standard Costing - Meaning and Steps 1._Definition: Standard Costing is — (@) 2 method of costing to measure the performance of an activity by ~ (i) comparing Standard (ans of Vaancs(Deviatons), and (i) reporting of Varancs fr tment cas moo Sa oy (©) 2 control technique that reports variar 7 = 2 by comparing actual costs to pre-set standards, and facitting acen 2 Steps: Standard Costing involves the following steps — (2) Setting up of Standards, (0) Ascertainment of Actual Costs, (©) Comparison of Actual and Standard costs to determine Variances, {2 Investigation of Variances and taking appropiate action thereon wherever necessary, and (©) Dspostion ot Variances suaby by anse to Costing PAL Arby absogion to eput 26 equred 2 Scanned with CamScannerclassification of Standards 4 nature of operating | Time period to | 13.2 Setting'tip Standards = conditions | Which they relate | _‘TYPe of Cost se ‘© Material Cost Physical (Quantity or «Ideal Standards |* Basle Standards | standards Time) Standards + Normal Standards | * a oe + Labour Cost Standards | « Monetary (Price or . OH Cost Standards Rate) Standards _ Ideal Standards Normal Standards ] “These represent the level of performance attainable with the “best” or ideal set-up, i.e. best quality materials at favourable prices, highly skilled labour, best equipment & layout. These represent the level of performance | attainable under normal operating conditions, 9. normal efficiency, normal sales / production volume, etc. These standards focus on the maximum efficiency in utilisation of resources, i.e. maximum output with minimum cost. These anda as one practical stainable | efficiency, after considering normal imperfections, ie. optimisation (not minimisation) of cost per unit. These ore peraralinigk SuDRDIG a90 eno® such standards may not be taken: eerie. Ses Gao oa tar cae change from one period to another ‘Current Standards get revised from period to period. | ‘They are necessarily set on a short-term basis. ‘These are the costs, which the business will | incur if the anticipated prices are paid for the and services and the usage corresponds to believed to be necessary to produce the | planned output. Generally used alt “Tor ‘range of eee ‘These costs relate to a base year, Which is chosen ‘are used, When Basic Standards are used, Variances are Scanned with CamScannereats Studer’ Handbook on Cost and Management Accounting For CA Ine ' —— Procedure Express the Actual Cost as a percentage of Basic Cost ———— 6 ‘Gurren percentage of Basic Cost ——_— - Express the Current Cost a8 @ from Current Standards, 3_| Compare the two percentages to find out the extent of deviation a ‘4 | Compare the above percentages with those of the prevous periods to establish the Wend of ual ang a __| standard from Basie Cost. $$ 13.2.5 Monetary / Financial Standards — 1. Meaning: These are standards, which relate to monetary factors of cost, |.e. Material Prices, Wage Rates, Overy Expenditure, etc. These are also called Monetary Standards. 2. Bases: The price or rate standards can be set on either of the following bases ~ (@) Actual Average or Mean Price expected to prevail during the coming period, say one year, or (0) Normal Prices expected to prevail during a cycle of seasons, which may be of a number of years, 13.2.6 Non-Monetary / Physical Standards 1. Meaning: (2) Physical Standards, which relate to Material Consumption Quantity, Labour Processing Time, et, may also be cae ‘Standards. () These are expressed in quantities or physical measure, e.g. material quantity in kilograms or litres, labour hours in ‘units of time, hours of plant capacity, units of output, etc. (€) These are generally constant over a long period of time, unless there is a significant change in producton j, methods of work, etc. (@) Physical Standards of manufacturing activities refer to — (I) Specifications of products and materials, (i) Method ot manufacture, (iii) Equipment to be used. (©) Physical Standards require dose co-operation and co-ordination between Engineering and Costing Departments. Purposes: The purposes of setting Physical Standards are ~ (2) To lay down expectations as regards the nature, type and quality of material required for production (0) To determine the average normal time required for completing the product (©) To secure economies in manufacture, and (@) To make it possible to estimate the cost and set selling prices in advance. Scanned with CamScannerLS senatt iit on standard Costing roan 8 ic p in setting Physical Standards = ae ry from dusty to Industry. Some diities are ‘a When new products are manufactured for ut accurately determ ‘sale, material quality 5 i ee his creates a problem of setting material con’ becaul ry to make adjustment for the inexperience of new workers: yy: Improvements in technology may necessitate imation of levable Installation of new machines, for which esti at eictency oak Pontie, wel ater te ore wen the wornng condo’ ore andards for such machines and estimating the Standard Costs will need considerable a" rovement: Changes and aa’ retuct Imerv“nlso, Manufacturers mers mde he esting poh twat et = spent (0) mao ‘standards (b) methods of work, ie. use of ner tools, oe = sorements, etc (€) labour hours aren | quality: Standards of material specications are es, pei, re rot avalable 36 Per quality esate! bed on carn asamp 1 ate. ee materials ut be ropa — ee The knpect ished output methods of work: There may be various ways in which the materials processed into fin waning mer methods of work have diferent material requirements, epic Rime, machine operating tme, eS cessed by grinding ether 12-m are or 13-mm bars. The problem sets & Oar iS a nd how to determine the maximum amount of materi that wil be alowed fora i of roc of setting Physical Standards: Physical Standards may be set by reference to - (a) Ideal Basis, (b) Practical sting res pass, General, te Prctal Base. Aaable Goed Performance) shoud be vse 94.8 and labour skill ‘sumption rates oo ech 0108 Classification: Detailed list of each class of product to be manufactured are prepares, of Materials: Specifications and quality of materials to be used inthe standard products are finalised. of Bill of Materiats (BOM): A Bil of Materials for each product or part showing the symbol or code ‘and quantity of each material to be used is prepared. Runs: Sample or Test Rune under regulated conations may belusefl In-satting quantity standards, in 9 manner. aey: aterol Prone are Bape ca mmnReoer meter Gatanal cr ory nel eter en wns te an tuner toa Pacis pacman, wom ls mncwiedee of caren market condRions and Wale coc i ae te prc fox varius ra materia WAP reasonable SE=UrECY, dn the follwing factors tera ice Standards ore ganeray based cf materials on hand and the prices at which they are hel have already been placed, Scanned with CamScanner13.2.11 Labour Time Standards ‘Labour Quantity Standards are set in the following manner ~ 1, Standardisation of Products: Detailed specications, blueprints, estimates for ‘alongwith their designs are settied, after proper analysis. 2. Labour Specification: For each product, the types (grades) of labour and time ‘Past experience, current methods and normal loss of time, ‘3. Standardisation of methods: This involves selection of right type of, (of processing (praper sequence) and methods of operations. | Motion Study: These studies are conducted for selecting the med by workers, & the standard time which an average worker 1 Standard Wage Rates may beset for various grades of labour, including ap 72 Labour Rate Standards are set after considering factors like ~ (2) Time taken to complete one unit of output / service, ath (©) Prevaling Wage Rates inthe Industry / Geographical Area of Operation, (© Contract Rates where Agreements with Workers’ Unions exist, - @) Relevant Law in the area of operation, e.g. Minimum Wages, Bonus, etc, vs | Overhead Time / Q Standards Scanned with CamScannersification of OH: Overheads are categorised into Fixed and Variable categories. SemiVarlable Expenses are sted into Fixed and Variable separation of Budgets: Overhead Expenditure Budgets are prepared for Ped and Variable expenses. Flexbie | Prepac: may be prepared to estimate OH at various levels of activity ion Rates: These rates are determined for the computation of costs and the variances thereof. Such rates pee nd either by Traditional Absorption Costing, or. Activity Based Costing. 2.15 Standard Hour ere several products are manufactured, it may be difficult to establish a common basis to measure output of the rows cepartments due to differences in volume of individual products, quality, axe In such cases, the concept of "Standard Hour” is used. Standard Hour is a hypothetical hour, which measures jmount of work that should be performed in 1 hour. The Standard Hour 's thus @ unit of work and not of tine Standard time per unit of output | Actual Quantity produced | Output expressed in Std. Hours 12 minutes per kg 100 kg 100 « 2 = 20 hours 18 minutes per litre 60 litres 60x 28 18 hours @ 30 minutes per kg 250 kgs 250% B= 125 hows | 24 minutes per kg 150 kgs 150 24 = 6ohours I Total 223 hours _ 13.3 Variance Computation _ = og .1 Meaning of Variances Variance = Expected / Standard Cost Less Actual Cos. Variance = Expected / Budgeted Sales Less Actual Sales. Classification of Variances iia Ey | ee Sas ne et | (a) Variances of Efficiency, (b) Variances of Price, and (¢) Variances of Volume, (@) Favourable, and (b) Adverse, (2) Controllable, and (b) Non-Controlab (a) Material, (b) Labour, and (@) Overheads. Scanned with CamScanner= Padhuka’s Stusients’ Handbook on Cost and Management Accounting ~ For CA _____ 13.3.3 Variances of Efficiency, Price and Volume ariance of Eficlency: These arse due to efficency oF neficency in the usage of mattis or abour 1 “scence ciel ganesh sandr aun aa bar was a Te allowances for surplus material and labour cost. ‘Pecig 2 Nariance of Price/Rates: These include variances resulting from changes in unit material prices, ‘Standard F rou toes and standard allowance for Indrest Coss, Mito 3 sures he he anda wes a en tf err betwen cl ya he tf cg, ‘assumed when the standard was set, ‘The following table the different types of variances under each element of cost — Elements of Cost Variance of Efficiency Variance of Price Variance of Volume ~) Materials Usage, Mixture, Yield Price Revision Labour Efficiency, Idle Time Rate of Pay Variable Overhead Efficiency Expenditure _| Revision Fixed Overhead Efficiency Expenditure Capacity, Calendar Sales Quantity, Mure Price shia 13.3.4 Favourable vs Adverse Variances Adverse Variance Variances which lead to an decrease in 1 alled Adverse or Pm ae) Favourable Variances aise when = - interval Verano. (2) Actual Cost > Standard Cost, or (b) Actual Sales < Budgeted Sales, or |! | Negative Cost Variance and Posiive Soiss Veloce’ Variances. Adverse Variances are debited to the PAL Account. These are denoted by "A (or) "Adv" (or) *U", Scanned with CamScannerEra “AQ AP | @| : a m3) wns 2 ae REP MO nS = ma 5-0-9 @ AQ « SP - AQ)» BB Material Usage Variance + Material Price Variance b/fé 25 Material Wield Variance + tera Mix arance + patel price Vorance| } | ‘quantity Material Purchase Price Variance. It is computed 2s — MPPV = PQ x SP-PQ« AP more materials are in use, Revised Actual Quantity (RAQ) is computed for determining Material Yiels Variances. quantity, rewritten in Standard represents actual material consumption es, it may also be referred to as Revised Standard Quantity (RSQ). However, in this Book, Scanned with CamScannerPediat Stuer’ andbook on Cost and Management Accounting ~ For CA Inter —<—e ed Actual Hours (RAH) is computed for Note: ‘When two or more grades of Labour are employed, ctu hours worked, resrtea Wi gugeay ‘is Book, ne Labour Sub-Efficiency and Latour Mix Variances. RAM represents , Proportion. Sometimes, it may also be referred to as Revised Star ‘uniformly adopted. ridard Hours (RSH). However, in Net AM x SR 2) | | Grade a | Grade 8, ete. (Tota wail WN 2 WN3 Differences =F aoe —— Labour Net Efficiency Variance + Labour Tdle Time Variance + Latour Rate SH SR=NetAH x SR = Net AH x SR ~ Total AH x =AH Net: aboar —— SR =A SB Ate Time | Variance ts Labour Gross Emiiency Variance + "Labour Rate Vrlance b/d s above always = SH x SR Total AH « SR Adverse. re Total Labour Cost Variance = Standar ‘Meaning of Terms / Abbreviations used: 1 Expected time for actual output ~= Actual Hours re-written in standard proportion, 18.8.8 Variable Overhead Cost Variances (on Based on AOXSR |" SOXxSR | “AO saan IG ee a ONE acl: 3, we get AP as balancing ure 2. Computation of Labour Cost Variances 4150 hgas =415 units FG. Gol. (4): Std Cost = SH x SR Col. (2): AH x SR Col. (3): AH x AR ‘SH = bal-fig, SR=given ‘AH=bal,ig, SR=alven ‘AH from Col 2, (2075 hrs x 78 ph = @ 16,600 (2,120 hrs x %8 ph= % 16,960 2,120 brs (ie Actual Cost € 16,324 + LCV 2276 F)_| (Ve. Actual Cost & 16,324 + LRV % 636 F) =t ee _— Labour Efficiency Variance = ® 360 A (given) + Labour Rate Variance = € 636 ( ee ee Total Labour Cost Variance (given) = ¢ 360A + 7636 F = € 276 F (Note: 1. Putting @ 16,600 in Col. 1, we get SH as balancing figure. 2. Since SH = 2,075, Actual Output of FG= 2075 MS -425 units FG, 3, Putting 16,960 in Col. 2, we get AH as balancing fig, and taking this AH to Col, 3, we get A ig oe over) = 820750 (from Lab.) 2,120 hrs x | (AFOH & 19,600 + FOH Exp. os ME Variance ® 400 F) = % 20,000 Carer —— Scanned with CamScanner= Standard Costing AO = 418 units | 7. Labour Hours Alowed SH = 2075 bes AP = 0165 8. Amount of Prodn OH Incurred = AFOH = ¢ 19,600 AQ = 3,900 uts | 9. Amount of Prodn OM Absorbed = Std FOH = % 20,750 ‘SQ = 4,150 uts | 10, Production OM Capacity Variance ?1,200F AR = &7.70 11, Production OM Efficiency Variance T4504 AM = 2,120 hrs | 12. Budgeted Output Units = % 20,000 + % 50=400 units FOH Variances ~ Reverse Working 95 Feystem of standard costing n respect of one of its product which is manufactured within » single cost conte, ntormation is available, duct, the Standard Material Input is 20 litres at a Standard Price of © 2 per litre. The Standard Wage Rate hours are allowed in which to produce one unit. Fixed Production Overhead is absorbed atthe rate of Cost. ‘ended, the following occurred ~ ©4.95 per litre 2 1,56,000 2 1,58,000 Col. (3): AN x AR ‘AH from Col 2, AR: 25,040 hes x @ = € 1,56, 000 (given) Scanned with CamScanner‘Scanned with CamScanner> Particulars | 15,000 kg. @ € 4.10 per kg (Materials used: 3,500 ig.) 4,700 hours @ 9 Total = 1/800 Direct Labour Hours for operation at the monthly activity level used to eat the Fixed GH ) Standard and Actual Cost of Production, " a ee (f Variable Overhead Efficiency Variance, | (g) Fixed Overhead Expenditure Variance, (h) Fixed Overhead Volume Variance, | () Fixed Overhead Capacity Varian, [Expenditure Variance, 0} Fined Overhead EmcteneyVarencs, | 1. Computation of Material Cost Variances ssn ais xSP Col. (2): AQ x SP Col. (3): AQ * AP K24 = 712,000 | 3,500 kg x % 4 = & 14,000 3,500 kg * 2 4.10 ¥ 12,000 = € 14,000 = £2,000 + ‘Total Material Cost Variance 143 Price Variance = Purchase Qlty x (Std Price — Actual Price) = 2. Comy 5,000 = (% 4—% 4.10) = % sag ady. of Labour Cost Variances es xSR Col. (2): AH x SR Col. (3): AH x AR 10 = 18,000 1,700 hours x 210 = 7 17,000 | 1,700 hours x 29 = % 15,300 = % 18,000 -% 17,000 = % 1,000F + Rate Variance = & 17,000 - & 15,300 = 1.7005 Total Labour Cost Variance = ¢ 18,000 -® 15 : 3. Com N of VOH Cost Variances : SH x SR Col. (2): AH x SR x%1=% 1,800 1,700 hrs x 1 = 21,700 VOH Variance + = %1,800-% 1,700 = 100 F 4. Computation of FOH Cost Variances Col. (2): Total AHxSR Col. (3): BFOH 1,700 hrs x & 0,50 1,800 hours x 80.50 = % 850 =%900 Variance Sessa crenead 850 = & 50 F * Capacity Variance FON Volume Variance = €50 = 50 it “eas ee ‘Total FOH Cost Variance = Ni — 13.51 ; Scanned with CamScannerfs Handbook on Cost and Management Accounting ~ For CA Inter ‘Standard Cost: 600 units at © 54.50 pu Effect of Variances: ‘Materia Usage ‘Material Purchase Price (since RM Stock Is valued at Std Cost) 5, Reconciliation of Standard and Actual Costs Particulars: ™ ‘Total of Variances [Reta Cost: Given 38,600 less RM Stock at Std Cost: 1,500 kg » ® 4/kg 6,000 Question Define the term Standard Cost. Is ithe same as Estimated Gost? NSZ ee ‘Outline the need and importance of Standard Costs. - Compare and Contrast between Historical Costs and Standard Coss in Decisio What are the uses of Standard Costs? Bring out the need for Standard Costs, Define the term Standard Costing and outline the steps involved therein. ‘Wat are the p ‘steps prior to the installation of a Standard Costing What are the areas or aspects wherein expectations or standards are laid down? How are Standards classified? Distinguish between ideal and Normal Standards. D between Basic and Current Standards. 10. How are variances analysed when Basic Standards are used? ‘11._Write a brit note on Price or Rate standards, _ | 42. Outline the meaning of Physical Standards. What are its purposes? 43. What are the bases of fixing Physical Standards? _ 1 What are the problems faced while setting physical standards? _ | 15. Outline the procedure for setting Material Quantity Standards. | 16. Outline the procedure for fixing Material Price Standards. Outline the procedure for setting Physical Standards in Labour, Outline the procedure for fixing Labour Rate Standards, 419. Oistine the procedure for fing Overhead Time / Quantity Standards 29, Outline the procedure for fixing Overhead Expense Standards. 1. Wie a bret note on the term Standard Hour, N75,N15 NT4N 15, ETETEVEIETEIEIEIEIEIE & Ee EERIE EIEE Scanned with CamScannertation of Fixed Overhead Cost Variances, co ation of Sale Variances, 80 ip between Soles Varian under Tt and Maryn Apprch, iret type of AECOuntng or Standard Cae? vand Single Plan yn Partial Plan and Plan. under Partial and Single Plans. ve 10 andard Costing and Budgetary Corral. Nt, N92 “contrast the scope and techniques of Standard Costing and Budgetary Control. mot jionship between Standard Costing and Budgetary Control. _N 82, N #9 ‘a Variances in Standard Costing isnot an end in itself, but a means to an end.” Discuss. Scanned with CamScanner