Q. What are the objectives of standard costing? Ans. The objectives of standard costing are as follows: 1.

It aims to eliminate the shortcomings of historical costing. 2. It aims to control future cost. 3. It aims to fix a more or less uniform price for the different batches of production. 4. It aims to furnish a near-accurate price quotation and production planning for the future period. 5. It aims to be the actual yard-stick for measuring efficiency of performance. Q. What is standard cost and standard costing? In which type of industries standard costing is employed? Ans. Standard cost is the predetermined cost based on a technical estimate for material, labor and overhead for a selected period of time and for a prescribed set of working conditions. Standard costing is the preparation of standard cost and applying them to measure the variations from standard cost and analyzing the causes of variation with a view to maintain maximum efficiency in production. The system of standard costing can be useful in all types of industries, but it is more commonly used in industries producing standardized products. It is most widely applied in process and engineering industries and is not suitable for job order industries. Even in jobbing industries, where jobs differ from each other, there is considerable scope for the use of this system of costing. Q. What are the techniques of standard costing? Ans. The techniques of standard costing may comprise: i) Ascertainment of standard cost under each element of cost, i.e. material, labor and overhead. ii) Measurement of actual cost. iii) Comparison of actual cost with standard cost to find out the variance. iv) Analysis of variances for the purpose of ascertainment of reasons of variances for taking the action where necessary so that maximum efficiency may be achieved. Q. What is the difference between standard costing and budgetary control? Ans. Both standard costing and budgetary control achieve the same objective of maximum efficiency and cost reduction by establishing predetermined standard, comparing actual performance with the predetermined standard and taking corrective measures, where necessary. Thus, although both are useful tools to management in controlling cost, they differ in the following respect: 1) Standard are based on technical assessment whereas budgets are based on past actual adjusted to future trends. 2) Budgetary control deals with the operation of department or business as a whole, while standard costing is mainly applied to manufacturing of a product or providing a service. Thus budgetary control is extensive whereas standard costing is intensive in its application.

3) Standards are set mainly for production and production expenses, whereas budgets are complied for all items of income and expenditure. 4) Budgets are projection of financial accounts, whereas standard costs are projection of cost accounts. 5) Budgetary control can be applied in parts such as for capital expenditure, R&D expenses etc., but there can be no partial application of standard costing.

Q. State the needs for variance analysis?

Ans. When actual cost is less than standard cost, the difference is called favorable variance. When actual cost exceeds standard cost, the difference is called unfavorable variance. Variance analysis is the basis of cost control under standard costing system. Variances are analyzed and reasons are established for taking necessary corrective action. Such analysis leads to cost reduction as well as revision of standard. Variance analysis helps to pin-point responsibilities to the manager, who can exercise the techniques of management by exception. They concentrate only on those expenses where variances are significant, leaving other expense area, which conform to standard.

Q. When does labor cost variance arise? Ans. Labor cost variance arises primarily due to two factors: 1. Labor rate variance 2. Labor efficiency variance Labor rate variance may arise due to any one of the following reasons: i) Payment at a rate higher or lower than the standard rate. ii) Grades of the employees changed. iii) Inclusion of new workmen. iv) Change in the method of payment of remuneration. Labor efficiency variance arises due to the following factors: i) Bad workmanship due to inefficient training. ii) Dissatisfaction among the workers. iii) Bad working conditions. iv) Production delays and hold-ups. v) Defective equipments, tools and materials. vi) Defective supervision. Q. When does Fixed overhead variance arise? Ans. Fixed overhead variance arises due to two factors: 1. Fixed overhead expenditure variance

2. Fixed overhead volume variance Fixed overhead expenditure variance arises due to the following factors: i) Rise in price due to inflation. ii) Lack of control over expenses. iii) Change in method of operation. Fixed O H volume variance arises due to the following factors: i) Decline in sales volume. ii) Idle time. iii) Defective material. iv) Reduced efficiency of workers. v) Break downs. vi) Ineffective supervision.