Standard cost

Standard Cost: It means the pre-determined cost

of future i.e., what should be the cost in future
period under a given set of operating conditions.
Standard cost is important because it is the ideal
cost to be incurred and it is also the base for
comparison with actual cost.
The comparison of standard cost with the actual
cost is essential because it helps us to ascertain
the difference the expected cost and actual cost
so that appropriate actions can be taken in future
to prevent such differences.
 Standard costing
Standard costing is a technique whereby
standard costs are computed and
subsequently compared with the actual costs
to find out the differences between the two.
 Steps in Standard costing
Standard costing system involves the following steps:
1. Determine the standard cost for each element of costs
(Material, labour and overheads).
2. Comparison of actual costs with the standard costs, the
differences between the two is termed as variance.
3. Analysis of variance to ascertain the reason of
variances.
4. Reporting of these variances and analysis thereof to
management for appropriate corrective actions.
 Variance Analysis
Variance Analysis: It is the process of analyzing
variances by sub-dividing the total variance in such a
way that management can assign responsibility for
below standard performance.
Variance Analysis is very important because with the
help of it, we can ascertain those variance which are
controllable and steps can be taken to reduce such
variances. It includes:
1. The amount of variance.
2. The causes of variance.
3. The person responsible for variance.
4. The corrective actions to be taken.
 Material Variances
1. Material Cost Variance: This is the difference
between the standard cost of direct material
for the output achieved and the actual cost of
direct material used. It is calculated as:
Material Cost Variance= Standard cost of actual
output-Actual Cost
Material Variances
 Material Variances
2. Material Price Variance: This is that portion
of material cost variance which is due to the
difference between the standard price
specified and the actual price paid. It is
calculated as:
Material Price Variance= (Standard Price-Actual
Price)*Actual quantity used
 Material Variances
3. Material Usage (quantity) Variance: This is
that portion of material cost variance which is
due to the difference between the standard
quantity specified and the actual quantity
used. It is calculated as:
Material Usage Variance= (Standard quantity for
actual output-Actual Quantity)*Standard price
Material Variances
 Material Variances
4. Material Mix Variance: This is sub-variance of
material usage variance. It arises only where
more than one type of material is used for
producing the finished product.
A company may be using a mixture of materials
which does not comply with the predetermined
standard mixture. This gives rise to material mix
variance.
Material Mix Variance= (Revised Standard
quantity-Actual quantity )*Standard price
 Material Variances
5. Material yield Variance: This is also a sub-variance of
material usage variance. It arises in process industries,
like chemicals, where loss of materials in production is
inevitable. While setting standards, the normal or
standard loss is taken into account. But actual loss may
differ from normal or standard loss. This results in
actual yield or output being different from standard
yield.
Material yield Variance= (Standard quantity for actual
output-Revised Standard quantity )*Standard price
Question 1
Solution
 Solution
1. Material Cost Variance= (Standard Cost for
actual production-Actual cost)
=Rs 10,000-Rs10,560
=Rs560(A)
2. Material Price Variance= (standard price-
Actual price)*Actual quantity used
=(Rs5-Rs4.80)*2,200Kg
=Rs 440 (F)
 Solution
3. Material Usage Variance= (Standard quantity
for actual production-Actual
quantity)*Standard price
= (2000Kg-2200Kg)*Rs 5
=Rs 1000 (A)
 Question 2
In a factory, standard estimates for material
for the manufacture of 1,000 units of product
Z is 400 Kg at Rs 2.50 per kg. When 2,000,
units of product Z are produced, it is found
that 825 kg of materials are consumed at Rs
2.70 per kg. Calculate material variances.
Solution
 Solution
1. Material Cost Variance= (Standard Cost for
actual production-Actual cost)
=Rs 2,000-Rs2227.50
=Rs227.50(A)
2. Material Price Variance= (standard price-
Actual price)*Actual quantity used
=(Rs2.50-Rs2.70)*825Kg
=Rs 165(A)
 Solution
3. Material Usage Variance= (Standard quantity
for actual production-Actual
quantity)*Standard price
= (800Kg-825Kg)*Rs 2.50
=Rs 62.50(A)
Question 3
Solution
 Solution
Working note 2:
Material consumed for production (Actual
quantity)=Opening Stock +Purchases-Closing
Stock
=100+3000-600
=2500 Units
Working note 3:
Actual price (Rate)=Total actual cost/Quantity
purchased
=Rs 9000/3000 units=Rs 3 per unit
 Solution
1. Material Cost Variance= (Standard Cost for
actual production-Actual cost)
=Rs 4,000-Rs7,500
=Rs3,500(A)
2. Material Price Variance= (standard price-
Actual price)*Actual quantity used
=(Rs2-Rs3)*2,500Kg
=Rs 2500 (A)
 Solution
3. Material Usage Variance= (Standard quantity
for actual production-Actual
quantity)*Standard price
= (2,000 units-2,500 units)*Rs 2
=Rs 1,000(A)
 Question 4
Birla &Co. Ltd manufactures Product 'P' by
mixing three raw material. Standard product
and cost specification for 1000 kg of product
are as follows:
Question 4
Solution
 Solution
Working notes:
Standard quantity for actual production=(Standard
Input/Standard output)*Actual output manufactured
= (1,200kg/1,000kg)*2,00,000kg
=2,40,000Kg
Divide this standard quantity between A,B and C in the
ratio of (800:200:200)i.e. 4:1:1
A: (240000/6)*4= 1,60,000 Kg
B: (240000/6)*1= 40,000 Kg
C: (240000/6)*1= 40,000 Kg
 Solution
Working notes:
Revised standard quantity= Actual quantity in
standard ratio (4:1:1):
A: (2,31,000/6)*4=1,54,000 Kg
B: (2,31,000/6)*1=38,500Kg
C: (2,31,000/6)*1=38,500Kg
 Solution

1. Material Cost Variance= (Standard Cost for

actual production Actual cost)
=Rs 6,00,000-Rs5,76,000
=Rs24,000(F)
 Solution
2. Material Price Variance= (standard price-Actual
price)*Actual quantity used
Material A=(Rs2.50-Rs2.40)*1,57,000Kg
=Rs 15,700(F)
Material B=(Rs4-Rs4.20)*38,000Kg
=Rs 7,600(A)
Material C=(Rs1-Rs1.10)*36,000Kg
=Rs 3,600(A)
Total material price variance=15,700
(F)+7,600(A)+3,600(A)
=Rs4500 (F)
 Solution
3. Material Usage Variance= (Standard quantity for actual
production -Actual quantity)*Standard price
Material A=(160000kg-157000)*Rs2.50
=Rs 7,500(F)
Material B=(40000kg-38000)*Rs4
=Rs 8,000(F)
Material C=(40000kg-36000)*Rs1
=Rs 4,000(F)
Total material Usage variance=7,500
(F)+8,000(F)+4,000(F)
=Rs19,500 (F)
 Solution
4. Material Mix Variance= (Revised Standard quantity-
Actual quantity)*Standard price
Material A=(1,54,000kg-157000)*Rs2.50
=Rs 7,500(A)
Material B=(38,500kg-38000)*Rs4
=Rs 2,000(F)
Material C=(38,500kg-36000)*Rs1
=Rs 2,500(F)
Total material Mix variance=7,500 (A)+2,000(F)+2,500(F)
=Rs3,000 (A)
 Solution
5. Material Yield Variance= (Standard quantity for actual
production -Revised Standard quantity)*Standard price
Material A=(1,60,000Kg-1,54,000kg)*Rs2.50
=Rs 15,000(F)
Material B=(40,000kg-38,500)*Rs4
=Rs 6,000(F)
Material C=(40,000kg-38,500)*Rs1
=Rs 1,500(F)
Total material yield variance=15,000
(F)+6,000(F)+1,500(F)
=Rs22,500 (F)
 Practice Question
Philips company manufactures Product 'P' by
mixing three raw material. For every 100 kg of
P, 125 Kg of raw materials are used. In April
there was an output of 5,600 kg of P.
Practice Question
 Labour Variance
1. Labour Cost Variance: This is the difference
between the standard direct labour cost specified
for the activity achieved and the actual direct
labour cost incurred. It is calculated as:
Labour Cost Variance= Standard cost of actual
output-Actual Cost
Or
(Standard Rate *Standard Time for actual output)-
(Actual Rate*Actual Time)
Labour Variance
 Labour Variance
2. Labour Rate Variance: This is that portion of the labour
cost variance which is due to the difference between
the standard rate specified and the actual rate paid. It
is calculated as:
Labour Rate Variance = (Standard Rate-Actual
Rate)*Actual hours
3. Labour Time (Efficiency) Variance: This is that portion
of labour cost variance which is due to the difference
between labour hours specified for actual output and
the actual labour hours expended. It is calculated as:
Labour Efficiency Variance= (Standard Hours for actual
output-Actual Hours)*Standard rate
 Labour Variance
4. Idle Time Variance: This variance represents
that portion of the labour efficiency variance
which is due to idle time, such as time lost due
to machine break-down, power failure, strike
etc.
Idle Time Variance= Idle hours*Standard rate
Labour Variance
 Labour Variance
5. Labour Mix (Gang composition) Variance: This variance is
similar to material mix variance. It arises when more than 1
grade of workers are employed and the composition of
actual grade of workers differ from those specified.
Labour Mix Variance= (Revised Standard hours-Actual
hours )*Standard rate
6. Labour yield Variance: This variance is similar to material
yield variance. It is the variance in labour cost on account of
increase or decrease in yield or output as compared to the
relative standard. It is calculated as:
Material yield Variance= (Standard hours for actual output-
Revised Standard hours )*Standard rate
 Question 5
Calculate All labour variances
Solution
 Solution
Working Note 2:
Revised standard hours= Actual hours in
standard ratio (3:2)
A: (5,100hours/5)*3=3,060 hours
B: (5,100hours/5)*2=2,040 hours
 Solution
1. Labour Cost Variance= (Standard Cost for actual output-
Actual cost)
=Rs 12,000-Rs12,400
=Rs400(A)
2. Labour Rate Variance= (standard Rate-Actual Rate)*Actual
hours
Worker A=(Rs2-Rs1.50)*3,200 hours
=Rs 1,600(F)
Worker B=(Rs3-Rs4)*1,900 hours
=Rs 1,900(A)
Total Labour Rate Variance =1,600 (F)+1,900(A)
=Rs300 (A)
 Solution
3. Labour Efficiency (Time) Variance= (Standard
Hours for actual output-Actual Hours)*Standard
rate
Worker A=(3,000 hrs-3,200 hrs)*Rs2
=Rs 400(A)
Worker B=(2,000 hrs-1,900)*Rs3
=Rs 300(F)
Total Labour efficiency variance=400 (A)+300(F)
=Rs100 (A)
 Solution
4. Labour Mix Variance= (Revised Standard hours-
Actual hours )*Standard rate
Worker A=(3060 hrs-3,200 hrs)*Rs2
=Rs 280(A)
Worker B=(2040 hrs-1900 hrs)*Rs3
=Rs 420(F)
Total Labour Mix Variance =280 (A)+420(F)
=Rs140(F)
 Solution
5. Labour Yield Variance= (Standard hours-
Revised Standard hours)*Standard rate
Worker A=(3,000 hrs-3,060 hrs)*Rs2
=Rs 120(A)
Worker B=(2,000-2,040)*Rs3
= Rs 120(A)
Total Labour yield variance=120(A)+120(A)
=Rs240 (A)
 Fixed overhead Variance
1. Fixed overhead Cost Variance: It is the difference
between standard fixed overhead cost for actual
output (absorbed or recovered overheads) and
actual fixed overheads. Its formula is:
Fixed overhead Cost Variance= Absorbed fixed
overhead-Actual fixed overhead
or
(Standard hours for actual output*Standard fixed
overhead rate)-Actual fixed overhead
Fixed overhead Variance
 Fixed overhead Variance
Fixed overhead cost variance is sub-divided into the following 2
variances:
2. Fixed overhead Expenditure variance: this is also known as
spending or Budget variance. It arises due to the difference
between budgeted fixed overhead and actual fixed overhead.
Fixed overhead Expenditure variance= Budgeted fixed overhead-
Actual fixed overhead
3. Fixed overhead Volume variance: This variance arises due to the
difference between standard output and actual output resulting in
under-recovery or over-recovery of fixed overheads.
Fixed overhead Volume variance= Absorbed fixed overheads-
Budgeted fixed overheads
or
(Standard hours for actual output-Budgeted hours)*Standard Rate
Fixed overhead Variance
 Fixed overhead Variance
Fixed overhead Volume variance is sub-divided into the following
2 variances:
4. Fixed overhead Efficiency Variance: The actual quantity produced
and standard quantity fixed might be different because of higher or
lower efficiency of workers employed in manufacturing goods.
Fixed overhead Efficiency Variance= (Standard hours for actual
production- Actual Hours)*Standard Rate
5. Fixed overhead Capacity variance: Actual capacity of the machine
or plant may vary from the planned capacity or expected capacity
due to idle time, strikes and lock-outs, breakdown, labour shortage,
absenteeism, under or over customer demand, etc. the variance is
an indicator of the degree of utilization of available capacity.
Fixed overhead Capacity variance= (Actual hours-Budgeted
hours)*Standard rate
 Fixed overhead Variance
6. 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 in which the budget is applied.
Actual number of working days being different
from those budgeted due to extra holiday being
declared. It is calculated:
Calendar Variance: (Actual no. of working days-
Standard no. of working days)*Standard rate per
day.
 Fixed overhead Variance
Rough Example:
Budgeted Fixed Overheads=Rs 5,000
Actual Fixed overheads=Rs 5,500
Budgeted Number of Students (units)=5
Actual Number of Students (units)=2
Solution
 Solution
1. Fixed Overhead Cost Variance= (Absorbed (Recovered)
Overhead-Actual Overhead)
=Rs 2,000-Rs5,500
=Rs3,500(A)
2. Fixed Overhead Expenditure Variance= (Budgeted
Overhead-Actual Overhead)
=Rs 5,000-Rs5,500
=Rs500(A)
3. Fixed Overhead Volume Variance= (Absorbed Overhead-
Budgeted Overhead)
=Rs 2,000-Rs5,000
=Rs3,000(A)
 Question 6
Budgeted Fixed Overheads=Rs 50,000
Budgeted units=5,000 units
Budgeted Hours=10,000 Hours
Actual Fixed overheads=Rs 52,000
Actual units=4,000 units
Actual Hours=9,500 Hours
Calculate all fixed overhead variances.
Solution
 Solution
Working note 1:
Standard hours for actual production=(Standard
Hours/Budgeted units)*Actual units
manufactured
= (10,000 hrs/5,000 units)*4,000 units
=8,000 hours
 Solution
1. Fixed Overhead Cost Variance= (Absorbed (Recovered)
Overhead-Actual Overhead)
=Rs 40,000-Rs52,000
=Rs12,000(A)
2. Fixed Overhead Expenditure Variance= (Budgeted
Overhead-Actual Overhead)
=Rs 50,000-Rs52,000
=Rs2,000(A)
3. Fixed Overhead Volume Variance= (Absorbed Overhead-
Budgeted Overhead)
=Rs 40,000-Rs50,000
=Rs10,000(A)
 Solution
4. Fixed Overhead Efficiency Variance= (Standard
hours for actual production Actual
hours)*Standard rate
=(8,000-hrs-9,500 hrs)*Rs 5
=Rs7,500(A)
5. Fixed Overhead Capacity Variance= (Actual
hours- Budgeted hours)*Standard rate
=(9,500 hrs-10,000 hrs)* Rs 5
=Rs2,500(A)
 Variable overhead variances
1. Variable overhead Cost Variance: It is the
difference between standard variable overhead
cost for actual output (absorbed or recovered
overheads) and actual variable overheads. Its
formula is:
Variable overhead Cost Variance= Absorbed
Variable overhead-Actual Variable overhead
or
(Standard hours for actual output*Standard
Variable overhead rate)-Actual Variable overhead
 Variable overhead variances
Variable overhead cost variance is sub-divided into the following 2
variances:
2. Variable overhead Expenditure variance: This is also known as spending or
Budget variance. It arises due to the difference between standard Variable
overhead allowed and actual Variable overhead incurred.
Variable overhead Expenditure variance= (Standard rate-Actual
rate)*Actual hours
or
(Actual hours*Standard Variable overhead rate)-Actual Variable
overhead
or
Standard Variable overhead-Actual Variable overhead
Note: Standard Variable overhead= Actual hours*Standard
Variable overhead rate
 Variable overhead variances
3. Variable overhead Efficiency variance: This
variance arises due to the difference between
standard hours allowed for actual output and
actual hours. The reason for this variance are
the same which give rise to labour efficiency
variance.
Variable overhead Efficiency variance= (Standard hours for
actual output-Actual hours)*Standard variable
overhead Rate
Or
Absorbed variable overhead-Standard variable overhead
 Question 7
Budgeted Variable Overheads=Rs 5000
Budgeted units=20,000 units
Budgeted Hours=5,000 Hours
Actual Variable overheads=Rs 4,800
Actual units=19,000 units
Actual Hours=4,500 Hours
Calculate Variable overhead variances.
Solution
 Solution
Working note 1:
Standard hours for actual production=(Standard
Hours/Budgeted units)*Actual units
manufactured
= (5,000 hrs/20,000 units)*19,000 units
=4,750 hours
 Solution
1. Variable Overhead Cost Variance= (Absorbed
(Recovered) Overhead-Actual Overhead)
=Rs 4,750-Rs4,800
=Rs50(A)
2. Variable overhead Expenditure variance=
(Standard rate-Actual rate)*Actual hours
= (Rs 1- Rs 1.0667)*4,500 hours
=Rs300 (A)
 Solution
3. Variable overhead Efficiency variance=
(Standard hours for actual output-Actual
hours)*Standard variable overhead Rate
= (4,750 hours-4500 hours)*Rs 1
=Rs 250 (F)
Practice question (overhead variance)