STANDARD COSTING

And VARIANCE ANALYSIS

Concept of Standard cost
‡ Standard cost is the pre-determined cost based preon technical estimates for materials, labour and overheads for a selected period of time. ‡ The standard cost is a predetermined cost which determines what each product or service should cost under given circumstances

Concept of Standard costing
‡ Standard costing is the preparation of standard cost and comparing them with actual costs for any variances and analysing the causes of variations to maintain maximum efficiency in production. It involves following steps: 1. Setting of standard costs for different elements of costs i.e. material, labour etc. 2. Ascertainment of actual costs. 3. Comparing standard costs with actual costs to determine differences or variances

Reporting of these variances and analysis . 5. Analysing variances for ascertaining reasons thereof.4.

Advantages of Standard Costing ‡ ‡ ‡ ‡ ‡ Effective cost control Helps in planning Provides incentives Facilitates delegation of authority Eliminates wastage .

‡ A business may not be able to keep standards up to date. ‡ The staff may not be capable of operating the system. ‡ Inaccurate and unreliable standards cause misleading results ‡ It is expensive .Limitations of Standard Costing ‡ The system may not be appropriate to the business.

Material price standard ² this is a forecast of the average prices of material for future period Material usage standard ² how much material and of what quality is to be used Labour rate standard ² this standard is determined having regard to the current rates of pay and any anticipated variations 1.Setting Standard Costs ‡ Standard costs are set for each element of cost i. labour and overheads.e. These are described below. 2. 3. . materials.

Overhead Standard . Labour time standard 5.4.

Therefore it is essential to have a common unit in which different types of production can be expressed. As time factor is common to all operations. litres etc. tonnes. when a company is manufacturing different types of products. It is the output or amount of work which should be done in one hour. it is difficult to aggregate the production. known as ² standard hour. which cannot be expressed in the same unit. a common practice is to express the various units in terms of time. .Standard Hour ‡ Production may be expressed in diverse type of units such as kilograms.

4. . Labour Rate Variance.Variance Analysis ‡ 1. Labour Efficiency (or time) Variance. these are: Material Cost Variance. Material usage Variance. 3. Material Price Variance. 6. Labour Cost Variance. 5. 7. There are various types of variances. Material Mix Variance. 2.

9. .8. Variable overhead variance. Fixed overhead variance.

Formulae ‡ Material cost variance = standard cost of actual output ² actual cost MCV = SC ² AC OR MCV = (SQ x SP) ² (AQ x AP) ‡ Material Price Variance = (SP ² AP) x AQ .

‡ Change in delivery costs. ‡ Change in the quantity of materials.Reasons for material price variance ‡ Change in the market prices of materials. thereby resulting in a different price paid. ‡ Failure to purchase the specified quality. ‡ Rush purchases . ‡ Inefficient purchasing. thereby leading to lower/higher quantity discount.

‡ Change in the rates of excise duty.Continued« ‡ Purchase of a substitute material on account of nonnon-availability of the material specified. . purchase tax etc.

Material Usage (or Quantity) Variance ‡ ´ that portion of the material cost variance which is due to the difference between the standard quantity specified and the actual quantity used. ‡ FORMULA: MUV = (SQ-AQ) x SP (SQ- .

Defect in the plant and machinery.Reasons for Material Usage Variance ‡ ‡ ‡ ‡ ‡ ‡ Use of defective or sub-standard materials. Change in the design or specification of the product. . Pilferage. subCarelessness in the use of materials. Poor workmanship.

Use of non-standard material mixture. nonYield from materials in excess of or less than standard yield.Continued« ‡ ‡ ‡ ‡ Change in the quality of materials. . Use of substitute materials.

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. The formula for it is: MMV = (revised standard quantity ² actual quantity) x SP RSQ = Standard quantity of one material x Total of AQ of all Total of standard quantities of all material material .Material Mix variance ‡ It is sub variance of material usage variance. It arises only where more than one type of material is used for producing the finished goods.

Example ‡ From the following data.50 P/U 60 units @ Rs. calculate material mix variance.45 P/U 110 units . price variance and usage variance.40 P/U 100 units Actual 50 units @ Rs. RM X Y Total Standard 40 units @ Rs.50 P/U 60 units @ Rs.

240 (F) Rs 60 (A) . 300 (A) Y = (66 ² 60) x 40 = Rs.Solution: ‡ Calculation of RSQ: X = 40 x 110 = 44 units 100 Y = 60 x 110 = 66 units 100 MMV = (RSQ ² AQ) x SP X = (44 ² 50) x 50 = Rs.

500 (A) Y = (60 ² 60) x 40 = Nil Rs. 500 (A) .‡ MPV = (SP. 300 (A) Rs.AP) x AQ (SPX = (50 ² 50) x 50 = Nil Y = ( 40 ² 45) x 60 = Rs. 300 (A) ‡ MUV = (SQ ² AQ) x SP X = (40 ² 50) x 50 = Rs.

Labour Cost Variance ‡ This is the difference between the standard labour cost and the actual labour cost. hours for actual output ² st. LCV = SC ² AC Or LCV = (St. rate) x (actual hours ² actual rate) .

New workers not being paid at full rates. Labour rate variance = (SR ² AR) x AH Reasons for labour variance: Change in the basic wage rates. Employing workers of grades different from the standard grades specified. Unscheduled overtime. 2. 4. .Labour rate variance ‡ This is that portion of the labour cost variance which is due to the difference between the standard rate and the actual rate. ‡ 1. 3.

‡ FORMULA: LEV = ( SH ² AH ) x SR .Labour Efficiency (or Time) Variance ‡ This is that portion of the labour cost variance which is due to the difference between labour hours specified for actual output and the actual labour hours expended.

nonTime wasted by factors like waiting for materials.Reasons for Labour Efficiency Variance Poor working conditions. break‡ Insufficient training of workers ‡ ‡ ‡ ‡ ‡ ‡ . Incompetent supervision.standard materials. Inefficient workers. Defective tools and plant & machinery. etc. tools or machine break-down. Use of defective and non.

. ‡ Change in the method of operation.Continued« ‡ Insufficient training of workers.

hours ² actual hrs ) x standard rate RSH = st. ‡ FORMULA: LMV = (revised st. total st. hrs .Labour Mix Variance ‡ This variance is similar to material mix variance. hrs of the grade x total actual hrs. It arises only when more than one grade of workers are employed and the composition of actual grade of workers differ from those specified.

Manufactures a particular product. 100 units of the product were produced. 120 per unit. Its manufacture involves the following: Grade of workers Hrs.Illustration: ‡ Coates India Ltd. the actual labour cost of which was as follows: . Rate Amount A 30 2 60 B 20 3 60 50 120 During a period. the standard direct labour cost of which is Rs.

Continued« ‡ Grade of workers A B Calculate: Labour cost variance Labour rate variance Hrs 3200 1900 5100 Rate 1.00 Amount 4800 7600 12400 Labour efficiency variance Labour mix variance .5 4.

5) x 3200 = Rs.300 (F) Check: LCV = LRV + LEV. 1900 (A) ‡ LEV = (SH ² AH) x SR A = (3000 ² 3200) x 2 = Rs. . 400 (A) B = (2000 ² 1900) x 3 = Rs. 1600 (F) B = (3 ² 4) x 1900 = Rs. 400 (A) ‡ LRV = (SR ²AR) x AH A = (2 ² 1.Solution ‡ LCV = SC ² AC = (120 x 100) ² 12400 = Rs.

Continued ‡ LMV = (RSH* ² AH) x SR A = (3060 ² 3200) x 2 = Rs. 140 (F) . 280 (A) B = (2040 ² 1900) x 3 = Rs. 420 (F) Rs.

Analysis of variances of these is called Overhead Variances. Overhead variances have been classified into fixed and variable overhead variances. indirect labour and indirect expenses.Overhead Variances ‡ Overhead is the aggregate of indirect materials. .

hrs for actual output = budgeted output x actual hrs budgeted hrs St. overhead ² actual overhead OR (St. overhead absorption rate) ² Actual overhead St. overhead absorption rate = budgeted overhead budgeted hrs .Overhead Cost Variance ‡ This is the total overhead variance and can be described as the difference between total standard overhead and total actual overhead. OCV = St. hours for actual output x st.

20000 ‡ Actual overhead Rs. . 22000 ‡ Actual output 12000 units.Example ‡ Budgeted output 10000 units ‡ Budgeted hrs 10000 ‡ Budgeted overhead Rs. Calculate overhead cost variance.

2 per hr ‡ SHAO = budgeted hrs x actual output budgeted output = 10000 x 12000 = 12000 hrs 10000 OCV = (12000 x 2) ² 22000 = Rs 2000 (F) .Solution: ‡ SOAR = budgeted overhead = 20000 budgeted hrs 10000 = Rs.

Variable Overhead Cost variance is sub-divided into subfollowing two variances . hrs for actual output x St. variable overhead rate) ² actual overhead cost.‡ Overhead Cost Variance is divided into Variable overhead and Fixed Overhead Variance. Variable overhead cost variance = (St. ‡ Variable Overhead (VO) Variances: it may be defined as the difference between standard variable overhead and actual variable overhead.

variable overhead rate x actual hrs) ² actual overhead cost.Variable Overhead Expenditure Variance ‡ This is also known as Spending Variance or Budget Variance.O. It rises due to the difference between standard variable overhead allowed and actual variable overhead incurred: V. . Expenditure Variance = (St.

hrs for actual output ² actual hrs) x St. The reasons for this variance are the same which give rise to labour efficiency variance. V.O. . efficiency variance = (St. variable overhead rate.Variable overhead efficiency variance ‡ This variance arises due to the difference between standard hours allowed for actual output and actual hours.

rate .O. hrs for actual output ² budgeted hrs) x St. rate) ² Actual F. ‡ Fixed Overhead Cost variance: (St.O. ² Actual F.Fixed overhead variances. hrs for actual output x St.) ‡ Fixed Overhead Volume Variance = (St.O.O. ‡ Fixed Overhead Cost Variance is sub-divided into subfollowing two variances: ‡ Fixed Overhead Expenditure Variance = (Budgeted F. F.

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