Standard Costing

Standard
Expected value that is desired
 Standard Cost
S.C. is a predetermined cost, which is
computed in advance of production on the
basis of specific factors.
 Standard Costing
CIMA, “The preparation and the use of standard
cost, their comparison with actual cost and
analysis of variances to their causes and points
of incidence”.

SC is the method of setting of standard costs

and applying them to measure the deviations
from the actual cost and analyzing the causes
of such deviation with a view to maximize
the efficiency of the production function.
Objectives of Standard Costing
1. Motivation and performance evaluation
2. Cost control
3. Management by exception: Exceptional
variances
 Standard Setting
 Material quantity standards
 Material price standards
 Labor time standard
 Labor rate standard
 Manufacturing overhead standard
 Variance Analysis
The deviation of actual performance from the
standard performance is called variance.

CIMA, “The process of computing the amount of

variance and separating the cause of variance
between actual and standard”.
 Variance Analysis
Variance Reporting: A reconciliation statement
showing actual cost, standard cost and
variances along with their causes is
prepared and submitted to the
management.
 Variance Analysis
Variance Analysis involves 4 functional
actions:
1. Computation of individual variances.
2. Identification of causes of variance and the
people responsible for them.
3. Reporting to the management based on the
principle of management by exception.
4. Corrective action by the management.
 Variance Analysis
Cost variances are sub-classified into 4 parts:

a) Material cost variance

b) Labor cost variance
c) Variable overhead cost variance
d) Fixed overhead cost variance
 Variance Analysis
Cost variances:

a) Material cost variance

b) Labor cost variance
 Material Cost Variance
Material cost variance may be subdivided into
2 parts:

1. Material Usage (Quantity) Variance (MUV)

2. Material Price Variance (MPV)
 Material Cost Variance
It is the difference between the standard cost of
material allowed (as per the standards laid
down) for the actual output achieved and
the actual cost of materials used.

This difference in material cost may be partly

due to difference in usage of raw material and
partly due to the difference in prices.

MCV = (SP*SQ) – (AP*AQ)

 Material Cost Variance
Standard
 SP = Standard Price per kg of raw material
 SQ = Standard Quantity of raw material
required for actual output

Actual
 AP = Actual Price per kg of raw material
 AQ = Actual Quantity of raw material
required for actual output
 Material Cost Variance
Material cost variance may be subdivided into
2 parts:

1. Material Usage Variance (MUV)

SP (SQ – AQ)

2. Material Price Variance (MPV)

AQ (SP – AP)
 Material Cost Variance
1. Material Quantity/Usage Variance
(MQV/MUV):

Reasons for the occurrence of this variance:

 Excessive wastage
 Careless handling
 Wrong specifications (planning engineer)
 Inferior quality of material
 Wrong mixture of materials
 Incorrect setting of material standards
 Material Cost Variance
1. Material Price Variance (MPV):

Reasons for the occurrence of this variance:

 Changes in the market prices of materials
 Inefficient buying
 Emergency purchases
 Changes in quantity
 Non-availability of standard quantity
 Labour Cost Variance
It is the difference between the standard cost of
labour allowed (as per the standards laid
down) for the actual output achieved and
the actual cost of labour employed.
Also know as wage variance
This difference in labour cost may be partly
due to difference in time taken by the workers
and partly due to the difference in wage rates.

LCV = (SR*ST) – (AR*AT)

 Labour Cost Variance
Standard
 SR = Standard Rate per labour hour
 ST = Standard Time required for actual
output

Actual
 AR = Actual Rate per labour hour
 AT = Actual Time required paid for
 Labour Cost Variance
Labour cost variance may be subdivided into 2
parts:

1. Labour Rate Variance (LRV)

2. Labour Efficiency/Time Variance (LEV)
 Labour Cost Variance
Labour cost variance may be subdivided into 2
parts:

1. Labour Rate variance (LRV)

AT (SR – AR)
2. Labour Efficiency variance (LEV)
SR (ST – AT)
 Advantages of Standard Costing
 Performance evaluation
 Analysis and cost control
 Management by exception
 Formulation of policies
 Cost consciousness
 Improves budgeting
 Delegation of authority and fixation of
responsibility
 Limitations of Standard Costing
 Suitable for large firms: (high degree of
technical knowledge and skill).

 Division of variances: (into controllable and

non-controllable variances).

 Standards are difficult to establish: (lot of

estimation and research work).

 Standardized products: (not possible where

products are frequently changed).
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