STANDARD COSTING

(Including Variance Analysis)

 Definition
According to ICMA,London, Standard
costing refers to “the preparation and use of
standard costs, their comparison with
Actual costs and the Analysis of Variances
to their causes and Points of incidence.”
 Steps
• Setting up of Standards
• Ascertainment of Actual costs
• Comparison of Actual and Standard costs
• Investigation of Variances &
• Taking Appropriate Action
 Advantages
• Planning and Control
• Pricing Decisions
• Variance Analysis
• Management by Exception
• Introduction of Incentives
• Optimum utilization of resources
 Variance Analysis

T yp es

C o s t s V a r ia n c e S a le s V a ria n c e

M a t e r ia l Labour v a r ia b le O H F ix e d O H
 Rules
1. Whenever there is a quantity factor then multiply by
Standard Rate.

2. Whenever there is Rate factor then multiply by

Actual Quantity.
 MATERIAL VARIANCE

STANDARD ACTUAL

QTY X RATE = AMT QTY X RATE = AMT

A 100 X 20 = 2000 A 120 X 25 = 3000

B 150 X 30 = 4500 B 140 X 25 = 3500

------- -------- -------- --------
250 6500 260 6500
------- -------- -------- ---------

ACTUAL OUTPUT IS 500 UNITS.

 FOR MIX VARIANCE *

FIND STANDARD PROPORTION

100 2 2
A = ----- = ---- HENCE REV.ACT =260 X ---- =104
250 5 5

150 3 3
B = ------ = ---- HENCE REV.ACT =260 X ---- =156
250 5 5

FOR REVISED OUTPUT **

500
REV ACT OUTPUT = ------ X 260 = 520 UNITS
250
 MATERIAL COST VARIANCE
(ST.COST – ACTUAL COST)

A (2000 – 3000 ) = 1000 (A)

B (4500 - 3500) = 1000 (F)

TOTAL (6500 – 6500 ) = NIL

MATERIAL USAGE VARIANCE MATERIAL PRICE VARIANCE

( ST.QTY – ACT. QTY) X ST. RATE (ST RATE- ACT. RATE) X ACT.
QTY

A (100 – 120 ) X 20 = 400 (A) A (20 –25 ) X 120 = 600 (A)

B ( 150 – 140 ) X 30 = 300 (F) B (30 – 25 ) X 140 = 700 (F)

----------- -------------
100 (A) 100 (F)
----------- -------------
 MATERIAL USAGE VARIANCE (100 A )

MATERIAL SUB USAGE VARIANCE MATERIAL MIX VARIANCE

(TOT. ST QTY – T.A.QTY) X ST AVG ( REV. ACT. QTY- A.QTY) X SR
6500 RATE A ( *104 – 120 ) X 20 = 320 (A)
( 250 – 260 ) X ------- = 260 ( A )
250 B (*156 – 140 ) X 30 = 480 (F)
---------- ------------
260 (A) 160 (F)
------------ -----------
MATERIAL YIELD VARIANCE
(REV. OUT – ACT. OUTPUT) X AVG OUTPUT RATE
6500 -----------
(** 520 – 500 ) X -------- = 260 (A)
500 -----------
 LABOUR VARIANCE

STANDARD ACTUAL

HRS X RATE = AMT HRS X RATE = AMT

A 100 X 20 = 2000 A 120 X 25 = 3000

B 150 X 30 = 4500 B 140 X 25 = 3500

------- -------- -------- --------
250 6500 260 6500
------- -------- -------- ---------

ACTUAL OUTPUT IS 500 UNITS.

IDLE TIME IS 2 ½ HRS OF A & B LABOUR EACH.

 LABOUR COST VARIANCE
(ST.COST – ACTUAL COST)

A (2000 – 3000 ) = 1000 (A)

B (4500 - 3500) = 1000 (F)

TOTAL (6500 – 6500 ) = NIL

LABOUR EFFICIENCY VARIANCE LABOUR RATE VARIANCE

( ST.HRS – ACT. HRS) X ST. RATE (ST RATE- ACT. RATE) X ACT. HRS

A (100 – 120 ) X 20 = 400 (A) A (20 –25 ) X 120 = 600 (A)

B ( 150 – 140 ) X 30 = 300 (F) B (30 – 25 ) X 140 = 700 (F)

----------- -------------
100 (A) 100 (F)
----------- -------------
 LABOUR EFFICIENCY VARIANCE (100 A )

LABOUR IDLE TIME VARIANCE

(ST RATE X IDLE TIME ) 26 X 5 = 130 (A)

LABOUR SUB EFFICIENCY VARIANCE LABOUR MIX VARIANCE

(TOT. ST HRS – T.A.HRS) X ST AVG ( REV. ACT. HRS- A.HRS) X SR
6500 RATE A ( *104 – 120 ) X 20 = 320 (A)
( 250 – 255 ) X ------- = 130 ( A )
250 B (*156 – 140 ) X 30 = 480 (F)
---------- ------------
130 (A) 160 (F)
------------ -----------
LABOUR YIELD VARIANCE
(REV. OUT – ACT. OUTPUT) X AVG OUTPUT RATE
6500 -----------
(** 520 – 500 ) X -------- = 260 (A)
500 -----------
VARIABLE OH VARIANCE

STANDARD ACTUAL

HRS X RATE = AMT HRS X RATE = AMT

250 X 26 = 6500 260 X 25 =6500

 VARIABLE OH COST VARIANCE
(ST.COST – ACTUAL COST)
TOTAL (6500 – 6500 ) = NIL

V.OH EFFICIENCY VARIANCE V. OH EXPENDITURE VARI

( ST.HRS – ACT. HRS) X ST. RATE (ST RATE- ACT. RATE) X ACT. HRS

(250 – 260 ) X 26 =260 (A) (26 – 25 ) X 260 = 260

----------- -------------
260 (A) 260 (F)
----------- -------------
V.OH.C.V. (NIL) = V.OH.EFF.V. (260 A)( + V.OH.EXP.V. (260 F)
 FIXED OVERHEAD VARIANCE

BUDGETED ACTUAL

UNITS X REC. RATE = AMT. UNITS AMT.

12000 25 300000 11000 325000

HRS X REC. RATE = AMT. HRS AMT.

24000 12.5 300000 25000 325000

DAYS X REC. RATE = AMT. DAYS AMT

300 1000 300000 305 325000

FIXED OVERHEAD RECOVERY ACCOUNT

TO BANK 325000 BY RECOVERY (11000 X 25) 275000
BY UNDER RECOVERY 50000
BUDGETED HRS FOR ACTUAL PRODUCTION (BHAP)
24000
=--------- X 11000 = 22000 HRS
12000

BUDGTED HRS FOR ACTUAL DAYS (BHAD)

24000
= -------- X 305 = 24400 HRS
300
 FIXED OH COST VARIANCE
(RECOVERED OH – ACT. OH) (275000 – 325000 ) = 50000 (A)

FIXED OH VOLUME VARIANCE FIXED OH EXP. VARIANCE

(B.UNITS – ACT. UNITS) X R/R (B.EXP – ACT. EXP )
(12000 – 11000 ) X 25 =25000 (A) (300000 – 325000) = 25000 (A)

F. OH CAPACITY VARIANCE F. OH EFFICIENCY VARIANCE

(B.HRS – ACT. HRS) X R/R (BHAP – A.HRS ) X R/R
(24000 – 25000) X 12.5 = 12500 (F) (22000 – 25000 ) X 12.5 =37500 (A)

F. OH CALENDAR VARIANCE F.OH REVISED CAP. VARIANCE

(B.DAYS – ACT. DAYS) R/R (BHAD – ACT.HRS) X R/R
(300 – 305 ) X 1000 = 5000 (F) (24400 – 25000 ) X 12.5 = 7500 (F)
 SALES VARIANCE

STANDARD ACTUAL

QTY X RATE = AMT QTY X RATE = AMT

A 100 X 20 = 2000 A 120 X 25 = 3000

B 150 X 30 = 4500 B 140 X 25 = 3500

------- -------- -------- --------
250 6500 260 6500
------- -------- -------- ---------

LIKE SALES VARIANCE WE CAN ALSO CALCULATE PROFIT

VARIANCE WHERE IN STEAD OF SELLING RATE WE SHALL TAKE
PROFIT PER UNIT. THE FORMULAE WILL BE THE SAME.
 FOR MIX VARIANCE *

FIND STANDARD PROPORTION

100 2 2
A = ----- = ---- HENCE REV.ACT =260 X ---- =104
250 5 5

150 3 3
B = ------ = ---- HENCE REV.ACT =260 X ---- =156
250 5 5
 SALES VARIANCE
(ST.SALES – ACTUAL SALES)

A (2000 – 3000 ) = 1000 (F)

B (4500 - 3500) = 1000 (A)

TOTAL (6500 – 6500 ) = NIL

SALES VOLUME VARIANCE SALES PRICE VARIANCE

( ST.QTY – ACT. QTY) X ST. RATE (ST RATE- ACT. RATE) X ACT.
QTY

A (100 – 120 ) X 20 = 400 (F) A (20 –25 ) X 120 = 600 (F)

B ( 150 – 140 ) X 30 = 300 (A) B (30 – 25 ) X 140 = 700 (A)

----------- -------------
100 (F) 100 (A)
----------- -------------
 SALES VOLUME VARIANCE (100 F)

SALES L SUB VOL./QTY VARIANCE SALES MIX VARIANCE

(TOT. ST QTY – T.A.QTY) X ST AVG ( REV. ACT. QTY- A.QTY) X SR
6500 RATE A ( *104 – 120 ) X 20 = 320 (F)
( 250 – 260 ) X ------- = 260 ( F )
250 B (*156 – 140 ) X 30 = 480 (A)
---------- ------------
260 (F) 160 (A)
------------ -----------
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