STANDARD COSTING AND

VARIANCE ANALYSIS
1. Gauri Singh 20GSOB2010026
2. Meenakshi Singh 20GSOB2010190
3. Shashwat Srivastava 20GSOB2010153

CASE STUDY - 2
STANDARD COSTING
Establishment of cost standards for
activities and their periodic analysis
to determine the reasons for any
variances.
A Tool that helps management
account in controlling costs.
ADVANTAGES OF STANDARD
COSTING
In most cases, users are probably not even aware that they are using standard
costing, only that they are using an approximation of actual costs. Here are
some potential uses:
 Budgeting
 Inventory costing
 Overhead application
 Price formulation
Standard costing provides a benchmark against which management can
compare actual performance.
PROBLEMS WITH STANDARD
COSTING
Despite the advantages just noted for some applications of standard costing,
there are substantially more situations where it is not a viable costing system.
Here are some problem areas:
 Cost-plus contracts
 Drives inappropriate activities
 Fast-paced environment
 Slow feedback
 Unit-level information
As long as you are aware of these issues, it is usually possible to profitably
adapt standard costing into some aspects of a company’s operations.
STANDARD COST VARIANCES
A variance is the difference between the actual cost incurred and the standard
cost against which it is measured.

A variance can also be used to measure the difference between actual and
expected sales.

Thus, variance analysis can be used to review the performance of both

revenue and expenses.
There are two basic types of variances from a standard that can arise, which are the rate variance and
the volume variance.
VARIANCE ANALYSIS
Variance analysis is usually conducted for
 Direct material costs (price and quantity variances);
 Direct labor costs (wage rate and efficiency variances); and
 Overhead costs.

Analysis of variance in planned and actual sales and sales margin

is also vital to ensure profitability.
STANDARD COST CARD -
SAMPLE
CASE STUDY
A company operates a standard cost system Cost variances
to control the variable works cost of its only
product. The following are the details of Direct materials – Price ` 5,000 (F)
actual production, costs and variances for Direct materials – Usages ` 25,000 (A)
November, 2015.
Direct labour – Rate ` 15,500(A)
Production and cost (actual)
Direct labour – Efficiency ` 7,500 (F)
Production 10,000 units
Variable overheads ` 10,000 (A)
Direct Materials (1,05,000 kg.) ` 5,20,000
Direct Labour (19,500 hrs.) ` 3,08,000
Variable Overheads ` 4,10,000
CASE STUDY
The Cost Accountant finds that the original standard cost data for the product
is missing from the cost department files. The variance analysis for
December, 2015 is held up for want of this data. Required:
(i) Calculate- Standard price per kg. of direct material
(ii) Calculate- Standard quantity for each unit of output
(iii) Calculate- Standard rate of direct labour hour
(iv) Calculate- Standard time for actual production
(v) Calculate- Standard variable overhead rate
STANDARD PRICE PER KG. OF
DIRECT MATERIAL
Material Price Variance = Standard Cost of Actual Quantity – Actual Cost
5,000 (F) = Standard Cost of Actual Quantity – 5,20,000
Standard Cost of Actual Quantity = 5,20,000 + 5,000 = 5,25,000
Standard Cost of Actual Quantity = Standard Price per Kg. × Actual Quantity
5,25,000 = Standard Price per Kg. × 1,05,000 Kg.
Standard Price per Kg. = Rs. 5,25,000 / 1,05,000 kg
Standard Price per Kg. = 5 (Favorable)
STANDARD QUANTITY FOR
EACH UNIT OF OUTPUT
Material Usage Variance = Standard Cost of Standard Quantity for Actual Output –
Standard Cost of Actual Quantity
25,000 (A) = Standard Cost of Standard Quantity for Actual Output – 5,25,000
Standard Cost of Standard Quantity for Actual Output = 5,25,000 – 25,000 = 5,00,000
Standard Cost of Standard Quantity for Actual Output = Standard Price per Kg. ×
Standard Quantity for Actual Output
5,00,000 = 5 × Standard Quantity for Actual Output
Standard Quantity for Actual Output = Rs. 5, 00, 000 / Rs. 5 = 1, 00, 000 Kg.
Standard Quantity for each unit of output = 1, 00, 000 kg / 10, 000 units = 10Kg.
(Adverse)
STANDARD RATE OF DIRECT
LABOUR HOUR
Direct Labor Rate Variance = Standard Cost of Actual Time – Actual Cost
15,500 (A) = Standard Cost of Actual Time – 3,08,000
Standard Cost of Actual Time = 3,08,000 – 15,500 = 2,92,500
Standard Cost of Actual Time = Standard Rate per hr. × Actual Hours
2,92,500 = Standard Rate per hr. × 19,500 hrs
Standard Rate per hr. = Rs. 2, 92, 500 / 19, 500 hrs. = 15 (Adverse)
STANDARD TIME FOR ACTUAL
PRODUCTION
Labour Efficiency Variance = Standard Cost of Standard Time for Actual
Production – Standard Cost of Actual Time
7,500 (F) = Standard Cost of Standard Time for Actual Production – 2,92,500
Standard Cost of Standard Time for Actual Production = 2,92,500 + 7,500 = 3,00,000
Standard Cost of Standard Time for Actual Production = Standard Rate per hr. ×
Standard Time for Actual Production
3,00,000 = 15 × Standard Time for Actual Production Standard Time for Actual
Production
Standard Time for Actual Production Standard Time for Actual Production =
Rs. 3, 00, 000 / Rs. 15 = 20, 000 hrs. (Favorable)
STANDARD VARIABLE
OVERHEAD RATE
Variable Overhead Variance = Standard Variable Or
Overheads for Production – Actual Variable
Overheads Standard Variable Overheads for
10,000 (A) = Standard Variable Overheads for Production = Standard Variable
Production – 4,10,000 Overhead Rate per Hour × Standard
Standard Variable Overheads for Production = Hours for Actual Production
4,10,000 – 10,000 = 4,00,000
Standard Variable Overheads for Production =
4,00,000 = Standard Variable Overhead
Standard Variable Overhead Rate per Unit × Actual Rate per Hour × 20,000 hrs
Production (Units)
Standard Variable Overhead Rate per
4,00,000 = Standard Variable Overhead Rate per
Unit × 10,000 units hour = Rs. 4, 00, 000 / 20, 000 hrs. =
20 (Adverse)
Standard Variable Overhead Rate per unit = Rs. 4,
00, 000 / 10, 000 units = 40
RECOMMENDATIONS
 Search for materials that meet the required specifications at prices equal to the
expected.
 The cost of labor is unfavorable, it should not affect efficiency, so there must be a
balance between these two points.
 Pay attention to the issue of employment, the efficiency of the employment
employed and the provision of skilled labor capable of providing the requirements as
short as possible.
The following three elements should be given the highest priority: to provide a well-
experienced recruitment department or staff, to provide good control over the use of
resources and supporting the procurement team to provide matching
CONCLUSION
Cost variance analysis is good tool to help the production management to take the
right decisions about the costs and efficiency for material and labor.
That helps the organization to reduce the costs and prices, then in case it is possible to
reduce costs, it will make the organization to increase the profits.
But companies and companies should not overuse this tool unless necessary in
accordance with the cases mentioned above.
THANK YOU