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STANDARD COSTING

STANDARD COSTING . And VARIANCE ANALYSIS. Concept of Standard cost. Standard is the pre-determined cost based on technical estimates for materials, labour and overheads for a selected period of time.

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STANDARD COSTING

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  1. STANDARD COSTING And VARIANCE ANALYSIS

  2. Concept of Standard cost • Standard is the pre-determined cost based on 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

  3. 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: • Setting of standard costs for different elements of costs i.e. material, labour etc. • Ascertainment of actual costs. • Comparing standard costs with actual costs to determine differences or variances

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

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

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

  7. Types of Standards • Basic Standards: these are established for an indefinite period of time. It is similar to an index number against which all later results are measured. Variances from basic standards show trends of deviation of the actual cost. • Current Standards: such standards remain in operation for a limited period of time and are related to current conditions. These are of three types- Ideal Standards, Expected Standards and Normal Standards.

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

  9. 4. Labour time standard 5. Overhead Standard

  10. Standard Hour • Production may be expressed in diverse type of units such as kilograms, tonnes, litres etc. when a company is manufacturing different types of products, it is difficult to aggregate the production, which cannot be expressed in the same unit. 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, a common practice is to express the various units in terms of time, known as – standard hour. It is the output or amount of work which should be done in one hour.

  11. Variance Analysis • There are various types of variances, these are: • Material Cost Variance. • Material Price Variance. • Material usage Variance. • Material Mix Variance. • Labour Cost Variance. • Labour Rate Variance. • Labour Efficiency (or time) Variance.

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

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

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

  15. Continued… • Purchase of a substitute material on account of non-availability of the material specified. • Change in the rates of excise duty, purchase tax etc.

  16. 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

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

  18. Continued… • Change in the quality of materials. • Use of substitute materials. • Use of non-standard material mixture. • Yield from materials in excess of or less than standard yield.

  19. 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. 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 – actual quantity) x SP RSQ = Standard quantity of one material x Total of AQ of all Total of standard quantities of all material material

  20. From the following data, calculate material mix variance, price variance and usage variance. Example

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

  22. MPV = (SP- AP) x AQ X = (50 – 50) x 50 = Nil Y = ( 40 – 45) x 60 = Rs. 300 (A) Rs. 300 (A) • MUV = (SQ – AQ) x SP X = (40 – 50) x 50 = Rs. 500 (A) Y = (60 – 60) x 40 = Nil Rs. 500 (A)

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

  24. 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. Labour rate variance = (SR – 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. • New workers not being paid at full rates.

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

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

  27. Continued… • Insufficient training of workers. • Change in the method of operation.

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

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

  30. Continued… • Grade of workers Hrs Rate Amount A 3200 1.5 4800 B 1900 4.00 7600 5100 12400 Calculate: Labour cost variance Labour efficiency variance Labour rate variance Labour mix variance

  31. Solution • LCV = SC – AC = (120 x 100) – 12400 = Rs. 400 (A) • LRV = (SR –AR) x AH A = (2 – 1.5) x 3200 = Rs. 1600 (F) B = (3 – 4) x 1900 = Rs. 1900 (A) • LEV = (SH – AH) x SR A = (3000 – 3200) x 2 = Rs. 400 (A) B = (2000 – 1900) x 3 = Rs.300 (F) Check: LCV = LRV + LEV.

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

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

  34. 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. overhead – actual overhead OR (St. hours for actual output x st. overhead absorption rate) – Actual overhead St. hrs for actual output = budgeted output x actual hrs budgeted hrs St. overhead absorption rate = budgeted overhead budgeted hrs

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

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

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

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

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

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

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