Standard Costing

Learning Objectives
1. The Meaning of Standard Costing
2. The nature of Variance Analysis
3. How to Calculate Variances
Standard Costing
Standard costing is an important tool of planning
and cost control. It provides base for performance
evolution. The standard that is provide may be used
as yardstick to measure the effectiveness of plans
and their implementation. The limitation of
historical costing system have led to the
development of standard costing system.


Standard Costing: The Pre-determined cost based on
technical estimate for material, Labour, And overheads for
a selected period of time and for a prescribed set of
working conditions. Standard cost expresses what should
be the cost, in advance of actual production. It Provides
standards or yardsticks or norms for comparing the actual
cost.
Standard Cost is different from estimated cost.
Estimated cost is computed before actual production is
commenced. It may be based only on estimates of different
factors affecting costs. It need not involved the scientific
measurement of various factors affecting production.
But Standard cost is pre-determined more scientifically
taking into consideration all elements of production and
costs. It consider both internal and external factors.
Standard costing involves:
1. The Ascertainment of standards costs for each
elements of cost. Material, labour, overheads,
2. Use of standard costs as a guide and measure of
actual costs.
3. Measurement of actual cost
4. Comparison of actual costs with the standard costs
5. Measurement and analysis of deviation of actual
costs and standards cost.
6. Standards costing depends on measurement and
analysis of variances.

Library Work
Difference between standard costing and
budgetary control.
Establishment of Standard Costs
1. Standards for Material:
A. Material Quantity Standard:
B. Material Price Standards
2. Standards For Labor
A. Labor Cost
B. Labor Efficiency Standards
3. Standards for Overheads Costs
A. Manufacturing
B. Administrative
C. Selling and Distribution
Variance Analysis
Variance is the difference between a standard cost
and the actual cost incurred during the period.
Analysis of individual variance to determine the
extent of deviation and their causes is called
Variance analysis. Thus it involves two elements:
A. Measurement of Individual Variances
B. identification of Causes of each Variances
Measurement of Individual Variance
When the actual cost is less than the standard cost
is know as Favorable Variance (0r Debit Variance).
The actual results is better than the standards result
or actual profit is more than the standard profit.
When actual cost is more than standard cost is called
Adverse or Unfavorable Variance (Credit Variance)
The Actual sales or profit is less than the standard
sales or profit. It is an indicators of efficiency of the
mgt. either in planning or implementing the plans.
Causes of Variance
The analysis of causes of variance helps to identify
the exacts reason, its nature and the person or
department responsible for that variance.
The causes of variance may be internal or external.
Internal causes results from the inefficiency of the
department or the individual within the
organization.
The Causes are controllable. External causes arise
due to factors outside the organization. Mainly
these factors are uncontrollable
Material Cost Variance
MCV is the difference between the standard cost of
direct materials specified for the actual output and
the actual cost of direct material as follows:
MCV=Standard cost of materials-Actual cost of material used
Standard cost of materials means the standard cost of
standard quantity of materials. Standard quantity means
the quantity of materials which should have been used as
per standards set, to produced actual output.
In other words, it is the Standard quantity of material per unit
* Actual output. Thus
MCV= {SQ*SP}{AQ*AP}
Where SP= Standard Price; SQ= Standard Quantity
AQ= Actual quantity and AP= Actual Price
Material Cost Variance Consists of :

MCV
Material Usage Variance Material Price Variance
MIX VARIANCE
Yield or Sub-Usage
Variance
Material Price Variance : is the difference between the
Standard Price Specified and the actual Price of materials.
MPV= SP-AP
Material Usage Variance=
(Standard Quantity- Actual Quantity)*Standard Price
MUV= (SQ-AQ)*SP
Material Mix Variance: for a certain products and process
two or more material are to be mixed together. The
grades and quantity of such materials are determined in
advance of production. A mix Variance arise due to
difference between Actual ratio and Standard ratio of
different materials used in the actual mix
MMV= (Standard cost of standard mix-standard cost of actual mix )
Or MMV= (Standard Mix-Actual Mix)*Standard Rate per unit
Material Yield Variance
It refers to difference between the standard yield
specified for the actual input and the actual yield
obtained. In other words the difference between
the actual output and the output that could have
been obtained by using the actual input.
If the actual yield is greater than the standard
yield it is favorable variance.
MYV=[Standard yield actual yield]*standard cost
of per unit.
If SY>AY=Adverse condition
SY<AY=Favorable condition
1. Q.The following information is given
Standard Quantity-250 units Actual Quantity-260 units.
Standard Price Rs.5 per Unit, actual Price Rs.5.5 per
unit. Calculate material variances.
2. Q. From the following you re required to calculate
material variance:
Quantity of material Purchased -3000units
Value of material Purchased Rs.9000
Standard quantity of material required for one tonne of
finished product-25 units
Standard rate of material Rs. 2 per unit
Opening stock of material NIL
Closing stock of material-500 units
Finashed production during the period 80 tonnes.
CXM Chemicals submit the following information
for the month March 2008. Standard material cost
to produce 100 kgs of Chemical is
Material A-30Kg @Rs. 100 per Kg
Material B-40 Kg @ Rs. 50 per Kg
Material C- 50Kg @Rs. 60 per Kg.
Actual Production of Chemical -1000 kg
Material Consumed A-350 Kgs@Rs90 per kg
B- 420 Kgs @ Rs. 60 per Kg
C- 530 kgs @ Rs.70 per Kg
Calculate material variance