Standard Costing and Variance Analysis

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Meaning of Standards Establishing Cost Standard Components of Standard Cost Variance AnalysisCost Variances- Material, Labour and Overhead variances Revenue Variances- Sales variances and Profit variances

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A level of quality A level of achievement A measure or model used to make comparison

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It is estimated in advance of production The costs should be estimated for a selected period of time. The apportioned expense should be estimated for the same period within a set of standard working conditions.

It is a system of cost accounting which assists in finding out in advance the amount of cost that should be incurred under the standard set of working conditions.

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Establish standards Collect information about the actual cost incurred Compare between actual and standard costs Get root causes for variances Make corrective measures to prevent variances Monitor standards regularly

Ideal standards: Fixed on the basis of ideal conditions of operation representing maximum efficiency. Expected standards: Based on conditions which may be realized in actual practice. Current standards: Set to reflect current conditions. These are set for limited periods. Basic standards: Set at a particular time and do not change over a period of time.

Standards can be set at High or Low The benefits of high standards are:
Produces better efficiency. If achieved, increases employees morale. Reduces cost effectively.

Process of developing standards:

The standards committee Technical input Past experience Other inputs

Success factors of a standard cost system:

Reliability Accuracy

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Direct Material Direct Labor Variable OH Fixed OH Sales Profit

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Standard quantities of material Standard loss Standard prices Stocks in hand Price fluctuations Extent of contracts

Different grades of labor required in the production of various products should be ascertained Standards of performance should be set in conjunction with the work-study engineers

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Setting of standards Computing the actual Comparing standards with the actual Expressing variances Controlling variances

Principal variance The variances of particular elements of cost and those relating to quantity and price Sub-variance A cost variance which is only a part of the principal variance

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SQ = Standard Quantity for Actual Output AQ = Actual Quantity SP = Standard Price AP = Actual Price RSQ = Revised Standard Quantity SQ = Standard Quantity x Actual Output / Standard Output RSQ = Standard Quantity x Actual Mix / Standard Mix

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Difference between the standard cost of direct materials specified for the output achieved and the actual cost of direct materials used: (SQ SP) ( AQ AP)

Portion of direct materials which is due to the difference between actual price paid and standard price specified, multiplied by the actual quantity (SP-AP) AQ

Difference between the actual quantities of raw materials used in production and the standard quantities that should have been used to produce the output achieved (SQ AQ) SP

Portion of the materials quantity variance which is due to the difference between the standard and actual composition of a mixture (RSQ AQ) SP

(SQ RSQ) x SP

The portion of materials usage variance which is due to the difference between the standard yield specified (in terms of actual inputs) and actual yield obtained
Standard Cost per unit x (Standard output for actual mix Actual Output)
Standard output for actual mix = Standard Output x Actual Mix / Standard Mix

Variance
1. Cost 2. Price (SP-AP) AQ

Formula
(SQ SP) ( AQ AP)

3. Usage / Quantity (SQ AQ) SP 4. Mix 5. Re ise Usage or Su Usage 6. Yiel 1 2 + 3, 3 (RSQ AQ) SP (SQ RSQ) x SP Stan ar Cost per unit x (Stan ar output for actual mix Actual Output) 4 + 5, 5 6

From the following information regarding a Standard product, compute Material Variances
Standard Qty (Kg) A B C 4 2 2 8 Rate PU ` 1 2 4 Total ` 4 4 8 16 Qty (Kg) 2 1 3 6 Actual Rate PU ` 3. 2 3 Total ` 7 2 9 18

Materials

TOTAL

Standard Output is 2 units, while actual output is 1 unit.

Working Notes: 1. SQ = Standard Quantity x Actual Output / Standard Output A =4x1/2 =2 B =2x1/2 =1 C =2x1/2 =1
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2. RSQ A B C

= Standard Quantity x Actual Mix / Standard Mix =4x6/8 =3 = 2 x 6 / 8 = 1. = 2 x 6 / 8 = 1.

3. Standard Cost Per Unit = Total Standard Cost / Standard Output = 16 / 2 = 8 4. Standard Output for Actual Mix
= Standard Output x Actual Mix / Standard Mix =2x6/8 = 1.

Variance
1. Cost A B C TOTAL

Formula
(SQ SP) ( AQ AP) [(2 x 1) (2x3. )] = [(1x2) (1x2)] [(1x4) (3x3)] A

= NIL = A 10 A

Variance
2. Price A B C TOTAL (SP-AP) AQ (1 3. ) x 2 (2 2) x 1 (4 3) x 3 =

Formula

= NIL = 3F 2A

Variance
3. Usage / Quantity (SQ AQ) SP A B C AL (2 2) x 1 (1 1) x 2 (1 3) x 4

Formula
= NIL = NIL =8A 8A

Variance
4. Mix A B C A (RSQ AQ) SP (3 2) x 1 =1F

Formula

(1. 1) x 2 = 1 F (1. 3) x 4 = 6 A 4A

Variance
5. Revised Usage or Sub Usage A B C TOTAL (SQ RSQ) x SP (2 3) x 1 = 1A

Formula

(1 1.5) x 2 = 1 A (1 1.5) x 4 = 2 A 4A

Variance
6. Yield

Formula
Standard Cost per unit x (Standard output for actual mix Actual Output) 8 x (1.5 1) = 4 A

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ST = Standard Time for Actual Output AT = Actual Time worked SR = Standard Rate AR = Actual Rate RST = Revised Standard Time SQ = Standard Time x Actual Output / Standard Output RSQ = Standard Time x Actual Mix / Standard Mix

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Difference between the standard direct wages specified for the output achieved and the actual direct wages paid (ST SR) ( AT AR)

Portion of the direct wages variance which is due to the difference between the standard rate of pay specified and the actual rate paid (SR-AR) AT

Difference between the actual hours expended and standard labor hours specified , multiplied by the standard labor rate per hour (ST AT) SR

Portion of the wages variance which is due to the difference between the standard and actual composition of a Labours (RST AT) SR

(ST RST) x SR

The portion of labour variance which is due to the difference between the standard yield specified (in terms of actual inputs) and actual yield obtained
Standard Cost per unit x (Standard output for actual mix Actual Output)
Standard output for actual mix = Standard Output x Actual Mix / Standard Mix

Standard labor cost of the hours during which no work has been done but for which workers have been paid for unproductive time Idle Hours x SR

Variance
1. Cost 2. Rate / Wage 3. Efficiency 4. Mix 5. Revised Efficiency 6. Yield 1=2 7. Idle 3, 3 = 4 (SR-AR) AT (ST AT) SR (RST AT) SR (ST RST) x SR

Formula
(ST SR) ( AT AR)

Standard Cost per unit x (Standard output for actual mix Actual Output) 5, 5 = 6
Idle Hours x SR