INSTITUTE OF MANAGEMENT AND SCIENCES UNIVERSITY OF LUCKNOW

STANDARD COSTING AND VARIANCE ANALYSIS

Presented To : Miss Vasudha Kumar Presented By: Ankita Singh (08) Amreen Fatima (05)

Meaning Of Standard
The term Standard means a norm or a criterion. Standard cost is thus a criterion cost which may be used as a yardstick to measure the efficiency with which actual cost has been incurred. In other words, standard cost are pre-determined costs or target costs that should be incurred under efficient operating conditions.

Standard Cost: Meaning & Definition

The Standard Cost is a pre-determined cost based o technical estimate for materials, labours and overhead fo selected period of time for a prescribed set of working conditions. - Charted Institute of Managemen Accounting (C.I.M.A.) London

Standard Costing: Meaning & Definition

Standard costing is simply the name given to a technique whereby costs are computed and subsequently compared with the actual costs to find out the difference between the two, and then the difference is analyzed to know the cause thereof so as to provide a basis of control. Standard Costing is defined as : the preparation of standard costs and applying them to measure the variation from actual costs and analyzing the course of variations with a view to maintain maximum efficiency in

Steps (standard costing involves the following steps)

The setting of standard costs for different elements of costs. Ascertaining actual costs. Comparing standard cost with actual cost to determine variance. Analyzing variance for ascertaining reason thereof, and Reporting of these variance.

Characteristics Of Standard Costing:

 Determination of standards, Computation of Actual Cost, Comparison of Standard & Actual costs, Computation of Variances, Study of Options.

Objectives Of Standard Costing:

Increase in Efficiency & Productivity, Cost Control, Determination of Responsibility, Progressiveness of Management.

Advantages Of Standard Costing:

    

Effective cost control. Helps in planning. Fixing price and formulating policies. Eliminates waste. Economical and simple.

Limitations Of Standard Costing:

 Difficulties in setting up Standards,  Not suitable for Small Firm,  Difficulty in Fixing Responsibility,  Changing Business Conditions,  Need of Budgetary Control,  Feeling of Dissatisfaction among Employees.

Difference Between Standard costing and budgetary control

Standard costing
Scope: It was mainly developed for manufacturing function and some time for marketing and advertising . Intensity: it is intensive in application as it calls for detailed analysis of variance. Usefulness: It is more useful for controlling and reducing costs.

Budgetary control
Budgets are compiled for different functions of the business such as sales alert , purchase, cash and development. It is extensive in nature and the intensity of analysis tend to be much less than that in standard costing. Budget usually represent an upper limit on spending without considering the effectiveness of the expenditure in term of output. In budgetary control the variance are not revealed through accounts.

Relation to accounts: in costing , variance are usually revealed through accounts.

Meaning Of Variance Analysis

The terms Variances Analysis refers to the systematic evaluatio variances in an attempt to provide manager with useful informatio measuring efficiency & improving performance. The Process of Analysis of Variance involves following th Steps:1. Computation of Variances. 2. Determination of causes of Variances. 3. Disposition of Variances.

Classification of Variances:I. On Functional Basis

1) Cost Variances Direct Material Variances Direct Labour Variances Overhead Variances: - Variable Overheads Variances. - Fixed overheads Variances.

2) Sales Variances

I. On Result Basis: 1) Favorable Variance 2) Unfavorable or Adverse Variance

III. On Controllability Basis: 1) Controllable Variances 2) Uncontrollable Variances

Importance of Variance Analysis:

 Measurement of Operational Efficiency, Technique of Cost Control, Determination of Responsibility, Measurement of Accuracy of Standards, Basis of Future Action & Planning.

Causes of Variances:
I. Material Cost Variances  Material Price Variances Material Usage Variances

II. Labour Cost Variances    Labour Rate Variances Labour Efficiency or Labour Time Variances Idle Time Variances Labour Mix Variances

Illustration 1: From the following calculate Material Cost variance and analyse the same on the basis of different causes: Standard Material Quantity per Unit Standard Price per Kg Actual Value of Material Purchased Closing Stock of Material Actual Usage Finished Stock sold Closing Stock of Finished Goods 2 Kg Rs. 4 Rs. 4,000 200 Kg 2.5 Kg 200 Units 40 Units

Solution:
SQ = 2(200+40) = 480 kg SP = Rs. 4 per Kg AQ = 2.5(200+40) = 600 kg AP = (Actual Value of Material Purchased)/(Actual Material Quantity Purchase = 4000/(600+200) = Rs. 5 SC per Unit = 2kg x Rs. 4 = Rs. 8 . MCV = (SQ X SP) (AQ X AP) = (480 X 4) (600 X 5) = Rs. 1,080 (Adverse) MPV = AQ(SP- AP) = 600(4-5) = Rs. 600 (Adverse) MUV = SP(SQ - AQ) = 4(480 - 600) = Rs. 480 (Adverse)

Material Cost Variances (MCV) Rs. 1,080 (Adverse)

Material Price Variances Rs. 600 (Adverse)

Material Usage Variances Rs. 480 (Adverse)

Verification : MCV = MPV + MUV 1,080(adv) = 600(adv) + 480(adv) = 1,080 (adv)

Illustration 2: From the following Information calculate:Labour Cost Variances, Labour Rate Variances, Labour Efficiency Variances, & Verify your answer.

Standard Output : 1,000 Units Rate of Payment : Rs. 6 per unit Time taken : 50 Hrs

Actual Output : 1,200 Units Wages Paid : Rs. 8,000 Time Taken : 40 Hrs

Solution: SH for Actual Output = (50 X 1,200)/1,000 = 60 Hrs. SR = (1,000 X 6)/50 = Rs. 120 per hr. AH = 40 hrs, AR = 8,000/40 = Rs. 200 per hr. Labour Cost Variances: LCV = (SH X SR) (AH X AR) = (60 X 120) - (40 X200) = Rs. 800 (adv) Labour Rate Variances: LRV = AH(SR - AR) = 40 (120 - 200) = Rs. 3,200 (adv) Labour Efficiency Variances: LEV = SR(SH - AH) = 120(60 - 40) = Rs. 2,400 (fav)

LCV (800 adv)

LRV (Rs. 3,200 adv)

LEV (Rs. 2,400 Fav)

Verification, LCV = LRV + LEV 800(adv) = 3,200(adv) + 2,400(Fav)

Overhead Cost Variance:

The difference between the standard cost of overhead absorbed in the outpu achieved & the actual overhead cost. Overhead Cost Variances = Absorbed overhead Actual Overhead
OCV = (St. hrs for actual Output x St. overheads absorption Rate ) - Actual Overheads

Overheads Cost Variances is divided into Variable and fixed Overheads Variances :Variable Overheads Cost VariancesVOCV = (St. Hours for Actual Output X St. Variable Overhead Rate) - Actual Variances

The Variance is Sub divided into the following two variances: (a) Variable Overhead Expenditure Variance: This is also known as Spending Variance or Budget Variance.
V.O.Ex.V = (St. variable overhead Rate x Actual hrs) Actual Overhead cost = ( standard V.O Actual V.O)

(b) Variable Overhead Efficiency variance: This Variance arises due to the differences between standard hours allowed for actual output & actual hours
V.O.Eff.V = (St. Hrs for actual output x Actual Hrs) X St. variable overhead Rate = (Absorbed V.O Standard V.O)

Check:V.O Cost Variance = V.O. Ex.V + V.O.Eff.V

Fixed Overhead Variances:

Fixed Overhead Cost Variance: It is the difference between standard fixed overhead cost for actual output (or absorbed overhead) & actual fixed overhe Its formula is: F.O.C.V = (St. hrs for actual output x St. F.O Rate) Actual Fixed Overhead = Absorbed Overhead Actual Overhead Fixed Overhead Cost Variance is Sub-divided into the following two variance (a) Fixed Overhead Expenditure Variance: It arises due to the difference between budgeted fixed overhead & actual fixed overhead. Its formula is: F.O.E.V = (Budgeted Fixed Overhead Actual fixed Overhead)

(b) Fixed Overhead Volume Variance: It is defined as that portion of overhead Variance which arises due to the difference between standard cost of overhe absorbed by actual production & the standard allowance for that output. F.O.V.V = (St. Hrs for actual output Budget Hrs) x St. rate = Absorbed Overhead Budgeted Overhead. Where, St. hours for actual output = (Budgeted Hrs/ Budgeted Output) X Actual Outp

Sub-Division Of Overhead Volume Variance:

Volume Variance is further sub-division into the following Variances:
 Efficiency Variances  Capacity Variances  Calendar Variances

(a) Fixed Overhead Efficiency Variance: This is defined as that portion of volume variance which reflects the increased or reduced output arising from efficiency above or below the standard which is expected. This Variance thus shows that the actual quantity produced is different from standard quantity because of higher or lower efficiency of workers engaged in production. Its formula is: Efficiency Variance=Absorbed Fixed Overhead Standard fixed Overhead = (St.hrs for actual output Actual Hrs) X St. rate (b) Fixed Overhead Capacity Variance: This is "that portion of the volume Variance which is due to working at higher or lower capacity usage than the standard. Thus this variance arises when plant capacity actually Utilised is more or less than the capacity planned to be utilised due to factors like idle time, under or over customer demand, strikes, power Failure, etc. Its formula is: Capacity Variance = Standard fixed Overhead Budgeted Overhead = (Actual Hrs Worked Budgeted Hrs) X St. rate

Illustration : The following data is given:Budget 12,500 6,250 12,500 50,000 Actual 11,000 5,750 13,000 45,000

Production in units Man Hours Overhead Costs: Fixed (Rs.) variable

Calculate:- Fixed Overhead Efficiency Variance & Capacity Variance. Solution:Efficiency Variance = (St. hrs. for actual output Actual hrs) x St. Rate where, Standard fixed overhead rate = Fixed cost / Man Hrs = Rs. 12,500/6,250 = Rs. 2 & St. Hrs for Actual Output = (6,250 hrs/12,500units) x 11,000 units = 5,500 h

So, Efficiency Variance = (St. Hrs. for actual output Actual Hrs) x St. rate = (5,500 5,750) X Rs. 2 = Rs. 500 (Adv).

Now, Capacity Variance = (Actual Hrs Budgeted Hrs.) x St. rate = (5,750 6,250) X Rs. 2 = Rs. 1,000 (Adv).

(c) Calendar Variance: It may be defined as that portion of the volume varian which is due to the difference between the number of working days in the bu period & the number of actual working days in the period to which is the bu is applied. Calendar variance is actually volume variance arising due to a particular cau actual number of working days being different from those budgeted due to e holiday being declared on the death of a national leader or any other reas Calendar variance arises only in exceptional circumstances because nor holidays are taken into account while laying down the standard. It is calculat the following formula: Calendar Variance = (Actual no. of working days St. no. of working days) X St. Rate per day

Ques: The following information is given: St. fixed Overhead rate (per hour) Budgeted Hours St. No. of working days Actual Hours Actual No. of working days Sol:

Rs. 5 12,500 25 11,500 22

St. Overhead rate per day = St. hrs. per day x St. rate per Hr = 500 hrs x Rs. 5 = Rs. 2,500 Calendar Variance = (Actual no. of working days St. no. of working days) x St. rate per day. = (22 - 25) x 2,500 = Rs. 7,500.(Adv)