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Presented By: AshutoshMishra, Ashok Gupta, Athar Jawaid, Avinash Tiwari, Chandan Kumar
Flow of Presentation
Meaning Types of Standard & Revision Procedure of setting standard cost : Material Labour Overhead Advantages Limitations References
What is Costing ?
What is Standard ?
A Standard may be a norm or a measure of comparison in terms of specific items such as Pounds or kilos for material. Labour hours required. Plant capacity used in hours.
Standard Costing
A Standard Cost is a planned cost for a unit of product or service rendered. In the words of Backer and Jacobsen, Standard cost is the amount the firm thinks a product or the operation of the process for a period of time should cost, based upon certain assumed conditions of efficiency, economic conditions and other factors.
Classification of Standards
Attainability of
standards.
Theoretic
Normal
Frequency with
which the standards are revised.
Basic
Currently Attainable
This is the standard which represents a high level of efficiency. Ideal standard is fixed on the assumption that favourable conditions will prevail and management will be at its best. The price paid for materials will be lowest and wastes etc. will be minimum possible. The labour time for making the production will be minimum and rates of wages will also be low. The overhead expenses are also set with maximum efficiency in mind. All the conditions, both internal and external, should be favourable and only then ideal standard will be achieved.
Basic
The changes in manufacturing costs can be measured by taking basic standard, as a base standard cannot serve as a tool for cost control purpose because the standard is not revised for a long time.
Normal
The normal standard concept is theoretical and cannot be used for cost control purpose. Normal standard can be properly applied for absorption of overhead cost over a long period of time.
It is presumed that conditions of production will remain unchanged. In case there is any change in price or manufacturing condition, the standards are also revised. Current standard may be ideal standard and expected standard.
Current
A current standard is a standard which is established for use over a short period of time and is related to current condition. It reflects the performance that should be attained during the current period. The period for current standard is normally one year.
We need to revise the standards which follow for better control. Even standards are also subjected to change like the production method, environment, raw material, and technology.
Revision of Standards
Standards may need to be changed to accommodate changes in the organization or its environment. When there is a sudden change in economic circumstances, technology or production methods, the standard cost will no longer be accurate.
If actual costs are greater than standard costs the variance is unfavourable. If actual costs are less than standard costs the variance is favourable.
The difference between the actual costs and the standard costs are known as variances. Standard costing and the related variances is a valuable management tool. If a variance arises, management becomes aware that manufacturing costs have differed from the standard (planned, expected) costs.
Overhead
Labour
Materials
When we want to purchase some material what are the factors we consider. If material is used for a product, it is known as direct material. On the other hand, if the material cost cannot be assigned to the manufacturing of the product, it will be called indirect material. Therefore, it involves two things: Quality of material Price of the material
The procedure for purchase of materials, minimum and maximum levels for various materials, discount policy and means of transport are the other factors which have bearing on the materials cost price. It includes: Cost of materials Ordering cost Carrying cost
Usage Variance
Price Variance
Formula MCV=(AQ*AP)-(SQ*SP) AQ=actual quantity AP=actual price SQ=standard quantity for actual output SP=standard price
Mix Variance
Yield Variance
3000 units
Numerical
Value of materials purchased Rs.9000
30 units
Std. rate of material Opening stock of materials Closing stock of materials Output during the period
Efficiency Variance
Labour cost variance is the difference between the actual direct wages paid & standard direct wages specified for output achieved.
Formula : LCV=(AH*AR)-(SH*SR) AH=actual hours AR=actual rate SH=standard hours SR=standard rate
Mix Variance
Yield Variance
Per unit(hr)
Numerical
From the following data given calculate,
a. b. c. d. e. f. Labour cost variance Labour rate variance Labour efficiency variance Labour mix variance Labour yield variance Labour efficiency subvariance
Skilled worker
5 8 4
Rate per hr(Rs.) Articles produced 1000 units Skilled worker 4500hrs. Unskilled worker 10000hrs. Semi-skilled worker 4200hrs 2.00 0.45
Total(Rs.)
9000 4500
0.75
3150
Numerical: Budgeted hrs. for month of march99 = 180 hrs. Std. rate of article produced per hr. = 50 units Budgeted fixed overheads = Rs.2700 Actual production = 9200 units Actual hrs. of production = 175 hrs. Actual fixed overhead costs = Rs.2800 Calculate overhead cost variances.
Advantages
Finding of variance Cost control Right decisions Eliminating inefficiencies Efficiency measurement
Limitations
It cannot be used in those organizations where non-standard products are produced. The process of setting standard is a difficult task, as it requires technical skills. There are no inset circumstances to be considered for fixing standards. The fixing of responsibility is not an easy task.
References
The Internet.
Management Accounting James Martin Management Accounting D Westra, M Kane & Srikanth Accounting for management Dr.Jawahar Lal