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r Discuss the meaning of standard cost and variances.r Differentiate between controllable and uncontrollable
variances.r Analyse and compute variances related tomaterial, labour
and overheads.
STANDARD COSTING
LEARNING OUTCOMES
13CHAPTER
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13.2 COST AND MANAGEMENT ACCOUNTING
13.1 INTRODUCTIONManagementofanorganisationusesstandardcostingasacontrollingtoolforcostcontrol andperformanceevaluation.Controlling is aprincipal functionofmanage-mentalongwithplanning,directingandstaffing.Everyorganisationsetsagoalandtoachieveitmanagementoftheorganisationmakeplans,gettheseplansexecutedandmonitortheworkforanydeviationfromtheplan.Pleasenotetheworddeviation.Deviationmeanstheamountbywhichasinglemeasurementdiffersfromafixedvaluesuchasthemeanorstandard(hereitisusedinthecontextofcostaccounting).Devi-
CHAPTER OVERVIEW
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STANDARD COSTING 13.3
ationismeasuredbycomparingactualfigurewiththestandardfigure.Standardcostingisamethodofcostingwhichmeasurestheperformanceoranactiv-itybycomparingactualcostwithstandardcost,analysethevariances(deviations)andreportingofvariancesforinvestigationandappropriateaction.OfficialTerminologyofCIMA,Londondefinesstandardcostingas“Controltechniquethatreportsvariancesbycomparingactualcoststopre-setstandardssofacilitatingactionthroughmanage-mentbyexception.”13.1.1 What is a Standard or Standard Cost? StandardcostisdefinedintheCIMAOfficialTerminologyas“‘theplannedunitcostoftheproduct,componentorserviceproducedinaperiod.Thestandardcostmaybedeterminedonanumberofbases.Themainuseofstandardcostsisinperformancemeasurement,control,stockvaluationandintheestablishmentofsellingprices.”FromtheabovedefinitionStandardcostscanbesaidas• Plannedcost• Determinedonabaseornumberofbases.13.1.2 Why Standard Costing is needed? StandardsorStandardcostsareestablishedtoevaluatetheperformanceofaparticu-larcostcentreorresponsibilitycentreandtocontrolcosts.Apartfromperformanceevaluationandcostcontrol,standardcostsarealsousedtovalueinventorywhereac-tualfiguresarenotreliablyavailableandtodeterminesellingpricesparticularlywhilepreparingquotations.Standardcostingsystemiswidelyacceptedasitservesthedifferentneedsofanor-ganisation.Thestandardcostingispreferredforthefollowingreasons:(a) Prediction of future cost for decision making: Standard costs are set after
takingintoaccountallthefuturepossibilitiesandcanbetermedasfuturecost.Standardcostisusedforcalculatingprofitabilityfromaproject/order/activityproposedtobeundertaken.Hence,standardcost isveryuseful fordecisionmakingpurpose.
(b) Provide target to be achieved: Standard costs are the target cost whichshouldnotbecrossedbytheresponsibilitycentres.Performanceofaresponsi-bilitycentreiscontinuouslymonitoredandmeasuredagainstthesetstandards.Anyvariancefromthestandardisnotedandreportedforappropriateaction.
(c) Used in budgeting and performance evaluation: Standard costs are used to setbudgetsandbasedonthesebudgetsmanagerialperformanceisevaluated.Thisisoftwobenefits,onemanagersofaresponsibilitycentrewillnotcom-promisewiththequalitytofulfillthebudgetedquantityandsecond,variancescanbetracedwiththeresponsibledepartmentorperson.
(d) Interim profit measurement and inventory valuation:Actualprofitisknownonlyaftertheclosureoftheaccount.Feworganisationsusetoprepareprofit-
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13.4 COST AND MANAGEMENT ACCOUNTING
abilitystatementforinterimperiodsalsoformanagementreportingpurpose.Toarriveatprofitfigure,standardcostsaredeductedfromtherevenue.
13.2 TYPES OF STANDARDSTypesofstandardsareasbelow:(i) Ideal Standards :Theserepresentthelevelofperformanceattainablewhenpricesformaterialandlabouraremostfavourable,whenthehighestoutputisachievedwiththebestequipmentandlayoutandwhenthemaximumefficiencyinutilisationofresourcesresultsinmaximumoutputwithminimumcost.Thesetypesofstandardsarecriticisedonthreegrounds:(a) Sincesuchstandardswouldbeunattainable,noonewouldtaketheseserious-
ly.(b) Thevariancesdisclosedwouldbevariances from the ideal standards. These
wouldnot,therefore,indicatetheextenttowhichtheycouldhavebeenrea-sonablyandpracticallyavoided.
(c) Therewouldbenologicalmethodofdisposingofthesevariances.(ii) Normal Standards:Thesearestandardsthatmaybeachievedundernormaloperatingconditions.Thenormalactivityhasbeendefinedas“thenumberofstand-ardhourswhichwillproduceatnormalefficiencysufficientgoodtomeettheaveragesalesdemandoveratermofyears”.Thesestandardsare,however,difficulttosetbecausetheyrequireadegreeoffore-casting.Thevariancesthrownoutunderthissystemaredeviationsfromnormaleffi-ciency,normalsalesvolume,ornormalproductionvolume.Iftheactualperformanceisfoundtobeabnormal,largevariancesmayresultandne-cessitate revision of standards.(iii) Basic or Bogey Standards:Thesestandardsareusedonlywhentheyarelikelytoremainconstantorunalteredoveralongperiod.Accordingtothisstandard,abaseyearischosenforcomparisonpurposesinthesamewayasstatisticiansusepricein-dices.Sincebasicstandardsdonotrepresentwhatshouldbeattainedinthepresentperiod,currentstandardsshouldalsobepreparedifbasicstandardsareused.Basicstandardsare,however,wellsuitedtobusinesseshavingasmallrangeofproductsandlongproductionruns.Basicstandardsareset,onalong-termbasisandareseldomrevised.Whenbasic standardsare inuse, variancesarenot calculated. Instead, theactualcostisexpressedasapercentageofbasiccost.Thecurrentcostisalsosimilarlyexpressedandthetwopercentagesarecomparedtofindouthowmuchtheactualcosthasdeviatedfromthecurrentstandard.Thepercentagesarenextcomparedwiththoseof thepreviousperiods toestablish the trendofactualandcurrentstandardfrombasiccost.
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STANDARD COSTING 13.5
(iv) Current Standards:Thesestandardsreflectthemanagement’santicipationofwhatactualcostswillbeforthecurrentperiod.Thesearethecostswhichthebusi-nesswill incur if theanticipatedpricesarepaidfor thegoodsandservicesandtheusagecorrespondstothatbelievedtobenecessarytoproducetheplannedoutput.Thevariancesarisingfromexpectedstandardsrepresentthedegreeofefficiency inusageofthefactorsofproduction,variationinpricespaidformaterialsandservicesanddifferenceinthevolumeofproduction.
13.3 THE PROCESS OF STANDARD COSTINGTheprocessofstandardcostisasbelow:(i) Setting of Standards :Thefirststepistosetstandardswhicharetobeachieved,
theprocessofstandardsettingisexplainedbelow.(ii) Ascertainment of actual costs :Actualcostforeachcomponentofcost isas-
certained.Actualcostsareascertainedfrombooksofaccount,materialinvoices,wagesheet,chargeslipetc.
(iii) Comparison of actual cost with standard cost :Actualcostsarecomparedwiththe standards costs and variances are determined.
(iv) Investigate the reasons for variances: Variances arises are investigated for fur-theraction.Basedonthis,performanceisevaluatedandappropriateactionsaretaken.
(v) Disposition of variances :Variancesarisearedisposedoffbytransferringittherelevantaccounts(costingprofitandlossaccount)aspertheaccountingmethod(plan)adopted.
13.4 SETTING-UP OF STANDARD COSTStandardcostissetonthebasisofmanagement’sestimation.Costisestimatedonthebasisoftechnicalspecificationprovidedbytheengineeringdepartmentorotherex-pertsuchasproductionengineer.Generally,whilesettingstandards,considerationisgiventohistoricaldata,currentproductionplanandexpectedconditionsoffuture.Forthesakeofdetailedanalysisandcontrolstandardcostissetforeachelementofcosti.e.material,labour,variableoverheadsandfixedoverheads.Apartfromthisstandardarealsosetforthesalesquantityandsalesvalue;thisisgenerallyknownasbudgetedsales.Standardsaresetinbothquantity(unitsorhours)andincost(priceorrate).Itisthusmeasureinquantities,hoursandvalueofthefactorsofproduction.Standardcostsaredividedintothreemaincostcomponents,suchas(a) DirectMaterialCost(b) DirectEmployee(Labour)Costand(c) Overheads© The Institute of Chartered Accountants of India
13.6 COST AND MANAGEMENT ACCOUNTING
Standards are set in bothphysical andmonetary terms for each cost components.Detailsareasfollows:13.4.1 Physical StandardsPhysical standards refer to expressionof standards in units or hours. At this stagestandardquantityandstandardhoursaredeterminedforaparticularproductorser-vice.Thepurposeofsettingstandardsistosecureeconomiesinscaleofproductionandtosetsellingpriceforquotationpurpose.Inmanufacturingorganisations,thetaskofsettingphysicalstandardsisassignedtotheindustrialengineeringdepartment.Whilesettingstandardsconsiderationisgivento the• Company’soperatingplani.e.budgets• Finaloutputtobeproduced• Materialspecification, inbothquantityandqualityprovidedbytheengineering
department.• Proportionofmaterialtobeusedincaseofmultipleinputs.• Methodofproductioni.e.fullyautomated,semi-automatedormanual.• Skillsetofworkersandavailabilityofworkers.• Workingconditionsandinternalfactors.• Externalfactors(suchasLabourLaw,FactoriesAct,Govt.policyetc.).PROCEDURE OF SETTING MATERIAL QUANTITY STANDARDSThefollowingprocedureisusuallyfollowedforsettingmaterialquantitystandards.(a) Standardisationofproducts:Atthisphase,productstobeproducedisdecided
basedonproductionplanandcustomer’sorder.Generallyfollowingquestionsareansweredatthisstage:(i)Whattobeproduced?(ii)Whichtypetobeproducedand(iii)Howmuchtobeproduced?
(b) Productstudy:Producttobeproducedisanalysedandstudiedfordevelopmentsandproduction.Productstudyiscarriedoutbytheengineeringdepartmentorproductconsultants.Atthisphaseanswerstothefollowingquestionsaresatis-fied:(i)Howcanitbeproduced?(ii)Whatarethepre-requisites?(iii)Whichtypeofmaterialstobeused?(iv)Howproductscanbeacceptedinthemarket?Etc.
(c) Preparationofspecificationlist:Aftertheproductstudyalistofmaterialispre-pared.Itspecifiestypes(quality)andquantityofmaterialstobeused,substituteofthematerials,quantityandproportionofmaterialstobeused,processtobefollowed,pre-requisitesandconditionrequiredetc.Whilepreparingspecificationlistconsiderationtoexpectedamountofwastageisgiven.Itmustbecustomisedtoadoptchangesintheproduct.
(d) Testruns:Sampleortestrunsunderspecifiedconditionsarecarriedoutandsam-pleproductsaretestedforthedesiredqualityandquantity.Anydeviationfromthespecificationisnoteddownandspecificationlistisupdated.
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STANDARD COSTING 13.7
PROCEDURE OF SETTING LABOUR TIME STANDARDSThefollowingarethestepsinvolvedinsettinglabourstandards:(a) Standardisationofproductandproductstudyiscarriedoutasexplainedabove.(b) Labourspecification:Typesof labourandlabourtimeisspecified.Labourtime
specificationisbasedonpastrecordsandittakesintoaccountnormalwastageoftime.
(c) Standardisationofmethods:Selectionofpropermachinestousepropersequenceandmethodofoperations.
(d) Manufacturinglayout:Aplanofoperationforeachproductlistingtheoperationstobeperformedisprepared.
(e) Timeandmotionstudy:Itisconductedforselectingthebestwayofcompletingthejobormotionstobeperformedbyworkersandthestandardtimewhichanaverageworkerwilltake foreachjob.Thisalsotakesintoaccountthelearningef-ficiencyandlearningeffect.
(f) Trainingandtrial:Workersaretrainedtodotheworkandtimespentatthetimeoftrialrunisnoteddown.
PROCEDURE OF SETTING OVERHEADS TIME/ QUANTITY STANDARDSVariable overhead time/ quantity is estimated based on specificationmade by theengineeringdepartments.Variableoverheadsmayeitherbebasedondirectmaterialquantityorlabourhour.Generally,itisbasedonlabourtimeworked.Fixedoverheadtimeisbasedonbudgetedproductionvolume.13.4.1.1 Problems faced while setting physical standardsTheproblemsinvolvedwhilesettingphysicalstandardswillvaryfromindustrytoin-dustryandmaybeillustratedasunder:(a) Asituationmayarisewherethecompanyisintroducingthemanufactureofanew
lineofproduct.Insuchcase,itmaybenecessarytoemployworkerswhohavenoexperienceinthejob.Thiscreatesaproblemofsettingstandardtimebecauseitisnecessarytomakeadjustmentfortheinexperienceofworkers.
(b) Changes in technologymay necessitate installation of sophisticatedmachines.Whensuchmachinesare installed, thepreciseestimationofoutputandstand-ardofefficiencyachievablewillposeaproblemuntilafteralongtimewhentheworkingconditionsaresettled.Thus,settingstandardsforthesemachinesandestimatingthestandardcostswillneedconsiderableamountofwork.
(c) Oftenmanufacturersprefertoproductdiversificationtoimproveprofitability.Oneofthemostimportantproblemsthatarisewiththeproposedchangeinproductisre-settingofproductionfacilities.Forexample,whenanoldcopperpartistobechangedintoonemadeofbronzetosuitthenewproduct,specialcarehastobetakentoordernewtoolswhichinturn,posetheproblemofsettingupofstandardtimeinrespectofthenewtools.© The Institute of Chartered Accountants of India
13.8 COST AND MANAGEMENT ACCOUNTING
(d) Standardsofmaterialspecificationsareestablishedandifthematerialsarenotavailableasperspecifications,thestandardsmaynotbeachievable.
(e) Veryoftenthecostaccountantisconfrontedwiththeproblemofchoosingthetypeofstandardstobeadopted.Forexample,theindustrialengineerhasfur-nishedthestandardtimeforalldirectlabouroperationsasunder:1. Standardtimeattainablebythebestoperationsis2hoursperunitofproduct
includingallowancesforpersonalfatigueanddelay.2. Attainablegoodperformancefortheaveragetrainedoperatoris2.10hours
perunitofproduct.3. Averagepastperformanceis2.60hoursperunit.
Theproblemis,shoulddirectlabourstandardhourbebasedonmaximumefficiencyorattainablegoodperformanceoraveragepastperformance?Ifcostsaretorepresentmaximumefficiency,theunitcostusedinsellingpricewillrelativelybelowbutahighdebitvariancemayariseifthestandardefficiencyisnotachieved.If,however,thestandardcostisbasedonattainablegoodperformance,thevariancesmay tend tobenil. If efficiency is tobegauged,maximumefficiency standardwillreflecttheoffstandardperformance,therebyenablingthedepartmentalheadtoex-ercisecontrol.Similarproblemsasthosementionedabove,mayalsoariseinsettingofwastestand-ards.Forexample,thequestionmayariseastowhetheronlyabsolutelyunavoidablewastageshouldbeprovidedorthepastaveragelevelofwastagemaybeprovided.Thiswillagainhavedifferentimpactonthestandardcostofproduction.13.4.2 Price or Rate StandardsBroadly,thepriceorratestandardscanbesetoneitherofthefollowingbases:(a) Actualaverageormeanpriceexpectedtoprevailduringthecomingperiod, sayoneyear;or(b) Normalpricesexpectedtoprevailduringacycleofseasonswhichmaybeofa numberofyears.PROCEDURES OF SETTING MATERIAL PRICE STANDARDSMaterialpricesarenotaltogetherwithinthecontrolofthemanufacturer;butthepur-chasingdepartment,onbeingapprisedofproductionquantitiesrequired,shouldbeable,fromitsknowledgeofcurrentmarketconditionsandtrends,tostatewithrea-sonableaccuracypricefortheconstituentitems.Thestandardsforpricesofmaterialsshouldbebasedonthefollowingfactors, ifpricefluctuationsaresmallandarenotserious.(a) Stockofmaterialsonhandandthepricesatwhichtheyareheld;(b) Thepricesatwhichordersforfuturedeliveriesofmaterials(agreemententered
into)havealreadybeenplaced,
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STANDARD COSTING 13.9
(c) Minimumsupportpricefixedbytheappropriateauthorityand(d) AnticipatedfluctuationinpricelevelsIncasethereareunsystematicfluctuationsinthemarketprice, itmaybedifficulttode-terminestandardcostsofmaterials;fluctuationsinthemarketpricemaybeofdiffer-entsorts;pricesmaybedifferentfrommonthtomonth,fromoneseasontoanotherorfromoneyeartoanother.Theremaybeaseculartrendwhich,onthewhole,ispushingpriceupwardsordownwards.Thenatureofdifficultiesencounteredinfixingstandardcostsofmaterialswillnaturallybedifferentineachcase.Inaddition,thepurchasingpolicyofthecompanyandtheobjectivetobeachieved(fromcostaccounting)willmakeadifference.Thedifficultyindeterminingthestandardcostofmaterialinsuchasituationcanberesolvedasfollows:(a) In casepricesfluctuate frommonth tomonth, the averageofpricesof a year
correctedfortheknownsecularchangesandanyotherexpectedchangecanverywellserveasthestandardpriceforthenextyear.
(b) Ifthefluctuationsareseasonal,butthewholeyear’srequirementsarepurchasedatonetime,theweightedaverageofthelikelypricestobepaidshouldbetreat-edasthestandardprice.But, ifbuyingisalsospreadoverthewholeyear,theweightedaverageofthepricesforthewholeyearshouldbethestandardprice.
(c) Ifpricesfluctuatefromoneyeartoanother,acarefulestimateofthepricelikelytoprevailnextyear,basedonastatisticalstudy,shouldbeadoptedasthestandardprice.
PROCEDURES OF SETTING WAGE RATE STANDARDThetypeoflabourrequiredforperformingaspecificjobwouldbethemostimportantfactor fordeciding the rateofwage tobepaid toworkers.Standardwage rate forskilledandunskilledworkersaresetbasedonthefollowingbasis: Timetakenbytheworkerstocompleteaunitofproduction. Timeorpiecerateprevailingintheindustry.Itcanbeknownfromthepeers.Wageagreemententeredintobetweenthemanagementandworkers’union. Lawprevailingintheareaofoperation,lawlikePaymentofminimumwagesAct,
PaymentofbonusActetc.PROCEDURES OF SETTING OVERHEAD EXPENSE STANDARDSIncomputingtheoverheadexpensestandards,considerationshouldbegiventothelevelofoutputandtheexpensesbudgeted.Abudgetshowingthelevelofoutputtobeconsideredforarrivingatoverheadexpensestandardsmaybebasedontheprac-ticalmanufacturingcapacityortheaveragesalescapacityorthebudgetedcapacitytobeutilisedinthecomingyear.Afterhavingchosenoneofthebasesforcomputingoutputlevel,theexpensescanbebudgetedunderdifferentheadsforthelevelofout-
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13.10 COST AND MANAGEMENT ACCOUNTING
putchosen.Theseexpensesareclassifiedunderfixedandvariablecategories.Thus,theoverheadexpensesstandardsaresetbycomputingtheoptimumlevelofoutputfortheproductiondepartmentsandthereafterdraftingabudgetforfixedandvariableexpenseswhichwillbeincurredatthislevel.Ifproductionisseasonaloritfluctuatesduringtheyear,aflexiblebudgetmaybepreparedtofacilitatecomparisonbetweenthetargetsetandtheactualexpenditurefortheperiod.
13.5 TYPES OF VARIANCESControllable and un-controllable variances : Thepurposeofthestandardcostingreportsistoinvestigatethereasonsforsignificantvariancessoastoidentifytheprob-lemsandtakecorrectiveaction.Variancesarebroadlyof two types,namely, controllableanduncontrollable.Con-trollable variances are thosewhich can be controlled by the departmental headswhereasuncontrollablevariancesarethosewhicharebeyondtheircontrol.Respon-sibilitycentresareanswerableforalladversevarianceswhicharecontrollableandareappreciatedforfavourablevariances.Controllabilityisasubjectivematterandvariesfromsituationtosituation. Iftheuncontrollablevariancesareofsignificantnatureandarepersistent,thestandardmayneedrevision.Favourable and Adverse variance :Favourablevariancesarethosewhichareprofita-bleforthecompanyandadversevariancesarethosewhichcauseslosstothecompa-ny.Whilecomputingcostvariancesfavourablevariancemeansactualcostislessthanstandardcost.On theotherhand,adversevariancemeansactualcost isexceedingstandardcost.Thesituationwillbereversedforsalesvariance.Favourablevariancesmeansactualismorethanbudgetedandoncontraryadversevarianceiswhereactualis lessthanbudgeted.Thesearecreditedanddebitedinthecostingprofitandlossaccountrespectively.Favourablevarianceinshortdenotedbycapital‘F’andadversevariancesbycapital‘A’.Studentsmay note that signs of favourable and adverse variancemay ormay notmatchexactlywithmathematicalsignsi.e.(+)or(-).
13.6 CLASSIFICATION OF VARIANCESVariancesarebroadlyclassifiedintotwopartsnamelyRevenuevarianceandCostvari-ance.AtRevenuesidevariancesiscalculatedbycomparingactualsalesfrombudgeted(standard)sales.Ontheotherhand,Costsidereflectsvariancesincostcomponents.Costvarianceclassificationisshownbelowwiththehelpofastructureddiagram.
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STANDARD COSTING 13.11
Total Cost
Material Cost Variance Labour Cost Variance Overhead Cost Variance
MaterialPrice
Variance
MaterialUsage
Variance
LabourRate
Variance
LabourEfficiencyVariance
MaterialMix
Variance
MaterialYield
Variance
LabourMix
Variance
IdleTime
Variance
LabourYield
Variance
Variable OverheadCost Variance
Fixed Overhead
Expenditure orBudget Variance
EfficiencyVariance
Expenditure orBudget Variance
VolumeVariance
EfficiencyVariance
CapacityVariance
CalendarVariance
Fig 13.1. Classification of Variances
13.7 COMPUTATION OF VARIANCESAsdiscussedearliervariancesareclassifiedintotwoparts.Herewewillstartfromcostsideanddiscussallcostcomponentsonebyonewiththehelpofappropriateexampleandillustrations.13.7.1 Material Cost VarianceMaterialcostvarianceisthedifferencebetweenstandardcostofmaterialsusedandtheactualcostofmaterials.Mathematicallyitiswrittenas.
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13.12 COST AND MANAGEMENT ACCOUNTING
MaterialCostVariance=[StandardCost–ActualCost]Or[(Std.Quantity×Std.Price)–(ActualQuantity×ActualPrice)](ThedifferencebetweentheStandardMaterialCost of the actual production volume and the ActualCostofMaterial)
Reasons for variance:Materialcostvariancearisesmainlybecauseofeitherdifferenceinmaterialpricefromthestandardpriceordifferenceinmaterialconsumptionfromstandardconsumptionorbecauseofbothreasons.AnalysisofmaterialcostvarianceisdonedividingitintotwopartsnamelyMaterialPricevarianceandMaterialUsagevariance.
Material Cost Variance
Material Price Variance Material Usage Variance
Material Mix Variance Material Yield Variance
(A) Material Price VarianceItmeasuresvariancearises in thematerial costdue todifference inactualmaterialpurchasepricefromstandardmaterialprice.Mathematicallyitiswrittenas:
Material Price Variance=[StandardCostofActualQuantity*–ActualCost](ThedifferencebetweentheStandardPrice and ActualPrice for the ActualQuantityPurchased)[(SP–AP)×AQ]Or [(SP×AQ)–(AP×AQ)]
*Here actualquantitymeansactualquantityofmaterialpurchased.Ifinthequestionmaterialpurchaseisnotgiven,itistakenasequaltomaterialconsumed.
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STANDARD COSTING 13.13
Explanation:Materialpricevariancecanalsobecalculatedtakingmaterialusedasactualquantityinsteadofmaterialpurchased.Thismethodisalsocorrectbutdoesnotserve thepurposeofvariancecomputation.Materialpricevariancemayarisefromvarietyofreasonsoutofwhichsomemaybecontrollableandsomemaybebeyondthecontrolofthepurchasedepartment.Ifpricevariancearisesduetoinef-ficiencyofpurchasedepartmentoranyotherreasonwithinthecontrolofthecom-pany,thenitisveryimportanttoreportvarianceasearlyaspossibleandthiscanbedonebytakingpurchasequantityasactualquantityforpricevariancecomputation.
Responsibility for Material Price Variance:Generally,purchasedepartmentpurchas-esmaterialsfromthemarket.Purchasedepartmentisexpectedtoperformitsfunctionveryprudently so that companynever suffers lossdue to its inefficiency. Purchasedepartment is held responsible for adverseprice variancearisesdue to the factorscontrollablebythedepartment.(B) Material Usage VarianceItmeasures variance inmaterial costdue tousage/ consumptionofmaterials. It iscomputedasbelow:
Material Usage Variance =[StandardCostofStandardQuantityforActualProduc-tion–StandardCostofActualQuantity*](ThedifferencebetweentheStandardQuantityspecified for actual production and the ActualQuantityused,atStandardPrice)[(SQ–AQ)×SP]Or [(SQ×SP)–(AQ×SP)]
*Hereactualquantitymeansactualquantityofmaterialused.
Responsibility for material usage variance:Materialusage is theresponsibilityofproductiondepartmentanditisheldresponsibleforadverseusagevariance.Reasons for variance: Actual material consumptionmay differ from the standardquantityduetoeitherdifferenceinproportionusedfromstandardproportionorduetodifferenceinactualyieldfromstandardyield.Materialusagevarianceisdividedintotwoparts(a)Materialusagemixvarianceand(b)Materialyieldvariance.(a) Material Mix VarianceVarianceinmaterialconsumptionmayariseduetodifferenceinproportionusedactu-allyfromthestandardmix/proportion.Itarisesonlywhentwomoreinputsareusedtoproduceaproduct.Mathematically,
Material Mix Variance=[StandardCostofActualQuantityinStandardProportion –StandardCostofActualQuantity](ThedifferencebetweentheActualQuantityinstandardproportionandActualQuan-tityinactualproportion,atStandardPrice)[(RSQ–AQ)×SP]Or[(RSQ×SP)–(AQ×SP)]
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13.14 COST AND MANAGEMENT ACCOUNTING
(b) Material Yield Variance (Material Sub-usage Variance)Varianceinmaterialconsumptionwhicharisesduetoyieldorproductivityofthein-puts.Itmayariseduetouseofsub-standardqualityofmaterials,inefficiencyofwork-ersorduetowrongprocessing.
Material Yield Variance =[StandardCostofStandardQuantityforActualProduc-tion–StandardCostofActualQuantityinStandardProportion](ThedifferencebetweentheStandardQuantityspecified for actual production and ActualQuantityin standard proportion,atStandardPurchasePrice)[(SQ–RSQ)×SP]Or [(SQ×SP)–(RSQ×SP)]
Verification of the formulae:MaterialCostVariance =MaterialUsageVariance+MaterialPriceVariance*
Or,MaterialCostVariance=(MaterialMixVariance+MaterialRevisedusageVariance)+Materialpricevariance
IfmaterialpurchasedquantityandmaterialconsumedquantityissameMeaning of the terms used in the formulae:
Term MeaningStandardQuantity(SQ) Quantityofinputstobeusedtoproduceactualoutput.ActualQuantity(AQ) Quantityofinputsactuallyusedtoproduceactualoutput.Revised Standard Quan-tity(RSQ)
If Actual totalquantity of inputswereused in standardproportion.
ILLUSTRATION 1The standard and actual figures of product ‘Z’ are as under:
Standard ActualMaterial quantity 50 units 45 unitsMaterial price per unit ` 1.00 ` 0.80Calculate material cost variance.SOLUTIONThevariancesmaybecalculatedasunder:(a) Standardcost = Std.Qty×Std.price=50units×`1.00=`50(b) Actualcost = Actualqty.×Actualprice=45units×`0.80=
`36Variances:(i) Pricevariance = Actualqty(Std.price–Actualprice) = 45units(`1.00–`0.80)=`9(F)(ii) Usagevariance = Std.price(Std.qty–Actualqty.)
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STANDARD COSTING 13.15
= `1(50units–45units)=`5(F)(iii) Materialcostvariance= Standardcost–Actualcost (Totalvariance) = `50–`36=`14(F)
ILLUSTRATION 2NXE Manufacturing Concern furnishes the following information:
Standard: Material for 70 kg finished products 100 kg.Price of material ` 1 per kg.
Actual: Output 2,10,000 kg.Material used 2,80,000 kg.Cost of Materials ` 2,52,000
Calculate: (a) Material usage variance, (b) Material price variance, (c) Material cost var-iance.SOLUTIONStandardQuantityofinputforactualoutput(SQ)=2,10,000kg×100 kg
70kg
=3,00,000kg.
ActualPrice(AP)=(` 2,52,000÷2,80,000kg)=` 0.90perkg.(a) MaterialUsageVariance =(SQ–AQ)×SP =(3,00,000–2,80,000)×1 =`20,000(F)(b) MaterialPriceVariance =(SP–AP)×AQ =(1–0.90)×2,80,000
=`28,000(F)(c) MaterialCostVariance =(SQ×SP)–(AQ×AP) =(3,00,000×1)–(2,80,000×0.90)
=`48,000(F)Check MCV =MPV+MUV
`48,000(F) =`28,000(F)+`20,000(F)ILLUSTRATION 3The standard cost of a chemical mixture is as follows:40% material A at ` 20 per kg.60% material B at ` 30 per kg.A standard loss of 10% of input is expected in production. The cost records for a period showed the following usage :90 kg material A at a cost of ` 18 per kg.
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13.16 COST AND MANAGEMENT ACCOUNTING
110 kg material B at a cost of ` 34 per kg.The quantity produced was 182 kg. of good product.Calculate all material variances. SOLUTIONBasic Calculation
Material Standard for 180 kg. output Actual for 182 kg. outputQty. Kg.
Rate(`)
Amount(`)
QtyKg.
Rate(`)
Amount(`)
A 80 20 1,600 90 18 1,620B 120 30 3,600 110 34 3,740
Total 200 5,200 200 5,360Less:Loss 20 - - 18 - -
180 5,200 182 5,360
Std.costofactualoutput=` 5,200×180182 =`5,257.78
CalculationofVariances1. MaterialCostVariance =(Std.costofactualoutput–Actualcost) =(5,227.78–5,360) =`102.22(A)2. MaterialPriceVariance =(SP–AP)×AQ MaterialA =(20–18)×90 =`180.00(F) MaterialB =(30–34))×110 =`440.00(A)
MPV =`260.00(A)3. MaterialUsageVariance=(Std.Quantityforactualoutput–ActualQuantity)
×Std.Price
MaterialA= 18280× – 90180
×20 =`182.22(A)
MaterialB=
−× 110
180182120 ×30 =`340.00(F)
MUV =`157.78(F)Check
MCV `102.22(A)
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STANDARD COSTING 13.17
13.7.2 Labour Cost VarianceAmountpaidtoemployeesfortheirlabourisgenerallyknownasemployeeorlabourcost. In this chapter labour cost is used todenote employees cost. Labour (em-ployee)costvarianceisthedifferencebetweenactuallabourcostandstandardcost.Mathematicallyitcanbewrittenas:
LabourCostVariance=[StandardCost–ActualCost](Thedifferencebetween theStandardLabourCost and the ActualLabourCostin-curred for the production achieved)[(SH×SR)–(AH*×AR)]*Actualhourspaid.
Reasons for variance:Differenceinlabourcostariseseitherduetodifferenceintheactuallabourratefromthestandardrateordifferenceinnumbersofhoursworkedfromstandardhours.Labourcostvariancecanbedividedintotwopartsnamely(i)LabourRateVarianceand(ii)LabourEfficiencyVariance.
. Labour Cost Variance
Labour RateVariance
Labour EfficiencyVariance
Labour Mix(Gang) Variance
Idle timeVariance
Labour YieldVariance
(A) Labour Rate Variance:Labourratevariancearisesduetodifferenceinactualratepaidfromstandardrate.Itisverysimilartomaterialpricevariance.Itiscalculatedasbelow:
LabourRateVariance=[StandardCostofActualTime–ActualCost](ThedifferencebetweentheStandard Rate per hour and ActualRateper hour for the ActualHours paid)[(SR–AR)×AH*]Or [(SR×AH*)–(AR×AH*)]*Actualhourspaid.Responsibility for labour rate variance:Generally,labourratesareinfluencedbytheexternalfactorswhicharebeyondthecontroloftheorganisation.However,per-sonnelmanagerisresponsibleforlabourratenegotiation.
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13.18 COST AND MANAGEMENT ACCOUNTING
(B) Labour Efficiency Variance:Labourefficiencyvariancearisesduetodeviationintheworkinghoursfromthestand-ardworkinghours.
LabourEfficiencyVariance=[StandardCostofStandardTime forActualProduction–StandardCostofActualTime](ThedifferencebetweentheStandardHoursspecified for actual production and Ac-tualHours worked at Standard Rate)[(SH–AH#)×SR]Or [(SH×SR)–(AH#×SR)]#ActualHoursworkedResponsibility for labour efficiency variance:Efficiencyvariancemayariseduetoabilityoftheworkers,inappropriateteamofworkers,inefficiencyofproductionman-agerorforemanetc.However,productionmanagerorforemancanbeheldresponsi-blefortheadversevariancewhichotherwisecanbecontrolled.Labourefficiencyvarianceisfurtherdividedintothefollowingvariances:(a) IdleTimeVariance(b) LabourMixVarianceorGangvariance(c) LabourYieldVariance(orLabourRevised-efficiencyVariance)(a) Idle Time Variance:Itiscalculatedfortheunproductivelabourhours.Hereidletimemeanslabouridletimearisesduetoabnormalreasons.Itiscalculatedasbelow:
LabourIdleTimeVariance=[StandardRateperHour×ActualIdleHours](ThedifferencebetweentheActualHours paid and ActualHours worked at Standard Rate)[(AH*–AH#)×SR]Or [(AH*×SR)–(AH# ×SR)]*Actualhourspaid;#ActualHoursworked(b) Labour Mix Variance: Labourefficiencyvariancewhicharisesduetochangeintheproportionorcombina-tionofdifferentskillseti.e.numberofskilledworkers,semi-skilledworkersandun-skilledworkers.Mathematically,
LabourMixVarianceOrGangVariance=[StandardCostofActualTime Worked inStandardProportion–StandardCostofActualTimeWorked](ThedifferencebetweentheActualHoursworked in standard proportion and ActualHours worked in actual proportion,atStandard Rate)[(RSH–AH#)×SR]Or [(RSH×SR)–(AH#×SR)]#ActualHoursworked© The Institute of Chartered Accountants of India
STANDARD COSTING 13.19
(c) Labour Yield Variance: Labourefficiencyvariancewhicharisesduetoproductivityofworkers.
LabourYieldVarianceOrSub-EfficiencyVariance=[StandardCostofStandardTime forActualProduction–StandardCostofActualTime WorkedinStandardProportion](ThedifferencebetweentheStandardHours specified for actual production and Ac-tualHours worked in standard proportion,atStandard Rate)(SH–RSH)× SR Or (SH×SR)–(RSH×SR)
Verification of formulae:LabourCostVariance=LabourRateVariance+LabourEfficiencyVariance (ifhours
paidandhoursworkedissame)OR
LabourCostVariance=LabourRateVariance+IdleTimeVariance+LabourEfficiencyVariance
ORLabourEfficiencyVariance=LabourMixVariance+LabourYieldVarianceILLUSTRATION 4The standard and actual figures of a firm are as underStandard time for the job 1,000 hoursStandard rate per hour ` 0.50Actual time taken 900 hoursActual wages paid ` 360Compute the variancesSOLUTION(a) Std.labourcost (`) (1,000hours×`0.50) 500(b) Actualwagespaid 360(c) Actualrateperhour:`360/900hours= `0.40Variances(i) Ratevariance =Actualtime(Std.rate–Actualrate) =900hours(`0.50–`0.40)=`90(F)(ii) Efficiencyvariance =Std.rateperhr.(Std.time–Actualtime) =`0.50(1,000hrs.–900hrs.)=`50(F)(iii) Totallabourcostvariance =Std.labourcost–Actuallabourcost=`140(F)
© The Institute of Chartered Accountants of India
13.20 COST AND MANAGEMENT ACCOUNTING
ILLUSTRATION 5The standard labour employment and the actual labour engaged in a week for a job are as under:
Skilledworkers
Semi-skilled
workers
Unskilled workers
Standard no. of workers in the gang 32 12 6
Actual no. of workers employed 28 18 4Standard wage rate per hour 3 2 1Actual wage rate per hour 4 3 2
During the 40 hours working week, the gang produced 1,800 standard labour hours of work. Calculate :(a) Labour Cost Variance (b) Labour Rate Variance(c) Labour Efficiency Variance (d) Labour Mix Variance(e) Labour Yield VarianceSOLUTIONCategory of
workersSH* × SR AH@ × SR AH@ × AR RSH# × SR
Skilled 1,152×3=3,456
1,120×3=3,360
1,120×4=4,480
1,280×3=3,840
Semi-skilled 432×2=864 720×2=1,440 720×3=2,160 480×2=960Unskilled 216×1=216 160×1=160 160×2=320 240×1=240Total `4,536 `4,960 `6,960 `5,040
* Std.labour hoursActualhoursproducedTotal Std. labour hours
×
Std.hrs.foractualoutputarecalculatedasfollows:
Skilled =2,0001,800
×1,280=1,152hrs.
Semi-skilled =2,0001,800
×480 =432hrs.
Unskilled =2,0001,800
×240=215hrs.
© The Institute of Chartered Accountants of India
STANDARD COSTING 13.21
@Actualno.ofworkers×40hours
# Std.hoursActualhours workedTotal Std. hours
×
LabourCostVariance =(SH×SR)–(AH×AR)Or, =` 4,536–6,960 =`2,424(A)LabourRateVariance =AH(SR–AR)or(AH×SR)–(AH×AR)
Skilled =3,360–4,480 =`1,120(A)Semi-skilled =1,440–2,160 =`720(A)Unskilled =160-320 =`160(A) 2,000(A)
LabourEfficiencyVariance =SR(SH–AH)or(SR×SH)–(SR×AH)Skilled =3,456–3,360 =`96(F)Semi-skilled =864–1,440 =`576(A)Unskilled =216-160 =`56(F) `424(A)
LabourMixVariance =SR(RSH–AH)or(SR×RSH)–(SR×AH)Skilled =3,840–3,360 =` 480(F)Semi-skilled =960–1,440 =`480(A)Unskilled =240-160 =`80(F) `80(F)
LabourYieldVariance =SR(SH–RSH)or(SR×SH–SR×RSH)Skilled =3,456-3,840 =` 384(A)Semi-skilled =864-960 =` 96(A)Unskilled =216-240 =` 24(A) `504(A)
Check(i) LCV =LRV+LEV
` 2,424(A) =` 2,000(A)+` 424(A)(ii) LEV =LMV+LYV
` 424(A) =` 80(F)+` 504(A)13.7.3 Variable Overheads Cost Variance
Variable OverheadExpenditure Variance
Variable OverheadEfficiency Variance
Variable Overhead Cost Variance
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13.22 COST AND MANAGEMENT ACCOUNTING
Variableoverheadsconsistofexpensesother thandirectmaterialanddirect labourwhichvarywiththe levelofproduction. Ifvariableoverheadconsistof indirectma-terials,theninthiscaseitvarieswiththedirectmaterialused.Ontheotherhand,ifvariableoverheadisdependingonnumberofhoursworkedtheninthiscaseitwillvarywithlabourhourormachinehours.Ifnothingismentionedspecificallythenwetakelabourhourasbasis.Variableoverheadcostvariancecalculationissimilartola-bourcostvariance.Variableoverheadcostvarianceisdividedintotwoparts(i)VariableOverheadExpenditureVarianceand(ii)VariableOverheadEfficiencyVariance.
Variable Overhead Cost Variance(StandardVariableOverheadsforProduction–ActualVariableOverheads)
Variable Overhead Expenditure (Spending) Variance (Standard Variable Overheads forActualHours#)Less(ActualVariableOverheads)[(SR–AR)×AH#]Or[(SR×AH#)–(AR×AH#)]
Variable Overhead Efficiency Variance
(StandardVariableOverheadsforProduction)Less(Standard Variable Overheads for ActualHours#)[(SH–AH#)×SR]Or[(SH×SR)–(AH#×SR)]
# Actual Hours (Worked)Meaning of the terms used in the formulae:
Term MeaningStandardHours(SH) Hoursrequiredproducingactualoutput.ActualHours(AH) ActualHourstakentoproduceactualoutput.RevisedStandardHours(RSH) Ifactuallabourhoursworkedwereworkedbystand-
ardmix(combination)oflabour.ActualYield(AY) ActualHoursworkedStandardYield(SY) ActualhoursiflabourworkedinstandardratioStandardLabourCost(SLC) Standardlabourcostforactualoutput
13.7.4 Fixed Overhead Cost VarianceTherecoveryofthefixedcomponentsoftheestimatedoverheadsdependsuponcapac-ityutilization.Incaseacompanyproduceslessthantheprojectedutilizationitshallnotbeabletorecoverallthebudgetedfixedoverheads.Thisunrecoveredportionisknownaspro-ductionvolumevariance.
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STANDARD COSTING 13.23
Theothervarianceisbecauseofvariationsinactualspendingwhencomparedwithbothestimatedfixedandestimatedvariableoverheads.SuchavarianceisknownasOverheadexpensesvariance.Thefollowingdetaileddiscussionshallhelpyouhaveaclearunderstandingofthesetwovariances.(1) Production Volume Variance : Thetermfixedoverheadsimpliesthattheelementofcostdoesnotvarydirectlyinproportiontotheoutput.Inotherwords,fixedover-headsdonotchangewithinagivenrangeofactivity.However,theunitcostchangeseventhoughthefixedoverheadsareconstantintotalwithinthegivenrangeofoutput.So,higherthelevelofactivity,thelowerwillbetheunit cost or vice versa. Themanagement is, therefore, facedwith a costingdifficultybecause it requires arepresentativerateforchargingfixedoverheadsirrespectiveofchangesinvolumeofoutput.Forexample,ifthefixedoverheadsare`10,000andtheoutputvariesfrom8,000to11,000units,thecostperunitofoutputwouldbeasunder:
Fixed Overheads Output in units Cost per unit of output (`)
10,000 8,000 1.2510,000 9,000 1.1110,000 10,000 1.0010,000 11,000 0.91
Wehave,however,seenthatinstandardcosting,apredeterminedrateofoverheadrecoveryisestablishedforcostingpurposes.Thisinvolvestheestablishmentofapre-determinedcapacity.Ifwetake,forexample;10,000unitsaspredeterminevolume/capacity,thepre-deter-minedratewillbe` 1perunit.Ifthefactoryproducesonly8,000units,therewillbealossduetounder-recoverywhichcanbeexplainedintwo-ways:(a) Theactualcostwillbe`10,000÷8,000units=`1.25perunitwhereastheab-
sorbedcostis`1perhour.Sincethecostismoreby`0.25perunit,thetotallossis8,000units×`0.25or`2,000.
(b) Since the factoryhasproducedonly 8,000units, the amountof overheads re-coveredis8,000units×` 1 or `8,000.Sincefixedoverheadsareconstant,theamountwhichshouldhavebeenideallyincurredforthedepartmentis` 10,000.Hencethereisadifferenceof`2,000betweentheoverheadsrecoveredandtheoverheadsestimated.Thisvarianceisknownasproductionvolumevariance.
Thisshowsthecostoffailureonthepartofthefactorytoproduceattheplannedac-tivityof10,000units.Ifthecompanyproduces11,000units,thevariancewillshowthebenefitsofoperatingatalevelabovethebudgetedactivity.If,however,thefactoryhas
© The Institute of Chartered Accountants of India
13.24 COST AND MANAGEMENT ACCOUNTING
produced10,000units,therewillbenoproductionvolumevariancebecausetheactualactivityequalswhatwasbudgetedi.e.theproductionof10,000units.(2) Overhead Expenses Variance :Asdiscussedabove,theProductionVolumeVar-ianceanalysestheunrecoveredfixedoverheads.Apartfromthis,therecanbevaria-tionsintheactualspendingofbothfixedandvariableoverheadswhencomparedtowhatwasestablishedasastandard.Suchvariationscanbeaccountedforbyanalyzinganoverheadexpensesvariance.Theanalysisofoverheadvariancesisdifferentfromthatofmaterialandlabourvari-ances.Asoverheadistheaggregateofindirectmaterials,indirectlabourandindirectexpenses,thisvariance isconsideredtobeadifficultpartofvarianceanalysis.Itisim-portanttounderstandthatoverheadvarianceisnothingbutunderorover-absorptionof overhead. Fixed Overhead Cost Variance:Fixedoverheadcostvarianceisthedifferencebe-tweenactualfixedoverheadandabsorbedfixedoverhead.Fixedoverheadvarianceisdividedintotwoparts(A) Fixed Overhead Expenditure Variance and (B) FixedOverheadVolumeVariance.(A) Fixed Overhead Expenditure Variance:This is thedifferencebetweentheactualfixedoverheadincurredandbudgetedfixedoverhead.(B) Fixed Overhead Volume Variance: Varianceinfixedoverheadwhichariseduetothevolumeofproductioniscalledfixedoverheadvolumevariance.Fixedoverheadvolumevarianceisfurtherdividedintothethreevariances: (a)EfficiencyVariance (b) CapacityVarianceand (c) CalendarVariance
Fixed Overhead Cost
Variance
Fixed OH Expenditure
Variance
Fixed OH
Volume Variance
FOH Calender
VarianceFOH Capacity
Variance
FOH Efficiency
Variance
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STANDARD COSTING 13.25
Mathematicallythesecanbewrittenasfollows:
Fixed Overhead Cost Variance(AbsorbedFixedOverheads)Less(ActualFixedOver-
heads)
Fixed Overhead ExpenditureVariance
(BudgetedFixedOverheads)Less(ActualFixedOverheads)Or(BH×SR)–(AH×AR)
Fixed Overhead VolumeVariance
(AbsorbedFixedOverheads)Less (BudgetedFixedOverheads)Or(SH×SR)–(BH×SR)
Fixed Overhead Ca-pacity Variance
SR(AH–BH)Or(AH×SR)–(BH×SR)
Fixed Overhead Calen-dar Variance
Std.FixedOverheadrateper day (Actual no. ofWorking days – Budg-etedWorkingdays)
Fixed Overhead Efficien-cy Variance
SR(AH–SH)Or(AH×SR)–(SH×SR)
(a)Fixed Overhead Efficiency Variance:Thisisthedifferencebetweenfixedoverheadabsorbedandstandardfixedoverhead.(b)Fixed Overhead Capacity Variance:Thisisthedifferencebetweenstandardfixedoverheadandbudgetedoverhead.(c)Fixed Overhead Calendar Variance: Thisvariancearisesduetodifferenceinnum-berofactualworkingdaysandthestandardworkingdays.
Note:Whencalendarvarianceiscomputed,therewillbeamodificationinthecapac-ityvariance.Inthatcaserevisedcapacityvariancewillbecalculatedandtheformulais:Revised Capacity Variance=(Actualhours–Revisedbudgetedhours)×Std.fixedrateperhour
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13.26 COST AND MANAGEMENT ACCOUNTING
Verification of formulae:F.O.CostVariance=F.O.ExpenditureVariance+F.O.VolumeVarianceF.O.VolumeVariance=EfficiencyVariance+CapacityVariance+CalendarVarianceBasic terms used in the computation of overhead variance
Standardoverheadrate(perhour)= Budgeted OverheadBudgeted hours
Or
Standardoverheadrate(perunit)=
Budgeted Overhead
Budgeted output in units
b
Note:Separateoverheadrateswillbecomputedforfixedandvariableoverheads.Basic calculations before the computation of overhead variances:Thefollowingbasiccalculationshouldbemadebeforecomputingvariances.(i) Whenoverheadrateperhourisused: (a) Standardhoursforactualoutput(SHAO)
SHAO=
Budgeted Hours ActualOutputBudgeted Output
×
b
(b) Absorbed(orRecovered)overhead=Std.hoursforactualoutput×Std. overheadrateperhour (c) Standardoverhead=Actualhours×Std.overheadrateperhour (d) Budgetedoverhead=Budgetedhours×Std.overheadrateperhour (e) Actualoverhead=Actualhours×Actualoverheadrateperhour(ii) Whenoverheadrateperunitisused
(a)Standardoutputforactualhours(SOAH)
SOAH=
Budgeted Output Actual HoursBudgeted Hours
×
b
(b) Absorbedoverhead=Actualoutput×Std.overheadrateperunit (c) Standardoverhead=Std.outputforactualtime×Std.overheadrateper unit (d) Budgetedoverhead=Budgetedoutput×Std.overheadrateperunit (e) Actualoverhead =Actualoutput×ActualoverheadrateperunitOverheadcostvariance =Absorbedoverhead–ActualoverheadOCV =(Std.hoursforactualoutput×Std.overheadrate)–Actual overhead
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STANDARD COSTING 13.27
ILLUSTRATION 6The overhead expense budget for a factory producing to a capacity of 200 units per month is as follows:
Description of overhead Fixed cost per unit in (`)
Variable cost per unit in (`)
Total cost per unit in (`)
Power and fuel 1,000 500 1,500Repair and maintenance 500 250 750Printing and stationary 500 250 750Other overheads 1,000 500 1,500
` 3,000 ` 1,500 4,500The factory has actually produced only 100 units in a particular month. Details of over-heads actually incurred have been provided by the accounts department and are as fol-lows:
Description of overhead Actual costPower and fuel ` 4,00,000Repair and maintenance ` 2,00,000Printing and stationary ` 1,75,000Other overheads ` 3,75,000
You are required to compute the production volume variance and the overhead expenses variance.SOLUTIONProductionvolumevarianceStandardfixedoverheadsperunit : `3,000(Given)Actualproduction : 100unitsStandardproduction(capacity) : 200unitsUnabsorbedunits : 100units(200–100)Productionvolumevariance:`3,000×100units=`3,00,000(Adverse)OverheadexpensesvarianceStandardfixedoverheadsforactualproduction : `6,00,000Standardvariableoverheadsforactualproduction:` 1,500×100units=`1,50,000Stdtotaloverheadsforactualproduction : `7,50,000Actualoverheads : `11,50,000Overheadexpensevariance : `4,00,000(Adverse)
© The Institute of Chartered Accountants of India
13.28 COST AND MANAGEMENT ACCOUNTING
ILLUSTRATION 7The following information was obtained from the records of a manufacturing unit using standard costing system.
Standard ActualProduction 4,000 units 3,800 unitsWorking days 20 21Fixed Overhead ` 40,000 ` 39,000Variable Overhead 12,000 12,000
You are required to calculate the following overhead variance: (a) Variable overhead variance(b) Fixed overhead variances
(i) Expenditure variances (ii) Volume variance
SOLUTION(a) ForVariableOverheadVariance:
Actualvariableoverhead=` 12,000 Standardvariableoverheadforproduction: =(Budgetedoutput×Std.variableoverheadrateperunit) =(12,000÷4,000)×3,800=` 11,400 Variableoverheadvariance:Standardvariableoverhead-Actualvariableoverhead=` 11,400–` 12,000=600(A)
(b) ForFixedOverheadVariance: Actualfixedoverheadincurred=`39,000
Budgetedfixedoverheadfortheperiod=`40,000 Standardfixedoverheadforproduction: (Standardoutputforactualtime×StandardFixedOverheadperunit) =(` 40,000÷4,000units)×3,800units=`38,000.
Variances: (i) FixedOverheadExpenditureVariances: Budgetedfixedoverhead–Actualfixedoverhead
=` 40,000–` 39,000=1,000(F)(ii) FixedOverheadVolumeVariance: Standardfixedoverhead–Budgetedfixedoverhead
=` 38,000–` 40,000=` 2,000(A)© The Institute of Chartered Accountants of India
STANDARD COSTING 13.29
(iii) FixedOverheadVariance: Standardfixedoverhead–Actualfixedoverhead
=` 38,000–` 39,000=` 1,000(A)
13.8 ADVANTAGES AND CRITICISM OF STANDARD COSTING
13.8.1 Advantages of Standard CostingFollowingaretheadvantagesofstandardcosting.(i) Itservesasabasisformeasuringoperatingperformanceandcostcontrol.Byset-
tingstandards,properclassificationanddeterminationofvariances,ispossible.Thisservesasasignalforpromptcorrectiveaction.Thissystemprovidesforre-portingontheprincipleofexception.Thebasisofthisprincipleisthatonlymat-terswhicharenotproceedingaccordingtoplanarereportedupon.Thisenablesthemanagerstoconcentrateuponessentialmattersandleavethenon-essentialstotakecareofthemselves.Byusingspecialforms,anyexcessivetimetaken,extramaterialusedoradditionalservicesconsumedcanbebroughttolightaspartoftheordinaryroutine.Inotherwords,ifthevariancesarenegligible,itmeansthattheperformanceismoreorlessinaccordancewiththestandards.Significantvar-ianceswhichwarranttheattentionofthemanagerarebroughttohisknowledge.
(ii) Itaidspricefixing.Standardcostingcanbeusedtopredictcosts.Althoughactu-alcostmayvaryfromdaytoday,standardcostswillremainstableoveraperiodoftimeand,wheredemandforaproductiselastic,thisinformationcanbeusedasabasisforfixingthesellingprice.
(iii) Introductionofstandardcosting facilitatesevaluationof jobsand introductionofincentives.Jobvaluescanbedeterminedbytheuseofevaluationandscaleofwagesfixedaccordingtotheresponsibilityinvolvedineachjob.
(iv) Standardcostingfacilitatestheestimationofthecostofnewproductswithgreat-eraccuracy.
(v) Itservesasabasisforinventoryvaluation.Standardcostsareusedforinventoryvaluationbecauseactualcostsarenottypicalandlessclericalworkis involvedin carrying standard value into inventory records than actual value. A furtheradvantageofthisprocedureisthatmaterialstockcanberecordedintermsofquantitiesonly.
(vi) Standardcostingisalsousedforthemeasurementofprofits.Thequestionofcor-rectapproachofcalculatingprofitisverymuchrelatedtostockvaluationandtothemethodsofdealingwiththeabsorptionoffixedoverheads.Standardcostingwilleliminateanyvariationsin profitduetochangesinthevaluesofstockholdingfromperiodtoperiodandwillthusprovideatruebasisforthemeasurementofprofit.
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13.30 COST AND MANAGEMENT ACCOUNTING
(vii) Standardcostinggreatlyaidsbusinessplanning,budgetingandmanagerialdeci-sionmaking.Standardcostsbeingpre-determinedcosts,areparticularlyusefulinplanningandbudgeting.
(viii)Standardcostingaidsinstandardisationofproducts,operationsandprocesses.Sincestandardsarelaiddownforeachproduct,itscomponents,materials,oper-ations,processesetc.,itimprovestheoverallproductionefficiencyandreducescosts.
(ix) Itprovidesobjectivesandtargetstobeachievedbyeachlevelofmanagementanddefines the responsibilitiesofdepartmentalmanagers. Standardcosts arepre-determinedonthebasisofreasonableandachievablelevelofoutput.Thedepartmentalhead,therefore,comestoknowwhatisexpectedofhimandhislevelofperformance in comparison to the targets canbe seen from thevari-ancereports.Thusthesystemservesasanincentivetothedepartmentalheadtoachievethetargetssetbythecompany.
(x) Standardcostingsetsauniformbasis forcomparisonofallelementsofcosts.Sincecareistakeninsettingstandards,thestandardsbecomeunchangingunitsofcomparison.Thestandardhourmaybeusedasabasicunittocomparedis-similarproductsorprocesses.
(xi) Themaximumuseofworkingcapital,plantfacilitiesandcurrentassetsisassuredbecausewastageofmaterialsandlossduetoidletimearecloselycontrolled.
13.8.2 Criticism of Standard CostingThe followingaresomeof thecriticismwhichmaybe leveledagainst thestandardcostingsystem.Theargumentshavebeensuitablyansweredasstatedagainsteachbyadvocatesofthestandardcostingandhencetheydonotinvalidatetheusefulnessofthesystemtobusinessenterprises.(i) Variation in price: Oneofthechiefproblemfacedintheoperationofthestand-
ardcostingsystemis thepreciseestimationof likelypricesor ratetobepaid.The variability of prices is sogreat that even actual prices are not necessarilyadequatelyrepresentativeofcost.Buttheuseofsophisticatedforecastingtech-niquesshouldbeabletocoverthepricefluctuationtosomeextent.Besidesthis,thesystemprovidesforisolatinguncontrollablevariancesarisingfromvariationstobedealtwithseparately.
(ii) Varying levels of output:Ifthestandardlevelofoutputsetforpre-determinationofstandardcostsisnotachieved,thestandardcostsaresaidtobenotrealised.However, thestatement that thecapacityutilisationcannotbepreciselyesti-matedforabsorptionofoverheadsmaybetrueonlyinsomeindustriesofjob-bingtype.Invastmajorityofindustries,useofforecastingtechniques,marketresearch,etc.,helptoestimatetheoutputwithreasonableaccuracyandthusthevariationisunlikelytobeverylarge.Primecostwillnotbeaffectedbysuch
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STANDARD COSTING 13.31
variationand,moreover,varianceanalysishelpstomeasuretheeffectsofidletime.
(iii) Changing standard of technology: Incaseofindustriesthathavefrequenttech-nologicalchangesaffectingtheconditionsofproduction,standardcostingmaynotbesuitable. Thiscriticismdoesnotaffect thesystemof standardcosting.Costreductionandcostcontrolisacardinalfeatureofstandardcostingbecausestandardsoncesetdonotalwaysremainstable.Theyhavetoberevised.
(iv) Attitude of technical people: Technicalpeopleareaccustomedtothinkofstandardsasphysicalstandardsand,therefore,theywillbemisledbystandardcosts.Sincetechnicalpeoplecanbeeducated toadopt themselves to thesystem throughorientationcourses,itisnotaninsurmountabledifficulty.
(v) Mix of products: Standard costing presupposes a pre-determined combinationofproductsbothinvarietyandquantity.Themixtureofmaterialsusedtoman-ufacturetheproductsmayvaryinthelongrunbutsincestandardcostsaresetnormally for a shortperiod, such changes canbe takencareofby revisionofstandards.
(vi) Level of Performance:Standardsmaybeeither too strict or too liberal becausetheymaybebasedon (a) theoreticalmaximumefficiency, (b)attainablegoodperformance or (c) average past performance. To overcome this difficulty, themanagementshouldgivethoughttotheselectionofasuitabletypeofstandard.Thetypeofstandardmosteffectiveinthecontrolofcostsisonewhichrepresentsanattainablelevelofgoodperformance.
(vii) Standard costs cannot possibly reflect the true value in exchange. Ifprevioushis-torical costs are amended roughly to arrive at estimates for adhocpurposes,theyarenotstandardcostsinthestrictsenseofthetermandhencetheycannotalsoreflect truevalue inexchange. Inarrivingatstandardcosts,however, theeconomicandtechnicalfactors,internalandexternal,arebroughttogetherandanalysedtoarriveatquantitiesandpriceswhichreflectoptimumoperations.Theresultingcosts,therefore,becomerealisticmeasuresofthesacrificesinvolved.
(viii)Fixation of standards may be costly:Itmayrequirehighorderofskillandcompe-tency.Smallconcerns,therefore,feeldifficultyintheoperationofsuchsystem.
SUMMARY♦ Standard Costing : Atechniquewhichusesstandardsforcostsandrevenuesfor
thepurposesofcontrolthroughvarianceanalysis.♦ Standard Price : Apredeterminedpricefixedonthebasisofaspecificationofa
productorserviceandofallfactorsaffectingthatprice.♦ Standard Time : Thetotaltimeinwhichtaskshouldbecompletedatstandard
performance.
© The Institute of Chartered Accountants of India
13.32 COST AND MANAGEMENT ACCOUNTING
♦ Variance : Adivergence fromthepredeterminedrates,expressedultimately inmoneyvalue,generallyusedinstandardcostingandbudgetarycontrolsystems.
♦ Variance Analysis:Theanalysisof variances arising in standard costing systemintotheirconstituentparts.
♦ Revision Variance:Itisthedifferencebetweentheoriginalstandardcostandtherevisedstandardcostofactualproduction.
♦ Basic Standard : Astandardfixedforafairlylongperiod.♦ Current Standard : Astandardfixedforashortperiod.♦ Estimated Cost : Anestimateofwhatthecostislikelytobeduringagivenperiod
of time.♦ Ideal Cost : Acostwhichshouldbeincurredduringaperiodunderidealcondi-
tions.Important Formulas♦ Material Variance : MaterialCostsVariance =(Std.qty×Std.Price)–(Actualqty×Actualprice) MaterialUsageVariance =Std.price(Std.Qty.–Actualqty.) MaterialPriceVariance =Actualqty.(Std.price–Actualprice) MaterialCostVariance =Materialusagevariance+Materialpricevariance MaterialMixVariance =SP(RSQ–AQ) MaterialYieldVariance =SP(SQ–RSQ)♦ Labour Variance : LabourCostVariance=(Std.time×Std.Rate)–(Actualtime×Actualrate) LabourEfficiencyVariance=Std.rate(Std.time–Actualtime) LabourRateVariance=Actualtime(Std.rate–Actualrate) LabourIdleTimeVariance=IdletimexStd.rate LabourCostVariance=LabourEfficiencyVariance+LabourRateVariance LabourMixVariance=SR(RSH–AH) LabourYieldVariance=SR(SH–RSH)♦ Fixed Overhead Variances: F.O.CostVariance=RecoveredOverhead–ActualOverhead F.O.ExpenditureVariance=BudgetedOverhead–ActualOverhead F.O.VolumeVariance=RecoveredOverhead–BudgetedOverhead F.O.EfficiencyVariance=RecoveredOverhead–StandardOverhead F.O.CapacityVariance=StandardOverhead–BudgetedOverhead F.O.CalendarVariance=SR(Actualno.ofworkingdays–Std.no.workingdays)
© The Institute of Chartered Accountants of India
STANDARD COSTING 13.33
♦ Variable Overhead Variances V.O.Costvariance=RecoveredOverhead–ActualOverhead V.O.ExpenditureVariance=StandardOverhead–ActualOverhead V.O.EfficiencyVariance=RecoveredOverhead–StandardOverhead
TEST YOUR KNOWLEDGEMCQs based Questions
1. Understandardcostsystemthecostoftheproductdeterminedatthebeginningofproductionisits:(a) Directcost(b) Pre-determinedcost(c) Historicalcost(d) Actualcost
2. Thedeviationsbetweenactualandstandardcostisknownas(a) Multipleanalysis(b) Variablecostanalysis(c) Varianceanalysis(d) Lineartrendanalysis
3. Thestandardwhichisattainableunderfavourableconditionsis(a) Theoreticalstandard(b) Expectedstandard(c) Normalstandard(d) Basicstandard
4. Thestandardmostsuitablefromcostcontrolpointofviewis(a) Normalstandard(b) Theoreticalstandard(c) Expectedstandard(d) Basicstandard
5. Overheadcostvariancesis(a) The difference between overheads recovered on actual output - actual
overhead incurred.(b) Thedifferencebetweenbudgetedoverheadcostandactualoverheadcost.(c) Obtainedbymultiplyingstandardoverheadabsorptionratewiththedifference
betweenstandardhoursforactualoutputandactualhoursworked.(d) Noneoftheabove
© The Institute of Chartered Accountants of India
13.34 COST AND MANAGEMENT ACCOUNTING
6. Whichofthefollowingvarianceariseswhenmorethanonematerialisusedinthemanufactureofaproduct(a) Materialpricevariance(b) Materialusagevariance(c) Materialyieldvariance(d) Materialmixvariance
7. Ifstandardhoursfor100unitsofoutputare400@`2perhourandactualhourstakeare380@`2.25per,thenthelabourratevarianceis(a) `95(adverse)(b) `100(adverse)(c) `25(favourable)(d) `120(adverse)
8. Controllablevariancearebestdisposedoffbytransferringto(a) Costofgoodssold(b) Costofgoodssoldandinventories(c) Inventoriesofwork–in–progressandfinishedgoods(d) Costingprofitandlossaccount
9. Idletimevarianceisobtainedbymultiplying(a) Thedifferencebetweenstandardandactualhoursbytheactualrateoflabour
perhour(b) The difference between actual labour hours paid and actual labour hours
workedbythestandardrate(c) Thedifferencebetweenstandardandactualhoursbythestandardrateof
labourperhour(d) Noneoftheabove.
10. Basicstandardsare(a) Thosestandards,whichrequirehighdegreeofefficiencyandperformance.(b) Averagestandardsandareusefulinlongtermplanning.(c) Standards,whichcanbeattainedorachieved(d) Assumingtoremainunchangedforalongtime.
Theoretical Questions1. Discusstheprocessofsettingstandards.2. Discussthetypesofstandards.3. Howmaterialusagestandardisset4. Discussthevarioustypesoffixedoverheadvariances.
© The Institute of Chartered Accountants of India
STANDARD COSTING 13.35
Practical Questions1. Formaking10kg.ofCEMCO,thestandardmaterialrequirementsis:
Material Quantity Rate per kg. (`)A 8 6.00B 4 4.00
DuringApril,1,000kgofCEMCOwereproduced.Theactualconsumptionofma-terialsisasunder:
Material Quantity (Kg.) Rate per kg. (`)A 750 7.00B 500 5.00
Calculate(A)MaterialCostVariance;(b)MaterialPriceVariance;(c)MaterialusageVariance.
2. Thestandardmixtoproduceoneunitofproductisasfollows: MaterialX 60units@`15perunit = 900 MaterialY 80units@`20perunit = 1,600 MaterialZ 100units @ `25perunit = 2,500 240units 5,000 DuringthemonthofApril,10unitswereactuallyproducedandconsumptionwas
asfollows: MaterialX 640units@`17.50perunit = 11,200 MaterialY 950units@`18.00perunit = 17,100 MaterialZ 870units @ `27.50perunit = 23,925 2460units 52,225 Calculateallmaterialvariances.3. Thefollowingstandardshavebeensettomanufactureaproduct:
DirectMaterial: (`)2unitsofA@`4perunit 8.003unitsofB@`3perunit 9.0015unitsofC@`1perunit 15.00
32.00DirectLabour:3hrs@`8perhour 24.00Totalstandardprimecost 56.00Thecompanymanufacturedandsold6,000unitsoftheproductduringtheyear.Directmaterialcostswereasfollows:
© The Institute of Chartered Accountants of India
13.36 COST AND MANAGEMENT ACCOUNTING
12,500unitsofAat` 4.40perunit18,000unitsofBat` 2.80perunit88,500unitsofCat` 1.20perunitThe companyworked17,500direct labourhoursduring the year. For 2,500ofthesehours,thecompanypaidat̀ 12perhourwhilefortheremaining,thewageswerepaidatstandardrate.Calculatematerialspricevarianceandusagevarianceandlabourrateandefficiencyvariances.
4. XYZCompanyhasestablishedthefollowingstandardsforfactoryoverheads. Variableoverheadperunit: `10/- Fixedoverheadspermonth `1,00,000 Capacityoftheplant20,000unitspermonth. Theactualdataforthemonthareasfollows: Actualoverheadsincurred `3,00,000 Actualoutput(units) 15,000units
Required: Calculateoverheadvariancesviz: (i) Productionvolumevariance (ii) Overheadexpensevariance5. Acompanyhasanormalcapacityof120machines,working8hoursperdayof25
daysinamonth.Thefixedoverheadsarebudgetedat` 1,44,000permonth.Thestandardtimerequiredtomanufactureoneunitofproductis4hours.InApril,20X2,thecompanyworked24daysof840machinehoursperdayandproduced5,305unitsofoutput.Theactualfixedoverheadswere` 1,42,000.
Compute:(i) Expensevariance (ii) Volumevariance(iii) Totalfixedoverheadsvariance.
6. Followinginformationisavailablefromtherecordsofafactory:
Budget ActualFixedoverheadforJune,20X2 ` 10,000 ` 12,000ProductioninJune,20X2(units) 2,000 2,100Standardtimeperunit(hours) 10 –ActualhoursworkedinJune – 21,000
© The Institute of Chartered Accountants of India
STANDARD COSTING 13.37
Compute:(i) Fixedoverheadcostvariance,(ii) Expenditurevariance,(iii) Volumevariance.
7. XYZLtd.has furnishedyouthe following information for themonthofAugust,20X2:
Budget ActualOutput(units) 30,000 32,500Hours 30,000 33,000Fixedoverhead `45,000 50,000Variableoverhead `60,000 68,000Workingdays 25 26Calculateoverheadvariances.
8. S.V.Ltd.hasfurnishedthefollowingdata:Budget Actual, July
(20X2)No.ofworkingdays 25 27Productioninunits 20,000 22,000Fixedoverheads `30,000 `31,000Budgetedfixedoverheadrateis̀ 1.00perhour.InJuly,20X2,theactualhoursworkedwere31,500.Calculatethefollowingvariances:(i) Volumevariance.(ii) Expenditurevariance.(iii) Totaloverheadvariance.
9. Thefollowingdatahasbeencollectedfromthecostrecordsofaunitforcomput-ingthevariousfixedoverheadvariancesforaperiod:Numberofbudgetedworkingdays 25Budgetedman-hoursperday 6,000Output(budgeted)perman-hour(inunits) 1Fixedoverheadcostasbudgeted `1,50,000Actualnumberofworkingdays 27Actualman-hoursperday 6,300Actualoutputperman-hour(in-units) 0.9Actualfixedoverheadincurred `1,56,000
© The Institute of Chartered Accountants of India
13.38 COST AND MANAGEMENT ACCOUNTING
Calculatefixedoverheadvariances:(a) ExpenditureVariance (b) VolumeVariance, (c) FixedCostVariance.
10. J.K.Ltd.manufacturesNXEbymixingthreerawmaterials.Foreverybatchof100kg.ofNXE,125kg.ofrawmaterialsareused.InApril,20X2,60batcheswerepre-paredtoproduceanoutputof5,600kg.ofNXE.Thestandardandactualparticu-larsforApril,20X2,areasfollows:
Raw Mate-rials
Standard Actual Quantity of Raw Mate-rials Pur-chased
Mix Price per kg. Mix Price per Kg.
(%) (`) (%) (`) (Kg.)A 50 20 60 21 5,000B 30 10 20 8 2,000C 20 5 20 6 1,200
Calculateallvariances.ANSWERS/ SOLUTIONS
Answers to the MCQs based Questions1. (b) 2. (c) 3. (a) 4. (c) 5. (a) 6. (d)7. (a) 8. (d) 9. (b) 10. (d)Answers to the Theoretical Questions1. Pleasereferparagraph13.32. Pleasereferparagraph13.23. Pleasereferparagraph13.7.14. Pleasereferparagraph13.7.4Answers to the Theoretical Questions1.BasicCalculations
Standard for 1,000 kg. Actual for 1,000 kg.Qty. Rate Amount Qty. Rate AmountKg. (`) (`) Kg. (`) (`)
A 800* 6 4,800 750 7 5,250B 400* 4 1,600 500 5 2,500
Total 1,200 6,400 1,250 7,750(*A-8÷10×1000=800 B-4÷10×1000=400)
© The Institute of Chartered Accountants of India
STANDARD COSTING 13.39
Calculation of Variances:(a)MaterialCostVariance = Std. cost for actual output – ActualcostMCV = 6,400–7,750=` 1,350(A)(b)MaterialPriceVariance = (SP–AP)×AQA =(6–7)×750 = `750(A)B =(4–5)×500 = `500(A)MPV = ` 1,250(A)(c)MaterialUsagesVariance=(SQ–AQ)×SP A =(800–750)×6 =`300(F) B =(400–500)×4 =`400(A) MUV =`100(A)Check MCV =MPV+MUV 1,350(A)=1,250(A)+100(A)
2.
MaterialStandard for 10 units Actual for 10 units
Qty.units
Rate(`)
Amount(`)
Qty.units
Rate(`)
Amount(`)
X 600 15 9,000 640 17.50 11,200Y 800 20 16,000 950 18.00 17,100Z 1,000 25 25,000 870 27.50 23,925
Total 2,400 50,000 2460 52,2251. MaterialCostVariance =Standardcost–Actualcost =`50,000–`52,225 MCV =`2,225(A)2.MaterialPriceVariance =(Std.Price–ActualPrice)×ActualQty. MaterialX =(15–17.50)×640 =`1,600(A) MaterialY =(20–18)×950 =`1,900(F) MaterialZ =(25–27.50)×870 =`2,175(A) MPV =`1,875(A)3.MaterialUsageVariance=(Std.Qty.–ActualQty.)×Std.Price MaterialX =(600–640)×15 =`600(A) MaterialY =(800–950)×20 =`3,000(A)
© The Institute of Chartered Accountants of India
13.40 COST AND MANAGEMENT ACCOUNTING
MaterialZ =(1,000–870)×25 =`3,250(F) MUV =`350(A)
Check MCV=MPV+MUV `2,225(A)=`1,875(A)+`350(A)4.MaterialMixVariance =(RevisedStd.Qty.–ActualQty.)×Std.Price MaterialX =(615*–640)×15 =`375(A) MaterialY =(820*–950)×20 =`2,600(A) MaterialZ =(1,025–870)×25 =`3,875(F) MMV =`900(F) *RevisedStandardQuantity(RSQ)iscalculatedasfollows:
MaterialX =
24002460 ×600=615units
MaterialY =24002460×800=820units
MaterialZ =24002460 ×1,000=1,025units
5.MaterialYieldVarianceForyieldvariance,certainbasiccalculationshavetobemadeasfollows:
StandardYieldVariance= ActualusageofmaterialsStandardusageperunitofoutput
= 2460
240=10.25units
SOP(Std.materialcostperunitofoutput)=`50,000÷10units=`5,000MaterialYieldVariance =(AY–SY)×SOP
MYV =(10–10.25)×5,000=`1,250(A)MaterialRevisedUsage(orSub-usage)Variance(MRUV)=(StandardQuantity–RevisedStandardQuantity)×StandardPrice
MaterialX =(600–615)×15 =`225(A) MaterialY =(800–820)×20 =`400(A) MaterialZ =(1,000–1,025)×25 =` 625(A) MRUV =` 1,250(A)Note:EitherMMVorMRUViscalculated.Thesetwoarealwaysequal.
© The Institute of Chartered Accountants of India
STANDARD COSTING 13.41
Check MUV =MMV+MYV(OrMRUV) ` 350(A) =` 900(F)+` 1,250(A)or MCV =MPV+MMV+MYV(OrMRUV) ` 2,225(A) =` 1,875(A)+` 900(F)+` 1,250(A)
3. ForMaterialCostVariances
SQ × SP AQ × AP AQ × SPA 12,000×4=48,000 12,500×4.40=55,000 12,500×4=50,000B 18,000×3=54,000 18,000×2.80=50,400 18,000×3=54,000C 90,000×1=90,000 88,500×1.20=1,06,200 88,500×1=88,500
Total `1,92,000 `2,11,600 ` 1,92,500Variances:MaterialPriceVariance =Actualquantity(Std.price–Actualprice)Or, =(AQ×SP)–(AQ×AP)Or, =`1,92,500–` 2,11,600
=`19,100(A)MaterialUsageVariance =StandardPrice(Std.Quantity–ActualQuantity)Or, =(SP×SQ)–(SP×AQ)Or, =`1,92,000–`1,92,500=`500(A)ForLabourCostVariance:
SH × SR AH × AR AH × SRLabour (6,000×3)×`8=
1,44,0002,500×12=30,000
15,000×8=1,20,000
17,500×8=1,40,000
Total `1,44,000 `1,50,000 `1,40,000Variances:LabourRateVariance:ActualHours(Std.Rate–ActualRate)Or, =(AH×SR)–(AH×AR)Or, =`1,40,000–`1,50,000
=`10,000(A)LabourEfficiencyVariance: StandardRate(Std.Hours–ActualHours)Or, =(SR×SH)–(SR×AH)Or, =`1,44,000–`1,40,000
=`4,000(F)© The Institute of Chartered Accountants of India
13.42 COST AND MANAGEMENT ACCOUNTING
4. Unutilisedcapacity : 20,000unitsless15,000units = 5,000unitsStdfixedoverheadsperunit = `5perunitProductionvolumevariance = 5,000units×`5 = `25,000(Adverse)Stdvariableoverheadsforactualproduction:`10×15,000units = `1,50,000Stdfixedoverheads = `1,00,000Totaloverheadsonstandardsforactualproduction=`2,50,000Actualoverheadsincurred = `3,00,000Overheadexpensevariance = `50,000
5. WorkingNotes:Budget Actual
1. Workinghourspermonth 24,000 20,1602. Productionunitspermonth=(Budget24,000÷4hrs,Ac-
tualgiven)6,000 5,305
3. Standardfixedoverheadrateperunit=`1,44,000÷6,000=`24
4. Standard fixed overhead rate per hour = `1,44,000 ÷24,000=`6
5. Standardfixedoverheadrateperday=`1,44,000÷25=`5,760
FixedOverheadVariances:ActualFixedoverheadincurred=`1,42,000(given)Budgetedfixedoverheadfortheperiod=`1,44,000.Standardfixedoverheadforactualproduction(Standardoutputforactualtime×StandardFixedOverheadperunit)=5,305×`24=`1,27,320.
Variances: (i) F.O.ExpenditureVariance =(Budgetedfixedoverhead–Actualfixed
overhead)=1,44,000–1,42,000 =`2,000(F)
(ii) TotalVolumeVariance =(Standardfixedoverhead–Budgetedfixedoverhead)
=1,27,320–1,44,000 =`16,680(A)
© The Institute of Chartered Accountants of India
STANDARD COSTING 13.43
(iii)Fixedoverheadvariance =(Standardfixedoverhead–ActualFixedoverhead)
=1,27,320–1,42,000 =`14,680(A)Alternatively: ExpenditureVariance+VolumeVariance=2,000(F)+16,680(A)=`14,680(A)
6. For fixed overhead variances: ActualF.O.incurred(given) `12,000BudgetedF.O.fortheperiod `10,000StandardF.O. forproduction(Standardoutput foractual time×StandardFixedOverheadperunit)2,100units×{`10,000÷2,000units} `10,500(i) FixedOverheadVariance =StandardF.O.–ActualF.O.
=`10,500–`12,000=`1,500(A)
(ii) F.O.ExpenditureVariance =BudgetedF.O–ActualF.O.=`10,000–`12,000=`2,000(A)
(iii) F.O.VolumeVariance =StandardF.O–BudgetedF.O.=`10,500–`10,000=`500(F)
7. Basic Calculations:
Standardhoursperunit =unitsBudgetedhoursBudgeted =
30,00030,000 =1hour
Std.hrs.foractualoutput =32,500units×1hr=32,500
Standardoverheadrateperhour =hoursBudgeted
overheadBudgeted
Forfixedoverhead = 45,00030,000
=`1.50perhour
Forvariableoverhead = 60,00030,000
=`2perhour
Std.F.O.rateperday =`45,000÷25days=`1,800Recoveredoverhead =Std.hrs.foractualoutput×St.rateForfixedoverhead =32,500hrs.×`1.50=`48,750Forvariableoverhead =32,500hrs.×`2=`65,000
© The Institute of Chartered Accountants of India
13.44 COST AND MANAGEMENT ACCOUNTING
Standardoverhead =Actualhours×Std.rateForfixedoverhead =33,000×1.50=`49,500Forvariableoverhead =33,000×2=`66,000
Revisedbudgethours =days Budgetedhours Budgeted ×Actualdays
= 30,00025
×26=31,200hours
Revisedbudgetedoverhead(forfixedoverhead)=31,200×1.50=`46,800Calculation of variancesFixedOverheadVariances:(i) F.O.costVariance =RecoveredOverhead–ActualOverhead =48,750–50,000
=`1,250(A)(ii) F.O.ExpenditureVariance =BudgetedOverhead–ActualOverhead
=45,000–50,000 =`5,000(A)
(iii) F.O.VolumeVariance =RecoveredOverhead–BudgetedOverhead =48,750–45,000 =`3,750(F)
(iv) F.O.EfficiencyVariance =RecoveredOverhead–StandardOverhead =48,750–49,500 =`750(A)(v) F.O.CapacityVariance =StandardOverhead-RevisedBudgeted
Overhead =49,500-46800=`2,700(F)
(vi) CalendarVariance =
−
DaysBudgeted
DaysActual
×St.rateperday.
=(26–25)×1,800 =`1,800(F)VariableOverheadVariances(i) V.O.Costvariance =RecoveredOverhead–ActualOverhead
=65,000–68,000=`3,000(A)(ii) V.O.ExpenditureVariance =StandardOverhead–ActualOverhead =66,000–68,000=`2,000(A)(iii) V.O.EfficiencyVariance =RecoveredOverhead–StandardOverhead
=65,000–66,000=`1,000(A)© The Institute of Chartered Accountants of India
STANDARD COSTING 13.45
Check(i) F.O.CostVariance =Expenditurevariance+Volumevariance 1,250(A) =5,000(A)+3,750(F)
(ii) F.O.VolumeVariance =VarianceEfficiency
+VarianceCapacity
+VarianceCalendar
3,750(F) =750(A)+2,700(F)+1,800(F)(iii) V.O.CostVariance =ExpenditureVariance+EfficiencyVariance 3,000(A) =2,000(A)+1,000(A).
8. For Fixed Overhead VariancesActualfixedoverheadincurred `31,000Budgetedfixedoverheadfortheperiod 30,000Standardfixedoverheadforproduction(Standardoutputforactualtime×StandardFixedOverheadperunit)(`30,000÷20,000units)×22,000
33,000
Computation of Variances:(i) Fixed overhead expenditure variance: =Budgetedfixedoverhead–Actualfixedoverhead =`30,000–`31,000 = `1,000(A)(ii) Fixed overhead volume variance: =Standardfixedoverhead–Budgetedfixedoverhead =`33,000–`30,000 = `3,000(F)(iii) Fixed overhead variance: =Standardfixedoverhead–Actualfixedoverhead =`33,000–`31,000 = `2,000(F)
9. For Fixed overheads Variances:Actualfixedoverheadincurred=`1,56,000Budgetedfixedoverheadfortheperiod=1,50,000Standardfixedoverheadforproduction(Standardoutputforactualtime×Stand-ardFixedOverheadperunit)(6,300hrs×27days×0.9)×(`1,50,000÷`1,50,000units)=`1,53,090(a) Fixed Overhead
ExpenditureVari-ance
= Budgetedfixedoverhead–Actualfixedoverhead
= `1,50,000–`1,56,000=`6,000(A)
© The Institute of Chartered Accountants of India
13.46 COST AND MANAGEMENT ACCOUNTING
(b) Fixed OverheadVolumeVariance
= Standard fixedoverhead–Budgetedfixedoverhead
= `1,53,090–`1,50,000=`3,090(F)
(c) Fixed OverheadVariance
= Standard fixed overhead – Actualfixedoverhead
= `1,53,090–`1,56,000=`2,910(A)
10. Actualmaterialused=125kg×60=7,500kg.Actual cost of actual material used (AQ × AR) (`)
A 60% 4,500kg×`21= 94,500B 20% 1,500kg×`8= 12,000C 20% 1,500kg×`6= 9,000
7,500 1,15,500Standard cost of actual material used (AQ × SR) (`)
A 4,500kg×`20= 90,000B 1,500kg×`10= 15,000C 1,500kg×`5= 7,500
7,500 1,12,500Standard cost of material, if it had been used in standard proportion (Stand-ard Proportion × Standard Rate)
(`)A 50% 3,750kg×`20= 75,000B 30% 2,250kg×`10= 22,500C 20% 1,500kg×`5= 7,500
7,500 1,05,000Standard cost of production (SQ for actual production × SR)Standardcostofoutputfor100kg: (`)
A 62.50kg×`20= 1,250B 37.50kg×`10= 375C 25.00kg×`5= 125
125.00 1,750Standardcostforoutputof5,600kg.
=100
1,750 kg×5,600kg.=`98,000
MaterialPriceVariance=Standardcostofactualmaterialused–Actualcostofactualmaterialused=`1,12,500–`1,15,500=`3,000(A)
© The Institute of Chartered Accountants of India
STANDARD COSTING 13.47
MaterialUsageVariance=Standardcostofproduction–Standardcostofactualmaterialused=`98,000–`1,12,500=`14,500(A)Note: MaterialPriceVariancecanbecalculatedatthetimeofpurchaseaswell.Inthatcase,materialvariancewillbeasfollows:Actual cost of material used
A 5,000kg×`21 =` 1,05,000B 2,000kg×`8 =` 16,000C 1,200kg×`6 =` 7,200
1,28,200Standard cost of material used
A 5,000kg×`20 =` 1,00,000B 2,000kg×`10 =` 20,000C 1,200kg×`5 =` 6,000
1,26,000MaterialPricevariance(ifcalculatedatthetimeofpurchase)=Standardcostofactualmaterialused–Actualcostofactualmaterialused=`1,26,000–`1,28,200=`2,200(A)
© The Institute of Chartered Accountants of India
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