STANDARD COSTING

:

Mrs. Kamlesh

INTRODUCTION Standard cost is: A predetermined cost. Used for cost-control. And the technique is known as

standard costing.

STANDARD COSTING It is the preparation of standard costs; Applying them to measure the

variations; Analysing the causes of variations; With a view to maintain maximum

efficiency in production.

NEED FOR STANDARDS Standards Are common in business Are often imposed by government

agencies (and called regulations)

Standard costs Are predetermined unit costs Used as measures of performance

SIMILARITY

Standards and budgets are both

Pre-determined costs Part of management planning and

control

DIFFERENCE A standard is a unit amount whereas a

budget is a total amount

Standard costs may be incorporated into a cost accounting system

ADVANTAGES

SETTING STANDARD Requires input from all persons who

have responsibility for costs and quantities

Standards costs need to be current and should be under continuous review

Differences between total actual costs and total standard costs

Unfavorable variances occur when too much is paid for materials and labor or when there are inefficiencies in using materials and labor

Favorable variances occur when there are efficiencies in incurring costs and in using materials and laborA variance is not favorable if quality

control standards are sacrificed

ANALYZING VARIANCES Variances must be analyzed to

determine their significance First, determine the cost elements that

comprise the variance For each manufacturing cost element, a

total dollar variance is computed. Then this variance is analyzed into a price variance and a quantity variance

TYPES OF VARIANCES

Variances

Material cost

Labour cost

Overheads cost

MATERIALS PRICE STANDARD

Cost per unit which should be incurred

Based on the purchasing department’s best estimate of the cost of raw materials

Includes related costs such as receiving, storing, and handling

MATERIALS QUANTITY STANDARD

Quantity of direct materials used per unit of finished goods

Based on physical measure such as pounds, barrels, etc.• Considers both the quantity and

quality of materials required Includes allowances for unavoidable

waste and normal storage

CAUSES OF MATERIALS VARIANCES

Materials variances may be caused by a variety of factors, including both internal and external factors

Investigating materials price variances begins in the purchasing department, but the variance may be beyond the control of purchasing (for ex., prices rise faster than expected)

Investigating materials quantity variance begins in the production department, but the variance may be beyond the control of production (for ex., faulty machinery)

MATERIAL VARIANCES

Material cost

variances

Usage variance

Mix variance

Yield variance

Price variance

MATERIAL VARIANCES Material cost variance(MCV): Difference between the standard cost of

materials for actual output and actual cost of materials used.

MCV=Standard Cost of Materials for Actual Output-Actual Cost of Materials Used

Material price variance(MPV): Material cost variance which is due to difference

between standard cost of materials used for the output achieved and the actual cost of materials used.

MPV=Actual usage(Standard Price-Actual Price)

Material Usage Variance(MUV): Material cost variance which is due to

the difference between standard quantity of materials specified for the actual output and the actual quantity of materials used.

MUV=Standard Price(standard quantity- actual quantity)

Material Mix Variance(MMV): That potion of material usage variance

which is due to the difference between standard and the actual composition of a mixture.

Material Yield Variance(MYV): That portion of the material usage variance which is due to the difference between the standard yield specified and actual yield obtained

CAUSES OF LABOUR VARIANCES

Labour variances may be caused by a variety of factors

Labor price variances usually result from either paying workers higher wages than expected or misallocating workers (for ex., using skilled workers in place of unskilled workers)

Labor quantity variances relate to the efficiency of workers and are usually related to the production department

LABOUR PRICE STANDARD Direct labour price standard Rate per hour incurred for direct labor Based on current wage rates adjusted

for anticipated changes, such as cost of living adjustments

Includes employer payroll taxes, and fringe benefit

LABOUR VARIANCES

Labour cost

variance

Efficiency variance

Mix variance

Yield variance

Rate variance

LABOUR VARIANCES Labour Cost Variance(LCV): It is the difference between the

standard cost of labour allowed for the actual output and the actual cost of labour employed.

LCV=Standard Cost of Labour-Actual Cost of Labour

Labour Rate Variance(LRV): That portion of the labour cost variance

which arises due to the difference between the standard rate specified and the actual rate paid.

LRV=Actual Time Taken(Standard Rate- Actual Rate)

Labour Efficiency Variance(LEV): That part of labour cost variance which arises due to the difference between the standard labour hours specified for the output achieved and the actual labour hours spent. LEV=Standard Rate(Standard Time for Actual Output-Actual Time paid for)

Labour Mix Variance (LMV): that portion of labour efficiency

variance which is due to the change in the composition of labour force.

Labour Yield Variance(LYV): that part of labour efficiency variance

which arises due to the difference between yield that should have been obtained by actual time utilised on production and actual yield obtained.

MANUFACTURING OVERHEAD STANDARD

For manufacturing overhead, a standard predetermined overhead rate is used

The predetermined rate is computed by dividing budgeted overhead costs by an expected standard activity index

The standard manufacturing overhead rate per unit is the predetermined overhead rate times the activity index quantity standard (for example, direct labor hours)

CAUSES OF MANUFACTURING

OVERHEAD VARIANCES Manufacturing overhead variances may

be caused by a variety of factors

The controllable variance relates to variable manufacturing costs and usually is the responsibility of the production department

• May result from either higher than expected use of indirect materials, indirect labor or supplies or increases in indirect manufacturing costs such as fuel

The volume variance may be the responsibility of the production department (inefficient use of direct labor hours) or may come from outside the production department (lack of sales orders)

OVERHEADS VARIANCE

Total overheads variance

Variable overheads

Fixed overheads

VARIABLE VARIANCE

Variable overheads variance

Expenditure variance

Efficiency variance

FIXED VARIANCEFixed

overheads variance

Volume variance

Capacity variance

Calendar variance

Efficiency variance

Expenditure variance

OVERHEAD VARIANCES Overhead Cost Variance(OCV): It is the difference between the standard

cost of overheads allowed for the actual output achieved and the actual overhead cost incurred.

OCV=Actual Output x Standard Overhead Rate Per Unit-Actual Overhead Cost

Actual Overhead=Actual Output x Actual Overhead Rate Per

Unit

VARIABLE VARIANCE Variable Overhead Variance(VOV): It is the difference between the

standard variable overheads cost allowed for the actual output achieved and the actual variable overheads cost.

VOV=Actual Output x Standard Variable Overhead Rate-Actual Variable Overheads

Variable Overhead Expenditure Variance:

Actual Hours Worked x Standard Variable Overhead Rate Per Hour-Actual Variable Overhead Rate

Variable Overhead Efficiency Variance: (Standard Hours for Actual

Production- Actual Hours)Standard Variable Overhead Rate Per Hour

FIXED VARIANCE Fixed Overhead Variance(FOV): It is that portion of total overhead cost

variance which is due to the difference between the standard cost of fixed overhead allowed for the actual output and fixed overhead cost incurred.

FOV=Actual Output x Standard Fixed Overhead Rate Per Unit-

Actual Fixed Overheads.

Fixed Expenditure Variance(FEV): it is that portion of the fixed overhead

variance which is due to the difference between the budgeted fixed overheads and the actual fixed overheads incurred.

FEV=Budgeted Fixed Overheads-Actual Fixed Overheads.

Volume Variance=Actual Output x Standard Rate-Budgeted Fixed Overheads

Capacity Variance: It is that portion of volume variance

which is due to working at higher or lower capacity than the budgeted capacity.

Capacity Variance=Standard Rate(Revised Budgeted Units-Budgeted Units)

Calendar Variance: Its that portion of the volume variance

which is due to the difference between the number of working days and the number of actual working days.

Calendar Variance=Increase or Decrease in Production due to more or less working days at the Rate of Budgeted Capacity x Standard Rate Per Unit.

Efficiency Variance: It is the difference between the

budgeted efficiency and actual efficiency achieved.

Efficiency Variance=Standard rate per unit(actual production-standard production)

REPORTING VARIANCES Reporting variances All variances should be reported to

appropriate levels of management as soon as possible so that corrective action can be taken.

The form, content, and frequency of variance reports vary considerably among companies

Variance reports facilitate the principle of “management by exception”

In using variance reports, top management normally looks for significant variances