STANDARD COSTING

By - ANKIT KUMAR JAIN

MEANING OF STANDARD COSTING• C.I.M.A (London) has defined standard cost as “ a pre-determined cost

which is calculated from management’s standard of efficient operations and the relevant necessary expenditure. It may be used as a basis for determination of prices and cost control through variance analysis”

MEANING AND DEFINATION OF STANDARD COSTING TECHNIQUE

According to C.I.M.A (London), standard costing is defined as “ The preparation and use of standard costs, their comparison with actual costs and the analysis of variances to their causes and point of incidence.”

Wheldon has defined it in the following words: “ Standard Costing is a method of ascertaining costs whereby statistics are prepared to show (a) The standard cost; (b) the actual cost; and (c) the difference between these costs, which is teremed as variance.”

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Objectives of Standard Costing

• To Establish Control.

• To Set Standard for various Elements of cost.

• To Fix Responsibility.

• To Make Budgetary Control more Effective.

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Advantages of Standard Costing Technique

• Increase in Efficiency.

• Detection of Efficient or Idle Centers.

• Ease in Managerial Decisions.

• Facilities Quality Control.

• Best use of Material.

• Facilities Budget Formation.

• Helps in Stock Valution.

• Knowledge of Worker’s Efficiency.

• Increase in Profits.

• Best use of Production capacity.

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Limitation of Standard Costing• Determination by the Experts.

• Determination of Standard Cost is difficult in this age of inflation.

• Unsuitable in some Industries.

• Morale of Employees Lowered.

• Necessity of Budgetary Control.

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Standard v/s Historical CostingStandard Costing

It is a predetermined cost.

It is an ideal cost.

It is a future cost, it can be used for cost control.

It is used for the measurement of operational efficiency of the enterprises.

Historical costing It is recorded after production.

It is an actual or incurred cost.

It is related to past, cannot be used for cost control.

It is used to ascertain the profit or loss incurred during a particular period.

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Standard Cost v/s Estimated CostStandard Cost

• It is scientifically used & it is a regular system based upon estimation & survey.

• Its object is to ascertain, ‘what the cost should be’?

• It is used for effective cost control & to take proper action to maximize.

• It is continuous process of costing & take into account all the manufacturing process.

• It is used where standard costing is in operation.

• It is more accurate than estimated cost.

Estimated Cost• It is used as statistical data and it

is based on lot of guess work.

• Its object is to ascertain ‘what the cost will be’?

• Its purpose is planning and ascertainment of cost for fixing sale price.

• It is used for a specific use i.e. fixing sale price.

• It is used where standard costing is not in operation.

• It is not accurate as it is based on past experience.

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Classification of Variances

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Direct Material Variance

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Direct Labour Variance

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ABBREVATIVES used in Direct Material VarianceSP = Standard Price per unit of material.SQ = Standard Quantity of material to be used for actual output.AP = Actual Price per unit of material.AQ = Actual Quantity of material used.SQM = Standard Quantity Mix.AQM = Actual Quantity Mix.AY = Actual Yield.SY = Standard Yield from actual input.SR = Standard Rate per unit of material.TSC = Total Standard Cost for Actual OutputTAC = Total Actual Cost.RSQ = Revised Standard Quantity.

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Direct Material Variance Material Cost Variance - According to C.I.M.A., London “Material cost variance is the difference between the standard cost of direct materials specified for the output achieved and the actual cost of direct material used.” MCV = ( SP * SQ ) – ( AP * AQ ) or ( TSC – TAC ) TSC = Actual Output * SR

Material Price Variance - According to C.I.M.A., London “Material price variance is that portion of the material cost variance which is due to the difference between the standard price specified and the actual price paid.” MPV = ( SP – AP ) * AQ Material Usage Variance - According to C.I.M.A., London “Material usage variance is that portion of the material cost variance which is due to the difference between the standard quantity specified and the actual quantity used.” MUV = ( SQ – AQ ) * SP

Varification - MCV = MPV + MUV

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Material Mix Variance – According to C.I.M.A., London “Mix variance is the portion of the direct material usage variance which is due to the difference between the standard and actual composition of mixture.”

Any one of the following situations may be there as regards material mix:1.When total quantity of materials actually used is equal to the total standard quantity, but the mixture ratio differs;2.When total quantity of materials actually used is not equal to the total standard quantity, and also the mixture ratio differs; or3.When total quantity of materials actually used is not equal to the total standard quantity, but mixture ratio is same. In the third case, as the mixture ratio is same, therefore material mix variance is not to be calculated. In the first and second cases only, material mix variance is calculated.First Situation : MMV = ( SQM – AQM ) * SP Second Situation : MMV = ( RSQ – AQ ) * SPRSQ ( Revised Standard Quantity)RSQ = Total Actual Qty. Consumed * Std. Qty. of Particular Material Total Std. Qty. of all the Materials

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Example 1- Calculate Material Mix Variance Standard Mix for one Unit of product ‘X’ is:Material A 50 kg. @ Rs. 10 per kg.Material B 75 kg. @ RS. 20 per kg. 125 kg.Actual Mix used wasMaterial A 60 kg. @ Rs. 12 per kg.Material B 65 kg. @ Rs. 18 per kg. 125 kg.Solution- MMV = ( SQM – AQM ) * SPHere, SQM = Standard Quantity Mix & AQM = Actual Quantity MixFor Material A : ( 50 – 60 ) * Rs. 10 = Rs. 100 ( A )For Material B : ( 75 – 65 ) * Rs. 20 = Rs. 200 ( F ) Rs. 100 ( F )Here, (F) means Favorable (+) & (A) means Adverse (-)

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Example 2 - Calculate Material Mix VarianceStandard Mix for one unit of Product ‘X’ is : Material A 50 kg. @ Rs. 10 per kg. Material B 75 kg. @ Rs. 20 per kg. 125 kg.Actual Mix used was : Material A 60 kg. @ Rs. 12 per kg. Material B 70 kg. @ Rs. 18 per kg. 130 kg.Solution –Here actual used (130 kg) & standard Mix (125 kg) are different also the actual mix ratio (6:7) differs from the standard mix ratio (2:3). In such case RSQ will be calculated as follows: MMV = ( RSQ – AQ ) * SPRSQ = Total Actual Qty. Consumed * Std. Qty. of Particular Material Total Std. Qty. of all the MaterialRSQ for Material A = 130 kg * 50/125 = 52 kg.RSQ for Material B = 130 kg * 75/125 = 78 kg.MMV for Material A = ( 52 – 60 ) * Rs. 10 = Rs. 80 (A)MMV for Material B = ( 78 – 70 ) * Rs. 20 = Rs. 160 (F) Rs. 80 (F)

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Material Sub-usage Variance – When a product is produced from a mixture of two or more kinds of material, there may arise material sub-usage variance. It should be noted that material sub-usage variance is calculated only when quantity of wastage or output is not given. When these quantities are given, this variance will be the same as material yield variance. This variance is also known Material Revised Usage Variance or Material Quantity Variance. There can be two possibilities :1.Total quantity of material consumed and standard quantity are not equal, but mix ratios are also different;2.Total quantity of material consumed and standard quantity are not equal, but mix ratios are equal.

MSUV = ( SQ – RSQ ) * SP

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Material Yield Variance – According to C.I.M.A., London “Material yield variance is that portion of direct material usage variance which is due to the difference between the standard yield and the actual yield obtained” MYV = ( AY – SY ) * SR SR = Total cost of Standard Mix Net Standard Output

Verification :MUV = MMV + MYVMUV = MMV + MSUVMCV = MPV + MMV + MYV

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Example- 3 Calculate Material Sub-usage Variance : Standard Mix Actual Mix

Material A 100 kg. @ Rs. 5 per kg. 120 kg. @ Rs. 7 per kg.Material B 150 kg. @ Rs. 10 per kg. 180 kg. @ Rs. 9 per kg.

250 kg. 300 kg.Solution – Here total of standard mix (250 kg) and actual mix (300 kg) are different, but material mix ratio ( 2 : 3 ) is same. Therefore, RSQ for each material has been calculated as follows :Material Sub-Usage Variance = ( SQ – RSQ ) * SPRSQ = Total Actual Mix * Particular Standard Mix Material / Total Standard MixRSQ for Material A = 300 * 100 / 250 = 120 kgRSQ for Material B = 300 * 150 / 250 = 180 kgAQ and RSQ of each material is same. Therefore,MSUV for Material A = ( 100 – 120 ) * Rs. 5 = Rs. 100 (A)MSUV for Material B = ( 150 – 180 ) * Rs. 10 = Rs. 300 (A) Rs. 400 (A)Some authors use AQ in place of RSQ in the above formulate because RSQ and AQ are equal.

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Example 4 – Calculate Material Variance from the following details available-Standard Actual for 10 MixesMaterial X 40 kgs. @ Rs. 6 Material X 600 kgs. @ Rs. 4Material Y 60 kgs. @ Rs. 4 Material Y 400 kgs. @ Rs. 6Process Loss 20% Process Loss 30%Solution - First of all standards will be set for 10 mixes as follows : Standard for 10 Mixes Actual for 10 MixesMaterial X : 40 * 10 * 6 = Rs 2400 600 * 4 = Rs 2400Material Y : 60 * 10 * 4 = Rs 2400 400 * 6 = Rs 2400Total 1000 kgs Rs 4800 1000 kgs Rs 4800Loss 200 kgs 300 kgsOutput 800 kgs 700 kgs(i)Calculation of Material Cost Variance (MCV) :MCV = TSC – TACTSC = Actual Output * SRSR = Total Cost of Standard Mix / Net Standard output SR = 4800/800 = Rs. 6 per unit, TSC = 700 * 6 = Rs. 4200, TAC = Rs. 4800(given)

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MCV = ( Rs. 4,200 – Rs. 4,800 ) = Rs. 600 (A)

(ii) Calculation of Material Price Variance (MPV)MPV = ( SP – AP ) * AQMPV for Material X = ( 6 – 4 ) * 600 = Rs. 1,200 (F)MPV for Material Y = ( 4 – 6 ) * 400 = Rs. 800 (A) Rs. 400 (F)

(iii) Calculation of Material Usage Variance (MUV)MUV = ( SQ – AQ ) * SPHere, SQ = Standard Particular Material Mix / Standard Output * Actual OutputSQ for actual output for material X = 400 / 800 * 700 = 350 kgsSQ for actual output for material Y = 600 / 800 * 700 = 525 kgsMUV for Material X = ( 350 – 600 ) * 6 = Rs. 1,500 (A)MUV for Material Y = ( 525 – 400 ) * 4 = Rs. 500 (F) Rs. 1,000 (A)

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(iv) Calculation of Material Mix Variance (MMV)MMV = ( SQM – AQM ) * SPMMV for Material X = ( 400 – 600 ) * 6 = Rs. 1,200 (A)MMV for Material Y = ( 600 – 400 ) * 4 = Rs. 800 (F) Rs. 400 (A)

(v) Calculation of Material Yield Variance (MYV)MYV = ( AY – SY ) * SRMYV = ( 700 – 800 ) * 6 = 600 (A)

Verification : MCV = MPV + MMV + MYV 600 (A) = 400 (F) + 400 (A) + 600 (A)

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Direct Labour Variance Labour Cost Variance - According to C.I.M.A. London, “Labour Cost Variance is the difference between standard cost of labour specified and actual cost of labour employed.”

LCV = ( Total Standard Labour Cost – Total Actual Labour Cost ) Labour Rate Variance – According to C.I.M.A. London, “Labour Rate Variance is that portion of labour cost variance which is due to the difference between standard rate specified and actual rate paid.”LRV = ( Standard rate per hour – Actual rate per hour )

Labour Efficiency Variance - According to C.I.M.A. London, “Labour Efficiency Variance is that portion of labour cost variance which is due to the difference between standard labour hours for output achieved and actual labour hours spent.” it is also known as Labour Time Variance, Labour Quantity Variance, Labour Usage Variance, Labour Spending Variance, etc.LEV = ( Standard Time – Actual Time ) * Standard rate per hourHere, Actual time means hours obtained on subtracting abnormal idle-time hours from labour hours actually paid for.

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Labour Idle Time Variance – Idle time variance is that portion of labour cost which arises due to abnormal idle time of the workers specified. This idle time is possible due to many reasons, such as, workers sitting free because of machine break-down, power failure, etc. it should be noted that this variance always shows adverse position. LITV = ( Abnormal Idle Time * Standard rate per hour )

Varification - LCV = LRV + LEV + LITV

Labour Yield Variance - When the actual yield is less or more than the standard yield, it gives rise to labour yield variance.LYV = ( Actual Yield – Standard Yield ) * Standard rate per unitHere, Standard Yield = Total actual time * Std. yield from Std. mix Total standard timeStandard rate per unit = Std. cost of standard mix / Std. yield from Std. mix

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Example – 5 Calculate Labour Yield Variance from the following details : Standard ActualSkilled 180 workers @ Rs. 3 per hour 160 workersUnskilled 120 workers @ Rs. 1 per hour 140 workersBudgeted hours for one month 200. actual hours during the month 180; Budgeted production 5,000 units less standard loss 20%, Actual production 4,200 units.Solution - Standard production (yield) = 5,000 units – 20% (1,000) = 4,000 unitsActual production (AY) = 4,200 units Calculation of Standard Hours Calculation of Actual Hours Budgeted hours No. of workers Total Hr Actual hour No. of worker Total Hr Skilled 200 * 180 = 36,000 180 * 160 = 28,800Unskilled 200 * 120 = 24,000 180 * 140 = 25,200Total 300 60,000 300 54,000Labour Yield Variance = ( AY – SY ) * SR per unitStandard Yield (SY) = Total actual time * Std. yield from Std. mix Total standard timeSY = 54,000 hours * 4,000 units / 60,000 hours = 3,600 unitsSR = Standard cost of standard mix / Standard yield from standard mix

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Standard Wages :

Skilled workers = 36,000 hours * Rs. 3 = Rs. 1,08,000Unskilled workers = 24,000 hours * Rs. 1 = Rs. 24,000 Total = Rs. 1,32,000

SR = Rs. 1,32,000 / 4,000 = Rs. 33

LYV = ( 4,200 – 3,600 ) * Rs. 33 = Rs. 19,800 (F)

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Labour Mix Variance - Different types of workers are generally required in a production, e.g., skilled, unskilled, men, women, children, etc. keeping in view the production efficiency of the factory and to control the labour cost, a standard mix ratio is specified for various type of workers. But in actual practice it is not possible to follow this standard because of some difficulties ( such as non-availability of desired type of workers, etc. ) Thus, labour mix variance arises. It is also known as Gang Composition Variance.It can be calculated in following two situations :1.When the totals of standard labour mix and actual labour mix are same but the two mix ratios are different.2.When the totals of standard labour mix and actual labour mix are different but the two mix ratios are also different.When the totals of standard labour mix and actual labour mix are different but the two mix ratios are same, there will be no labour mix variance.First Situation LMV = ( Standard time mix – Actual time mix ) * Std. rate per hour.Second Situation LMV = ( RST – Actual Time ) * Standard rate per hourHere, RST ( Revised Standard Time )RST = Total actual time * Standard time of particular labour Total standard time of all the labour

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Example 6 – The budget of labour hours for the week ending June 30, 2011 is of 50 hours. The other details are as follows ; Standard ActualGrade A 100 workers @ Rs. 3 per hour 120 workers @ Rs. 2.50 per hourGrade B 200 workers @ Rs. 1 per hour 180 workers @ Rs. 1.50 per hourThe actual production is for 50 hours during the week. Calculate Labour Mix Variance.Solution - Calculation of Standard Time Calculation of Actual TimeGrade A workers 100 * 50 = 5,000 Hours 120 * 50 = 6,000 HoursGrade B workers 200 * 50 = 10,000 Hours 180 * 50 = 9,000 HoursTotal 15,000 Hours 15,000 HoursAs the total of standard labour time mix (15,000 hours) and actual labour time mix (15,000 hours) is same, but standard labour mix ratio (1 : 2) and actual labour mix ratio (2 : 3) are different, therefore situation first is applicableLabour Mix Variance = ( Standard time mix – Actual time mix ) * Std. rate per hourLMV for Grade A workers = ( 5,000 – 6,000 ) * Rs. 3 = Rs. 3,000 (A)LMV for Grade B workers = ( 10,000 – 9,000 ) * Rs. 1 = Rs. 1,000 (F) Total = Rs. 2,000 (A)

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Example – 7 In above Example No. 6 let assumed that the actual number of grade B workers is 210 in place of 180. then calculate labour mix variance.Solution- Calculation of Standard Time Calculation of Actual Time

Grade A workers 100 * 50 = 5,000 Hours 120 * 50 = 6,000 HoursGrade B workers 200 * 50 = 10,000 Hours 210 * 50 = 10,500 HoursTotal 15,000 Hours 16,500 HoursAs the totals of standard labour time mix (15,000 hours) and actual labour time mix (16,500 hours) are different, and standard labour mix ratio (1 : 2) and actual labour mix ratio (60 : 105) are also different, therefore second situation applicableLabour Mix Variance = ( RST – AT ) * SRRST = Total actual time * Standard time of particular labour Total standard time of all the labourRST for Grade A workers = 16,500 * 5,000 / 15,000 = 5,500 hoursRST for Grade B workers = 16,500 * 10,000 / 15,000 = 11,000 hoursLMV for Grade A workers = ( 5,500 – 6,000 ) * Rs. 3 = Rs. 1,500 (A)LMV for Grade B workers = ( 11,000 – 10,500 ) * Rs. 1 = Rs. 500 (F) Total = Rs. 1,000 (A)

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Example – 8 Calculate Direct Labour Variance from the following : Standard ActualWorkman A : 20 hours @ Rs. 3 = Rs. 60 30 hours @ Rs. 4 = Rs. 120Workman B : 20 hours @ Rs. 7 = Rs. 140 25 hours @ Rs. 6 = Rs. 150 40 hours Rs. 200 55 hours Rs. 270In actual production, 3 hours (included in above) have been lost on account of machine breakdown.Solution – (i)Labour Cost Variance = Total Standard labour Cost – Total Actual Labour Cost LCV = ( Rs. 200 – Rs. 270 ) = Rs. 70 (A)(ii) Labour Rate Variance = ( Std. rate per hr – Actual rate per hr ) * Actual timeLRV for A = ( Rs. 3 – Rs. 4 ) * 30 hours = Rs. 30 (A)LRV for B = ( Rs. 7 – Rs. 6 ) * 25 hours = Rs. 25 (F) Rs. 5 (A)(iii) Labour Efficiency Variance = ( Standard time – Actual time ) * SR per hourLEV for A = ( 20 hours – 27 hours ) * Rs. 3 = Rs. 21 (A)LEV for B = ( 20 hours – 22 hours ) * Rs. 7 = Rs. 14 (A) Rs. 35 (A)

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(iv) Labour Idle time Variance = Idle time * Standard Rate per hour LITV for A = 3hours * Rs. 3 per hour = Rs. 9 (A)LITV for B = 3 hours * Rs. 7 per hour = Rs. 21 (A) Rs. 30 (A)

Verification – Labour Cost Variance = Labour rate Variance + Labour Efficiency Variance + Labour Idle time Variance Rs. 70 (A) = Rs. 5 (A) + Rs. 35 (A) + Rs. 30 (A)

Module I

Faculty: J.Rai, IIPM-School of Management, Kansbahal 31

Module I

Faculty: J.Rai, IIPM-School of Management, Kansbahal 32