Presented by: Mr. Jaswant Singh Mr. Kadir Shaikh Ms. Jigyasa Soni Ms. Vibhavari Pawar

1.Definition of Standard Cost & Standard Costing. 2.Developing OR Setting Standards. 3.Variance Analysis. 4.Material Variance. 5.Labour Variance. 6.Overhead Variance. 7.Sales Variance. 8.Profit Variance. 9.Disposition of Variance. 10.Limitations of Standard Costing. 11.Control Ratios.

Definition of Standard Cost & Standard Costing. Standard Cost A predetermined cost which is calculated from managements standards of efficient operation and the relevant necessary expenditure. It may be used as a basis for price fixing and for cost control through variance analysis.

Standard Costing The preparation and use of standard costs, their comparison with actual costs, and the analysis of variance to their causes and points of incidence.

Developing OR Setting Standards. All factors related with standard setting should be considered in the establishment of standards. Standards must be established for a definite period of time so that they can be effective in performance evaluation, control and analysis of costs. Standards are usually used for six- or twelve- month period. Standards are developed for: Materials Labour Overhead Sales

Advantages of Standard Costs

Variance Analysis. The function of standards in cost accounting is to indicate variances between standard costs which are allowed and actual costs which have been recorded. Variances as the difference between a standard cost and the comparable actual cost incurred during a period. Variance analysis can be defined as the process of computing the amount of, and isolating the cause of variances between actual costs and standard costs. Variance analysis involves two phases: Computing of individual variances Determination of the cause(s) of each variance.

Material Variance.Material Standard is developed on two basis 1. Material Quantity Standard 2. Material Price Standard The following variances constitute materials variances:

Material Cost Variance

Usage Variance

Price Variance

Material Usage(Quantity) Variance.The material quantity or usage variance results when actual quantities of raw materials used in production differ from standard quantities that should have been used to produce the output achieved. It is that portion of the direct material cost variance which is due to the difference between the actual quantity used and standard quantity specified. MUV= (AQ-SQ)x SP MUV= Material Usage Variance AQ= Actual Quantity SQ= Standard Quantity SP= Standard Price

Causes Of Material Usage Variance: Poor materials handling Inferior workmanship by machine operator Faulty equipment Cheaper, defective raw material causing excessive scrap. 5. Inferior quantity control inspection 6. Pilferage 7. Wastage due to inefficient production method. 1. 2. 3. 4.

Material Price VarianceA materials price variance occurs when raw materials are purchased at a price different from standard price. It is that portion of the direct materials which is due to the difference between actual price paid and standard price specified and cost variance multiplied by the actual quantity. MPV=(AP-SP)x AQ MPV= Material Price Variance AP= Actual Price SP= Standard Price AQ= Actual Quantity.

Causes Of Material Price Variance: 1. Recent changes in purchase price of materials. 2. Failure to purchase anticipated quantities when standard were established 3. Not taking cash discounts anticipated at the time of setting standard, resulting in higher prices 4. Substituting raw material differing from original materials specifications 5. Freight cost changes & changes in purchasing & storekeeping costs.

Material Cost Variance.It is the difference between the actual cost of direct materials used and standard cost of direct materials specified for the output achieved. This variance results from differences between quantities consumed and quantities of materials allowed for production and from difference between prices paid and prices predetermined. MCV=(AQ x AP)-(SQ x SP) OR MCV= MUV+MPV MCV= Material Cost Variance AQ= Actual Quantity AP= Actual Price SQ= Standard Quantity SP= Standard Price MUV= Material Usage Variance MPV= Material Price Variance

Labour Variance.Labour standards are also established for both cost and quantity(efficiency). For standard cost purpose, direct labour is treated separately from indirect labour, which is included in the factory overhead. Two standards are usually developed for labour costs: 1. Labour usage (efficiency) standard 2. Labour cost (rate) standard The following variances constitute labour variances:Labour Cost Variance

Efficiency Variance

Rate Variance

Labour Efficiency VarianceIf actual direct labour hours required to complete a job differ from the number of standard hours specified, a labour efficiency variance results. LEV= (AH-SH for the actual output) x SR LEV= Labour Efficiency Variance AH= Actual Hours SH= Standard Hours for the actual output SR= Standard Rate per hour

Causes Of Labour Efficiency Variance: 1. Machine Breakdown 2. Inferior raw material 3. Poor supervision 4. Poor employee performance 5. Lack of timely material handling 6. Inefficient production scheduling 7. Inferior engineering specifications 8. New inexperienced employees 9. Inefficient training to workers 10.Poor working conditions

Labour Rate VarianceWhen actual direct labour hour rates differ from standard rates, the result is a labour rate variance. Favorable rate variance arise whenever actual rates are less than standard rates; unfavorable variances occur when actual rates exceed standard rates. LRV= (AR-SR) x AH LRV= Labour Rate Variance AR= Actual Rate SR= Standard Rate AH= Actual Hours

Causes Of Labour Rate Variance: 1. Recent labour rate changes in the industry 2. Employing a man of a different grade as mentioned in the standard 3. Labour strike 4. Labour layoff 5. Employee sickness 6. Paying high for overtime then mentioned in the standard.

Labour Cost VarianceIt denotes the difference between the actual direct wages paid and the standard direct wages specified for the output achieved. LCV=(AH x AR- SH x SR) OR LCV= LEV+LRV LCV= Labour Cost Variance AH= Actual Hours AR= Actual Rate SH= Standard Hours SR= Standard Rate LEV= Labour Efficiency Variance LRV= Labour Rate Variance

Overhead Variance.The analysis of factory overhead variances is more complex than variance analysis for direct materials and direct labour.Overhead cost variance Variable overhead variance Variable Overhead Expenditure Variance Variable Overhead Efficiency Variance

Fixed overhead variance Fixed overhead expenditure variance Fixed overhead volume variance

Calendar Variance

Efficiency Variance

Capacity Variance

Total Overhead Cost VarianceOverall overhead variance is the difference between the actual overhead cost incurred and the standard cost of overhead for the output achieved. Total Overhead Cost Variance = (Actual overhead incurred- Standard hours for the actual output x standard overhead rate per hour) OR Total Overhead Cost Variance = Actual overhead incurred (Actual output x standard overhead rate per unit)

Variable Overhead Variance.It is the difference between actual variable overhead cost and standard variable overhead allowed for the actual output achieved. Variable Overhead Variance = Actual overhead cost (Actual output x variable overhead rate per unit) OR Variable Overhead Variance = Actual overhead cost (Standard hours for actual output x standard variable overhead rate per hour)

Fixed Overhead VarianceIt indicates the difference between the actual fixed overhead cost and the standard fixed overhead cost allowed for the actual output. Fixed overhead variance = Actual overhead cost fixed overhead absorbed OR Fixed overhead variance = Actual overhead cost (Standard hours for actual output x standard fixed overhead rate per hour)

Variable Overhead Expenditure(Spending Or Budget) VarianceIt indicates the difference between actual overhead and budgeted variable overhead based on actual hours work Variable Overhead Expenditure Variance = (Actual variable overhead budgeted variable overhead)

Variable Overhead Efficiency VarianceWhen the actual quantity produced and the standard quantity fixed might be different because of higher or lower efficiency of workers employed in the manufacturing of goods. Variable Overhead Efficiency Variance = (Actual hours standard hours for actual output) x Standard variable overhead rate per hour.

Fixed overhead expenditure (spending or budget) varianceIt indicates the difference between actual fixed overhead and budgeted fixed overhead. If actual fixed overhead costs are greater than budgeted fixed costs, an unfavorable variance results because actual costs exceeds the budget. Fixed overhead expenditure variance = (actual fixed overhead-budgeted fixed overhead)

Fixed Overhead Volume varianceVolume variance relates to only fixed overhead this varianc arises due to the difference between the standard fixed overhead cost allowed for the actual output and the budgeted fixed overhead based on standard hours allowed for actual output achieved during the period. Fixed Overhead Volume variance = (actual productionbudgeted production) x standard fixed overhead rate per unit OR Fixed Overhead Volume variance = (budgeted overhead applied to actual output-budgeted fixed overhead based on standard hour allowed for actual output)

Causes of overhead volume variance 1. 2. 3. 4. 5. 6. 7. 8. Failure to utilize normal capacity. Lack of sales order. Too much idle capacity. Inefficient or efficient utilization of existing capacity. Machine breakdown. Defective materials. Labour troubles. Power failures.

Fixed Overhead Calendar VarianceIt is that portion of volume variance which is due to the difference between the number of actual working days in the period to which the budget is applicable and budgeted number of days in budget period. Calendar Variance =(number of actual working days no. of budgeted working days) x Standard Fixed Overhead rate per day. Hour basis Calendar Variance = (Revised budget capacity hours Budgeted hours) x Standard fixed overhead rate per hour Output basis Calendar variance = (Revised budget quantity in terms of actual no. of days worked Budgeted quantity) x Standard fixed overhead rate per unit

Fixed Overhead Efficiency VarianceIt is that portion of volume variance which arises when actual hours of production used for actual output differ from standard hours specified for that output. Fixed Overhead Efficiency Variance = (Actual hours Standard hours for actual production) x Standard Fixed Overhead rate per hour OR Fixed Overhead Efficiency Variance = (Actual production Standard production as per actual time available) x Standard Fixed overhead rate per unit

Fixed Overhead Capacity VarianceIt is that part of fixed overhead volume variance which is due to difference between the actual capacity (in hours) worked during the given period and the budgeted capacity (in hours) Fixed overhead capacity variance = (Actual capacity hours - Budgeted capacity hours) x Standard Fixed overhead rate per hour

Variance Relationships

Sales Variance.It is the difference between the actual value of sales achieved in the given period and budgeted value of sales. Sales variance can be calculated by using any one of the following:1. Sales Variance based on TURNOVER 2. Sales variance based on MARGIN

Sales Variance Based on TurnoverVariance based on turnover shows the difference between total sales and total budgeted sales

Sales Value Variance

Sales volume variance

Sales Price variance

Sales Value VarianceThis variance shows the difference between actual sales value and budgeted sales value. Sales Value Variance= (Actual value of sales- Budgeted value of sales) Actual Sales= Actual quantity sold x Actual selling price Budgeted Sales= Standard quantity x standard selling price OR Sales Value Variance= (Actual quantity x Actual selling price)- (Selling quantity x Standard selling price)

Sales Price VariancesThis variance is due to the difference between actual selling price and standard or budgeted selling price. Sales price variance = (Actual selling price Budgeted selling price) x Actual quantity

Sales volume varianceIt arises when the actual quantity sold is different form the budgeted quantity. Sales volume variance = (Actual quantity Budgeted quantity) x Budgeted selling price

Sales Variance Based on MarginThe Sales Variances using margin approach show the difference in actual profit and budgeted profit.

Sales Margin Variance

Sales Margin Volume Variance

Sales Margin Price Variance

Sales Margin VarianceIt indicates the aggregate or total variance under the margin method. Sales Margin Variance= Actual profit- Budgeted profit.

Sales Margin Price VarianceIt is one part of total sales margin variance and arises due to the difference between actual margin and budgeted margin per unit. It is significant to note that, assuming cost of production being constant, the difference in the actual margin and budgeted margin will only be because of the difference between actual selling price and budgeted selling price. Sales margin price variance=(Actual margin per unitBudgeted margin per unit) x Actual quantity.

Sales Margin Volume VarianceIt shown as the difference between Actual Sales Units & Budgeted Sales Unit. Sales Margin Volume Variance=(Actual QuantityBudgeted Quantity) x Budgeted Margin/ unit OR Sales Margin Volume Variance=((Standard Profit on Actual Quantity of Sales Budgeted Profit.)

Profit Variance. Profit variance analysis, often called gross profit analysis, deals with how to analyze the profit variance that constitutes the departure between actual profit and the previous years income or the budgeted figure. The primary goal of profit variance analysis is to improve performance and profitability in the future Profit, whether it is gross profit or contribution margin, is affected by at least three basic items: sales price, sales volume, and costs. In addition, in a multi product firm, if not all products are equally profitable, profit is affected by the mix of products sold.

Standards In Profit Variance AnalysisTo determine the various causes for a favorable variance (an increase) or an unfavorable variance (a decrease) in profit, we need some kind of yardstick to compare against the actual results. The yardstick may be based on the prices and costs of the previous year, or any year selected as the base period. Some companies summarize profit variance analysis data in their annual report by showing departures from the previous years reported income.

Ways to Calculate PV The sales price variance measures the impact on the firms contribution margin (or gross profit) of changes in the unit selling price. It is computed as: Sales price variance = (Actual price - Budget price) Actual sales The cost price variance, however, is simply the summary of price variances for materials, labor, and overhead. (This is the sum of material price, labor rate, and factory overhead spending variances.) Cost price variance = (Actual cost - Budget cost) Actual sales The sales volume variance indicates the impact on the firms profit of changes in the unit sales volume. This is the amount by which sales would have varied from the budget if nothing but sales volume had changed. Sales volume variance = (Actual sales - Budget sales) Budget price

Disposition of Variance.Variance may be disposed off in either of the following two ways: 1. Inventories and the cost of goods sold may be adjusted to reflect the actual costs. 2. Variances may be transferred to the profit and loss account. Under the first method, all variances are allocated between the inventory accounts and cost of goods sold accounts. This method, in fact, converts the accounts balances from standard costs to actual historical costs. Under the second method, the variances are considered as profit or loss items in the period in which they occurred. The work-in-process, finished goods inventory, and cost of goods sold are stated at standard costs. Unfavorable cost variances are deducted from the gross profit at standard costs. Favorable cost variances are added to the gross profit calculated at standard costs.

The treatment of variancesIt depends on factors such as: 1. Size of variance 2. Accuracy of standard costs 3. Cause of variances such as incorrect standard costs. 4. Timing of variances 5. Type of variances

Limitations of Standard Costing1. Predetermined nature of standard cost- The accuracy of standard costs is limited by the knowledge and skill of the people who created them and they contain the prejudices of their makers. 2. Difficult to select type of standard- if the standards are too low, they defeat the objective of standard costing and bring the operating efficiency down. If they are too high, they can create ill- will and encourage employees to beat the system by fair means or foul. 3. Requirement for good programme of standard costing- Both the management and operating personnel should have full confidence in it and standards should be fair and workable.

Control RatiosControl ratios are useful to management to know whether the deviations of actual from budgeted results are favorable or unfavorable. These control ratios are expressed in percentage. The ratio is taken as favorable if it is 100% or more. In case it is less than 100% the ratio is considered as unfavorable. 1. Activity Ratio= Standard hrs for actual production X 100 Budgeted hours 1. Capacity Ratio= Shows the relationship between actual working hours and budgeted working hours. 2. Efficiency Ratio= Standard hours for actual production X 100 Actual hours worked

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