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ASSIGNMENT NO.2Cost Accounting Application of standard costing in a manufacturing concern keeping in a view the various variance Submitted To: Sir Waqar Akbar Allama Iqbal Open University Submitted By: Faiz-ullah Khan Roll no , Ah-522997 April 9, 2011

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In the name of Allah, the most beneficent and the most merciful.

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Acknowledgements:All words of praise and gratitude to the sole Lord of universe, almighty Allah. I am thank, first and foremost, Allah for having enable me to complete my effort of writing such an assignment that would not have been possible for me to complete without his help in all stages of its preparation. I revoke peace for Hazrat Muhammad (S.A.W) for whom the earth and heaven is created. I am thankful for my parents, teachers, friends and class fellows for having great courage and help during the report

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Dedication:

Dedicate to my Parents. I would like to admit that I owe all my achievements to the most sincere and most loving relation of this world, whose prayers are a source of determination for me.

Abstract:2 Faizullah khan Roll # A-522997 2

Standard costs are aid in the planning, operations and gaining insights in to the probable impact of managerial decision on cost levels and profit. Standard cost is used for Establishing Budgets, Controlling cost and motivating and measuring efficiencies. Standard cost are also used for promoting possible cost reduction and assigning cost to material, work in process and finished goods inventories. Levis Straus signature has small wholesale business that supplied miners and workers with work clothes that were strong and did not tear easily, the company is adopting the standard cost for their planning and budgeting.

Table of Contents:2 Faizullah khan Roll # A-522997 2

Contents

Page No01 03 05 06 07 13 18 19 21 22 23

Title page Acknowledgement Abstracts Table of contents Introduction to the issue Practical study of organization Data collection methods SWOT analysis Conclusion Recommendations

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Topic: - Application of standard costing in a manufacturing concern keeping in a view the various varianceStandard Costing:

Introduction to issue

Standard costs are usually associated with a manufacturing company's costs of direct material, direct labor, and manufacturing overhead.

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Rather than assigning the actual costs of direct material, direct labor, and manufacturing overhead to a product, many manufacturers assign the expected or standard cost. This means that a manufacturer's inventories and cost of goods sold will begin with amounts reflecting the standard costs, not the actual costs, of a product. Manufacturers, of course, still have to pay the actual costs. As a result there are almost always differences between the actual costs and the standard costs, and those differences are known as variance. Standard costing and the related variances is a valuable management tool. If a variance arises, management becomes aware that manufacturing costs have differed from the standard (planned, expected) costs.

Situations in Standard Cost: The following situations can be accruing during standard costing: 1. If actual costs are greater than standard costs: the variance is unfavorable. An unfavorable variance tells

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management that if everything else stays constant the company's actual profit will be less than planned. 2. If actual costs are less than standard costs: the variance is favorable. A favorable variance tells management that if everything else stays constant the actual profit will likely exceed the planned profit. Process of Standard Costing: Distinguish between a standard and a budget. Identify the advantages of standard costs. Describe how standards are set. Discuss the reporting of variances. The Need for Standards: Standards Are common in business Are often imposed by government agencies (and called regulations)

Standard costs Are predetermined unit costs2 Faizullah khan Roll # A-522997 2

Used as measures of performance Distinguishing Between Standards and Budgets

Standards and budgets are both Pre-determined costs Part of management planning and control A standard is a unit amount whereas a budget is a total amount Standard costs may be incorporated into a cost accounting system Advantages of Standard Costs

Facilitate management planning Promote greater economy by making employees more cost- conscious Useful in setting selling prices

Contribute to management control by providing basis for evaluation of cost control

Useful in highlighting variances in management by exceptions Simply costing of inventories and reduce costs `

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Standard Cost per Unit Sum of the standard costs for direct materials, direct labor, and Manufacturing over head Is determined for each product and often recorded on a standard cost Card which provides the basis for determining variances from standards. Variances from standards 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 labor A variance is not favorable if uality control standards are sacrificed Analyzing variances Variances must be analyzed to determine their significance

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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. The setting of standards is: a. A managerial accounting decision. b. A management decision c. A worker decision. d. Preferably set at the ideal level of performance

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Practical study of the organization levi,s denim In 1853, Leob Strauss, who later changed his name to Levi, moved to San Francisco and opened a small wholesale business that supplied miners and workers with work clothes that were strong and did not tear easily. Later in 1872, as the clothing became popular, Levi Strauss partnered with an inventor named Jacob Davis. Davis had the interesting idea of adding copper rivets to the corners of the pockets to the waist overalls Levi Strauss had produced. Quality of Levis Products: 100-year-old pair of Levi Strauss & Co. jeans recently purchased by the company for $25,000. The jeans, found last November in an abandoned mine, are one of the two oldestknown pairs of Levi's in existence. Research & Development Company places great emphasis on Research and

Development. For this purpose it has well equipped and modern factory run by qualified staff, which is responsible for2 Faizullah khan Roll # A-522997 2

the development of new products and it carries extensive research to improve the quality of the product. It is also entrusted with the jobs of testing the raw material to enforce the compliance to standard specifications. Quality Control: Company vigorously pursues the quality in all processes starting from procurement of the raw material to shipment of finished products to customers. Basic Products: Jeans, Shirts, Shorts, coats Variety for ladies, gents and children Fashionable & latest designing wear Workers suiting and many more During my study I found that Levis Denim is working under powerful manufacturing and marketing strategy. The management also employs financial analysis for the purpose of internal control and to better provide what capital suppliers seek in the financial condition and performance form the firm. From internal control standpoint, management needs to2 Faizullah khan Roll # A-522997 2

undertake financial analysis in order to plan and control effectively. To plan for future, the financial manager assesses the firms present financial position and evaluates opportunities in relation to this current position. One of the main reasons of their success is proper investment and financing decision at the right time.

Examples of Standard Cost of Materials and Price VarianceLet's assume that on January 2, 2010 Denim Works ordered 1,000 yards of denim at $2.90 per yard. On January 8, 2010 Denim Works receives 1,000 yards of denim and an invoice for the actual cost of $2,900. On January 8, 2010 Denim Works becomes the owner of the material and has a liability to its supplier. On January 8 Denim Works' Direct Materials Inventory is increased by the standard cost of $3,000 (1,000 yards of denim at the standard cost of $3 per yard), Accounts Payable is credited for $2,900 (the actual amount owed to the supplier), and the difference of $100 is credited to Direct Materials Price Variance. In general journal format the entry looks like this:

Date

Account Name

Debit

Credit

Jan. 8, 2010

Direct Materials Inventory Accounts Payable Direct Materials Price

3,000 2,900 100

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Variance

The $100 credit to the price variance account communicates immediately (when the denim arrives) that the company is experiencing actual costs that are more favorable than the planned, standard cost.

In February, Denim Works orders 3,000 yards of denim at $3.05 per yard. On March 1, 2010 Denim Works receives the 3,000 yards of denim and an invoice for $9,150 due in 30 days. On March 1, the Direct Materials Inventory account is increased by the standard cost of $9,000 (