STANDARD COSTING

ZAREEN KHAN13053032026

MBA-PUMT

System for Computing and Analyzing Costs and its Operations in an

Organization.

Historical Cost Vs. Standard Cost

COSTING:

Original cost/value of an asset or liability at the time of transaction.

Example:

– June 2013: 20 units were bought on RS 40/unit

– July 2013: current price RS 50/unit

– It will be recorded as Rs. 800 NOT Rs. 1000 in balance

sheet.

HISTORICAL COSTING:

Doesn’t value appreciation / depreciation of asset but, cost.

Unhelpful while comparing corporate performances.

No set standards.

HISTORICAL COSTING: LIMITATIONS

Cost of product occurred or incurred at the time of production.

Incurred on Direct Material, Direct Labor and Factory Overheads.

ACTUAL COST:

• Standard: measure, criteria. (Example: ISO)

• Variances: Standard cost Vs. Actual cost

STANDARD COSTING:

Predetermined, planned or expected cost under anticipated conditions.

When the actual cost is less than standard cost , it is known as FAVORABLE

VARIANCE (F).

When actual cost exceeds

standards cost, it is known as

UNFAVORABLE or ADVERSE

VARIANCE (A).

The deviation of actual performance from standard is

called VARIANCE.

Role: Provide reasons for off-standard performance.

Purpose: Improved operations, error corrections and deployment of resources effectively -> reduced costs.

VARIANCE ANALYSIS:

Direct Material Variance

Direct Labor Variance

Factory Overheads Variance

How much more or less material cost had been incurred when actual are

compared to the standards?

DIRECT MATERIAL VARIANCE:Direct material costs (price and quantity variances)

For Price:(Actual Quantity X Actual Price) – (Actual Quantity X Standard Price)

For Quantity:(Actual Quantity X Standard Price) – ( Standard Quantity X Standard Price)

How much wage is paid on the output achieved?How much time has been taken to achieve the output?

DIRECT LABOR VARIANCE:Direct labor costs (wage rate and efficiency variances)

For Rate:(Actual Hours X Actual Rate) – (Actual Hours X Standard Rate)

For Quantity:(Actual Hours X Standard Rate) – (Standard Hours X Standard Rate)

How much fixed and variable overheads have been charged actually than standard?

FACTORY OVERHEADS VARIANCE:Manufacturing/Factory Overheads (fixed and variable)

For Variable Overhead Variance:(Actual Output X Standard Rate) – (Actual Output X Actual Rate)

For Fixed Overhead Variance:(Actual Output X Standard Fixed Overhead) – (Actual Output X

Actual Fixed Overhead)

Rules, levels, guidelines for

production and price strategies

Comparison and analysis of data

management

Good for cost consciousness organizations

Prepare financial statements effectively

Better economy, efficiency, and productivity

Assists in budgeting

Helps in performance management

STANDARD COSTING: BENEFITS

Process is technical

Not an easy task to set the standards

Meeting standards should not only be

the target.

STANDARD COSTING: LIMITATIONS

THANK YOU!