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