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Standard Costing & Variance Analysis

Standard costing involves setting predetermined costs (standards) for products and services and comparing actual costs to identify variances. A standard committee sets standards for direct materials, direct labor, and overhead costs which are recorded on standard cost cards. Actual costs are also recorded and variances identified as favorable or unfavorable depending on whether actual performance was better or worse than the standard. Variance analysis is used to identify reasons for variances and assign responsibility so that corrective actions can be taken.

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58 views4 pages

Standard Costing & Variance Analysis

Standard costing involves setting predetermined costs (standards) for products and services and comparing actual costs to identify variances. A standard committee sets standards for direct materials, direct labor, and overhead costs which are recorded on standard cost cards. Actual costs are also recorded and variances identified as favorable or unfavorable depending on whether actual performance was better or worse than the standard. Variance analysis is used to identify reasons for variances and assign responsibility so that corrective actions can be taken.

Uploaded by

vsrajeshvs
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© © All Rights Reserved
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Standard Costing & Variance Analysis

Thetermstandardcostreferstopredeterminedcosts,whichdetermineswhateachproductorservice
shouldcostundergivencircumstances.Thisdefinitionstatesthatstandardcostsrepresentplannedcost
ofaproduct.

StandardCostingisaconceptofaccountingfordeterminationofstandardforeachelementofcosts.
Thesepredeterminedcostsarecomparedwithactualcoststofindoutthedeviationsknownas
"Variances."Identificationandanalysisofcausesforsuchvariancesandremedialmeasuresshouldbe
takeninordertoovercomethereasonsforVariances.

Determinationofstandardcost.
Recordingofactualcost.
Comparisonofstandardcostandactualcost.
Findingoutreasonsforvariance.
Reportingvariancetoconcernedforcorrectiveaction.

Advantagesofstandardcostingare
Helptomanagementinplanning,coordination,organization,motivation&control.
Measurementofefficiency.
Fixingprices&formulatingstrategies.
Facilitatescontrol&decisionmaking.
Eliminateswastes.
Inventoryvaluation.
Createscostconsciousness
Economical&simple

Someofthelimitationsofstandardcostingare
Difficulttoestablish
Conditionchange
Morale&motivationmayaffected
Expensive.
Duetolackoftechnicalaspects,itisdifficulttoestablishstandards.
Standardcostingcannotbeappliedinthecaseofaconcernwherenonstandardisedproducts
areproduced.
Frequentrevisionisrequiredwhileinsufficientstaffisincapableofoperatingthissystem.

Astandardcommitteeconsistsofpurchasemanager,productionmanager,personnelmanager,
engineers,marketingmanagersandcostaccountantisresponsibleforsettingstandardsforeachelement
ofcostsasgivenbelow.
DirectMaterial
DIrectLabor

Overheads

Materialquantity&pricestandardneedtobeestablishedaspartofdirectmaterialcostandstandard
labortimeandstandardrateneedstobeestablishedfordirectlabor.

Settingofoverheadstandardsisdividedintofixedoverhead.variableoverheadandsemivariable
overhead.

AfterfixingtheStandardsfordirectmaterial,directlabourandoverheadcost,theyarerecordedina
StandardCostCard.ThisStandardcostispresentedforeachunitcostofaproduct.ThetotalStandard
CostofmanufacturingaproductcanbeobtainedbyaggregatingthedifferentStandardCostCardsof
differentprocesses.TheseCostCardsareusefultothefirminproductionplanningandpricingpolicies.

Theterm"Variances"maybedefinedasthedifferencebetweenStandardCostandactualcostforeach
elementofcostincurredduringaparticularperiod.Theterm"VarianceAnalysis"maybedefinedas
theprocessofanalyzingvariancebysubdividingthetotalvarianceinsuchawaythatmanagementcan
assignresponsibilityforoffStandardPerformance.

Thevariancemaybefavourablevarianceorunfavourablevariance.Whentheactualperformanceis
betterthantheStandard,itresents"FavourableVariance."Similarly,whereactualperformanceis
belowthestandarditiscalledas"UnfavourableVariance."
Cost Variance
TotalCostVarianceisthedifferencebetweenStandardsCostfortheActualOutputandtheActual
TotalCostincurredformanufacturingactualoutput.
DirectMaterialCostVariance
DirectLaborCostVariance
OverheadCostVariance

MCV=SCAC=SQ*SPAQ*AP
**Calculationshouldbemadeforactualproduction,butnotplannedproduction.Itshouldbenoted
thatthestandardquantitymustrelatetotheactualproduction

MaterialUsage(Quantity)VarianceMUV=SP(SQAQ)
Useofdefectiveorsubstandardmaterials,causingspoilage.
Carelessnessintheuseofmaterials,resultingexcessiveconsumption.
Pilferageofmaterials.
Faultyworkmanship.
Defectinplantandmachinery,causingexcessiveconsumptionofmaterials.
Changeinthedesignorspecificationoftheproduct.
Changeinthequalityofmaterials.
Useofmaterialmixture,otherthanstandardmix.
Useofsubstituteornonstandardmaterials.

Yieldfrommaterialsinexcessoforlessthanstandardyield.
Faultymaterialprocessing.
Normally,foremanofthatmachineisresponsiblefornotexercisingeffectivesupervisionoverthe
concernedworker.Butthedepartmentheadandproductionmanagerareresponsibleforthedepartment
asawhole.

MaterialPriceVarianceMPC=AQ(SPAP)
Changeinthebasicpricesofmaterials.
Failuretopurchasethestandardquality,therebyresultinginadifferentpricebeingpaid.
Uneconomicalsizeofpurchaseorders,leadingtolower/higherquantitydiscount.
Notavailingcashdiscounts,whenstandardssetarebasedonsuchdiscounts.
Badpurchasing.
Changeintransportationcosts.
Rushpurchasesfromuneconomicalmarkets.
Purchaseofasubstitutematerialonaccountofnonavailabilityofthematerialspecified.
Changeintheratesofexciseduty,purchasetax,etc.
Offseasonpurchasing,especially,forcertainseasonalproductslikejute,cotton,etc.
Normally,thepurchasemanagerisresponsibleformaterialpricevariance.However,hecannotbeheld
responsibleforvarianceduetochangeinmarketprices,becauseageneralchangeinpricesis,
obviously,outsidehiscontrol.Similarly,purchaseofsmallerquantitymaybeduetoshortageof
finances,whichisafinancialmatter,beyondhiscontrol.

LCV=SCAC=(SH*SRAH*AR)

LaborTime(Efficiency)VarianceLTV=SR(SHAH)
Poorworkingconditionse.g.inadequatelightingandventilation,excessiveheating,etc.
Defectivetoolsandplantandmachinery.
Inefficientworkers.
Incompetentsupervision.
Useofdefectiveornonstandardmaterials,whichrequiresmoreorlesstimethanthestandard
timeforprocessing.
Timewastedbyfactorslikewaitingformaterials,toolsetc.ormachinebreakdown.
Insufficienttrainingofworkers.
Changeinthemethodofoperation.
Nonstandardgradeworkers.

LaborRateVarianceLRV=AH(SRAR)
Changeinthebasicwagerates.
Useofadifferentmethodofwagepayment.
Employingworkersofdifferentgradesfromthestandardgradesspecified.
Unscheduledovertime.
Newworkersnotbeingpaidatfullrates.

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