UNIT - IV

STANDARD COSTING

Standard Cost : Standard costs are predetermined cost or forecast

estimate of cost. I.C.M.A Terminology defines Standard Cost as,
"a predetermined cost, which is calculated from management standard
of efficient operations and, the relevant necessary expenditure. It may be
used a basis for price-fixing and for cost control through variance
analysis ”. The other names for standard costs are predetermined costs,
budgeted costs, projected costs, model costs, measured costs, specifica-
tion costs etc., Standard cost is predetermined estimate of cost to manu-
facture a single unit or a number of units of product during a future
peroid. Actual costs are compared with these standard costs.

Standard costing : Standard costing is defined by I.C.M.A. Terminolo-

gy as, “The preparation and use of standard costs, their comparison with
actual costs and the analysis variances to the causes and points of inci-
dence ”.

Advantages of standard Costing :

1. It helps the management in formulating price and production policy.
2. It is a yardstick of performance. Standard costs are compared with
actual costs, and the differences are analysed and effective cost con-
rol is taken. Thus reduction of cost is possible by increasing the
profits.
3. It reduces avoidable wastages and losses.
4. It facilitates to reduce clerical and accounting cost and managerial
time.
5. It creates cost consciousness among the personnel, because the
variance analysis fixes responsibility for favourable and unfavoura-
ble performances.
6. Executives become more responsible for the cost centres.
7. By the variance analysis and reporting, “the principle of management
by exception” is facilitated. Management must concentrate their
 attention on variations only.
8. It aids in budgetary control and in decision-making.
9. Opening stock and closing stock are valued at the standard price.
This helps in the preparation of Profit and Loss Account for a short
period say a week, a month etc.,
10. It facilitated timely cost reports to management and a forward look-
ing mentality is encouraged at all levels of the management. It is a
basis for the implementation of an incentive system for the emplo-
yees.

Limitations of standard Costing :

1. It is closely, as the setting of standards needs high technical skill.
2. Keeping of up-to-date standard is a problem. Periodic revision of
standard is a costly thing.
3. Inefficient staff is incapable of operating this system.
4. Since it is difficult to set correct standards, it is difficult to ascertain
correct variance.
5. Industries, which are subject to frequent changes in technological
procsess or the quality of the material or the character of the labour,
need a constant revision of standard is more expensive.
6. For small concerns, standard costing is expensive.
7. It is difficult to apply this method where production takes more than
one accounting period. Standard costing may not be effective in
industries which deal in non standardized products or jobs according
to customer’s requirements.

VARIANCE ANALYSIS
The most significant contributin of standard costing to the science
and art of management is the presentation of ‘variances’. As a matter
of fact, without determination and analysis of variances, standard cost-
ing is meaingless. The term ‘Variance’ has been derived from the verb
‘To vary’ meaning of differ. In cost accounting,variance means deviation
of the actual cost from the standard cost. In standard costing, standard
costs are pre-determined and refer to the amounts which ought to be
incurred. These become the yardsticks against which actual costs can be
compared.
Variance analysis is the process of analyzing variance by sub-divid-
ing the total variance in such a way that management can assign respon-
sibility for off-standard performance.
After the standard costs have been fixed, the next stage in the opera-
tion of standard costing is to ascertain the actual cost of each element
and compare them with the standard already set. Computation and ana-
sis of variances is the main objective of standard costing. The deviation
of actual from the standard cost is called ‘Variance’. The difference
between the actual cost and the standard cost is known as the ‘cost
variance’.
Uses :-
The variance analysis are important tools of cost control and cost
reduction and they generate an atmosphere of cost consciousness in the
organization. In short, the uses of variances are :
1) Comparision of actual with standard cost which reveals the efficiency
or inefficiency of performance. The inefficiency or unfavourable
variance is analysed and immediate action is taken. Thus variance
is like a barometer.
2) It is a tool of cost control and cost reduction.
3) It helps the management to apply the principle of management by
exception.
4) It helps the management to maximise the profits by analyzing the
variances into controllable and uncontrollable; the controllable
variances are further analysed so as to bring a cost reduction,
indirectly more profit.
5) Future planning and programmes are based on the variance analysis,
because standard costing and variance analysis need a complete
study of the organization. Thus, the factors of profits can be known
and future plan can be made.
6) Within the organization, a cost consciousnsess is created along with
the team spirit. The variance analysis and fact finding further boost
the profits of the organization.
Types of Variances :
The following are the different types of variances :
1. Material Cost Variance
2. Labour Cost Variance
3. Overhead Cost Variance
4. Sales Variance

Material Variances :
Material Variances mainly arises due to the efficiency or inefficiency
in the use of materials and / or change in Actual Price and Standard
Price of materials. These can be summarized as follows :

1. Direct Material Cost Variance : (MCV)

Material Cost Variance (MCV) is the difference between the Standard
Cost of Direct Material specified for the output achieved and the Actual
Cost of Direct Materials consumed.
Material Cost Variance (MCV) is calculated as follows :

MCV = Standard Cost of Standard Qty. of Materials for Actual

Output - Actuala Cost of Actual Qty. of Materials consumed
for Actual Output
or = (Standard Quantity for Actual Output x Standard Price) -
(Actual Quantity x Actual Price)
or = ( SQ x SP ) - (AQ x AP)

MCV arise due to:

(a) Change in price of material or
(b) Change in quantity of material or
(c) Change in price and quantity of material
The following chart shows the component of material cost variance.

Material Cost Variance (MCV)

|
___________________________________________
| |
Maerial Price Variance Material Usage Variance
(MPV) (MUV)
|
___________________
| |
Material Mix Material Yield
Variance Variance
(MMV) (MYV)
|
Material sub-
usage variance
(MSUV)
__________________________________________________________

2.Direct Material Price Variance : (MPV)

Direct Material Price Variance (MPV) is that portion of the material
cost variance which is due to the difference between the standard price
specified and the actual price paid.
Material Price variance (MPV) is calculated as follows :

MPV = (Standard Price - Actual Price) x Actual Quantity

or = ( SP- AP ) x AQ

MPV arise due to :

1. Change in the market price of materials.
2. Change in the quantity of materials, thereby leading to lower/higher
quantity discount.
3. Not availing cash discounts, when standards set took into account
such discounts.
4. Change in the delivery costs.
5. Purchase of a substitute material on account non-availability of the
material specified.
6. Off-season purchasing for certain seasonal products like jute, cotton
etc.,
7. Change in the rates of excise duty, purchase tax etc.,
8. Failure to purchase the specified quantity, thereby resulting in a
different price being paid.

3. Direct Matrial Usage Variance : (MUV)

Direct Material Usage variance (MUV) is that portion of the material
cost variance which is due to the difference between the standard quanti-
ty specified and the actual quantity consumed.
Material Usage Variance (MUV) is calculated as follows :

MUV = (Standared Qty. for actual output-Actual Qty.) x Standard Price

or = (SQ - AQ) x SP

MUV may arise due to :

1. Use of non-standard materials
2. Use of non-standard material mixture
3. Use of substitute materials
4. Inefficiency in the use of materials
5. Change in the quality of materials
6. Change in the design or specification of the product
7. Change in the method of production
8. Yield from materials in excess of or less than standard yield
9. Pilferage
10.Defect in plant and machinery

4. Direct Material Mix Variance : (MMV)

Direct Material Mix Variance (MMV) is that portion of the material
usage variance which is due to the difference between standard and
actual composition of materials. In other words, this variance arises be-
cause the ratio of materials being changed from the standard ratio set.
Material Mix Variance is (MMV) is calculated as follows :

MMV = (Revised Standard Qty. - Actual Qty.) x Standard Price

or = (RSQ - AQ) x SP
Note : Revised Standard Quantity (RSQ) is calculated by dividing the
total actual quantity of all materials in a standard mix ratio as follows :
Standard Qty. of one material
RSQ = ------------------------------------------ x Total Actual Qty. of all
Total Standard Qty. of all materials Matetrials

MMV is arises only when the actual two or more materials are mixed
in a ratio different from the standard material mix ratio. Change from
standard mix may be due to the non-availability of one or more compo-
nents of material mix.

5. Material Yield (or Sub-usage) Variance : (MSUV & MYV)

It is that portion of the material usage variance which is due to the
difference between the standard yield specified and the actual yield
obtained. This variance measures the abnormal loss or saving of
materials. This variance is particularly important in case of process
industries where certain percentage of loss of materials is inevitable.
Material Sub-Usage Variance (MSUV) is calculated as follows :

MSUV = (Standard Qty. - Revised Standard Qty.) x Standard Price

or = (SQ - RSQ) x SP

Material Yeild Variance (MYV) is calculated as follows :

MYV = Standard Rate per unit x (Standard Yield - Actual Yield)

(or)
Standard Rate x (Standard Loss on Actual Output - Actual loss)

MYV arises only when the actual loss as % of total actual input differs
from the standard loss % of total standard input.
 PROBLEMS

1. Product X requires 20 Kgs of materials at Rs.4 per Kg. The actual

consumption of materials for the manufacture of product X comes to
24 Kgs. of matetrials of Rs.4.50 per Kg.
Calculate : (a) Material Cost Variance
(b) Material Price Variance
(c) Material Usage Variance.

2. The standard material and standard cost per kg. of material require-
ment for the production of one unit of product ‘A’ as follows.
Materials 5 Kgs.
Standard Price Rs.5 per kg.
Actual production and related material data are as 400 units of pro-
duct ‘A’.
Materials used 2,200 kgs.
Price of material Rs.4.50 per kg.
Calculate : (a) Material Cost Variance
(b) Material Price Variance
(c) Material Usage Variance

3. From the following information Calculate :

(a) Material Cost Variance
(b) Material Price Variance
(c) Material Usage Variance
Standard for 70 kgs. of finished stock, required materials 100 kgs,
cost of material Rs.1 per kg.
Actual for production of 2,10,000 kgs. the materials used 2,80,000
kgs., Material cost Rs.2,52,000.

4. The Standard Materials required for producing 100 units is 120 kgs.
A standard price of Rs.0.50 paise per kg. is fixed and 2,40,000 units
were produced during the period. Actual Materials purchased were
3,00,000 kgs. at a cost of Rs.1,65,000. Calculate Material Variances.
5. From the following particulars Calculate (A) Material Cost Var-
iance (B) Material Price Variance and C) Material Usage Variance.
Materials purchased 3,000 kgs. at Rs.6 per kg.
Standard Quantity of material fixed for one unit of finished product -
25 kgs, at Rs.4 per kg.
Opening Stock of material - Nil
Closing Stock of material - 500 kgs.
Actual output during the period - 80 units

6. The standard quantity and standard price of raw marterials of one

unit of product ‘A’ are below :
__________________________________________________________
Particulars Standard Qty. (Kgs.) Standard Price (Rs.)
__________________________________________________________
Material ‘X’ 2 3
Material ’Y’ 4 2
__________________________________________________________

The actual production and relavant data are as output 500 units of
Products ‘A’.
__________________________________________________________
Particulars Total Quantity for Total Cost
500 units
__________________________________________________________
Material ‘X’ 1,200 kgs. Rs.3,900
Material ‘Y’ 1,800 kgs. Rs.4,500
__________________________________________________________
Calculate : 1.Material Cost Variance
2. Material Price Variance
3. Material Usage Variance.

7. From the data given below Calculate :

1. Material Cost Variance
2. Material Price Variance
3. Material Usage Variance and 4. Material Mix Variance
 Consumption for 100 units of product
__________________________________________________________
Raw Material Standard Actual
__________________________________________________________
A 40 units @ Rs.50 50 units @ Rs.50
per unit per unit
B 60 units @ Rs.40 60 units @ Rs.45
per unit per unit
---- ----
100 100
---------------------------------------------------------------------------------------

8. From the following information calculate Material Variances :

__________________________________________________________
Standard Actual
Material Quantity Price Quantity Price
kgs. Rs. kgs. Rs.
__________________________________________________________
A 10 2 5 3
B 20 3 10 6
C 20 6 15 5
__________________________________________________________

9. The standard mix of a product is as under :

A - 60 units at 0-15 per unit Rs.9
B - 80 units at 0-20 per unit Rs.16
C - 100 units at 0-25 per unit Rs.25
10 units of finished product should be obtained from the above
mentioned mix.
During the month of January, 2017 10 Mixes were completed and
the consumption was as follows :
A - 640 units at 0-20 per unit Rs.128
B - 960 units at 0-15 per unit Rs.144
C - 840 units at 0-30 per unit Rs.252
The Actual output was 90 units. Calculate Material Variances.
10. The standard cost of a certain Chemical Mixture is

35% Material A at Rs.25 per kg.

65% Material B at Rs.36 per kg.
A standard loss of 5% is expected in production.
During a period, there is used :
125 kg. of Material A at Rs.27 per kg.
275 kg. of Material B at Rs.34 per kg.
----------
400 kg.
-----------
The output was 365 kgs. Calculate Material Cost Variance and
Material Yield Variance.

11. _______________________________________________________
Standard Actual
Marterial Quantity Price Amount Quantity Price Amount
Units Rs. Rs. Units Rs. Rs.
__________________________________________________________
A 500 6-00 3000 400 6-00 2400
B 400 3-75 1500 500 3-60 1800
C 300 3-00 900 400 2-80 1120
__________________________________________
1200 1300
Less:10% Normal
loss 120 220
___________________________________________
1080 5400 1080 5320
__________________________________________________________

Calculate Material Variances.

12. From the following data, Calculate Material Variances.
__________________________________________________________
Standard Actual
Product Standard Qty Standard Price Standard Qty Standard price
(Units) Rs. (Units) Rs.
__________________________________________________________
A 1050 2-00 1100 2-25
B 1500 3-25 1400 3-50
C 2100 3-50 2000 3-75
__________________________________________________________
[April, 2018]

13. The standard cost of chemical mixture is :

40% Material A at Rs.20 per kg.
60% Material B at Rs. 30 per kg.
A standard loss of 10% is expected in production.
During a period consumption is as follows :
90 kgs. Material A at a cost of Rs.18 per kg.
110 kgs. Material B at a cost of Rs.34 per kg.
The weight product is 182 kgs. of goods produced.
Calculate :
a) Material Cost Variance
b) Material Price Variance
c) Material Usage Variance
d) Material Mix Variance.
[April, 2018]

14. From the following information of product No: 444, Calculate

a) Material Cost Variance, b) Material Price Variance, c) Material Usage
Variance, and d) Material Mix Variance.
__________________________________________________________
Material Standard Qty.in Standard Price Actual Qty.in Actual price
Kgs Rs. Kgs Rs.
__________________________________________________________
X 20 5 24 4.00
Y 16 4 14 4.50
Z 12 3 10 3.25
_____ _____
48 48
__________________________________________________________
[April, 2019]

15. From the following information calculate the following.

a) Material Cost variance, b) Material Price Variance, c) Material Usage
Variance and d) Material Mix Variance.
__________________________________________________________
Type of Standard Qty. in Standrd Price Actual Qty. in Actual Price
Material Kgs Rs. Kgs. Rs.
__________________________________________________________
M 800 50 1000 40
N 400 60 500 50
__________________________________________________________
[April, 2019]

16.
__________________________________________________________
Standard Actual
Materials Units Price (Rs.) Units Price (Rs.)
__________________________________________________________
A 1010 1.0 1080 1.2
B 410 1.5 380 1.8
C 350 2.0 380 1.9
__________________________________________________________
 From the above particulars Calculate :
a) Material Cost Variance
b) Material Price Variance
C) Material Usage Variance

[April, 2020]

17. From the figures given below, Calculate :

a) Material Cost Variance
b) Material Price Variance
c) Material Usage Variance

The standard quantity of materials required for producing one ton

of output is 40 units. The standard price per unit of matetial is Rs.3.
During a particular period 90 tons of output was undertaken. The
materials required for actual production were 4,000 Units. The actual
amount of Rs.14,000 was spent on purchasing the materials.

[April,2020]

---OOO---