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Standard Costing & Variance Analysis

The document discusses standard costing and variance analysis. It defines standard costs as the costs management believes should be incurred under anticipated conditions. Variances are differences between standard and actual costs, and should be investigated if significant. The document provides examples of calculating variances for materials, labor, and sales based on standard and actual quantities, prices, and amounts. It emphasizes that variances indicate potential problems to investigate, not necessarily good or poor performance.

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200 views15 pages

Standard Costing & Variance Analysis

The document discusses standard costing and variance analysis. It defines standard costs as the costs management believes should be incurred under anticipated conditions. Variances are differences between standard and actual costs, and should be investigated if significant. The document provides examples of calculating variances for materials, labor, and sales based on standard and actual quantities, prices, and amounts. It emphasizes that variances indicate potential problems to investigate, not necessarily good or poor performance.

Uploaded by

sadikzeenat
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Standard costing & Variance

analysis
Meaning
 The term standard cost refers to the cost that
management believes should be incurred to produce
a good or service under anticipated conditions.
 The primary benefit of a standard cost system is that
it allows for comparison of standard versus actual
costs. Differences are referred to as standard cost
variances and should be investigated if significant.
 According to Chartered Institute of Management
Accountants (CIMA), London, “Standard cost is the
pre determined cost based on technical estimates for
materials, labour & overheads for a selected period
of time”.
Steps
1. Setting of standard costs for different element of cost. (In
developing standard costs, there are two schools of thought:
Ideal standards: developed under the assumption that no
obstacles to the production process will be encountered.
They are sometimes referred to as perfection standards.
Attainable Standards: developed under the assumption that there
will be occasional problems in the production process such
as equipment failure, labor turnover, and materials defects.
2. Ascertaining actual cost.
3. Comparing standard costs with actual costs to determine the
difference between the two.
4. Analyzing variances for ascertaining reasons thereof.
5. Reporting of these variances & analysis thereof to
management for appropriate action, where necessary.
Investigation of Standard Cost
Variances
 It is important to note that standard cost variances are not a
definitive sign of good or bad performance. These variances
are merely indicators of potential problems which must be
investigated.
 The fact that a variance is “favorable” does not mean that it
should not be investigated.
 Raw materials are good examples of this phenomenon,
especially considering the competitive pricing environment for
most commodities. Suppose inferior, low-priced materials are
ordered. One the one hand, a favorable price variance will arise.
On the other hand, most likely there will be substantially more
scrap and rework, and thus an adverse quantity variance.
 Unfavorable variances do not imply poor performance. For
example, an unfavorable labor efficiency variance could result
from the purchase of inferior goods (which by the way resulted in
a favorable material price variance).
Material Variances
1. MCV (Material Cost Variance) = (SQ X SP) - (AQ X AP)

2. MUV (Material Usage Variance) = (SQ - AQ) X SP


3. MPV (Material Price Variance) = (SP – AP) X AQ
4. MMV (Material Mix Variance) = (Revised SQ – AQ) X SP
5. MYV (Material Yield Variance) = (Actual yield – Standard yield) X
Standard output price

 Check: MCV = MUV + MPV, MCV = MPV + MMV + MYV


MUV = MMV + MYV
Where, SQ = Standard Qty; AQ = Actual Qty.
SP = Standard Price; AP = Actual Price
 Decision rule:
AC > SC = Adverse
AP > SP = Adverse
AU > SU = Adverse
Illustration 1
A manufacturing concern which has adopted
Standard costing system furnishes you
the following information:
 Standard material for 70 Kg. finished
products, 100 Kgs.
 Standard price of material Re. 1 per Kg.
 Actual output 2,10,000 Kg.
 Actual material used 2,80,000 Kg.
 Cost of material Rs. 2,52,000.
 Calculate Material Variances.
Illustration 2
For producing 80 units of output 30 Kg of
Material X & 20 Kg of Material Y is the
standard requirement.
Standard price is Rs. 6 per Kg of X & Rs. 10
per Kg of Y.
80 units were actually produced using 50 Kg of
Material X purchased for Rs. 200 & 10 Kg of
Material Y purchased at Rs. 8 per Kg.
 Compute Material Variances.
Illustration 3
 The following data relates to two products
X & Y. Calculate all material variances.

Standard for 100 kg. output Actual for 102 kg. output

Qty. Rate Amt. Qty. Rate Amt.


(Kgs) (Kgs)
Mtrl. A 80 2 160 70 2.10 147

Mtrl. B 40 5 200 50 4.50 225


Labour Variances
1. LCV (Labour Cost Variance) = (SH X SR) - (AH X AR)
2. LEV (Labour Efficiency Variance) = (SH - AH) X SR
3. LRV (Labour Rate Variance) = (SR – AR) X AH
4. LMV (Labour Mix Variance) = (Revised SH – AH) X SR
5. LYV (Labour Yield Variance) = (Actual yield – Standard yield
for AH) X Standard output Rate
6. LITV ( Labour Idle time Variance) = SR X Idle Hrs.
 Check: LCV = LEV + LRV
LEV = LMV + LYV
Where, SH = Standard Hours; AH = Actual Hours
SR = Standard Rate; AR = Actual Rate
Illustration 4
 From the following, calculate labour
variances for department A and B.
Dept. A Dept. B
Actual wage rate 0.35 0.20
SH 8000 6000
SR per Hr. 0.30 0.35
AH 8200 5800
Illustration 5
 A firm manufactures a particular product.
Data is as follows. Calculate all labour
variances.
Standard for 1 unit output Actual for 100 units output

Grade of Hrs. Rate Amt. Hrs. Rate Amt.


worker
Grade A 30 2 60 3200 1.50 4800

Grade B 20 3 60 1900 4 7600


Illustration 6
The following information was gathered from the labour
records of KT Ltd.
 Payroll allocation of direct labour Rs. 20,000
 Time card analysis shows that 8,000 hrs. were
worked on production.
 Production report for the period shows that 4,000
units have been completed each having standard
labour time 1 ½ hrs. and standard labour rate
Rs. 2 per hr.
 Compute Labour Variances.
Sales variances
1. Sales value variance = Actual sales – Budgeted sales
2. Sales volume variance = (AQ – BQ) X SP
3. Sales price variance = (AP – SP) X AQ
4. Sales mix variance = (AQ – Revised SQ) X SP
5. Sales quantity variance = (Revised SQ – Budgeted Q) X
SP
Check:
Sales value V. = SPV + Sales volume v.
Sales volume v. = SMV + SQV
Illustration 7
 The following data relates to two products
X & Y. Calculate all sales variances.

Budget Actual

Qty. Rate Amt. Qty. Rate Amt.

X 8000 12 ? 9000 ? 99000

Y ? 9 108000 6000 10 ?
Illustration 8
 A company marketing a product supplies
the following information. Calculate sales
variances.
Budgeted sales Actual sales
Qty. Price Amt. Qty. Price Amt.
10,000 3 30,000 12,000 2.8 33,600

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