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Standard Costs and Variance Analysis

Meaning of Standard Costing

According to CIMA London, Standard Costing is, the preparation and use of standard costs, their comparison with actual costs, and the analysis of variances to their causes and points of incidence. Standard Costing discloses the cost of deviations from standard and classifies these as to their causes, so that management is immediately informed of the sphere of operations in which remedial action is necessary. Thus Standard Costing is a method of ascertaining costs whereby statistics are prepared to show : The standard costs The actual costs The difference between these costs which is termed as variance
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Standard Costing As A Management Tool

Delegation of Authority and Responsibility :The sphere of :The operation of adverse variations is disclosed and particular production department or centre can be held accountable. The delegation of responsibility and authority can be made by the management to control the affairs in different departments. Management by Exception: Management by exception can be made applicable in the business and the management can concentrate on cases which are off standard. Better Economy, Efficiency and Productivity: Managerial review of costs is more effective as the operations are scrutinized carefully and inefficiencies are disclosed.

Limitations of Standard Costing

Heavy costs :Fixation of standards may be costly and may :Fixation require high skill and competence. Frequent Revision Required :Revision of standards is a :Revision tedious and costly process. Unsuitable for Non-standardized Products: Industries Nondealing in non- standardized products may find the system nonunsuitable and costly. Fixation of Responsibility Difficult: Responsibility can be fixed only when controllable and non controllable factors are distinctly known Adverse Psychological Effects: Standards may be fixed at a high level which is unachievable, resulting in frustration or building up of resistance.
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Standard costs may be: (i) IDEAL, (ii) Expected, and (iii) Normal/Attainable.
Ideal standard cost The ideal standard cost refers to estimates of costs under ideal or perfect conditions. The assumption would be that there would be no waste, no scrap, no idle items, no machine breakdown, and so on. Expected Standard Cost The expected standard cost is based upon the most likely attainable result. Technically, it means what can happen and not what should happen. Normal Standard Costs Normal standard costs are costs which are attainable if operations/activities are efficient.

Determination of Standard Costs

Preliminaries to setting of Standards: Establishment of Cost Centres : Though all the processes combined together manufacture the final product, but for measuring productivity and controlling labour and overheads, classification into cost centres becomes necessary. Classification and Codification of Accounts: Helps in quick Accounts: collection and analysis of cost information. Period of Use: This involves the length of the operating Use: period for which standards are to be used. The standards, which may be long term or short term, may be categorized as : a) Basic Standards: Not altered over a long period of time, Standards: revisions are not frequent and there is a stability and stagnancy in standards fixed. fixed. b) Current Standards: These are short term standards. 6

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Determination of Standard Costs ( Contd )

Reasonable or Desired Level of Attainment :Standards are :Standards to be set assuming efficient working conditions and reasonable good performance. Active Level: The level of activity or performance required must be decided upon before establishing any standards. It should be computed keeping in mind the capacity of the plant and the marketability of the products.

Cost Variances
The deviation of the actual from the standard is known as variance. Variance may be favourable or adverse. Cost Variance may be depicted in the following manner: Cost Variances

Direct Material Cost Variance

Direct Labour Cost Variance

Over Head Cost Variance

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Direct Material Variance

Direct Material Cost Variance Direct Material Price Variance Direct Material Mix Variance

Direct Material Usage Variance Direct Material Yield Variance

Direct Material Cost Variance: It is the difference between the standard cost of direct material specified for the output achieved and the actual cost of direct material used. = (Total Standard cost for actual output) Total Actual Cost = ( Std. Price x Std Quantity for _ ( Actual Price x Actual actual output) quantity)
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Direct Material Variance ( Contd )

Direct Material Price Variance : That portion of direct material cost variance which is due to the difference between the standard price specified and actual price paid. = ( Actual Qty used) x ( Std Price Actual Price ) Direct Material Usage Variance : That portion of direct material cost variance which is due to the difference between the standard quantity specified and the actual quantity used. = ( Std. Rate ) x ( Std. qty for actual output Actual qty ) Direct Material Mix Variance: That portion of direct material Variance: usage variance which is due to the difference between the standard and actual composition of a mixture. = ( Std. Price ) x (Revised Std. Qty Actual Qty)
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Direct Material Variance ( Contd )

where, Revised Std Qty = (Total weight of Actual Mix) x Std. Qty ( Total Weight of Std. Mix ) Material Yield Variance : It is that portion of direct material usage variance which is due to the difference between the standard yield specified and the actual yield obtained. = ( Std. Cost per unit ) x ( Std. Output for Actual Mix - Actual Output )

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Direct Labour Variance

Direct Labour Cost Variance Direct Labour Rate Variance Direct Labour Mix Variance

Direct Labour Efficiency Variance Direct LabourYield Variance

Direct Labour Cost Variance: It is the difference between standard direct wages specified for the activity achieved and the actual direct wages paid. = ( Std. cost for actual output ) - ( Actual Cost ) = ( Std rate x Std Time for Actual Output) ( Actual rate Actual Time )
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Direct Labour Variance ( Contd )

Direct Labour Rate Variance : That portion of direct labour cost variance which is due to the difference between the standard rate of pay specified and the actual rate paid. = Actual Time x ( Std. Rate Actual Rate ) Direct Labour Efficinecy Variance: That portion of direct Variance: labour cost variance which is due to the difference between the standard labour hours specified for the activity achieved and the actual labour hours expended. = Std Rate x ( Std. Time for Actual Output Actual Time) Direct Labour Mix Variance : This variance arises if during a particular period, the grades of labour used in production are different from those budgeted. = Std. Rate x ( Revised Std. Time Actual Time )
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Direct Labour Variance ( Contd )

where, Revised Std. Time = (Total Actual Time ) x Std. Time ( Total Std. Time) Direct Labour Yield Variance : It is the variance in labour cost on account of increase or decrease in yield or output as compared to the relative standard. = Std. Cost per unit x ( Std. Output of _ Actual Actual mixture output ) Total Direct Labour Efficiency Variance : In those cases where there is an idle time variance ; Total Direct Labour efficiency variance = ( Idle Time variance )+ (Direct Labour efficiency variance) Idle Time Variance = Idle Time x Std. Rate
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Overhead Variances
Certain Important terms related to Overhead Variances: Standard Overhead rate per unit = Budgeted Overheads Budgeted Output Standard Overhead rate per hr = Budgeted Overheads Budgeted Hours Standard hrs for Actual Output = Budgeted hrs x Actual Output Budgeted Output Standard Output = Budgeted Output x Actual Hrs Budgeted hrs Recovered Overheads = (Std rate per hr) x (Std hrs for actual output) Budgeted Overheads = (Std. Rate per unit) x (Budgeted Output) Standard Overheads = (Std. rate per unit) x (Std. Output for actual time) Actual Overheads = (Actual rate per unit) x (Actual output)
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Overhead Variance ( Contd )

Overhead Cost Variance Variable Overhead Cost Variance Fixed Overhead Expenditure Variance Fixed Overhead Efficiency Variance

Fixed Overhead Cost Variance Fixed Overhead Volume Variance Fixed Overhead Capacity Variance

Overhead Cost Variance = Recovered Overheads Actual Overheads Variable Overhead Cost Variance: Variance: = Recovered Variable Overheads Actual Variable Overheads
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Variable Overheads ( Contd )

Fixed Overhead Cost Variance : = Recovered fixed Overheads Actual Fixed Overheads Fixed Overhead Expenditure Variance: Variance: = Budgeted Fixed Overheads Actual Fixed Overheads Fixed Overhead Volume Variance : = Recovered Fixed Overheads Budgeted Fixed Overheads Fixed Overhead Efficiency Variance : = Std Fixed Overhead x ( Std. Hrs for _ Actual rate per hour Actual production Hours ) Fixed Overhead Capacity Variance : = Std Fixed Overhead x ( Actual Hrs _ Budgeted Rate per hr Worked Hours )

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Sales Variance
Sales Variance With Reference to Turnover With Reference to Profit

Value Variance Price Mixture Volume Quantity

With Reference to Turnover: Value Variance = Budgeted Sales Actual Sales Price Variance = Actual Qty Sold x ( Std. Price Actual price) = (Standard Sales Actual Sales) Volume Variance = Std. Price x ( Budgeted Qty Actual Qty ) = Budgeted Sales Standard Sales
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Sales Variance ( Contd )

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Mix Variance : Based On Quantity : Mix Variance = Std. Price x ( Revised Std. Qty Actual Qty.) = Revised Std. Sales Std. Sales Based on Value : Mix Variance = Revised Std. Sales Std. Sales where, Revised Std. Sales = Budgeted Ratio of Sales x Std. Sales where, Budgeted Ratio of Sales = Budgeted Sales of a Product Total Budgeted Sales Quantity Variance = Budgeted Sales Revised Std. Sales
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Sales Variance ( Contd )

With Reference to Profit : Value Variance = Budgeted profit Actual Profit Price Variance = Std. Profit Actual Profit = Actual Qty Sold x ( Std. Profit Actual Profit per unit ) Volume Variance = Budgeted Profit Standard Profit = Std. Rate of Profit x ( Budgeted Qty Actual Qty ) Mix Variance = Revised Std. Profit Std. Profit Quantity Variance = Budgeted profit Revised Std. Profit

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