MODULE FIVE

Standard Costing Variance Analysis

Technique of using PRE-DETERMINED COSTS Establish STANDARDS for costs Use it to control actual costs

Historical Costing Use actual costs for control purposes Done after costs are actually incurred More of a Post Mortem analysis Very INEFFECTIVE for cost control Standard Costing Actual costs PRECEDED by Pre-determined Costs Benchmarks are established for what costs should be Benchmarks compared with actual costs More effective costs control

Process of Standard Costing 1. Establish STANDARDS for Specified Working Conditions 2. Standards for: Material Cost, Labour Cost, and Overheads 3. Measure Actual Costs

4. Compare Standard cost with Actual cost

5. Find VARIANCES 6. Analyze causes of Variance 7. Execute appropriate corrective actions

Establishing Standard Costs

1. STANDARD MATERIAL COST Standard Quantity, and

Standard Unit Price

2. STANDARD LABOUR COST Standard Labour Time, and

Standard Labour Rate

3. STANDARD OVERHEAD Fixed Overhead Rate, and

Variable Overhead Rate

Deviation from Standards May be Favourable or Unfavourable Always follows Standard Costing Includes: Material Variance, Labour Variance, and Overhead Variance

Material variance consists of:

MATERIAL COST VARIANCE

MATERIAL PRICE VARIANCE

MATERIAL USAGE VARIANCE

MATERIAL MIX VARIANCE

MATERIAL YIELD VARIANCE

Material Cost Variance = Material Price Variance + Material Usage Variance Material Usage Variance = Material Mix Variance + Material Yield Variance

MATERIAL COST VARIANCE

Caused by Price and Usage Variances

MATERIAL PRICE VARIANCE

Caused by difference in Actual and Standard Unit Price

MATERIAL USAGE VARIANCE

Caused by difference in Actual and Standard Quantity

The standard material needed to manufacture one unit of product is 10 kgs. and the standard price per kg. is Rs. 25.

The cost accounting records show that for manufacturing 1000 units of product, 11,500 kgs. of material costing Rs. 2,76,000 were used. Calculate Material variances.

MATERIAL MIX VARIANCE

2 or more materials may be mixed to get a product Caused when standard and actual mix ratios are different 2 situations arise:
Material Standard Mix A 200 kg B 100 kg TOTAL 300 kg Material Standard Mix A 200 kg B 100 kg TOTAL 300 kg Actual Mix 160 kg 140 kg 300 kg Revised Standard Mix 220 kg the Revise Standards 110 kg for 330 330 kgkg

Actual Mix 190 kg 140 kg 330 kg

MATERIAL MIX VARIANCE

1. Found separately for each material and sum it up

x or

Calculate Material Mix Variance Material Standard A 170 units@ Rs. 12 B 130 units @ Rs. 10 Calculate Material Mix Variance
Material A B Standard 40 units @ Rs. 50 60 units @ Rs. 40

Actual 160 units @ Rs. 13 140 units @ Rs. 10

Actual 50 units @ Rs. 50 60 units @ Rs. 45

MATERIAL YIELD VARIANCE

Actual yield different from Standard Yield Measures Abnormal Loss/Gains

Material Standard Mix A 200 kg B 100 kg Total 300 kg Normal Loss 30 kg Standard Output 270 kg Actual Mix 160 kg 140 kg 300 kg 25 kg 275 kg

Calculate Material Yield Variance

Material A B Standard 200 units@ Rs. 12 100 units @ Rs. 10 Actual 160 units @ Rs. 13 140 units @ Rs. 10

Standard loss allowed is 10 % of input. Actual input is 275 units

Calculate Material Yield Variance

Material A B Standard 60 units@ Rs. 50 40 units @ Rs. 30 Actual 300 units @ Rs. 51 200 units @ Rs. 28

Standard loss allowed is 10 % of input. Scrap realises Rs. 6 per unit. Actual output is 440 units

Labour Variance consists of:

LABOUR COST VARIANCE

LABOUR RATE VARIANCE

TOTAL LABOUR EFFICIENCY VARIANCE

LABOUR EFFICIENCY VARIANCE

IDLE TIME VARIANCE

LABOUR COST VARIANCE

LABOUR RATE VARIANCE

TOTAL LABOUR EFFICIENCY VARIANCE

LABOUR EFFICIENCY VARIANCE

IDLE TIME VARIANCE

Calculate: a. Labour cost, rate, and efficiency variances Standard Actual No. of employees 100 90 Output units 5000 5000 Working days per month 20 days 18 days Average wage per Rs. 200 Rs. 198 employee per month Calculate: a. Labour cost, rate, and efficiency variances
No. of employees Output units Working days per month Average wage per employee per month Standard 100 5000 20 days Rs. 200 Actual 90 4800 18 days Rs. 198

Calculate Labour variances Total wages paid: Rs. 3,000

Standards hours needed: 1,600

Standard Rate per Hour: Rs. 1.50 Actual Hours paid for is 1,500 hours, out of which hours not worked [abnormal idle time] is 50 hours.

Variable Overhead Variance consists of:

VARIABLE OVERHEAD VARIANCE

VOH EXPENDITURE VARIANCE

VOH EFFICIENCY VARIANCE

VARIABLE OVERHEAD VARIANCE

VARIABLE OVERHEAD EXPENDITURE VARIANCE

VARIABLE OVERHEAD EFFICIENCY VARIANCE

Calculate VOH variances Standard VOH: Rs. 2,50,000

Standard Output in units: 25,000 units

Standard Working Hours: 1,25,000 hrs Actual VOH: Rs. 2,60,000 Actual Output in units: 20,000 units Actual Working Hours: 1,10,000 hrs

Fixed Overhead Variance consists of:

FIXED OVERHEAD VARIANCE

FOH EXPENDITURE VARIANCE

VOLUME VARIANCE

FIXED OVERHEAD VARIANCE

FIXED OVERHEAD EXPENDITURE VARIANCE

VOLUME VARIANCE

Calculate FOH variances Standard FOH: Rs. 30,000

Standard Output in units: 15,000 units

Standard Working Days: 25 Actual FOH: Rs. 30,500 Actual Output in units: 16,000 units Actual Working Days: 27