Standard%20Costing%20

1
Standard Costing Variance Analysis!
2
Definitions

• Standard Cost (CIMA) Standard cost is the
  pre-determined cost based on the technical
  estimates for materials, labour and overhead for
  a selected period of time for a prescribed set of
  working conditions.
• Standard Costing (CIMA) the preparation of
  standard costs and applying them to measure the
  variations from the actual costs and analyzing
  the causes of variations with a view to maintain
  maximum efficiency of the operations so that any
  remedial action may be taken immediately.

3
Variance Analysis

• Cost Variance is the difference between the
  standard cost and the actual costs.
• Variance Analysis is the resolution into
  constituent parts and the explanation of the
  variances.
• Favorable Unfavorable Variances.
• Controllable Uncontrollable Variances

4
What all could be the reasons for the actual
manufacturing cost or the sales/profit to vary
from their standard costs and price/profit?
5
(No Transcript)
6
Favorable Unfavorable Variances

• Favorable variances(F) arise when actual costs
  are less than budgeted costs or actual
  sales/profit exceed budgeted.
• Un favorable variances(U) arise when actual costs
  exceed budgeted or actual sales/profit are less
  than budgeted.

Profit Revenue Costs Actual gt Expected
F F U Actual lt Expected U
U F
7
Standard Costs
Based on carefullypredetermined amounts.
Standard Costs are
Used for planning labor, materialand overhead
requirements.
The expected levelof performance.
Benchmarks formeasuring performance.
8
Setting Standard Costs
Accountants, engineers, personnel
administrators, and production managers combine
efforts to set standards based on experience and
expectations.
9
Standards vs. Budgets
A standard is the expected cost for one unit. A
budget is the expected cost for all units.
Are standards the same as budgets?
10
How will the material price variance and
material usage be computed if the quantity
purchased is different from the quantity used?
The price variance is computed on the entire
quantity purchased. The quantity variance is
computed only on the quantity used.
11
Material Cost Variance

• Material cost variance arises due to variance in
  the price of material or its usage.
• This can be calculated by using the following
  formula,
• Material Cost Variance (SQ x SP) (AQ x AP) ,
• Where,
• SQ  Standard quantity for the actual output
• SP  Standard price per unit of material
• AQ  Actual quantity
• AP  Actual price per unit of material
• A positive result implies favorable variance and
  a negative result implies unfavorable variance
  (adverse variance).

12
Material Price Variance

• Material price variance may arise due to number
  of reasons like fluctuations in market prices,
  error in buying due to wrong purchasing policy
  etc,
• This can be calculated by using the following
  formula,
• Material Price Variance (SP AP) x AQ
• Where,
• SP  Standard price per unit of material
• AQ  Actual quantity
• AP  Actual price per unit of material
• A positive result implies favorable variance and
  a negative result implies unfavorable variance
  (adverse variance).

13
Material usage Variance

• Material Usage variance is the difference between
  the actual quantities of raw materials used in
  production and the standard quantities that
  should have been used to produce the product,
• MUV may arise due to number of reasons like
  Pilferage of materials , Wastage , Sub-standard
  or defective materials etc,
• This can be calculated by using the following
  formula,
• Material Usage Variance (SQ AQ) x SP

14
Material Mix Variance

• MMV is calculated when a product uses mixture of
  different raw materials,
• MMV is that portion of the materials quantity
  variance, which is due to the difference between
  the standard and actual composition of a mixture.
  
• It can be represented by the following formula
• Material mix variance 
• (Standard cost of actual quantity of the standard
  mixture Standard cost of actual quantity of the
  actual mixture) or (Revised SQ AQ) x SP

15
Practical Problems

• A furniture company uses sunmica tops for tables.
  It provides the following data
• St. Quantity for sunmica per table 4 sq. ft
• St. price per sq. ft of sunmica Rs. 5
• Actual prod. Of tables 1000
• Sunmica actually used 4,300 sq.ft
• Actual purchase price per sq. ft Rs. 5.50.
• Calculate Material variances.

16
(No Transcript)
17

• From the following information calculate (i)
  material cost variance (ii) material price
  variance (iii) Material Usage variance
• Standard output 100 units
• Standard Material per unit 3 Ibs
• Standard price per Ib. Rs. 2
• Actual output 80 units
• Actual price Rs. 5.50
• Actual materials used 250 Ibs

18

• From the following information calculate (i)
  material cost variance (ii) material price
  variance (iii) Material Usage variance
• Quantity of material purchased 3000 units
• Value of material purchased Rs. 9000
• St. quantity of raw material req. p.u. 25 units
• Standard rate of material unit Rs. 2 per
• Opening stock of material Nil
• Closing stock of material 500 units
• Finished production during the period 80 units

19

• The standard output of the production house has
  been set at 1000 pieces per month. However
  actually 1020 pieces were produced. Following is
  the data for actual and standard production.
• Standard Actual Results
• Usage 1.5 sq. ft per pad 1.3 sq. ft per pad
• Price Rs. 0.15 per sq. ft Rs. 0.18 per sq. ft
• Calculate all material variances.

20

• A mfg. concern, which has adopted standard
  costing, furnishes the following information
• Standard
• Material for 70 kg. Of finished products 100
  kgs.
• Price of materials Rs. 1 per kg.
• Actual
• Output 210,000 kgs
• Material used 280,000 kgs.
• Cost of materials Rs. 2,52,000
• Calculate all material variances.

21
Material Mix Variance

• Material Mix Variance
• Revised St. Qty Actual Qty x St. Price
• Rev. St. Qty St. Qty of 1 Mat. x Actual Total
• Standard Total

22
From the following information regarding a
standard product, compute 1. Mix 2. Price 3.
Usage Variance
23
From the following information regarding a
standard product, compute 1. Mix 2. Price 3.
Usage Variance
Material Standard Standard Standard Actual Actual Actual
Material Qty. Rs. p.u. Total Qty Unit Price Total
A 4 1.00 4.00 2 3.50 7.00
B 2 2.00 4.00 1 2.00 2.00
C 2 4.00 8.00 3 3.00 9.00
Total 8 7.00 16.00 6.00 8.50 18.00
24
Labour Variances
Material variances

• Labour Cost Variance SHSR AHAR
• Labour Usage/Efficie. Var (SH-AHactual)SR
• Labour Rate Variance (SR-AR) AH
• Idle time Variance SRIdle time

25
Practice Problem

• A firm gives you the following data
• Standard time per unit 2.5 hours
• Actual hours worked 2,000 hours
• Standard rate of pay Rs. 2 per hour
• 25 of the actual hours has been lost as idle
  time.
• Actual output 1,000 units
• Actual wages Rs. 4,500
• Calculate all labour variances.

St. Rate 2 LUV 2000 F
St. Hrs 2500 LPV -500 U
Actual Rate 2.25 ITV 1000 F
Actual Hrs 2000 LCV 500 F
Idle time 500
26
Practice Problems

• Compute the Labour variances from the information
  given below
• Standard time 3 hours per unit
• Standard rate of wages Rs. 6 per hour
• Actual production 700 units
• Actual time taken 2000 hours
• Actual Wages Rs. 14000 
• Idle time 50 hours

St. Rate 6 LUV 900 F
St. Hrs 2100 LPV -2000 U
Actual Rate 7 LCV -1400 U
Actual Hrs 2000 IDV 300
Idle time 50
27
Labor Efficiency Variance- Causes
Poorlytrainedworkers
Poorqualitymaterials
UnfavorableEfficiencyVariance
Poorlymaintainedequipment
Poorsupervisionof workers
28
Responsibility for Labor Variances
You used too much time because of poorly trained
workers and poor supervision.
I am not responsible for the unfavorable
laborefficiency variance! You purchased
cheapmaterial, so it took moretime to process
it.
29
Overhead Variances

• Overhead variances arise due to the difference
  between actual overheads and absorbed overheads.
  The estimate of budget of the overheads is to be
  divided into fixed and variable elements. i.e.
• Variable overhead variances.
• Variable overhead budget or expenditure variance,
  and
• Variable overhead efficiency variance.
• Fixed overhead variances.

30
Formulas

• Variable overhead variances.
• (Standard variable o/h for actual prodn. Actual
  variable o/h)
• Variable overhead budget or expenditure variance,
  (Budgeted variable overhead for actual hours
  Actual variable overhead) i.e. AHBR Actual
  Cost
• Variable overhead efficiency variance.
• Standard variable overhead rate per hour Std.
  hours for actual output Actual hours i.e.
  (SH-AH) SR
• Fixed Overhead Variance
• Budgeted FO- AFO

31
Sales Variances

• Sales Margin Price Margin (AP-BP)AQ
• Sales Margin Volume variance (AQ-BQ)BC
• Total Sales Margin variance AQAC BQBC