13 · Management of an organisation uses standard costing as a controlling tool for cost control and performance evaluation. Controlling is a principal function of manage-ment alongwith

r Discuss the meaning of standard cost and variances.r Differentiate between controllable and uncontrollable

variances.r Analyse and compute variances related tomaterial, labour

and overheads.

STANDARD COSTING

LEARNING OUTCOMES

13CHAPTER

© The Institute of Chartered Accountants of India

13.2 COST AND MANAGEMENT ACCOUNTING

13.1 INTRODUCTIONManagementofanorganisationusesstandardcostingasacontrollingtoolforcostcontrol andperformanceevaluation.Controlling is aprincipal functionofmanage-mentalongwithplanning,directingandstaffing.Everyorganisationsetsagoalandtoachieveitmanagementoftheorganisationmakeplans,gettheseplansexecutedandmonitortheworkforanydeviationfromtheplan.Pleasenotetheworddeviation.Deviationmeanstheamountbywhichasinglemeasurementdiffersfromafixedvaluesuchasthemeanorstandard(hereitisusedinthecontextofcostaccounting).Devi-

CHAPTER OVERVIEW


STANDARD COSTING 13.3

ationismeasuredbycomparingactualfigurewiththestandardfigure.Standardcostingisamethodofcostingwhichmeasurestheperformanceoranactiv-itybycomparingactualcostwithstandardcost,analysethevariances(deviations)andreportingofvariancesforinvestigationandappropriateaction.OfficialTerminologyofCIMA,Londondefinesstandardcostingas“Controltechniquethatreportsvariancesbycomparingactualcoststopre-setstandardssofacilitatingactionthroughmanage-mentbyexception.”13.1.1 What is a Standard or Standard Cost? StandardcostisdefinedintheCIMAOfficialTerminologyas“‘theplannedunitcostoftheproduct,componentorserviceproducedinaperiod.Thestandardcostmaybedeterminedonanumberofbases.Themainuseofstandardcostsisinperformancemeasurement,control,stockvaluationandintheestablishmentofsellingprices.”FromtheabovedefinitionStandardcostscanbesaidas• Plannedcost• Determinedonabaseornumberofbases.13.1.2 Why Standard Costing is needed? StandardsorStandardcostsareestablishedtoevaluatetheperformanceofaparticu-larcostcentreorresponsibilitycentreandtocontrolcosts.Apartfromperformanceevaluationandcostcontrol,standardcostsarealsousedtovalueinventorywhereac-tualfiguresarenotreliablyavailableandtodeterminesellingpricesparticularlywhilepreparingquotations.Standardcostingsystemiswidelyacceptedasitservesthedifferentneedsofanor-ganisation.Thestandardcostingispreferredforthefollowingreasons:(a) Prediction of future cost for decision making: Standard costs are set after

takingintoaccountallthefuturepossibilitiesandcanbetermedasfuturecost.Standardcostisusedforcalculatingprofitabilityfromaproject/order/activityproposedtobeundertaken.Hence,standardcost isveryuseful fordecisionmakingpurpose.

(b) Provide target to be achieved: Standard costs are the target cost whichshouldnotbecrossedbytheresponsibilitycentres.Performanceofaresponsi-bilitycentreiscontinuouslymonitoredandmeasuredagainstthesetstandards.Anyvariancefromthestandardisnotedandreportedforappropriateaction.

(c) Used in budgeting and performance evaluation: Standard costs are used to setbudgetsandbasedonthesebudgetsmanagerialperformanceisevaluated.Thisisoftwobenefits,onemanagersofaresponsibilitycentrewillnotcom-promisewiththequalitytofulfillthebudgetedquantityandsecond,variancescanbetracedwiththeresponsibledepartmentorperson.

(d) Interim profit measurement and inventory valuation:Actualprofitisknownonlyaftertheclosureoftheaccount.Feworganisationsusetoprepareprofit-



abilitystatementforinterimperiodsalsoformanagementreportingpurpose.Toarriveatprofitfigure,standardcostsaredeductedfromtherevenue.

13.2 TYPES OF STANDARDSTypesofstandardsareasbelow:(i) Ideal Standards :Theserepresentthelevelofperformanceattainablewhenpricesformaterialandlabouraremostfavourable,whenthehighestoutputisachievedwiththebestequipmentandlayoutandwhenthemaximumefficiencyinutilisationofresourcesresultsinmaximumoutputwithminimumcost.Thesetypesofstandardsarecriticisedonthreegrounds:(a) Sincesuchstandardswouldbeunattainable,noonewouldtaketheseserious-

ly.(b) Thevariancesdisclosedwouldbevariances from the ideal standards. These

wouldnot,therefore,indicatetheextenttowhichtheycouldhavebeenrea-sonablyandpracticallyavoided.

(c) Therewouldbenologicalmethodofdisposingofthesevariances.(ii) Normal Standards:Thesearestandardsthatmaybeachievedundernormaloperatingconditions.Thenormalactivityhasbeendefinedas“thenumberofstand-ardhourswhichwillproduceatnormalefficiencysufficientgoodtomeettheaveragesalesdemandoveratermofyears”.Thesestandardsare,however,difficulttosetbecausetheyrequireadegreeoffore-casting.Thevariancesthrownoutunderthissystemaredeviationsfromnormaleffi-ciency,normalsalesvolume,ornormalproductionvolume.Iftheactualperformanceisfoundtobeabnormal,largevariancesmayresultandne-cessitate revision of standards.(iii) Basic or Bogey Standards:Thesestandardsareusedonlywhentheyarelikelytoremainconstantorunalteredoveralongperiod.Accordingtothisstandard,abaseyearischosenforcomparisonpurposesinthesamewayasstatisticiansusepricein-dices.Sincebasicstandardsdonotrepresentwhatshouldbeattainedinthepresentperiod,currentstandardsshouldalsobepreparedifbasicstandardsareused.Basicstandardsare,however,wellsuitedtobusinesseshavingasmallrangeofproductsandlongproductionruns.Basicstandardsareset,onalong-termbasisandareseldomrevised.Whenbasic standardsare inuse, variancesarenot calculated. Instead, theactualcostisexpressedasapercentageofbasiccost.Thecurrentcostisalsosimilarlyexpressedandthetwopercentagesarecomparedtofindouthowmuchtheactualcosthasdeviatedfromthecurrentstandard.Thepercentagesarenextcomparedwiththoseof thepreviousperiods toestablish the trendofactualandcurrentstandardfrombasiccost.



(iv) Current Standards:Thesestandardsreflectthemanagement’santicipationofwhatactualcostswillbeforthecurrentperiod.Thesearethecostswhichthebusi-nesswill incur if theanticipatedpricesarepaidfor thegoodsandservicesandtheusagecorrespondstothatbelievedtobenecessarytoproducetheplannedoutput.Thevariancesarisingfromexpectedstandardsrepresentthedegreeofefficiency inusageofthefactorsofproduction,variationinpricespaidformaterialsandservicesanddifferenceinthevolumeofproduction.

13.3 THE PROCESS OF STANDARD COSTINGTheprocessofstandardcostisasbelow:(i) Setting of Standards :Thefirststepistosetstandardswhicharetobeachieved,

theprocessofstandardsettingisexplainedbelow.(ii) Ascertainment of actual costs :Actualcostforeachcomponentofcost isas-

certained.Actualcostsareascertainedfrombooksofaccount,materialinvoices,wagesheet,chargeslipetc.

(iii) Comparison of actual cost with standard cost :Actualcostsarecomparedwiththe standards costs and variances are determined.

(iv) Investigate the reasons for variances: Variances arises are investigated for fur-theraction.Basedonthis,performanceisevaluatedandappropriateactionsaretaken.

(v) Disposition of variances :Variancesarisearedisposedoffbytransferringittherelevantaccounts(costingprofitandlossaccount)aspertheaccountingmethod(plan)adopted.

13.4 SETTING-UP OF STANDARD COSTStandardcostissetonthebasisofmanagement’sestimation.Costisestimatedonthebasisoftechnicalspecificationprovidedbytheengineeringdepartmentorotherex-pertsuchasproductionengineer.Generally,whilesettingstandards,considerationisgiventohistoricaldata,currentproductionplanandexpectedconditionsoffuture.Forthesakeofdetailedanalysisandcontrolstandardcostissetforeachelementofcosti.e.material,labour,variableoverheadsandfixedoverheads.Apartfromthisstandardarealsosetforthesalesquantityandsalesvalue;thisisgenerallyknownasbudgetedsales.Standardsaresetinbothquantity(unitsorhours)andincost(priceorrate).Itisthusmeasureinquantities,hoursandvalueofthefactorsofproduction.Standardcostsaredividedintothreemaincostcomponents,suchas(a) DirectMaterialCost(b) DirectEmployee(Labour)Costand(c) Overheads© The Institute of Chartered Accountants of India


Standards are set in bothphysical andmonetary terms for each cost components.Detailsareasfollows:13.4.1 Physical StandardsPhysical standards refer to expressionof standards in units or hours. At this stagestandardquantityandstandardhoursaredeterminedforaparticularproductorser-vice.Thepurposeofsettingstandardsistosecureeconomiesinscaleofproductionandtosetsellingpriceforquotationpurpose.Inmanufacturingorganisations,thetaskofsettingphysicalstandardsisassignedtotheindustrialengineeringdepartment.Whilesettingstandardsconsiderationisgivento the• Company’soperatingplani.e.budgets• Finaloutputtobeproduced• Materialspecification, inbothquantityandqualityprovidedbytheengineering

department.• Proportionofmaterialtobeusedincaseofmultipleinputs.• Methodofproductioni.e.fullyautomated,semi-automatedormanual.• Skillsetofworkersandavailabilityofworkers.• Workingconditionsandinternalfactors.• Externalfactors(suchasLabourLaw,FactoriesAct,Govt.policyetc.).PROCEDURE OF SETTING MATERIAL QUANTITY STANDARDSThefollowingprocedureisusuallyfollowedforsettingmaterialquantitystandards.(a) Standardisationofproducts:Atthisphase,productstobeproducedisdecided

basedonproductionplanandcustomer’sorder.Generallyfollowingquestionsareansweredatthisstage:(i)Whattobeproduced?(ii)Whichtypetobeproducedand(iii)Howmuchtobeproduced?

(b) Productstudy:Producttobeproducedisanalysedandstudiedfordevelopmentsandproduction.Productstudyiscarriedoutbytheengineeringdepartmentorproductconsultants.Atthisphaseanswerstothefollowingquestionsaresatis-fied:(i)Howcanitbeproduced?(ii)Whatarethepre-requisites?(iii)Whichtypeofmaterialstobeused?(iv)Howproductscanbeacceptedinthemarket?Etc.

(c) Preparationofspecificationlist:Aftertheproductstudyalistofmaterialispre-pared.Itspecifiestypes(quality)andquantityofmaterialstobeused,substituteofthematerials,quantityandproportionofmaterialstobeused,processtobefollowed,pre-requisitesandconditionrequiredetc.Whilepreparingspecificationlistconsiderationtoexpectedamountofwastageisgiven.Itmustbecustomisedtoadoptchangesintheproduct.

(d) Testruns:Sampleortestrunsunderspecifiedconditionsarecarriedoutandsam-pleproductsaretestedforthedesiredqualityandquantity.Anydeviationfromthespecificationisnoteddownandspecificationlistisupdated.



PROCEDURE OF SETTING LABOUR TIME STANDARDSThefollowingarethestepsinvolvedinsettinglabourstandards:(a) Standardisationofproductandproductstudyiscarriedoutasexplainedabove.(b) Labourspecification:Typesof labourandlabourtimeisspecified.Labourtime

specificationisbasedonpastrecordsandittakesintoaccountnormalwastageoftime.

(c) Standardisationofmethods:Selectionofpropermachinestousepropersequenceandmethodofoperations.

(d) Manufacturinglayout:Aplanofoperationforeachproductlistingtheoperationstobeperformedisprepared.

(e) Timeandmotionstudy:Itisconductedforselectingthebestwayofcompletingthejobormotionstobeperformedbyworkersandthestandardtimewhichanaverageworkerwilltake foreachjob.Thisalsotakesintoaccountthelearningef-ficiencyandlearningeffect.

(f) Trainingandtrial:Workersaretrainedtodotheworkandtimespentatthetimeoftrialrunisnoteddown.

PROCEDURE OF SETTING OVERHEADS TIME/ QUANTITY STANDARDSVariable overhead time/ quantity is estimated based on specificationmade by theengineeringdepartments.Variableoverheadsmayeitherbebasedondirectmaterialquantityorlabourhour.Generally,itisbasedonlabourtimeworked.Fixedoverheadtimeisbasedonbudgetedproductionvolume.13.4.1.1 Problems faced while setting physical standardsTheproblemsinvolvedwhilesettingphysicalstandardswillvaryfromindustrytoin-dustryandmaybeillustratedasunder:(a) Asituationmayarisewherethecompanyisintroducingthemanufactureofanew

lineofproduct.Insuchcase,itmaybenecessarytoemployworkerswhohavenoexperienceinthejob.Thiscreatesaproblemofsettingstandardtimebecauseitisnecessarytomakeadjustmentfortheinexperienceofworkers.

(b) Changes in technologymay necessitate installation of sophisticatedmachines.Whensuchmachinesare installed, thepreciseestimationofoutputandstand-ardofefficiencyachievablewillposeaproblemuntilafteralongtimewhentheworkingconditionsaresettled.Thus,settingstandardsforthesemachinesandestimatingthestandardcostswillneedconsiderableamountofwork.

(c) Oftenmanufacturersprefertoproductdiversificationtoimproveprofitability.Oneofthemostimportantproblemsthatarisewiththeproposedchangeinproductisre-settingofproductionfacilities.Forexample,whenanoldcopperpartistobechangedintoonemadeofbronzetosuitthenewproduct,specialcarehastobetakentoordernewtoolswhichinturn,posetheproblemofsettingupofstandardtimeinrespectofthenewtools.© The Institute of Chartered Accountants of India


(d) Standardsofmaterialspecificationsareestablishedandifthematerialsarenotavailableasperspecifications,thestandardsmaynotbeachievable.

(e) Veryoftenthecostaccountantisconfrontedwiththeproblemofchoosingthetypeofstandardstobeadopted.Forexample,theindustrialengineerhasfur-nishedthestandardtimeforalldirectlabouroperationsasunder:1. Standardtimeattainablebythebestoperationsis2hoursperunitofproduct

includingallowancesforpersonalfatigueanddelay.2. Attainablegoodperformancefortheaveragetrainedoperatoris2.10hours

perunitofproduct.3. Averagepastperformanceis2.60hoursperunit.

Theproblemis,shoulddirectlabourstandardhourbebasedonmaximumefficiencyorattainablegoodperformanceoraveragepastperformance?Ifcostsaretorepresentmaximumefficiency,theunitcostusedinsellingpricewillrelativelybelowbutahighdebitvariancemayariseifthestandardefficiencyisnotachieved.If,however,thestandardcostisbasedonattainablegoodperformance,thevariancesmay tend tobenil. If efficiency is tobegauged,maximumefficiency standardwillreflecttheoffstandardperformance,therebyenablingthedepartmentalheadtoex-ercisecontrol.Similarproblemsasthosementionedabove,mayalsoariseinsettingofwastestand-ards.Forexample,thequestionmayariseastowhetheronlyabsolutelyunavoidablewastageshouldbeprovidedorthepastaveragelevelofwastagemaybeprovided.Thiswillagainhavedifferentimpactonthestandardcostofproduction.13.4.2 Price or Rate StandardsBroadly,thepriceorratestandardscanbesetoneitherofthefollowingbases:(a) Actualaverageormeanpriceexpectedtoprevailduringthecomingperiod, sayoneyear;or(b) Normalpricesexpectedtoprevailduringacycleofseasonswhichmaybeofa numberofyears.PROCEDURES OF SETTING MATERIAL PRICE STANDARDSMaterialpricesarenotaltogetherwithinthecontrolofthemanufacturer;butthepur-chasingdepartment,onbeingapprisedofproductionquantitiesrequired,shouldbeable,fromitsknowledgeofcurrentmarketconditionsandtrends,tostatewithrea-sonableaccuracypricefortheconstituentitems.Thestandardsforpricesofmaterialsshouldbebasedonthefollowingfactors, ifpricefluctuationsaresmallandarenotserious.(a) Stockofmaterialsonhandandthepricesatwhichtheyareheld;(b) Thepricesatwhichordersforfuturedeliveriesofmaterials(agreemententered

into)havealreadybeenplaced,



(c) Minimumsupportpricefixedbytheappropriateauthorityand(d) AnticipatedfluctuationinpricelevelsIncasethereareunsystematicfluctuationsinthemarketprice, itmaybedifficulttode-terminestandardcostsofmaterials;fluctuationsinthemarketpricemaybeofdiffer-entsorts;pricesmaybedifferentfrommonthtomonth,fromoneseasontoanotherorfromoneyeartoanother.Theremaybeaseculartrendwhich,onthewhole,ispushingpriceupwardsordownwards.Thenatureofdifficultiesencounteredinfixingstandardcostsofmaterialswillnaturallybedifferentineachcase.Inaddition,thepurchasingpolicyofthecompanyandtheobjectivetobeachieved(fromcostaccounting)willmakeadifference.Thedifficultyindeterminingthestandardcostofmaterialinsuchasituationcanberesolvedasfollows:(a) In casepricesfluctuate frommonth tomonth, the averageofpricesof a year

correctedfortheknownsecularchangesandanyotherexpectedchangecanverywellserveasthestandardpriceforthenextyear.

(b) Ifthefluctuationsareseasonal,butthewholeyear’srequirementsarepurchasedatonetime,theweightedaverageofthelikelypricestobepaidshouldbetreat-edasthestandardprice.But, ifbuyingisalsospreadoverthewholeyear,theweightedaverageofthepricesforthewholeyearshouldbethestandardprice.

(c) Ifpricesfluctuatefromoneyeartoanother,acarefulestimateofthepricelikelytoprevailnextyear,basedonastatisticalstudy,shouldbeadoptedasthestandardprice.

PROCEDURES OF SETTING WAGE RATE STANDARDThetypeoflabourrequiredforperformingaspecificjobwouldbethemostimportantfactor fordeciding the rateofwage tobepaid toworkers.Standardwage rate forskilledandunskilledworkersaresetbasedonthefollowingbasis: Timetakenbytheworkerstocompleteaunitofproduction. Timeorpiecerateprevailingintheindustry.Itcanbeknownfromthepeers.Wageagreemententeredintobetweenthemanagementandworkers’union. Lawprevailingintheareaofoperation,lawlikePaymentofminimumwagesAct,

PaymentofbonusActetc.PROCEDURES OF SETTING OVERHEAD EXPENSE STANDARDSIncomputingtheoverheadexpensestandards,considerationshouldbegiventothelevelofoutputandtheexpensesbudgeted.Abudgetshowingthelevelofoutputtobeconsideredforarrivingatoverheadexpensestandardsmaybebasedontheprac-ticalmanufacturingcapacityortheaveragesalescapacityorthebudgetedcapacitytobeutilisedinthecomingyear.Afterhavingchosenoneofthebasesforcomputingoutputlevel,theexpensescanbebudgetedunderdifferentheadsforthelevelofout-



putchosen.Theseexpensesareclassifiedunderfixedandvariablecategories.Thus,theoverheadexpensesstandardsaresetbycomputingtheoptimumlevelofoutputfortheproductiondepartmentsandthereafterdraftingabudgetforfixedandvariableexpenseswhichwillbeincurredatthislevel.Ifproductionisseasonaloritfluctuatesduringtheyear,aflexiblebudgetmaybepreparedtofacilitatecomparisonbetweenthetargetsetandtheactualexpenditurefortheperiod.

13.5 TYPES OF VARIANCESControllable and un-controllable variances : Thepurposeofthestandardcostingreportsistoinvestigatethereasonsforsignificantvariancessoastoidentifytheprob-lemsandtakecorrectiveaction.Variancesarebroadlyof two types,namely, controllableanduncontrollable.Con-trollable variances are thosewhich can be controlled by the departmental headswhereasuncontrollablevariancesarethosewhicharebeyondtheircontrol.Respon-sibilitycentresareanswerableforalladversevarianceswhicharecontrollableandareappreciatedforfavourablevariances.Controllabilityisasubjectivematterandvariesfromsituationtosituation. Iftheuncontrollablevariancesareofsignificantnatureandarepersistent,thestandardmayneedrevision.Favourable and Adverse variance :Favourablevariancesarethosewhichareprofita-bleforthecompanyandadversevariancesarethosewhichcauseslosstothecompa-ny.Whilecomputingcostvariancesfavourablevariancemeansactualcostislessthanstandardcost.On theotherhand,adversevariancemeansactualcost isexceedingstandardcost.Thesituationwillbereversedforsalesvariance.Favourablevariancesmeansactualismorethanbudgetedandoncontraryadversevarianceiswhereactualis lessthanbudgeted.Thesearecreditedanddebitedinthecostingprofitandlossaccountrespectively.Favourablevarianceinshortdenotedbycapital‘F’andadversevariancesbycapital‘A’.Studentsmay note that signs of favourable and adverse variancemay ormay notmatchexactlywithmathematicalsignsi.e.(+)or(-).

13.6 CLASSIFICATION OF VARIANCESVariancesarebroadlyclassifiedintotwopartsnamelyRevenuevarianceandCostvari-ance.AtRevenuesidevariancesiscalculatedbycomparingactualsalesfrombudgeted(standard)sales.Ontheotherhand,Costsidereflectsvariancesincostcomponents.Costvarianceclassificationisshownbelowwiththehelpofastructureddiagram.



Total Cost

Material Cost Variance Labour Cost Variance Overhead Cost Variance

MaterialPrice

Variance

MaterialUsage

Variance

LabourRate

Variance

LabourEfficiencyVariance

MaterialMix

Variance

MaterialYield

Variance

LabourMix

Variance

IdleTime

Variance

LabourYield

Variance

Variable OverheadCost Variance

Fixed Overhead

Expenditure orBudget Variance

EfficiencyVariance

Expenditure orBudget Variance

VolumeVariance

EfficiencyVariance

CapacityVariance

CalendarVariance

Fig 13.1. Classification of Variances

13.7 COMPUTATION OF VARIANCESAsdiscussedearliervariancesareclassifiedintotwoparts.Herewewillstartfromcostsideanddiscussallcostcomponentsonebyonewiththehelpofappropriateexampleandillustrations.13.7.1 Material Cost VarianceMaterialcostvarianceisthedifferencebetweenstandardcostofmaterialsusedandtheactualcostofmaterials.Mathematicallyitiswrittenas.



MaterialCostVariance=[StandardCost–ActualCost]Or[(Std.Quantity×Std.Price)–(ActualQuantity×ActualPrice)](ThedifferencebetweentheStandardMaterialCost of the actual production volume and the ActualCostofMaterial)

Reasons for variance:Materialcostvariancearisesmainlybecauseofeitherdifferenceinmaterialpricefromthestandardpriceordifferenceinmaterialconsumptionfromstandardconsumptionorbecauseofbothreasons.AnalysisofmaterialcostvarianceisdonedividingitintotwopartsnamelyMaterialPricevarianceandMaterialUsagevariance.

Material Cost Variance

Material Price Variance Material Usage Variance

Material Mix Variance Material Yield Variance

(A) Material Price VarianceItmeasuresvariancearises in thematerial costdue todifference inactualmaterialpurchasepricefromstandardmaterialprice.Mathematicallyitiswrittenas:

Material Price Variance=[StandardCostofActualQuantity*–ActualCost](ThedifferencebetweentheStandardPrice and ActualPrice for the ActualQuantityPurchased)[(SP–AP)×AQ]Or [(SP×AQ)–(AP×AQ)]

*Here actualquantitymeansactualquantityofmaterialpurchased.Ifinthequestionmaterialpurchaseisnotgiven,itistakenasequaltomaterialconsumed.



Explanation:Materialpricevariancecanalsobecalculatedtakingmaterialusedasactualquantityinsteadofmaterialpurchased.Thismethodisalsocorrectbutdoesnotserve thepurposeofvariancecomputation.Materialpricevariancemayarisefromvarietyofreasonsoutofwhichsomemaybecontrollableandsomemaybebeyondthecontrolofthepurchasedepartment.Ifpricevariancearisesduetoinef-ficiencyofpurchasedepartmentoranyotherreasonwithinthecontrolofthecom-pany,thenitisveryimportanttoreportvarianceasearlyaspossibleandthiscanbedonebytakingpurchasequantityasactualquantityforpricevariancecomputation.

Responsibility for Material Price Variance:Generally,purchasedepartmentpurchas-esmaterialsfromthemarket.Purchasedepartmentisexpectedtoperformitsfunctionveryprudently so that companynever suffers lossdue to its inefficiency. Purchasedepartment is held responsible for adverseprice variancearisesdue to the factorscontrollablebythedepartment.(B) Material Usage VarianceItmeasures variance inmaterial costdue tousage/ consumptionofmaterials. It iscomputedasbelow:

Material Usage Variance =[StandardCostofStandardQuantityforActualProduc-tion–StandardCostofActualQuantity*](ThedifferencebetweentheStandardQuantityspecified for actual production and the ActualQuantityused,atStandardPrice)[(SQ–AQ)×SP]Or [(SQ×SP)–(AQ×SP)]

*Hereactualquantitymeansactualquantityofmaterialused.

Responsibility for material usage variance:Materialusage is theresponsibilityofproductiondepartmentanditisheldresponsibleforadverseusagevariance.Reasons for variance: Actual material consumptionmay differ from the standardquantityduetoeitherdifferenceinproportionusedfromstandardproportionorduetodifferenceinactualyieldfromstandardyield.Materialusagevarianceisdividedintotwoparts(a)Materialusagemixvarianceand(b)Materialyieldvariance.(a) Material Mix VarianceVarianceinmaterialconsumptionmayariseduetodifferenceinproportionusedactu-allyfromthestandardmix/proportion.Itarisesonlywhentwomoreinputsareusedtoproduceaproduct.Mathematically,

Material Mix Variance=[StandardCostofActualQuantityinStandardProportion –StandardCostofActualQuantity](ThedifferencebetweentheActualQuantityinstandardproportionandActualQuan-tityinactualproportion,atStandardPrice)[(RSQ–AQ)×SP]Or[(RSQ×SP)–(AQ×SP)]



(b) Material Yield Variance (Material Sub-usage Variance)Varianceinmaterialconsumptionwhicharisesduetoyieldorproductivityofthein-puts.Itmayariseduetouseofsub-standardqualityofmaterials,inefficiencyofwork-ersorduetowrongprocessing.

Material Yield Variance =[StandardCostofStandardQuantityforActualProduc-tion–StandardCostofActualQuantityinStandardProportion](ThedifferencebetweentheStandardQuantityspecified for actual production and ActualQuantityin standard proportion,atStandardPurchasePrice)[(SQ–RSQ)×SP]Or [(SQ×SP)–(RSQ×SP)]

Verification of the formulae:MaterialCostVariance =MaterialUsageVariance+MaterialPriceVariance*

Or,MaterialCostVariance=(MaterialMixVariance+MaterialRevisedusageVariance)+Materialpricevariance

IfmaterialpurchasedquantityandmaterialconsumedquantityissameMeaning of the terms used in the formulae:

Term MeaningStandardQuantity(SQ) Quantityofinputstobeusedtoproduceactualoutput.ActualQuantity(AQ) Quantityofinputsactuallyusedtoproduceactualoutput.Revised Standard Quan-tity(RSQ)

If Actual totalquantity of inputswereused in standardproportion.

ILLUSTRATION 1The standard and actual figures of product ‘Z’ are as under:

Standard ActualMaterial quantity 50 units 45 unitsMaterial price per unit ` 1.00 ` 0.80Calculate material cost variance.SOLUTIONThevariancesmaybecalculatedasunder:(a) Standardcost = Std.Qty×Std.price=50units×`1.00=`50(b) Actualcost = Actualqty.×Actualprice=45units×`0.80=

`36Variances:(i) Pricevariance = Actualqty(Std.price–Actualprice) = 45units(`1.00–`0.80)=`9(F)(ii) Usagevariance = Std.price(Std.qty–Actualqty.)



= `1(50units–45units)=`5(F)(iii) Materialcostvariance= Standardcost–Actualcost (Totalvariance) = `50–`36=`14(F)

ILLUSTRATION 2NXE Manufacturing Concern furnishes the following information:

Standard: Material for 70 kg finished products 100 kg.Price of material ` 1 per kg.

Actual: Output 2,10,000 kg.Material used 2,80,000 kg.Cost of Materials ` 2,52,000

Calculate: (a) Material usage variance, (b) Material price variance, (c) Material cost var-iance.SOLUTIONStandardQuantityofinputforactualoutput(SQ)=2,10,000kg×100 kg

70kg

=3,00,000kg.

ActualPrice(AP)=(` 2,52,000÷2,80,000kg)=` 0.90perkg.(a) MaterialUsageVariance =(SQ–AQ)×SP =(3,00,000–2,80,000)×1 =`20,000(F)(b) MaterialPriceVariance =(SP–AP)×AQ =(1–0.90)×2,80,000

=`28,000(F)(c) MaterialCostVariance =(SQ×SP)–(AQ×AP) =(3,00,000×1)–(2,80,000×0.90)

=`48,000(F)Check MCV =MPV+MUV

`48,000(F) =`28,000(F)+`20,000(F)ILLUSTRATION 3The standard cost of a chemical mixture is as follows:40% material A at ` 20 per kg.60% material B at ` 30 per kg.A standard loss of 10% of input is expected in production. The cost records for a period showed the following usage :90 kg material A at a cost of ` 18 per kg.



110 kg material B at a cost of ` 34 per kg.The quantity produced was 182 kg. of good product.Calculate all material variances. SOLUTIONBasic Calculation

Material Standard for 180 kg. output Actual for 182 kg. outputQty. Kg.

Rate(`)

Amount(`)

QtyKg.

Rate(`)

Amount(`)

A 80 20 1,600 90 18 1,620B 120 30 3,600 110 34 3,740

Total 200 5,200 200 5,360Less:Loss 20 - - 18 - -

180 5,200 182 5,360

Std.costofactualoutput=` 5,200×180182 =`5,257.78

CalculationofVariances1. MaterialCostVariance =(Std.costofactualoutput–Actualcost) =(5,227.78–5,360) =`102.22(A)2. MaterialPriceVariance =(SP–AP)×AQ MaterialA =(20–18)×90 =`180.00(F) MaterialB =(30–34))×110 =`440.00(A)

MPV =`260.00(A)3. MaterialUsageVariance=(Std.Quantityforactualoutput–ActualQuantity)

×Std.Price

MaterialA= 18280× – 90180

×20 =`182.22(A)

MaterialB=

−× 110

180182120 ×30 =`340.00(F)

MUV =`157.78(F)Check

MCV `102.22(A)



13.7.2 Labour Cost VarianceAmountpaidtoemployeesfortheirlabourisgenerallyknownasemployeeorlabourcost. In this chapter labour cost is used todenote employees cost. Labour (em-ployee)costvarianceisthedifferencebetweenactuallabourcostandstandardcost.Mathematicallyitcanbewrittenas:

LabourCostVariance=[StandardCost–ActualCost](Thedifferencebetween theStandardLabourCost and the ActualLabourCostin-curred for the production achieved)[(SH×SR)–(AH*×AR)]*Actualhourspaid.

Reasons for variance:Differenceinlabourcostariseseitherduetodifferenceintheactuallabourratefromthestandardrateordifferenceinnumbersofhoursworkedfromstandardhours.Labourcostvariancecanbedividedintotwopartsnamely(i)LabourRateVarianceand(ii)LabourEfficiencyVariance.

. Labour Cost Variance

Labour RateVariance

Labour EfficiencyVariance

Labour Mix(Gang) Variance

Idle timeVariance

Labour YieldVariance

(A) Labour Rate Variance:Labourratevariancearisesduetodifferenceinactualratepaidfromstandardrate.Itisverysimilartomaterialpricevariance.Itiscalculatedasbelow:

LabourRateVariance=[StandardCostofActualTime–ActualCost](ThedifferencebetweentheStandard Rate per hour and ActualRateper hour for the ActualHours paid)[(SR–AR)×AH*]Or [(SR×AH*)–(AR×AH*)]*Actualhourspaid.Responsibility for labour rate variance:Generally,labourratesareinfluencedbytheexternalfactorswhicharebeyondthecontroloftheorganisation.However,per-sonnelmanagerisresponsibleforlabourratenegotiation.



(B) Labour Efficiency Variance:Labourefficiencyvariancearisesduetodeviationintheworkinghoursfromthestand-ardworkinghours.

LabourEfficiencyVariance=[StandardCostofStandardTime forActualProduction–StandardCostofActualTime](ThedifferencebetweentheStandardHoursspecified for actual production and Ac-tualHours worked at Standard Rate)[(SH–AH#)×SR]Or [(SH×SR)–(AH#×SR)]#ActualHoursworkedResponsibility for labour efficiency variance:Efficiencyvariancemayariseduetoabilityoftheworkers,inappropriateteamofworkers,inefficiencyofproductionman-agerorforemanetc.However,productionmanagerorforemancanbeheldresponsi-blefortheadversevariancewhichotherwisecanbecontrolled.Labourefficiencyvarianceisfurtherdividedintothefollowingvariances:(a) IdleTimeVariance(b) LabourMixVarianceorGangvariance(c) LabourYieldVariance(orLabourRevised-efficiencyVariance)(a) Idle Time Variance:Itiscalculatedfortheunproductivelabourhours.Hereidletimemeanslabouridletimearisesduetoabnormalreasons.Itiscalculatedasbelow:

LabourIdleTimeVariance=[StandardRateperHour×ActualIdleHours](ThedifferencebetweentheActualHours paid and ActualHours worked at Standard Rate)[(AH*–AH#)×SR]Or [(AH*×SR)–(AH# ×SR)]*Actualhourspaid;#ActualHoursworked(b) Labour Mix Variance: Labourefficiencyvariancewhicharisesduetochangeintheproportionorcombina-tionofdifferentskillseti.e.numberofskilledworkers,semi-skilledworkersandun-skilledworkers.Mathematically,

LabourMixVarianceOrGangVariance=[StandardCostofActualTime Worked inStandardProportion–StandardCostofActualTimeWorked](ThedifferencebetweentheActualHoursworked in standard proportion and ActualHours worked in actual proportion,atStandard Rate)[(RSH–AH#)×SR]Or [(RSH×SR)–(AH#×SR)]#ActualHoursworked© The Institute of Chartered Accountants of India


(c) Labour Yield Variance: Labourefficiencyvariancewhicharisesduetoproductivityofworkers.

LabourYieldVarianceOrSub-EfficiencyVariance=[StandardCostofStandardTime forActualProduction–StandardCostofActualTime WorkedinStandardProportion](ThedifferencebetweentheStandardHours specified for actual production and Ac-tualHours worked in standard proportion,atStandard Rate)(SH–RSH)× SR Or (SH×SR)–(RSH×SR)

Verification of formulae:LabourCostVariance=LabourRateVariance+LabourEfficiencyVariance (ifhours

paidandhoursworkedissame)OR

LabourCostVariance=LabourRateVariance+IdleTimeVariance+LabourEfficiencyVariance

ORLabourEfficiencyVariance=LabourMixVariance+LabourYieldVarianceILLUSTRATION 4The standard and actual figures of a firm are as underStandard time for the job 1,000 hoursStandard rate per hour ` 0.50Actual time taken 900 hoursActual wages paid ` 360Compute the variancesSOLUTION(a) Std.labourcost (`) (1,000hours×`0.50) 500(b) Actualwagespaid 360(c) Actualrateperhour:`360/900hours= `0.40Variances(i) Ratevariance =Actualtime(Std.rate–Actualrate) =900hours(`0.50–`0.40)=`90(F)(ii) Efficiencyvariance =Std.rateperhr.(Std.time–Actualtime) =`0.50(1,000hrs.–900hrs.)=`50(F)(iii) Totallabourcostvariance =Std.labourcost–Actuallabourcost=`140(F)



ILLUSTRATION 5The standard labour employment and the actual labour engaged in a week for a job are as under:

Skilledworkers

Semi-skilled

workers

Unskilled workers

Standard no. of workers in the gang 32 12 6

Actual no. of workers employed 28 18 4Standard wage rate per hour 3 2 1Actual wage rate per hour 4 3 2

During the 40 hours working week, the gang produced 1,800 standard labour hours of work. Calculate :(a) Labour Cost Variance (b) Labour Rate Variance(c) Labour Efficiency Variance (d) Labour Mix Variance(e) Labour Yield VarianceSOLUTIONCategory of

workersSH* × SR AH@ × SR AH@ × AR RSH# × SR

Skilled 1,152×3=3,456

1,120×3=3,360

1,120×4=4,480

1,280×3=3,840

Semi-skilled 432×2=864 720×2=1,440 720×3=2,160 480×2=960Unskilled 216×1=216 160×1=160 160×2=320 240×1=240Total `4,536 `4,960 `6,960 `5,040

* Std.labour hoursActualhoursproducedTotal Std. labour hours

×

Std.hrs.foractualoutputarecalculatedasfollows:

Skilled =2,0001,800

×1,280=1,152hrs.

Semi-skilled =2,0001,800

×480 =432hrs.

Unskilled =2,0001,800

×240=215hrs.



@Actualno.ofworkers×40hours

# Std.hoursActualhours workedTotal Std. hours

×

LabourCostVariance =(SH×SR)–(AH×AR)Or, =` 4,536–6,960 =`2,424(A)LabourRateVariance =AH(SR–AR)or(AH×SR)–(AH×AR)

Skilled =3,360–4,480 =`1,120(A)Semi-skilled =1,440–2,160 =`720(A)Unskilled =160-320 =`160(A) 2,000(A)

LabourEfficiencyVariance =SR(SH–AH)or(SR×SH)–(SR×AH)Skilled =3,456–3,360 =`96(F)Semi-skilled =864–1,440 =`576(A)Unskilled =216-160 =`56(F) `424(A)

LabourMixVariance =SR(RSH–AH)or(SR×RSH)–(SR×AH)Skilled =3,840–3,360 =` 480(F)Semi-skilled =960–1,440 =`480(A)Unskilled =240-160 =`80(F) `80(F)

LabourYieldVariance =SR(SH–RSH)or(SR×SH–SR×RSH)Skilled =3,456-3,840 =` 384(A)Semi-skilled =864-960 =` 96(A)Unskilled =216-240 =` 24(A) `504(A)

Check(i) LCV =LRV+LEV

` 2,424(A) =` 2,000(A)+` 424(A)(ii) LEV =LMV+LYV

` 424(A) =` 80(F)+` 504(A)13.7.3 Variable Overheads Cost Variance

Variable OverheadExpenditure Variance

Variable OverheadEfficiency Variance

Variable Overhead Cost Variance



Variableoverheadsconsistofexpensesother thandirectmaterialanddirect labourwhichvarywiththe levelofproduction. Ifvariableoverheadconsistof indirectma-terials,theninthiscaseitvarieswiththedirectmaterialused.Ontheotherhand,ifvariableoverheadisdependingonnumberofhoursworkedtheninthiscaseitwillvarywithlabourhourormachinehours.Ifnothingismentionedspecificallythenwetakelabourhourasbasis.Variableoverheadcostvariancecalculationissimilartola-bourcostvariance.Variableoverheadcostvarianceisdividedintotwoparts(i)VariableOverheadExpenditureVarianceand(ii)VariableOverheadEfficiencyVariance.

Variable Overhead Cost Variance(StandardVariableOverheadsforProduction–ActualVariableOverheads)

Variable Overhead Expenditure (Spending) Variance (Standard Variable Overheads forActualHours#)Less(ActualVariableOverheads)[(SR–AR)×AH#]Or[(SR×AH#)–(AR×AH#)]

Variable Overhead Efficiency Variance

(StandardVariableOverheadsforProduction)Less(Standard Variable Overheads for ActualHours#)[(SH–AH#)×SR]Or[(SH×SR)–(AH#×SR)]

# Actual Hours (Worked)Meaning of the terms used in the formulae:

Term MeaningStandardHours(SH) Hoursrequiredproducingactualoutput.ActualHours(AH) ActualHourstakentoproduceactualoutput.RevisedStandardHours(RSH) Ifactuallabourhoursworkedwereworkedbystand-

ardmix(combination)oflabour.ActualYield(AY) ActualHoursworkedStandardYield(SY) ActualhoursiflabourworkedinstandardratioStandardLabourCost(SLC) Standardlabourcostforactualoutput

13.7.4 Fixed Overhead Cost VarianceTherecoveryofthefixedcomponentsoftheestimatedoverheadsdependsuponcapac-ityutilization.Incaseacompanyproduceslessthantheprojectedutilizationitshallnotbeabletorecoverallthebudgetedfixedoverheads.Thisunrecoveredportionisknownaspro-ductionvolumevariance.



Theothervarianceisbecauseofvariationsinactualspendingwhencomparedwithbothestimatedfixedandestimatedvariableoverheads.SuchavarianceisknownasOverheadexpensesvariance.Thefollowingdetaileddiscussionshallhelpyouhaveaclearunderstandingofthesetwovariances.(1) Production Volume Variance : Thetermfixedoverheadsimpliesthattheelementofcostdoesnotvarydirectlyinproportiontotheoutput.Inotherwords,fixedover-headsdonotchangewithinagivenrangeofactivity.However,theunitcostchangeseventhoughthefixedoverheadsareconstantintotalwithinthegivenrangeofoutput.So,higherthelevelofactivity,thelowerwillbetheunit cost or vice versa. Themanagement is, therefore, facedwith a costingdifficultybecause it requires arepresentativerateforchargingfixedoverheadsirrespectiveofchangesinvolumeofoutput.Forexample,ifthefixedoverheadsare`10,000andtheoutputvariesfrom8,000to11,000units,thecostperunitofoutputwouldbeasunder:

Fixed Overheads Output in units Cost per unit of output (`)

10,000 8,000 1.2510,000 9,000 1.1110,000 10,000 1.0010,000 11,000 0.91

Wehave,however,seenthatinstandardcosting,apredeterminedrateofoverheadrecoveryisestablishedforcostingpurposes.Thisinvolvestheestablishmentofapre-determinedcapacity.Ifwetake,forexample;10,000unitsaspredeterminevolume/capacity,thepre-deter-minedratewillbe` 1perunit.Ifthefactoryproducesonly8,000units,therewillbealossduetounder-recoverywhichcanbeexplainedintwo-ways:(a) Theactualcostwillbe`10,000÷8,000units=`1.25perunitwhereastheab-

sorbedcostis`1perhour.Sincethecostismoreby`0.25perunit,thetotallossis8,000units×`0.25or`2,000.

(b) Since the factoryhasproducedonly 8,000units, the amountof overheads re-coveredis8,000units×` 1 or `8,000.Sincefixedoverheadsareconstant,theamountwhichshouldhavebeenideallyincurredforthedepartmentis` 10,000.Hencethereisadifferenceof`2,000betweentheoverheadsrecoveredandtheoverheadsestimated.Thisvarianceisknownasproductionvolumevariance.

Thisshowsthecostoffailureonthepartofthefactorytoproduceattheplannedac-tivityof10,000units.Ifthecompanyproduces11,000units,thevariancewillshowthebenefitsofoperatingatalevelabovethebudgetedactivity.If,however,thefactoryhas



produced10,000units,therewillbenoproductionvolumevariancebecausetheactualactivityequalswhatwasbudgetedi.e.theproductionof10,000units.(2) Overhead Expenses Variance :Asdiscussedabove,theProductionVolumeVar-ianceanalysestheunrecoveredfixedoverheads.Apartfromthis,therecanbevaria-tionsintheactualspendingofbothfixedandvariableoverheadswhencomparedtowhatwasestablishedasastandard.Suchvariationscanbeaccountedforbyanalyzinganoverheadexpensesvariance.Theanalysisofoverheadvariancesisdifferentfromthatofmaterialandlabourvari-ances.Asoverheadistheaggregateofindirectmaterials,indirectlabourandindirectexpenses,thisvariance isconsideredtobeadifficultpartofvarianceanalysis.Itisim-portanttounderstandthatoverheadvarianceisnothingbutunderorover-absorptionof overhead. Fixed Overhead Cost Variance:Fixedoverheadcostvarianceisthedifferencebe-tweenactualfixedoverheadandabsorbedfixedoverhead.Fixedoverheadvarianceisdividedintotwoparts(A) Fixed Overhead Expenditure Variance and (B) FixedOverheadVolumeVariance.(A) Fixed Overhead Expenditure Variance:This is thedifferencebetweentheactualfixedoverheadincurredandbudgetedfixedoverhead.(B) Fixed Overhead Volume Variance: Varianceinfixedoverheadwhichariseduetothevolumeofproductioniscalledfixedoverheadvolumevariance.Fixedoverheadvolumevarianceisfurtherdividedintothethreevariances: (a)EfficiencyVariance (b) CapacityVarianceand (c) CalendarVariance

Fixed Overhead Cost

Variance

Fixed OH Expenditure

Variance

Fixed OH

Volume Variance

FOH Calender

VarianceFOH Capacity

Variance

FOH Efficiency

Variance



Mathematicallythesecanbewrittenasfollows:

Fixed Overhead Cost Variance(AbsorbedFixedOverheads)Less(ActualFixedOver-

heads)

Fixed Overhead ExpenditureVariance

(BudgetedFixedOverheads)Less(ActualFixedOverheads)Or(BH×SR)–(AH×AR)

Fixed Overhead VolumeVariance

(AbsorbedFixedOverheads)Less (BudgetedFixedOverheads)Or(SH×SR)–(BH×SR)

Fixed Overhead Ca-pacity Variance

SR(AH–BH)Or(AH×SR)–(BH×SR)

Fixed Overhead Calen-dar Variance

Std.FixedOverheadrateper day (Actual no. ofWorking days – Budg-etedWorkingdays)

Fixed Overhead Efficien-cy Variance

SR(AH–SH)Or(AH×SR)–(SH×SR)

(a)Fixed Overhead Efficiency Variance:Thisisthedifferencebetweenfixedoverheadabsorbedandstandardfixedoverhead.(b)Fixed Overhead Capacity Variance:Thisisthedifferencebetweenstandardfixedoverheadandbudgetedoverhead.(c)Fixed Overhead Calendar Variance: Thisvariancearisesduetodifferenceinnum-berofactualworkingdaysandthestandardworkingdays.

Note:Whencalendarvarianceiscomputed,therewillbeamodificationinthecapac-ityvariance.Inthatcaserevisedcapacityvariancewillbecalculatedandtheformulais:Revised Capacity Variance=(Actualhours–Revisedbudgetedhours)×Std.fixedrateperhour



Verification of formulae:F.O.CostVariance=F.O.ExpenditureVariance+F.O.VolumeVarianceF.O.VolumeVariance=EfficiencyVariance+CapacityVariance+CalendarVarianceBasic terms used in the computation of overhead variance

Standardoverheadrate(perhour)= Budgeted OverheadBudgeted hours

Or

Standardoverheadrate(perunit)=

Budgeted Overhead

Budgeted output in units

b

Note:Separateoverheadrateswillbecomputedforfixedandvariableoverheads.Basic calculations before the computation of overhead variances:Thefollowingbasiccalculationshouldbemadebeforecomputingvariances.(i) Whenoverheadrateperhourisused: (a) Standardhoursforactualoutput(SHAO)

SHAO=

Budgeted Hours ActualOutputBudgeted Output

×

b

(b) Absorbed(orRecovered)overhead=Std.hoursforactualoutput×Std. overheadrateperhour (c) Standardoverhead=Actualhours×Std.overheadrateperhour (d) Budgetedoverhead=Budgetedhours×Std.overheadrateperhour (e) Actualoverhead=Actualhours×Actualoverheadrateperhour(ii) Whenoverheadrateperunitisused

(a)Standardoutputforactualhours(SOAH)

SOAH=

Budgeted Output Actual HoursBudgeted Hours

×

b

(b) Absorbedoverhead=Actualoutput×Std.overheadrateperunit (c) Standardoverhead=Std.outputforactualtime×Std.overheadrateper unit (d) Budgetedoverhead=Budgetedoutput×Std.overheadrateperunit (e) Actualoverhead =Actualoutput×ActualoverheadrateperunitOverheadcostvariance =Absorbedoverhead–ActualoverheadOCV =(Std.hoursforactualoutput×Std.overheadrate)–Actual overhead



ILLUSTRATION 6The overhead expense budget for a factory producing to a capacity of 200 units per month is as follows:

Description of overhead Fixed cost per unit in (`)

Variable cost per unit in (`)

Total cost per unit in (`)

Power and fuel 1,000 500 1,500Repair and maintenance 500 250 750Printing and stationary 500 250 750Other overheads 1,000 500 1,500

` 3,000 ` 1,500 4,500The factory has actually produced only 100 units in a particular month. Details of over-heads actually incurred have been provided by the accounts department and are as fol-lows:

Description of overhead Actual costPower and fuel ` 4,00,000Repair and maintenance ` 2,00,000Printing and stationary ` 1,75,000Other overheads ` 3,75,000

You are required to compute the production volume variance and the overhead expenses variance.SOLUTIONProductionvolumevarianceStandardfixedoverheadsperunit : `3,000(Given)Actualproduction : 100unitsStandardproduction(capacity) : 200unitsUnabsorbedunits : 100units(200–100)Productionvolumevariance:`3,000×100units=`3,00,000(Adverse)OverheadexpensesvarianceStandardfixedoverheadsforactualproduction : `6,00,000Standardvariableoverheadsforactualproduction:` 1,500×100units=`1,50,000Stdtotaloverheadsforactualproduction : `7,50,000Actualoverheads : `11,50,000Overheadexpensevariance : `4,00,000(Adverse)



ILLUSTRATION 7The following information was obtained from the records of a manufacturing unit using standard costing system.

Standard ActualProduction 4,000 units 3,800 unitsWorking days 20 21Fixed Overhead ` 40,000 ` 39,000Variable Overhead 12,000 12,000

You are required to calculate the following overhead variance: (a) Variable overhead variance(b) Fixed overhead variances

(i) Expenditure variances (ii) Volume variance

SOLUTION(a) ForVariableOverheadVariance:

Actualvariableoverhead=` 12,000 Standardvariableoverheadforproduction: =(Budgetedoutput×Std.variableoverheadrateperunit) =(12,000÷4,000)×3,800=` 11,400 Variableoverheadvariance:Standardvariableoverhead-Actualvariableoverhead=` 11,400–` 12,000=600(A)

(b) ForFixedOverheadVariance: Actualfixedoverheadincurred=`39,000

Budgetedfixedoverheadfortheperiod=`40,000 Standardfixedoverheadforproduction: (Standardoutputforactualtime×StandardFixedOverheadperunit) =(` 40,000÷4,000units)×3,800units=`38,000.

Variances: (i) FixedOverheadExpenditureVariances: Budgetedfixedoverhead–Actualfixedoverhead

=` 40,000–` 39,000=1,000(F)(ii) FixedOverheadVolumeVariance: Standardfixedoverhead–Budgetedfixedoverhead

=` 38,000–` 40,000=` 2,000(A)© The Institute of Chartered Accountants of India


(iii) FixedOverheadVariance: Standardfixedoverhead–Actualfixedoverhead

=` 38,000–` 39,000=` 1,000(A)

13.8 ADVANTAGES AND CRITICISM OF STANDARD COSTING

13.8.1 Advantages of Standard CostingFollowingaretheadvantagesofstandardcosting.(i) Itservesasabasisformeasuringoperatingperformanceandcostcontrol.Byset-

tingstandards,properclassificationanddeterminationofvariances,ispossible.Thisservesasasignalforpromptcorrectiveaction.Thissystemprovidesforre-portingontheprincipleofexception.Thebasisofthisprincipleisthatonlymat-terswhicharenotproceedingaccordingtoplanarereportedupon.Thisenablesthemanagerstoconcentrateuponessentialmattersandleavethenon-essentialstotakecareofthemselves.Byusingspecialforms,anyexcessivetimetaken,extramaterialusedoradditionalservicesconsumedcanbebroughttolightaspartoftheordinaryroutine.Inotherwords,ifthevariancesarenegligible,itmeansthattheperformanceismoreorlessinaccordancewiththestandards.Significantvar-ianceswhichwarranttheattentionofthemanagerarebroughttohisknowledge.

(ii) Itaidspricefixing.Standardcostingcanbeusedtopredictcosts.Althoughactu-alcostmayvaryfromdaytoday,standardcostswillremainstableoveraperiodoftimeand,wheredemandforaproductiselastic,thisinformationcanbeusedasabasisforfixingthesellingprice.

(iii) Introductionofstandardcosting facilitatesevaluationof jobsand introductionofincentives.Jobvaluescanbedeterminedbytheuseofevaluationandscaleofwagesfixedaccordingtotheresponsibilityinvolvedineachjob.

(iv) Standardcostingfacilitatestheestimationofthecostofnewproductswithgreat-eraccuracy.

(v) Itservesasabasisforinventoryvaluation.Standardcostsareusedforinventoryvaluationbecauseactualcostsarenottypicalandlessclericalworkis involvedin carrying standard value into inventory records than actual value. A furtheradvantageofthisprocedureisthatmaterialstockcanberecordedintermsofquantitiesonly.

(vi) Standardcostingisalsousedforthemeasurementofprofits.Thequestionofcor-rectapproachofcalculatingprofitisverymuchrelatedtostockvaluationandtothemethodsofdealingwiththeabsorptionoffixedoverheads.Standardcostingwilleliminateanyvariationsin profitduetochangesinthevaluesofstockholdingfromperiodtoperiodandwillthusprovideatruebasisforthemeasurementofprofit.



(vii) Standardcostinggreatlyaidsbusinessplanning,budgetingandmanagerialdeci-sionmaking.Standardcostsbeingpre-determinedcosts,areparticularlyusefulinplanningandbudgeting.

(viii)Standardcostingaidsinstandardisationofproducts,operationsandprocesses.Sincestandardsarelaiddownforeachproduct,itscomponents,materials,oper-ations,processesetc.,itimprovestheoverallproductionefficiencyandreducescosts.

(ix) Itprovidesobjectivesandtargetstobeachievedbyeachlevelofmanagementanddefines the responsibilitiesofdepartmentalmanagers. Standardcosts arepre-determinedonthebasisofreasonableandachievablelevelofoutput.Thedepartmentalhead,therefore,comestoknowwhatisexpectedofhimandhislevelofperformance in comparison to the targets canbe seen from thevari-ancereports.Thusthesystemservesasanincentivetothedepartmentalheadtoachievethetargetssetbythecompany.

(x) Standardcostingsetsauniformbasis forcomparisonofallelementsofcosts.Sincecareistakeninsettingstandards,thestandardsbecomeunchangingunitsofcomparison.Thestandardhourmaybeusedasabasicunittocomparedis-similarproductsorprocesses.

(xi) Themaximumuseofworkingcapital,plantfacilitiesandcurrentassetsisassuredbecausewastageofmaterialsandlossduetoidletimearecloselycontrolled.

13.8.2 Criticism of Standard CostingThe followingaresomeof thecriticismwhichmaybe leveledagainst thestandardcostingsystem.Theargumentshavebeensuitablyansweredasstatedagainsteachbyadvocatesofthestandardcostingandhencetheydonotinvalidatetheusefulnessofthesystemtobusinessenterprises.(i) Variation in price: Oneofthechiefproblemfacedintheoperationofthestand-

ardcostingsystemis thepreciseestimationof likelypricesor ratetobepaid.The variability of prices is sogreat that even actual prices are not necessarilyadequatelyrepresentativeofcost.Buttheuseofsophisticatedforecastingtech-niquesshouldbeabletocoverthepricefluctuationtosomeextent.Besidesthis,thesystemprovidesforisolatinguncontrollablevariancesarisingfromvariationstobedealtwithseparately.

(ii) Varying levels of output:Ifthestandardlevelofoutputsetforpre-determinationofstandardcostsisnotachieved,thestandardcostsaresaidtobenotrealised.However, thestatement that thecapacityutilisationcannotbepreciselyesti-matedforabsorptionofoverheadsmaybetrueonlyinsomeindustriesofjob-bingtype.Invastmajorityofindustries,useofforecastingtechniques,marketresearch,etc.,helptoestimatetheoutputwithreasonableaccuracyandthusthevariationisunlikelytobeverylarge.Primecostwillnotbeaffectedbysuch



variationand,moreover,varianceanalysishelpstomeasuretheeffectsofidletime.

(iii) Changing standard of technology: Incaseofindustriesthathavefrequenttech-nologicalchangesaffectingtheconditionsofproduction,standardcostingmaynotbesuitable. Thiscriticismdoesnotaffect thesystemof standardcosting.Costreductionandcostcontrolisacardinalfeatureofstandardcostingbecausestandardsoncesetdonotalwaysremainstable.Theyhavetoberevised.

(iv) Attitude of technical people: Technicalpeopleareaccustomedtothinkofstandardsasphysicalstandardsand,therefore,theywillbemisledbystandardcosts.Sincetechnicalpeoplecanbeeducated toadopt themselves to thesystem throughorientationcourses,itisnotaninsurmountabledifficulty.

(v) Mix of products: Standard costing presupposes a pre-determined combinationofproductsbothinvarietyandquantity.Themixtureofmaterialsusedtoman-ufacturetheproductsmayvaryinthelongrunbutsincestandardcostsaresetnormally for a shortperiod, such changes canbe takencareofby revisionofstandards.

(vi) Level of Performance:Standardsmaybeeither too strict or too liberal becausetheymaybebasedon (a) theoreticalmaximumefficiency, (b)attainablegoodperformance or (c) average past performance. To overcome this difficulty, themanagementshouldgivethoughttotheselectionofasuitabletypeofstandard.Thetypeofstandardmosteffectiveinthecontrolofcostsisonewhichrepresentsanattainablelevelofgoodperformance.

(vii) Standard costs cannot possibly reflect the true value in exchange. Ifprevioushis-torical costs are amended roughly to arrive at estimates for adhocpurposes,theyarenotstandardcostsinthestrictsenseofthetermandhencetheycannotalsoreflect truevalue inexchange. Inarrivingatstandardcosts,however, theeconomicandtechnicalfactors,internalandexternal,arebroughttogetherandanalysedtoarriveatquantitiesandpriceswhichreflectoptimumoperations.Theresultingcosts,therefore,becomerealisticmeasuresofthesacrificesinvolved.

(viii)Fixation of standards may be costly:Itmayrequirehighorderofskillandcompe-tency.Smallconcerns,therefore,feeldifficultyintheoperationofsuchsystem.

SUMMARY♦ Standard Costing : Atechniquewhichusesstandardsforcostsandrevenuesfor

thepurposesofcontrolthroughvarianceanalysis.♦ Standard Price : Apredeterminedpricefixedonthebasisofaspecificationofa

productorserviceandofallfactorsaffectingthatprice.♦ Standard Time : Thetotaltimeinwhichtaskshouldbecompletedatstandard

performance.



♦ Variance : Adivergence fromthepredeterminedrates,expressedultimately inmoneyvalue,generallyusedinstandardcostingandbudgetarycontrolsystems.

♦ Variance Analysis:Theanalysisof variances arising in standard costing systemintotheirconstituentparts.

♦ Revision Variance:Itisthedifferencebetweentheoriginalstandardcostandtherevisedstandardcostofactualproduction.

♦ Basic Standard : Astandardfixedforafairlylongperiod.♦ Current Standard : Astandardfixedforashortperiod.♦ Estimated Cost : Anestimateofwhatthecostislikelytobeduringagivenperiod

of time.♦ Ideal Cost : Acostwhichshouldbeincurredduringaperiodunderidealcondi-

tions.Important Formulas♦ Material Variance : MaterialCostsVariance =(Std.qty×Std.Price)–(Actualqty×Actualprice) MaterialUsageVariance =Std.price(Std.Qty.–Actualqty.) MaterialPriceVariance =Actualqty.(Std.price–Actualprice) MaterialCostVariance =Materialusagevariance+Materialpricevariance MaterialMixVariance =SP(RSQ–AQ) MaterialYieldVariance =SP(SQ–RSQ)♦ Labour Variance : LabourCostVariance=(Std.time×Std.Rate)–(Actualtime×Actualrate) LabourEfficiencyVariance=Std.rate(Std.time–Actualtime) LabourRateVariance=Actualtime(Std.rate–Actualrate) LabourIdleTimeVariance=IdletimexStd.rate LabourCostVariance=LabourEfficiencyVariance+LabourRateVariance LabourMixVariance=SR(RSH–AH) LabourYieldVariance=SR(SH–RSH)♦ Fixed Overhead Variances: F.O.CostVariance=RecoveredOverhead–ActualOverhead F.O.ExpenditureVariance=BudgetedOverhead–ActualOverhead F.O.VolumeVariance=RecoveredOverhead–BudgetedOverhead F.O.EfficiencyVariance=RecoveredOverhead–StandardOverhead F.O.CapacityVariance=StandardOverhead–BudgetedOverhead F.O.CalendarVariance=SR(Actualno.ofworkingdays–Std.no.workingdays)



♦ Variable Overhead Variances V.O.Costvariance=RecoveredOverhead–ActualOverhead V.O.ExpenditureVariance=StandardOverhead–ActualOverhead V.O.EfficiencyVariance=RecoveredOverhead–StandardOverhead

TEST YOUR KNOWLEDGEMCQs based Questions

1. Understandardcostsystemthecostoftheproductdeterminedatthebeginningofproductionisits:(a) Directcost(b) Pre-determinedcost(c) Historicalcost(d) Actualcost

2. Thedeviationsbetweenactualandstandardcostisknownas(a) Multipleanalysis(b) Variablecostanalysis(c) Varianceanalysis(d) Lineartrendanalysis

3. Thestandardwhichisattainableunderfavourableconditionsis(a) Theoreticalstandard(b) Expectedstandard(c) Normalstandard(d) Basicstandard

4. Thestandardmostsuitablefromcostcontrolpointofviewis(a) Normalstandard(b) Theoreticalstandard(c) Expectedstandard(d) Basicstandard

5. Overheadcostvariancesis(a) The difference between overheads recovered on actual output - actual

overhead incurred.(b) Thedifferencebetweenbudgetedoverheadcostandactualoverheadcost.(c) Obtainedbymultiplyingstandardoverheadabsorptionratewiththedifference

betweenstandardhoursforactualoutputandactualhoursworked.(d) Noneoftheabove



6. Whichofthefollowingvarianceariseswhenmorethanonematerialisusedinthemanufactureofaproduct(a) Materialpricevariance(b) Materialusagevariance(c) Materialyieldvariance(d) Materialmixvariance

7. Ifstandardhoursfor100unitsofoutputare400@`2perhourandactualhourstakeare380@`2.25per,thenthelabourratevarianceis(a) `95(adverse)(b) `100(adverse)(c) `25(favourable)(d) `120(adverse)

8. Controllablevariancearebestdisposedoffbytransferringto(a) Costofgoodssold(b) Costofgoodssoldandinventories(c) Inventoriesofwork–in–progressandfinishedgoods(d) Costingprofitandlossaccount

9. Idletimevarianceisobtainedbymultiplying(a) Thedifferencebetweenstandardandactualhoursbytheactualrateoflabour

perhour(b) The difference between actual labour hours paid and actual labour hours

workedbythestandardrate(c) Thedifferencebetweenstandardandactualhoursbythestandardrateof

labourperhour(d) Noneoftheabove.

10. Basicstandardsare(a) Thosestandards,whichrequirehighdegreeofefficiencyandperformance.(b) Averagestandardsandareusefulinlongtermplanning.(c) Standards,whichcanbeattainedorachieved(d) Assumingtoremainunchangedforalongtime.

Theoretical Questions1. Discusstheprocessofsettingstandards.2. Discussthetypesofstandards.3. Howmaterialusagestandardisset4. Discussthevarioustypesoffixedoverheadvariances.



Practical Questions1. Formaking10kg.ofCEMCO,thestandardmaterialrequirementsis:

Material Quantity Rate per kg. (`)A 8 6.00B 4 4.00

DuringApril,1,000kgofCEMCOwereproduced.Theactualconsumptionofma-terialsisasunder:

Material Quantity (Kg.) Rate per kg. (`)A 750 7.00B 500 5.00

Calculate(A)MaterialCostVariance;(b)MaterialPriceVariance;(c)MaterialusageVariance.

2. Thestandardmixtoproduceoneunitofproductisasfollows: MaterialX 60units@`15perunit = 900 MaterialY 80units@`20perunit = 1,600 MaterialZ 100units @ `25perunit = 2,500 240units 5,000 DuringthemonthofApril,10unitswereactuallyproducedandconsumptionwas

asfollows: MaterialX 640units@`17.50perunit = 11,200 MaterialY 950units@`18.00perunit = 17,100 MaterialZ 870units @ `27.50perunit = 23,925 2460units 52,225 Calculateallmaterialvariances.3. Thefollowingstandardshavebeensettomanufactureaproduct:

DirectMaterial: (`)2unitsofA@`4perunit 8.003unitsofB@`3perunit 9.0015unitsofC@`1perunit 15.00

32.00DirectLabour:3hrs@`8perhour 24.00Totalstandardprimecost 56.00Thecompanymanufacturedandsold6,000unitsoftheproductduringtheyear.Directmaterialcostswereasfollows:



12,500unitsofAat` 4.40perunit18,000unitsofBat` 2.80perunit88,500unitsofCat` 1.20perunitThe companyworked17,500direct labourhoursduring the year. For 2,500ofthesehours,thecompanypaidat̀ 12perhourwhilefortheremaining,thewageswerepaidatstandardrate.Calculatematerialspricevarianceandusagevarianceandlabourrateandefficiencyvariances.

4. XYZCompanyhasestablishedthefollowingstandardsforfactoryoverheads. Variableoverheadperunit: `10/- Fixedoverheadspermonth `1,00,000 Capacityoftheplant20,000unitspermonth. Theactualdataforthemonthareasfollows: Actualoverheadsincurred `3,00,000 Actualoutput(units) 15,000units

Required: Calculateoverheadvariancesviz: (i) Productionvolumevariance (ii) Overheadexpensevariance5. Acompanyhasanormalcapacityof120machines,working8hoursperdayof25

daysinamonth.Thefixedoverheadsarebudgetedat` 1,44,000permonth.Thestandardtimerequiredtomanufactureoneunitofproductis4hours.InApril,20X2,thecompanyworked24daysof840machinehoursperdayandproduced5,305unitsofoutput.Theactualfixedoverheadswere` 1,42,000.

Compute:(i) Expensevariance (ii) Volumevariance(iii) Totalfixedoverheadsvariance.

6. Followinginformationisavailablefromtherecordsofafactory:

Budget ActualFixedoverheadforJune,20X2 ` 10,000 ` 12,000ProductioninJune,20X2(units) 2,000 2,100Standardtimeperunit(hours) 10 –ActualhoursworkedinJune – 21,000



Compute:(i) Fixedoverheadcostvariance,(ii) Expenditurevariance,(iii) Volumevariance.

7. XYZLtd.has furnishedyouthe following information for themonthofAugust,20X2:

Budget ActualOutput(units) 30,000 32,500Hours 30,000 33,000Fixedoverhead `45,000 50,000Variableoverhead `60,000 68,000Workingdays 25 26Calculateoverheadvariances.

8. S.V.Ltd.hasfurnishedthefollowingdata:Budget Actual, July

(20X2)No.ofworkingdays 25 27Productioninunits 20,000 22,000Fixedoverheads `30,000 `31,000Budgetedfixedoverheadrateis̀ 1.00perhour.InJuly,20X2,theactualhoursworkedwere31,500.Calculatethefollowingvariances:(i) Volumevariance.(ii) Expenditurevariance.(iii) Totaloverheadvariance.

9. Thefollowingdatahasbeencollectedfromthecostrecordsofaunitforcomput-ingthevariousfixedoverheadvariancesforaperiod:Numberofbudgetedworkingdays 25Budgetedman-hoursperday 6,000Output(budgeted)perman-hour(inunits) 1Fixedoverheadcostasbudgeted `1,50,000Actualnumberofworkingdays 27Actualman-hoursperday 6,300Actualoutputperman-hour(in-units) 0.9Actualfixedoverheadincurred `1,56,000



Calculatefixedoverheadvariances:(a) ExpenditureVariance (b) VolumeVariance, (c) FixedCostVariance.

10. J.K.Ltd.manufacturesNXEbymixingthreerawmaterials.Foreverybatchof100kg.ofNXE,125kg.ofrawmaterialsareused.InApril,20X2,60batcheswerepre-paredtoproduceanoutputof5,600kg.ofNXE.Thestandardandactualparticu-larsforApril,20X2,areasfollows:

Raw Mate-rials

Standard Actual Quantity of Raw Mate-rials Pur-chased

Mix Price per kg. Mix Price per Kg.

(%) (`) (%) (`) (Kg.)A 50 20 60 21 5,000B 30 10 20 8 2,000C 20 5 20 6 1,200

Calculateallvariances.ANSWERS/ SOLUTIONS

Answers to the MCQs based Questions1. (b) 2. (c) 3. (a) 4. (c) 5. (a) 6. (d)7. (a) 8. (d) 9. (b) 10. (d)Answers to the Theoretical Questions1. Pleasereferparagraph13.32. Pleasereferparagraph13.23. Pleasereferparagraph13.7.14. Pleasereferparagraph13.7.4Answers to the Theoretical Questions1.BasicCalculations

Standard for 1,000 kg. Actual for 1,000 kg.Qty. Rate Amount Qty. Rate AmountKg. (`) (`) Kg. (`) (`)

A 800* 6 4,800 750 7 5,250B 400* 4 1,600 500 5 2,500

Total 1,200 6,400 1,250 7,750(*A-8÷10×1000=800 B-4÷10×1000=400)



Calculation of Variances:(a)MaterialCostVariance = Std. cost for actual output – ActualcostMCV = 6,400–7,750=` 1,350(A)(b)MaterialPriceVariance = (SP–AP)×AQA =(6–7)×750 = `750(A)B =(4–5)×500 = `500(A)MPV = ` 1,250(A)(c)MaterialUsagesVariance=(SQ–AQ)×SP A =(800–750)×6 =`300(F) B =(400–500)×4 =`400(A) MUV =`100(A)Check MCV =MPV+MUV 1,350(A)=1,250(A)+100(A)

2.

MaterialStandard for 10 units Actual for 10 units

Qty.units

Rate(`)

Amount(`)

Qty.units

Rate(`)

Amount(`)

X 600 15 9,000 640 17.50 11,200Y 800 20 16,000 950 18.00 17,100Z 1,000 25 25,000 870 27.50 23,925

Total 2,400 50,000 2460 52,2251. MaterialCostVariance =Standardcost–Actualcost =`50,000–`52,225 MCV =`2,225(A)2.MaterialPriceVariance =(Std.Price–ActualPrice)×ActualQty. MaterialX =(15–17.50)×640 =`1,600(A) MaterialY =(20–18)×950 =`1,900(F) MaterialZ =(25–27.50)×870 =`2,175(A) MPV =`1,875(A)3.MaterialUsageVariance=(Std.Qty.–ActualQty.)×Std.Price MaterialX =(600–640)×15 =`600(A) MaterialY =(800–950)×20 =`3,000(A)



MaterialZ =(1,000–870)×25 =`3,250(F) MUV =`350(A)

Check MCV=MPV+MUV `2,225(A)=`1,875(A)+`350(A)4.MaterialMixVariance =(RevisedStd.Qty.–ActualQty.)×Std.Price MaterialX =(615*–640)×15 =`375(A) MaterialY =(820*–950)×20 =`2,600(A) MaterialZ =(1,025–870)×25 =`3,875(F) MMV =`900(F) *RevisedStandardQuantity(RSQ)iscalculatedasfollows:

MaterialX =

24002460 ×600=615units

MaterialY =24002460×800=820units

MaterialZ =24002460 ×1,000=1,025units

5.MaterialYieldVarianceForyieldvariance,certainbasiccalculationshavetobemadeasfollows:

StandardYieldVariance= ActualusageofmaterialsStandardusageperunitofoutput

= 2460

240=10.25units

SOP(Std.materialcostperunitofoutput)=`50,000÷10units=`5,000MaterialYieldVariance =(AY–SY)×SOP

MYV =(10–10.25)×5,000=`1,250(A)MaterialRevisedUsage(orSub-usage)Variance(MRUV)=(StandardQuantity–RevisedStandardQuantity)×StandardPrice

MaterialX =(600–615)×15 =`225(A) MaterialY =(800–820)×20 =`400(A) MaterialZ =(1,000–1,025)×25 =` 625(A) MRUV =` 1,250(A)Note:EitherMMVorMRUViscalculated.Thesetwoarealwaysequal.



Check MUV =MMV+MYV(OrMRUV) ` 350(A) =` 900(F)+` 1,250(A)or MCV =MPV+MMV+MYV(OrMRUV) ` 2,225(A) =` 1,875(A)+` 900(F)+` 1,250(A)

3. ForMaterialCostVariances

SQ × SP AQ × AP AQ × SPA 12,000×4=48,000 12,500×4.40=55,000 12,500×4=50,000B 18,000×3=54,000 18,000×2.80=50,400 18,000×3=54,000C 90,000×1=90,000 88,500×1.20=1,06,200 88,500×1=88,500

Total `1,92,000 `2,11,600 ` 1,92,500Variances:MaterialPriceVariance =Actualquantity(Std.price–Actualprice)Or, =(AQ×SP)–(AQ×AP)Or, =`1,92,500–` 2,11,600

=`19,100(A)MaterialUsageVariance =StandardPrice(Std.Quantity–ActualQuantity)Or, =(SP×SQ)–(SP×AQ)Or, =`1,92,000–`1,92,500=`500(A)ForLabourCostVariance:

SH × SR AH × AR AH × SRLabour (6,000×3)×`8=

1,44,0002,500×12=30,000

15,000×8=1,20,000

17,500×8=1,40,000

Total `1,44,000 `1,50,000 `1,40,000Variances:LabourRateVariance:ActualHours(Std.Rate–ActualRate)Or, =(AH×SR)–(AH×AR)Or, =`1,40,000–`1,50,000

=`10,000(A)LabourEfficiencyVariance: StandardRate(Std.Hours–ActualHours)Or, =(SR×SH)–(SR×AH)Or, =`1,44,000–`1,40,000

=`4,000(F)© The Institute of Chartered Accountants of India


4. Unutilisedcapacity : 20,000unitsless15,000units = 5,000unitsStdfixedoverheadsperunit = `5perunitProductionvolumevariance = 5,000units×`5 = `25,000(Adverse)Stdvariableoverheadsforactualproduction:`10×15,000units = `1,50,000Stdfixedoverheads = `1,00,000Totaloverheadsonstandardsforactualproduction=`2,50,000Actualoverheadsincurred = `3,00,000Overheadexpensevariance = `50,000

5. WorkingNotes:Budget Actual

1. Workinghourspermonth 24,000 20,1602. Productionunitspermonth=(Budget24,000÷4hrs,Ac-

tualgiven)6,000 5,305

3. Standardfixedoverheadrateperunit=`1,44,000÷6,000=`24

4. Standard fixed overhead rate per hour = `1,44,000 ÷24,000=`6

5. Standardfixedoverheadrateperday=`1,44,000÷25=`5,760

FixedOverheadVariances:ActualFixedoverheadincurred=`1,42,000(given)Budgetedfixedoverheadfortheperiod=`1,44,000.Standardfixedoverheadforactualproduction(Standardoutputforactualtime×StandardFixedOverheadperunit)=5,305×`24=`1,27,320.

Variances: (i) F.O.ExpenditureVariance =(Budgetedfixedoverhead–Actualfixed

overhead)=1,44,000–1,42,000 =`2,000(F)

(ii) TotalVolumeVariance =(Standardfixedoverhead–Budgetedfixedoverhead)

=1,27,320–1,44,000 =`16,680(A)



(iii)Fixedoverheadvariance =(Standardfixedoverhead–ActualFixedoverhead)

=1,27,320–1,42,000 =`14,680(A)Alternatively: ExpenditureVariance+VolumeVariance=2,000(F)+16,680(A)=`14,680(A)

6. For fixed overhead variances: ActualF.O.incurred(given) `12,000BudgetedF.O.fortheperiod `10,000StandardF.O. forproduction(Standardoutput foractual time×StandardFixedOverheadperunit)2,100units×{`10,000÷2,000units} `10,500(i) FixedOverheadVariance =StandardF.O.–ActualF.O.

=`10,500–`12,000=`1,500(A)

(ii) F.O.ExpenditureVariance =BudgetedF.O–ActualF.O.=`10,000–`12,000=`2,000(A)

(iii) F.O.VolumeVariance =StandardF.O–BudgetedF.O.=`10,500–`10,000=`500(F)

7. Basic Calculations:

Standardhoursperunit =unitsBudgetedhoursBudgeted =

30,00030,000 =1hour

Std.hrs.foractualoutput =32,500units×1hr=32,500

Standardoverheadrateperhour =hoursBudgeted

overheadBudgeted

Forfixedoverhead = 45,00030,000

=`1.50perhour

Forvariableoverhead = 60,00030,000

=`2perhour

Std.F.O.rateperday =`45,000÷25days=`1,800Recoveredoverhead =Std.hrs.foractualoutput×St.rateForfixedoverhead =32,500hrs.×`1.50=`48,750Forvariableoverhead =32,500hrs.×`2=`65,000



Standardoverhead =Actualhours×Std.rateForfixedoverhead =33,000×1.50=`49,500Forvariableoverhead =33,000×2=`66,000

Revisedbudgethours =days Budgetedhours Budgeted ×Actualdays

= 30,00025

×26=31,200hours

Revisedbudgetedoverhead(forfixedoverhead)=31,200×1.50=`46,800Calculation of variancesFixedOverheadVariances:(i) F.O.costVariance =RecoveredOverhead–ActualOverhead =48,750–50,000

=`1,250(A)(ii) F.O.ExpenditureVariance =BudgetedOverhead–ActualOverhead

=45,000–50,000 =`5,000(A)

(iii) F.O.VolumeVariance =RecoveredOverhead–BudgetedOverhead =48,750–45,000 =`3,750(F)

(iv) F.O.EfficiencyVariance =RecoveredOverhead–StandardOverhead =48,750–49,500 =`750(A)(v) F.O.CapacityVariance =StandardOverhead-RevisedBudgeted

Overhead =49,500-46800=`2,700(F)

(vi) CalendarVariance =

−

DaysBudgeted

DaysActual

×St.rateperday.

=(26–25)×1,800 =`1,800(F)VariableOverheadVariances(i) V.O.Costvariance =RecoveredOverhead–ActualOverhead

=65,000–68,000=`3,000(A)(ii) V.O.ExpenditureVariance =StandardOverhead–ActualOverhead =66,000–68,000=`2,000(A)(iii) V.O.EfficiencyVariance =RecoveredOverhead–StandardOverhead

=65,000–66,000=`1,000(A)© The Institute of Chartered Accountants of India


Check(i) F.O.CostVariance =Expenditurevariance+Volumevariance 1,250(A) =5,000(A)+3,750(F)

(ii) F.O.VolumeVariance =VarianceEfficiency

+VarianceCapacity

+VarianceCalendar

3,750(F) =750(A)+2,700(F)+1,800(F)(iii) V.O.CostVariance =ExpenditureVariance+EfficiencyVariance 3,000(A) =2,000(A)+1,000(A).

8. For Fixed Overhead VariancesActualfixedoverheadincurred `31,000Budgetedfixedoverheadfortheperiod 30,000Standardfixedoverheadforproduction(Standardoutputforactualtime×StandardFixedOverheadperunit)(`30,000÷20,000units)×22,000

33,000

Computation of Variances:(i) Fixed overhead expenditure variance: =Budgetedfixedoverhead–Actualfixedoverhead =`30,000–`31,000 = `1,000(A)(ii) Fixed overhead volume variance: =Standardfixedoverhead–Budgetedfixedoverhead =`33,000–`30,000 = `3,000(F)(iii) Fixed overhead variance: =Standardfixedoverhead–Actualfixedoverhead =`33,000–`31,000 = `2,000(F)

9. For Fixed overheads Variances:Actualfixedoverheadincurred=`1,56,000Budgetedfixedoverheadfortheperiod=1,50,000Standardfixedoverheadforproduction(Standardoutputforactualtime×Stand-ardFixedOverheadperunit)(6,300hrs×27days×0.9)×(`1,50,000÷`1,50,000units)=`1,53,090(a) Fixed Overhead

ExpenditureVari-ance

= Budgetedfixedoverhead–Actualfixedoverhead

= `1,50,000–`1,56,000=`6,000(A)



(b) Fixed OverheadVolumeVariance

= Standard fixedoverhead–Budgetedfixedoverhead

= `1,53,090–`1,50,000=`3,090(F)

(c) Fixed OverheadVariance

= Standard fixed overhead – Actualfixedoverhead

= `1,53,090–`1,56,000=`2,910(A)

10. Actualmaterialused=125kg×60=7,500kg.Actual cost of actual material used (AQ × AR) (`)

A 60% 4,500kg×`21= 94,500B 20% 1,500kg×`8= 12,000C 20% 1,500kg×`6= 9,000

7,500 1,15,500Standard cost of actual material used (AQ × SR) (`)

A 4,500kg×`20= 90,000B 1,500kg×`10= 15,000C 1,500kg×`5= 7,500

7,500 1,12,500Standard cost of material, if it had been used in standard proportion (Stand-ard Proportion × Standard Rate)

(`)A 50% 3,750kg×`20= 75,000B 30% 2,250kg×`10= 22,500C 20% 1,500kg×`5= 7,500

7,500 1,05,000Standard cost of production (SQ for actual production × SR)Standardcostofoutputfor100kg: (`)

A 62.50kg×`20= 1,250B 37.50kg×`10= 375C 25.00kg×`5= 125

125.00 1,750Standardcostforoutputof5,600kg.

=100

1,750 kg×5,600kg.=`98,000

MaterialPriceVariance=Standardcostofactualmaterialused–Actualcostofactualmaterialused=`1,12,500–`1,15,500=`3,000(A)



MaterialUsageVariance=Standardcostofproduction–Standardcostofactualmaterialused=`98,000–`1,12,500=`14,500(A)Note: MaterialPriceVariancecanbecalculatedatthetimeofpurchaseaswell.Inthatcase,materialvariancewillbeasfollows:Actual cost of material used

A 5,000kg×`21 =` 1,05,000B 2,000kg×`8 =` 16,000C 1,200kg×`6 =` 7,200

1,28,200Standard cost of material used

A 5,000kg×`20 =` 1,00,000B 2,000kg×`10 =` 20,000C 1,200kg×`5 =` 6,000

1,26,000MaterialPricevariance(ifcalculatedatthetimeofpurchase)=Standardcostofactualmaterialused–Actualcostofactualmaterialused=`1,26,000–`1,28,200=`2,200(A)


13 · Management of an organisation uses standard costing as a controlling tool for cost control and performance evaluation. Controlling is a principal function of manage-ment alongwith

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