m7 Macs Final

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MODULE 7

STANDARD COSTING

&

VARIANCE ANALYSIS

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Standard Cost

It is a predetermined cost. It is a determination

in advance of production, what should be the

cost.

When the standard costs are used for the

purposes of cost-control, the technique is knownas the standard costing.

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Defn. Standard CostICMA

Standard cost is the predetermined cost based on

a technical estimate for materials, labour and

overhead for a selected period of time and for a

prescribed set of working conditions.

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Defn. Standard Costing

It is the preparation of standard costs and

applying them to measure the variations from

actual costs and analysing the causes of variations

with a view to maintain maximum efficiency in

production. It is a technique which uses

standards for costs and revenues for the purpose

of control through variance analysis.

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LIMITATIONS OF STANDARD COSTING

1. It is costly, as the setting of standards needs high

technical skill.

2. Keeping of up-to-date standard is a problem. Periodic

revision of standard is a costly thing.

3. Inefficient staff is incapable of operating the system.

4. Since it is difficult to set correct standards, it is difficult

to ascertain correct variance.

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5. Industries, which are subject to frequent changes in

technological process or the quality of material, need aconstant revision of standard. But revision of standard is

more expensive.

6. For small concerns, standard costing is expensive.

7. It is difficult to apply this method where producing takes

more than one accounting period. Standard costing may not

be effective in industries which deal in non-standardised

products or jobs according to customers requirements.

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TECHNIQUE OF STANDARD COSTING

MAY COMPRISE:

Ascertainment of standard costs.

Measurement of actual costs.

Comparison of the actual costs with the standard costs to

find our the variances.

Analysis of variances

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NEED FOR SETTING STANDARDS

Standards are usually set for a six-or-twelve

month period. Sometimes a longer period is used

but rarely a shorter period. The success of

standard costing depends upon the establishment

of correct standards and standards should be

established for each element of cost.

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All factors related with standards-setting should be

considered in the establishment of standards.

whatever methods is used, standards must be established

for a definite period of time so that they can be effective

in performance evaluation, control and analysis of costs.

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SETTING OF STANDARDS FOR MATERIALS

Direct Material Cost: Standard material cost is equal to

the standard quantity multiplied by the standard price.

The setting of standard costs for direct materials

involves:

(i) fixation of standard material quantities

(ii) standard material prices.

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Standard material quantity: In ascertaining standard

quantity of materials , the standard specification of materials

should be planned by the engineering department after

consulting the past records. While setting standards an

allowance should be made for the normal wastage of

materials. The purpose of determining standard quantity of

materials should be to achieve maximum economies in

material usage. 11


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SETTING OF STANDARDS FOR MATERIALS

The standard prices of materials should be determined for the

various types of material needed for the production. This is

done by the cost accountants in collaboration with the

purchase department.

Standard price for each item of material is established after

carefully studying the market conditions and forecasting the

trend of prices for a future period.

The object of fixing standard prices.

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NEED FOR SETTING STANDARDS

Labour Standards:

As in the case of direct materials, labour standards are also

established for both cost and quantity (efficiency). For standard

cost purposes, direct labour is treated separately from indirect

labour, which is included in the factory overhead. Two

standards are usually developed for labour costs:

(i) Labour usage ( or efficiency) standard

(ii) Labour cost ( or rate) standard

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Standard Costing Vs. Budgetary Control

To establish S.Costs,

budgeting is essential forforecasting the level ofoutput.

Standards are based on

technical assessments It is applied to

manufacturing of aproduct, process or

providing a service. S.costs set up targets

which are to be attainedby actual performance.

Budgetary control can be

prepared on the basis ofpast figures adjusted tofuture trends.

Budgets are based on

past actuals adjusted tofuture trends

Deals with theoperations of a dept of

business as a whole. Set up maximum limits

of expenses above whichthe actual expenditure

should no exceed. 14


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S. costs are projection of

cost accounts

It reveals Variance

Analysis in detail

according to theiroriginating causes,

They say what the costs

should be under specific

conditions of production

performance

Budgets are projection of

financial accounts

Variances are not

revealed through the

accounts but are revealedin total

Budgets are anticipated

or expected costs meant

to be used for forecastingrequirements of material,

labour, cash, etc.

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VARIANCE ANALYSIS

The deviations of the actual cost or profit or sales from the

standard cost or profit or sales is known as variance.

When actual cost is less than standard cost or actual profit is

better than standard profit it is known as favourable variance

& its a sign of efficiency of the orgn.

When actual cost is more than standard cost or actual profit or

turnover is less than standard profit or turnover it is called

unfavourable or adverse variance & its an indicator of

inefficiency of the orgn.16


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Analysis of variance is done with respect to the

each element of cost and sales following; viz

1. Direct material variances

2. Direct labour variances

3. Overhead variances

4. Sales variances

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MATERIAL VARIANCES

1. Material Cost Variance

2. Material price variance

3. Material usage or quantity variance

4. Material mix variance

5. Material yield variance

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MCV= (SQ x SP AQ x AP)

MPV=AQ(SR-AR)

MYV=

SR(AY-SY)MMV=SR(SQ-AQ)

or SR(RSQ-AQ)

MUV= SR(SQ-AQ)

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MATERIAL VARIANCES

MCV = MPV + MUV

MUV = MMV + MYV

MCV = MPV = MMV + MYV

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