Standard Costing and Variance Analysis.pptx

This ppt is about Business Statistics topic - Standard Costing and Variance Analysis

1. STANDARD COSTING AND VARIANCE ANALYSIS

2. STANDARD COSTING According to Chartered Institute of Management Accountants (CIMA), London, ‘Standard cost is the predetermined cost based on technical estimates for materials, labour and overhead for a selected period of time for a prescribed set of working conditions’. Standard costing system involves the following steps:

3. Applicability of Standard Costing The application of standard costing requires certain conditions to be fulfilled. These are:

4. STANDARD COSTING vs BUDGETARY CONTROL Points of Similarity Points of Difference

5. Advantages of Standard Costing

6. Types of Standards Basic standards These are the standards which are established for an indefinite period of time. They are similar to an index number against which all later results are measured. Current Standards Such standards remain in operation for a limited period and are related to current conditions. These standards are revised at regular intervals. They are of three types: Ideal standard This is a theoretical standard which is rather not practicable to attain. Expected or practical standards This is a standard, which may be anticipated to be attained during a future period. Normal standards This is known as Past Performance Standard because it is based on the average performance in the past.

7. VARIANCE ANALYSIS Variance: According to CIMA, London, Terminology, Variance analysis can be defined as the process of computing the amount of, and isolating the cause of variances between actual costs and standard costs. Variances are the difference between a standard cost and the comparable actual cost incurred during a period. Favourable and Unfavorable Variances: Where the actual cost is less than standard cost, it is known as favourable or credit variance. On the other hand, where the actual cost is more than standard cost, the difference is referred to as unfavourable, adverse or debit variance. Controllable and Uncontrollable Variances: If a variance can be regarded as the responsibility of a particular person, with the result that his degree of efficiency can be reflected in its size, then it is said to be a controllable variance. If a variance arises due to certain factors beyond the control of management, it is known as uncontrollable variance.

8. MATERIAL COST VARIANCE Material cost variance is the difference between the actual cost of direct material used and stand­ard cost of direct materials specified for the output achieved. This variance results from differences between quantities consumed and quantities of materials allowed for production and from differences between prices paid and prices predetermined. This can be computed by using the following formula: Material cost variance = Standard Cost of Materials - Actual Cost of Materials = (SQ X SP) - (AQ X AP) Where AQ = Actual quantity AP = Actual price SQ = Standard quantity for the actual output  SP = Standard price

9. Material Price and USAGE Variance This is ‘that portion of the material cost variance which is due to the difference between the standard price specified and the actual price paid’. Material Usage (or Quantity) Variance This is ‘that portion of the material cost variance which is due to the difference between the standard quantity specified and the actual quantity used’. Material Price Variance

10. Example It is estimated that a product required 100 kgs of material at the rate of Rs.5 per kg. The actual consumption of material for manufacturing the same product came to 120 kgs . at the rate of Rs.4.75 per kg. Calculate material cost variances.

11. LABOUR VARIANCES Labour Cost Variance Classification of Labour Cost Variance Labour Rate Variance Labour Time (or Efficiency) Variance

12. Idle Time Variance Idle time variance occurs when workers are not able to do the work due to some reason during the hours for which they are paid. Idle Time Variance = Abnormal Idle Time x Standard Rate Suppose, in a factory 2,000 workers were idle because of a power failure. As a result of this, a loss of production of 4,000 units of product A and 8,000 units of product B occurred. Each employee was paid his normal wage (a rate of Rs 20 per hour). A single standard hour is needed to manufacture four units of product A and eight units of product B.

13. REPORTING OF VARIANCES Essentials of Effective Variance Report 1. The reports should be simple, clear and quick. If reports do not inform management, in a clear and unmistakable manner, of what has taken place and what action may be taken, they may not fully serve their purpose. 2. The reports should show the results of the period in view and assess the level of efficiency achieved. 3. The reports should show a comparison of results achieved with those planned. 4. The amount of details included in a report should vary according to the person for whom it is intended. For example, reports for top management should be in the nature of summaries of periodís activities while reports for department heads should be detailed and should show individuals responsible for sub-standard and above standard operations. 5. Variances arising out of each factor should be correctly segregated. Moreover, controllable variances should be separated from uncontrollable variances and analysis of uncontrollable variances should be made with the same care as for controllable variances. 6. Special attention should be focused on significant variances, thereby following the ‘principle of exception’ rule. 7. Wherever possible, the use of charts and graphs should be made in variance reports.

14. Standard Actual Price $ 10 per kg. $ 8 per kg. Quantity 200 kgs. 150 kgs . Let us understand this formula with the help of an example.

15. Product X is estimated to require 20 hours per unit. The standard rate per hour is Re 1. During a month, 2000 units were produced. For this 38000 hours were taken at Rs 1.05 per hour. Calculate the labor variances. If it is assumed that 100 hours were lost due to breakdown of machinery. What will be the idle time variance/

16. Material Variances :The standard mix to produce one unit of product is as follows: Material A 60 units @ ₹ 15 per unit Material B 80 units @ ₹ 20 per unit Material C 100 units @ ₹ 25 per unit During the month of July , 10 units were actually produced and consumption was as follows: Material A 640 units @ ₹ 17.50 per unit Material B 950 units @ ₹ 18.00 per unit Material C 870 units @ ₹ 27.50 per unit Calculate material variances