Acc Standard Costing and Variance Analysis

8/3/2019 Acc Standard Costing and Variance Analysis

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Standard costing is a technique which is used in many industries, where production is of repetitive nature.

Standard costing is developed due to the shortcomings of historical costing. CIMA, London, defines standard costing as the predetermined cost based on technical estimates of materials, labour

and overheads for selected period of time and for the prescribed set of working conditions.

Standard costing is that technique in which the standard cost is determined before starting the production. Standard cost is a predetermined cost and such cost indicates what a product should cost. Standard cost is calculated by considering all the situations ideal in nature. Standard costs have been defined as the normal costs for normal production efficiency at normal level of output. Standard Cost

Standard cost is a predetermined cost which is compared in advance of production on the basis of specifications of all

the factors affecting costs and used in standard costing.

In other words, standard cost is a predetermined cost that should be attained under a given set of operating conditions.

Objectives Of Standard Costing1 To establish control 2- To set standards for various elements of cost 3- To fix responsibility

4- To make budgetary control more effective

Need For Standards

Cost control 2- Pricing decisions 3- Performance Appraisal 4- Cost awareness 5- Management by objective

Sales price variance =Actual quantity sold (Actual price Standard price)

Sales Volume VarianceIt is the portion of the sales value variance which is due to the difference between actual quantity of sales and

standard quantity of sales.

Sales Volume Variance = Standard price (Actual quantity of sales Standard quantity of sales)


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Advantages Of Standard Costing and limitations of standard costing

advantagesdisadvantages

Comparison and analysis of data

Management by exception and

Delegation of authority and responsibility

Cost consciousness

Better capacity to anticipate

Better economy, efficiency, and productivity

Preparation of periodical financial statements

Facilities budgeting

high degree of technical skill

egregation of variances into controllable and non-

controllable factors

duplication in recording,

either too strict or too liberal

.

Classification Of Variances1-Functional Basis 2- Measurement Basis 3- Result Basis 4- Controllability Basis

Absolute variance: Difference between the standard cost and the actual cost in terms of moneyis known as absolute variance.


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Relative variance: difference is expressed as a percentage of the standard cost, it is known asrelative variance

Material cost variance

Material cost variance = (Standard quantity of input for actual production SP) (Actual

quantity of input AP)

Material cost variance = Material price variance + Material usage varianceThe variance in the cost of materials i.e. the difference between the standard cost of materials for actual output and the

actual cost of materials would give the variance on account of materials. We call this the "Material Cost Variance".

This would give an idea of how much more or less cost had been incurred when the actuals are compared to plans.

However, it does not give a scope for pin pointing the responsibility for the variance and thereby take corrective actions.

We cannot identify whether the variance is on account of more or less purchase price being paid (in which case, the

purchases department should be held responsible) or on account of more or less quantity of materials being used (in

which case the production department should be held responsible) etc.

Therefore to enable derivation of data that would be useful, material cost variance is analysed further into its constituent

parts.

The analysis of material cost variance into its constituent parts gives an idea of the material variance in various other angles. This

possibility for anlaysis arises on account of the fact that material cost is a product of (thereby is influence by) two factors, i.e. the

quantity of materials and the price of materials .

All the variances involving materials which are collectively called "Material variances" and their inter relationships are depicted

in the illustration below:

This can be understood as the "Material Cost Variance" broken down into its constituent parts and the constituent parts further

broken down wherever possible.

Material price variance = Actual quantity (Standard price Actual price) 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.

If the actual price is higher than the standard price, it would result in adverse price variance and if the actual price islower than standard price, the result is favourable price variance.

Labour Rate VarianceThis is that portion of the labour cost variance which is caused by the use of actual wage rate other than

predetermined.

Labour rate variance = Actual labour time (Standard wage rate Actual wage rate)


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Variable overhead varianceDifference between the standard variable overheads and absorbed variable overheads is called variable overhead

variance.

If variable overhead absorbed to actual output is more or less than its standard variable overhead, this variance iscreated.

Overhead variance is the difference between the amount calculated at standard rate of variable overhead and theamount calculated at actual rate of variable overhead on the on the actual output.

Variable overhead variance = AO (SR AR)

= (AO SR) (AO AR)

= SVO AVO

Here, AO = Actual output, SR = Standard rate,

AR = Actual rate,

SVO = Standard variable overhead, and

AVO = Actual variable overheadFixed overhead variance

Fixed overhead variance is mainly concerned with over absorption or under absorption on fixed overheads.

As the fixed overheads are not affected by the volume of output, its absorption is done on actual output thepredetermined rate only.

Fixed overhead variance is caused due to the difference between standard fixed overhead and actual fixed overheadon actual output.

Fixed overhead variance = TSC TAC[AO SFO] [ AO AFO]

TSO TAO

Here, TSC = Total standard cost for actual output,TAC = Total actual cost,

AO = Actual output

SFO = Standard fixed overhead

AFO = Actual fixed overhead

TSO = Total standard overhead

TAO = Total actual overheadSales Value Variance

It is the difference between the standard value and the actual value of sales affected during a period.


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Variyance analysis

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. It involves two phases:

Variance are of four they are material variance labour variance variable overhead variyance and fixed

over head variance

MATERIAL COST VARIANCE

Material Cost Variance is the difference between the actual cost of direct materials used and standard

cost of direct materials specified for the output achieved.

This variance results from differences between quantities consumed and quantities of materials allowedfor production and from differences between prices paid and prices predetermined.

Can be computed using the formula:

Material Cost Variance = (SQ x SP) (AQ x AP)

where, AQ = Actual Quantity

AP = Actual Price

SQ = Standard Quantity for the actual output

SP = Standard Price

MATERIAL PRICE VARIANCE

A Materials Price Variance occurs when raw materials are purchased at a price different from standard

price.

It is that portion of the direct materials which is due to the difference between actual price paid and

standard price specified


Material Price Variance = (Standard Price Actual Price) x Actual Quantity

This variance is unfavourable when the actual price paid exceeds the predetermined standard price.

It is advisable that materials price variance should be calculated at the time of materials purchase rather

than when materials are used. This is quite beneficial from the viewpoint of performance measurement

and corrective action.


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LABOUR COST VARIANCE

Labour Cost Variance denotes the difference between the actual direct wages paid and standard direct

wages specified for the output achieved.


Labour Cost Variance = (SH x SR) (AH x AR)

where, AH = Actual hours , AR = Actual Rate , SH = Standard hours for actual output, SR =

Standard Rate

Standard time for actual output =

When the actual labour cost is more than standard cost, there will be adverse variance.

LABOUR RATE VARIANCE

A Labours Rate Variance is the difference between the standard labour rate specified and the actual

labour rate paid.

It is that portion of the direct Labour (wages) variance which is due to the difference between actual

Rate of pay paid and standard Rate specified


Labour Rate Variance = (Standard Wage Rate Actual Rate) x Actual Time

This variance is adverse when the actual wage rate paid exceeds the predetermined standard wage rate.

LABOUR EFFICIENCY VARIANCE

The Labour time or efficiency variance is the result of taking more or less time than the standard time specified for the

performance of a work.

It is that portion of the Labour cost variance which is due to the difference between the actual labour hour expended and

standard labour hours specified.


Labour Efficiency variance = (SH for actual output AH ) x Standard Rate

This variance is favourable when the total actual hours are less than the standard hours allowed.

Labour Cost Variance = Labour Rate Variance + Labour Efficiency Variance


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Direct Labour Cost Variance =Standard cost for actual output actual cost

Standard cost for actual output=Standard cost per unit x actual output

Direct Labour efficiency variance=Standard wage rate (standard time for actual output actual time

paid for)

Standard time for actual output=Standard hours x

Labour Cost Variance=Labour rate variance + Labour efficiency variance

Labour Efficiency Variance=Direct Labour Mix Variance + Idle Time Variance + Direct Labour Yield

Variance

VARIABLE OVERHEAD VARIANCES=Variable Overhead Variance represents he difference between

standard variable overhead (specified for actual units produced) and the actual variable overhead

incurred.


Variable OH Cost Variance = Standard Variable OH on actual production Actual

variable OH

OR

Variable OH Cost variance = (Actual time or standard hours for actual production x

Standard variable OH Rate) (Actual Variable OH)

Where, Standard variable OH Rate per unit or per hours = Budgeted OH

Budgeted output or hours

Solution Variable Overhead = Actual Production x Overhead Rate on actual

Production

Variable Overhead Cost Variance = [Standard Variable Overhead on

Actual Production Actual Variable

Overhead] or Recovered Variable

Overheads Actual Variable

Overheads


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Terms to be understood before calculating OH Variances:

1. Standard OH Rate per unit or per hour or Budgeted OH Rate per unit= Budgeted Overheads or per hour

Budgeted Output Units or Budgeted Hours

2. Recovered or Absorbed Overheads

= Standard OH Rate per unit x Actual Output or Standard OH Rate per hour x Standard

hours for actual output

3. Budgeted Overheads (for budgeted hours or budgeted output):

= Standard OH rate per unit x Budgeted output units or Standard overhead rate per hour

x budgeted hours.

4. Standard Overheads (for actual time or budgeted output for actual time)

= Standard OH Rate per unit x Standard output for actual time or Standard OH rate per

hour x actual hours

5. Actual Overheads = Actual OH Rate per unit x Actual Output or Actual Rate per

hours x Actual hours

6. Standard Hours for actual output

= Budgeted hours x Actual Output

Budgeted Output

7. Standard output for Actual Time

= Budgeted Output x Actual hours

Budgeted hours

Fixed Overhead Cost Variance is the difference between standard overhead recovered or absorbed foractual output and the actual fixed overhead.


Fixed OH Cost Variance = (Recovered or absorbed Fixed OH) (Actual Fixed OH)

OR

(Actual output) x (Standard OH Rate) (Actual OH Rate x

Actual Output)


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Acc Standard Costing and Variance Analysis

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