Developing or setting standards

8/7/2019 Developing or setting standards

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Developing or setting standards

All factors related with standards setting should be considered in the establishment of

standards. Standards must be established for a definite period of time so that they canbe effective in performance evaluation, control and analysis of cost.

Standards are developed for:

Materials:

Material quantity standardMaterials price standard

Labor :

Labor usage standard

Labor cost standard

Overhead: Requires the determination of

1.Standard capacity

2.Standard overhead cost for this capacity

Standard overhead rate = Standard Overhead

Standard production


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Variance analysis

Variance is the difference between the standard cost and the comparable actualcost incurred during a period.

Variance analysis involves two phases:

Computation of individual variance.

Determination of the causes of each variance.

Material variance:

Material cost variance

Usage variance Price variance

Mix variance yield variance


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Material cost variance:

Difference between the actual cost of direct material used and standard cost of directmaterials specified for the output achieved.

This variance results from differences between quantities consumed and quantities ofmaterials allowed for production and from differences between prices paid and pricespredetermined.

This can be computed by using the below formula:

Material cost variance = (AQ*AP) (SQ*SP)

Where AQ = Actual quantity

AP = Actual price

SQ = Standard quantity of the actual output

SP = Standard price

Material usage variance:

Results when actual quantities of raw materials used in production differs fromstandard quantities that should have been used to produce the output achieved.


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Material quantity variance :

(Actual quantity Standard quantity) * Standard price

Material usage variance is favorable when the total actual quantity of direct materials used is lessthan the total standard quantity allowed for the actual output.

Standard material cost per unit: Materials issued:

Material A 2 pieces @ Rs 1.00 = 2.00 Material A 2050 pieces

Material B 3 pieces @ Rs 2.00 = 6.00 Material B 2980 pieces

Rs 8.00 Units completed 1000

Solution:

Material A = (2050 2000) * Rs 1.00 = Rs 50Material B = (2980 3000) * Rs 2.00 = Rs 40

Total Rs 10

Material price variance:

Occurs when the raw materials are purchased from the price different from standard price.

Material price variance:

(Actual price Standard price) * Actual quantity

Material price variance is unfavorable when the actual price paid exceeds the predeterminedstandard price.


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For the previous example that material A was purchased at the rate of RS 1.00 andmaterial B was purchased at the rate of Rs 2.10.

Solution:

Material A = (1.00 1.00) * 2050 = 0

Material B = (2.10 2.00) * 2980 = Rs 298

Material mix variance:

A mix variance will result when the materials are not actually placed into production inthe same ratio as the standard formula.

For instance, if a product is produced by adding 100 kg of raw material A and 200kg ofraw material B, the standard material mix ratio is 1:2. Actual raw materials used mustbe in this 1:2 ratio, otherwise a material mix variance will be found.

Material mix variance:

(Actual mix Revised standard mix of actual input) * Standard price

Revised standard proportion is calculated as follows:

Standard mix of a particular material * Actual input

Total standard quantity


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Material yield variance:

It explains the remaining portion of the total material quantity variance.

The total of material mix variance and the material yield variance equals materials

quantity or usage variance. When there is no materials mix variance, the materials

yield variance equals the total material quantity variance.

Material yield variance:

(Actual yield Standard yield specified) * Standard cost per unit

Standard input = 100kg

Standard yield = 90kg

Standard cost per kg of output = Rs 20

Actual input = 200kgActual yield = 182 kg

Compute the yield variance.


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Solution: Standard yield for the actual input = 90\100 * 200 = 180 Kg.

Yield variance = (182 180) * 20 = 2 * 20 = 40


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ABC company uses a standard cost system and manufactures product Z.Standard cost per

1000kg of output is given as under:

aterial Quantity (kg) Price(Rs)

A 800 2.5

B 200 4

200 1

In arch 2007, the company produces 2,00,000 kg of output. Actual consumption was:

aterial Consumption(kg) Price(Rs)

A 157000 2.4

B 38000 4.2

36000 1.1

Calculate material variance


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Solution: Standard material cost of 200000kg of output

Standard quantity(kg) Standard price(Rs) SQ*SP(Rs)

A 800*200= 160000 2.5 400000

B 200*200= 40000 4 160000

C 200*200= 40000 1 40000

240000 600000

Actual material cost of 200000kg of output

AQ(kg) AP(Rs) AQ*AP(Rs)

A 157000 2.4 376800

B 38000 4.2 159600

C 36000 1.1 39600

231000 576000

1.Material cost variance

(SQ*SP)-(AQ*AP)

600000-576000

Rs 24000

2.Material price variance

AQ(SP-AP)

A 157000(2.50-2.40) 15700(F)

B 38000(4-4.20) 7600(A)

C 36000(1-1.1) 3600(A)

MPV Rs4500


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3.Material usage variance

SP(SQ-AQ)

A 2.5(160000-157000) 7500(F)

B 4(40000-38000) 8000(F)

C 1(40000-36000) 4000(F)MUV Rs19500(F)

MCV=MPV+MUV

4500(F)+19500(F)

Rs24000(F)

4.Material mix varianceSQ(Aqin std proportin_AQ)

A 2.5(154000_157000) 7500(A)

B 4(38500_38000) 2000(F)

C 1(38500_36000) 2500(F)

Rs3000(A)

5.Material yield variance(SQ*SQP/Output)*(Expected output from AQ-Actual output)

(600000/200000)*((200000/240000)*231000)-200000)

Rs22500

MUV=MMV+MYV

3000(A)+22500(F)

Rs19500(F)

Developing or setting standards

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