Standard Costing Final

7/29/2019 Standard Costing Final

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STANDARD COSTING & VARIANCE ANALYSIS

USES OF ACCOUNTING INFORMATIONAccounting information is quite useful to the Management in terms of arriving at a

decision and also in planning, control and performance evaluation. Accounting

information can be used for:

1. Projecting the profit level.

2. Analysing the impact of cost if sales volume drop by 10 %.

3. Measuring the efficiency of production.4. Measuring the performance of each segment.

5. Designing performance measurement systems to encourage employees to

participate for the betterment of the Organization

The answers to the above issues lie in the installation of a good accounting

system encompassing an effective Budgetary control and STANDARD COSTING

SYSTEM.Establishing a Standard costing system will be quite useful to the

Management in both planning and control. In the planning stage, it can assist the

Management with necessary data; at the control stage, it can be used to find the

deviations between the actual vis-a-vis the standards. The measurement of such

deviations is carried out through the technique ofVARIANCE ANALYSIS.

What is Costing ?

Costing (or cost-benefit analysis) is the process of analyzing the costs and benefits of

different options to determine

what approach should be taken to a particular conflict. what solution or resolution should be chosen once various options are being

considered.


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Meaning of Standard

When you want to measure some thing, you must take some parameter or yardstick

for measuring. We can call this as standard. What are your daily expenses? An

average of $50! If you have been spending this much for so many days, then this is

your daily standard expense.

The word standard means a benchmark or yardstick. The standard cost is a

predetermined cost which determines in advance what each product or service should

cost under given circumstances.

In the words of Backer and Jacobsen, Standard cost is the amount the firm thinks a

product or the operation of the process for a period of time should cost, based upon

certain assumed conditions of efficiency, economic conditions and other factors.

STANDARD COSTING

MEANING AND DEFINATION OF STANDARD COSTING TECHNIQUE

A Standard Cost is a planned cost for a unit of product or service rendered.

C.I.M.A (London) has defined standard cost as a pre-determined cost which is

calculated from managements standard of efficient operations and the relevant

necessary expenditure. It may be used as a basis for determination of prices and cost

control through variance analysis

According to C.I.M.A (London), standard costing is defined as The preparation

and use of standard costs, their comparison with actual costs and the analysis of

variances to their causes and point of incidence.

Wheldon hasdefined it in the following words: Standard Costing is a method of

ascertaining costs whereby statistics are prepared to show (a) The standard cost; (b)

the actual cost; and (c) the difference between these costs, which is teremed as

variance.


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Classification of Standards

The two principal considerations for classification of standards are :

Attainability of standards. Frequency with which the standards are revised.

Ideal standard

Ideal standard is fixed on the assumption of those conditions which may rarely exist.

This standard is notpracticable and may not be achieved.

This is the standard which represents a high level of efficiency. Ideal standard is fixed

on the assumption that favourable conditions will prevail and management will be at

its best. The price paid for materials will be lowest and wastes etc. will be minimum

possible. The labour time for making the production will be minimum and rates of

wages will also be low. The overhead expenses are also set with maximum efficiency

in mind. All the conditions, both internal and external, should be favourable and only

then ideal standard will be achieved.

Theoretic Normal

BasicCurrently

Attainable


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Basic

The changes in manufacturing costs can be measured by taking basic standard, as a

base standard cannotserve as a tool for cost control purpose because the standard isnot revised for a long time.

Basic standard is established for a long period and is not adjusted to the preset

conations. The same standard remains in force for a long period. These standards are

revised only on the changes in specification of material and technology productions. It

is indeed just like a number against which subsequent process changes can be

measured. Basic standard enables the measurement of changes in costs.

NormalThe normal standard concept is theoretical and cannot be used for cost control

purpose. Normal standard can be properly applied for absorption of overhead cost

over a long period of time.

Normal standard has been defined as a standard which, it is anticipated, can be

attained over a future period of time, preferably long enough to cover one trade cycle.

The standard attempts to cover variance in the production from one time to another

time. An average is taken from the periods of recession and depression.

Current

It is presumed that conditions of production will remain unchanged. In case there is

any change in price or manufacturing condition, the standards are also revised.

Current standard may be ideal standard and expected standard.

A current standard is a standard which is established for use over a short period of

time and is related to current condition. It reflects the performance that should be

attained during the current period. The period for current standard is normally one

year.

Revision of standards

We need to revise the standards which follow for better control. Even standards are

also subjected to change like the production method, environment, raw material, and

technology.


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Standards may need to be changed to accommodate changes in the organization or its

environment. When there is a sudden change in economic circumstances, technology

or production methods, the standard cost will no longer be accurate.

STEPS IN STANDARD COSTING

Standard costing involves:

The setting of standards

Ascertaining actual results

Comparing standards and actual costs to determine the variances

Investigating the variances and taking appropriate action where necessary.

PRELIMINARIES IN ESTABLISHING A SYSTEM OF

STANDARD COSTS

1. The establishment of cost centers with clearly defined areas ofresponsibility.

2. The classification of accounts, with provision for standard and actual costs with

variances.

3. The type of standard to be operated.

4. The setting of standard costs for each element of cost.


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Objectives of Standard Costing

To Establish Control. To Set Standard for various Elements of cost. To Fix Responsibility. To Make Budgetary Control more Effective.

The Need for Standards

Standards Are common in business Are often imposed by government agencies (and called regulations) Standard costs Are predetermined unit costs Used as measures of performance

Distinguishing Between Standards and Budgets

Standards and budgets are both Pre-determined costs Part of management planning and control A standard is a unit amount whereas a budget is a total amount Standard costs may be incorporated into a cost accounting system


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Standard v/s Historical Costing

Standard Costing

It is a predetermined cost. It is an ideal cost. It is a future cost, it can be used for cost control. It is used for the measurement of operational efficiency of the enterprises.

Historical costing

It is recorded after production. It is an actual or incurred cost. It is related to past, cannot be used for cost control. It is used to ascertain the profit or loss incurred during a particular period.

Standard Cost v/s Estimated Cost

Standard Cost

It is scientifically used & it is a regular system based upon estimation &survey.

Its object is to ascertain, what the cost should be? It is used for effective cost control & to take proper action to maximize. It is continuous process of costing & take into account all the manufacturing

process.

It is used where standard costing is in operation. It is more accurate than estimated cost.


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Estimated Cost

It is used as statistical data and it is based on lot of guess work. Its object is to ascertain what the cost will be? Its purpose is planning and ascertainment of cost for fixing sale price. It is used for a specific use i.e. fixing sale price. It is used where standard costing is not in operation. It is not accurate as it is based on past experience.


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Advantages of Standard Costing Technique

Increase in Efficiency. Detection of Efficient or Idle Centers. Ease in Managerial Decisions. Facilities Quality Control. Best use of Material. Facilities Budget Formation. Helps in Stock Valution. Knowledge of Workers Efficiency. Increase in Profits. Best use of Production capacity.

Standard costing is a management control technique for every activity. It is not only

useful for cost control purposes but is also helpful in production planning and policy

formulation. It allows management by exception. In the light of various objectives of

this system, some of the advantages of this tool are given below:

1. Efficiency measurement-- The comparison of actual costs with standard costsenables the management to evaluate performance of various cost centers. In

the absence of standard costing system, actual costs of different period may be

compared to measure efficiency. It is not proper to compare costs of different

period because circumstance of both the periods may be different. Still, a

decision about base period can be made with which actual performance can be

compared.

2. Finding of variance-- The performance variances are determined bycomparing actual costs with standard costs. Management is able to spot out the

place of inefficiencies. It can fix responsibility for deviation in performance. It


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is possible to take corrective measures at the earliest. A regular check on

various expenditures is also ensured by standard cost system.

3. Management by exception-- The targets of different individuals are fixed ifthe performance is according to predetermined standards. In this case, there is

nothing to worry. The attention of the management is drawn only when actual

performance is less than the budgeted performance. Management by exception

means that everybody is given a target to be achieved and management need

not supervise each and everything. The responsibilities are fixed and every

body tries to achieve his/her targets.

4. Cost control-- Every costing system aims at cost control and cost reduction.The standards are being constantly analyzed and an effort is made to improve

efficiency. Whenever a variance occurs, the reasons are studied and immediate

corrective measures are undertaken. The action taken in spotting weak points

enables cost control system.

5. Right decisions-- It enables and provides useful information to themanagement in taking important decisions. For example, the problem created

by inflating, rising prices. It can also be used to provide incentive plans for

employees etc.

6. Eliminating inefficiencies-- The setting of standards for different elements ofcost requires a detailed study of different aspects. The standards are set

differently for manufacturing, administrative and selling expenses. Improved

methods are used for setting these standards. The determination of

manufacturing expenses will require time and motion study for labor and

effective material control devices for materials. Similar studies will be needed

for finding other expenses. All these studies will make it possible to eliminate

inefficiencies at different steps.


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Limitation of Standard Costing

Determination by the Experts. Determination of Standard Cost is difficult in this age of inflation. Unsuitable in some Industries. Morale of Employees Lowered. Necessity of Budgetary Control. It cannot be used in those organizations where non-standard products are

produced. If the production is undertaken according to the customer

specifications, then each job will involve different amount of expenditures.

The process of setting standard is a difficult task, as it requires technical skills.The time and motion study is required to be undertaken for this purpose. These

studies require a lot of time and money.

There are no inset circumstances to be considered for fixing standards. Theconditions under which standards are fixed do not remain static. With the

change in circumstances, if the standards are not revised the same become

impracticable.

The fixing of responsibility is not an easy task. The variances are to beclassified into controllable and uncontrollable variances. Standard costing is

applicable only for controllable variances.

For instance, if the industry changed the technology then the system will not be

suitable. In that case, we will have to change or revise the standards. A frequentrevision of standards will become costly.


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Setting Standards

Normally, setting up standards is based on the past experience. The total standard cost

includes direct materials, direct labor and overheads. Normally, all these are fixed to

some extent. The standards should be set up in a systematic way so that they are used

as a tool for cost control.

Various Elements which Influence the Setting of Standards

Setting Standards for Direct Materials

There are several basic principles which ought to be appreciated in setting standards

for direct materials. Generally, when you want to purchase some material what are the

factors you consider. If material is used for a product, it is known as direct material.

On the other hand, if the material cost cannot be assigned to the manufacturing of the

product, it will be called indirect material. Therefore, it involves two things:

Quality of material Price of the material

When you want to purchase material, the quality and size should be determined. The

standard quality to be maintained should be decided. The quantity is determined by

the production department. This department makes use of historical records, and an

allowance for changing conditions will also be given for setting standards. A number

of test runs may be undertaken on different days and under different situations, and an

average of these results should be used for setting material quantity standards.

The second step in determining direct material cost will be a decision about the

standard price. Materials cost will be decided in consultation with the purchase

department. The cost of purchasing and store keeping of materials should also be

taken into consideration. The procedure for purchase of materials, minimum and

maximum levels for various materials, discount policy and means of transport are the

other factors which have bearing on the materials cost price. It includes the following:


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Cost of materials Ordering cost Carrying cost

The purpose should be to increase efficiency in procuring and store keeping of

materials. The type of standard used-- ideal standard or expected standard-- also

affects the choice of standard price.

Setting Direct Labor Cost

If you want to engage a labor force for manufacturing a product or a service for which

you need to pay some amount, this is called wages. If the labor is engaged directly to

produce the product, this is known as direct labor. The second largest amount of cost

is of labor. The benefit derived from the workers can be assigned to a particular

product or a process. If the wages paid to workers cannot be directly assigned to a

particular product, these will be known as indirect wages. The time required for

producing a product would be ascertained and labor should be properly graded.

Different grades of workers will be paid different rates of wages. The times spent by

different grades of workers for manufacturing a product should also be studied for

deciding upon direct labor cost. The setting of standard for direct labor will be done

basically on the following:

Standard labor time for producing Labor rate per hour

Standard labor time indicates the time taken by different categories of labor force

which are as under:

Skilled labor Semi-skilled labor Unskilled labor

For setting a standard time for labor force, we normally take in to account previous

experience, past performance records, test run result, work-study etc. The labor rate


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standard refers to the expected wage rates to be paid for different categories of

workers. Past wage rates and demand and supply principle may not be a safe guide for

determining standard labor rates. The anticipation of expected changes in labor rates

will be an essential factor. In case there is an agreement with workers for payment of

wages in the coming period, these rates should be used. If a premium or bonus

scheme is in operation, then anticipated extra payments should also be included.

Where a piece rate system is used, standard cost will be fixed per piece. The object of

fixed standard labor time and labor rate is to device maximum efficiency in the use of

labor.

Setting Standards of Overheads

The next important element comes under overheads. The very purpose of setting

standard for overheads is to minimize the total cost. Standard overhead rates are

computed by dividing overhead expenses by direct labor hours or units produced. The

standard overhead cost is obtained by multiplying standard overhead rate by the labor

hours spent or number of units produced. The determination of overhead rate involves

three things:

Determination of overheads Determination of labor hours or units manufactured Calculating overheads rate by dividing A by B

The overheads are classified into fixed overheads, variable overheads and semi-

variable overheads. The fixed overheads remain the same irrespective of level of

production, while variable overheads change in the proportion of production. The

expenses increase or decrease with the increase or decrease in output. Semi-variable

overheads are neither fixed nor variable. These overheads increase with the increase

in production but the rate of increase will be less than the rate of increase in

production. The division of overheads into fixed, variable and semi-variable

categories will help in determining overheads.


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Determination of Standard Costs

How should the ideal standards for better controlling be determined?

1. Determination of Cost Center

According to J. Betty, A cost center is a department or part of a department or an

item of equipment or machinery or a person or a group of persons in respect of which

costs are accumulated, and one where control can be exercised. Cost centers are

necessary for determining the costs. If the whole factory is engaged in manufacturing

a product, the factory will be a cost center. In fact, a cost center describes the productwhile cost is accumulated. Cost centers enable the determination of costs and fixation

of responsibility. A cost center relating to a person is called personnel cost center, and

a cost center relating to products and equipments is called impersonal cost center.

2. Current Standards

A current standard is a standard which is established for use over a short period of

time and is related to current condition. It reflects the performance that should be

attained during the current period. The period for current standard is normally one

year. It is presumed that conditions of production will remain unchanged. In case

there is any change in price or manufacturing condition, the standards are also

revised. Current standard may be ideal standard and expected standard.

3. Ideal Standard

This is the standard which represents a high level of efficiency. Ideal standard is fixed

on the assumption that favorable conditions will prevail and management will be at its

best. The price paid for materials will be lowest and wastes etc. will be minimum

possible. The labor time for making the production will be minimum and rates of

wages will also be low. The overheads expenses are also set with maximum efficiency

in mind. All the conditions, both internal and external, should be favorable and only

then ideal standard will be achieved.


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Ideal standard is fixed on the assumption of those conditions which may rarely exist.

This standard is not practicable and may not be achieved. Though this standard may

not be achieved, even then an effort is made. The deviation between targets and actual

performance is ignorable. In practice, ideal standard has an adverse effect on the

employees. They do not try to reach the standard because the standards are not

considered realistic.

4. Basic Standards

A basic standard may be defined as a standard which is established for use for an

indefinite period which may a long period. Basic standard is established for a longperiod and is not adjusted to the preset conations. The same standard remains in force

for a long period. These standards are revised only on the changes in specification of

material and technology productions. It is indeed just like a number against which

subsequent process changes can be measured. Basic standard enables the

measurement of changes in costs. For example, if the basic cost for material is Rs. 20

per unit and the current price is Rs. 25 per unit, it will show an increase of 25% in the

cost of materials. The changes in manufacturing costs can be measured by taking

basic standard, as a base standard cannot serve as a tool for cost control purpose

because the standard is not revised for a long time. The deviation between standard

cost and actual cost cannot be used as a yardstick for measuring efficiency.

5. Normal Standards

As per terminology, normal standard has been defined as a standard which, it is

anticipated, can be attained over a future period of time, preferably long enough to

cover one trade cycle. This standard is based on the conditions which will cover a

future period of five years, concerning one trade cycle. If a normal cycle of ups and

downs in sales and production is 10 years, then standard will be set on average sales

and production which will cover all the years. The standard attempts to cover variance

in the production from one time to another time. An average is taken from the periods

of recession and depression. The normal standard concept is theoretical and cannot be


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used for cost control purpose. Normal standard can be properly applied for absorption

of overhead cost over a long period of time.

6. Organization for Standard Costing

The success of standard costing system will depend upon the setting up of proper

standards. For the purpose of setting standards, a person or a committee should be

given this job. In a big concern, a standard costing committee is formed for this

purpose. The committee includes production manager, purchase manager, sales

manager, personnel manager, chief engineer and cost accountant. The cost accountant

acts as a co-coordinator of this committee.

7. Accounting System

Classification of accounts is necessary to meet the required purpose, i.e. function,

asset or revenue item. Codes can be used to have a speedy collection of accounts. A

standard is a pre-determined measure of material, labor and overheads. It may be

expressed in quality and its monetary measurements in standard costs.


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What is variances??

If actual costs are greater than standard costs the variance is unfavourable. If actual costs are less than standard costs the variance is favourable. The difference between the actual costs and the standard costs are known as

variances.

Standard costing and the related variances is a valuable management tool. If avariance arises, management becomes aware that manufacturing costs have

differed from the standard (planned, expected) costs.

Variance analysis involves two phases :

Computation of individual variances. Determination of the cause of each variance.

Classification of Variances

variances

Direct Material

Variances

Direct Labour

Variances


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Direct Material Variance

Direct Labour Variance

Direct Cost Variance (MCV)

Material Price

Variance (MPV)

Material Usage

Variance (MUV)

Material Mix

Variance (MMV)

Material Yield

Variance (MYV)

Direct Cost Variance

Rate Variance

Efficiency

Variance

Mix Variance Yield Variance

Idle Time

Variance


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ABBREVATIVES used in Direct Material Variance

SP = Standard Price per unit of material.

SQ = Standard Quantity of material to be used for actual output.

AP = Actual Price per unit of material.

AQ = Actual Quantity of material used.

SQM = Standard Quantity Mix.

AQM = Actual Quantity Mix.

AY = Actual Yield.

SY = Standard Yield from actual input.

SR = Standard Rate per unit of material.

TSC = Total Standard Cost for Actual Output

TAC = Total Actual Cost.

RSQ = Revised Standard Quantity.


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Direct Material Variance

The standard direct materials cost per unit is calculated as follows

Material Cost Variance - According to C.I.M.A., London Material costvariance is the difference between the standard cost of direct materials

specified for the output achieved and the actual cost of direct material used.

MCV = ( SP * SQ )( AP * AQ ) or ( TSCTAC )

TSC = Actual Output * SR

Material Price Variance - According to C.I.M.A., London Material pricevariance is that portion of the material cost variance which is due to the

difference between the standard price specified and the actual price paid.

MPV = ( SPAP ) * AQ

Material Usage Variance - According to C.I.M.A., London Material usagevariance is that portion of the material cost variance which is due to the

difference between the standard quantity specified and the actual quantityused.

MUV = ( SQAQ ) * SP

Varification - MCV = MPV + MUV


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Material Mix VarianceAccording to C.I.M.A., London Mix variance isthe portion of the direct material usage variance which is due to the difference

between the standard and actual composition of mixture.

Any one of the following situations may be there as regards material mix:

1. When total quantity of materials actually used is equal to the total standardquantity, but the mixture ratio differs;

2. When total quantity of materials actually used is not equal to the total standardquantity, and also the mixture ratio differs; or

3. When total quantity of materials actually used is not equal to the total standardquantity, but mixture ratio is same.

In the third case, as the mixture ratio is same, therefore material mix variance is not

to be calculated. In the first and second cases only, material mix variance is

calculated.

First Situation : MMV = ( SQMAQM ) * SP

Second Situation : MMV = ( RSQAQ ) * SP

RSQ ( Revised Standard Quantity)

RSQ = Total Actual Qty. Consumed * Std. Qty. of Particular Material

Total Std. Qty. of all the Materials

Example 1- Calculate Material Mix Variance

Standard Mix for one Unit of product X is:

Material A 50 kg. @ Rs. 10 per kg.

Material B 75 kg. @ RS. 20 per kg.

125 kg.

Actual Mix used was


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Material A 60 kg. @ Rs. 12 per kg.

Material B 65 kg. @ Rs. 18 per kg.

125 kg.

Solution-

MMV = ( SQMAQM ) * SP

Here, SQM = Standard Quantity Mix & AQM = Actual Quantity Mix

For Material A : ( 5060 ) * Rs. 10 = Rs. 100 ( A )

For Material B : ( 7565 ) * Rs. 20 = Rs. 200 ( F )

Rs. 100 ( F )

Here, (F) means Favorable (+) & (A) means Adverse (-)

Example 2 - Calculate Material Mix Variance

Standard Mix for one unit of Product X is : Material A 50 kg. @ Rs. 10 per kg.


125 kg.

Actual Mix used was : Material A 60 kg. @ Rs. 12 per kg.


130 kg.


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Solution

Here actual used (130 kg) & standard Mix (125 kg) are different also the actual mix

ratio (6:7) differs from the standard mix ratio (2:3). In such case RSQ will be

calculated as follows:

MMV = ( RSQAQ ) * SP

RSQ = Total Actual Qty. Consumed * Std. Qty. of Particular Material

Total Std. Qty. of all the Material

RSQ for Material A = 130 kg * 50/125 = 52 kg.

RSQ for Material B = 130 kg * 75/125 = 78 kg.

MMV for Material A = ( 5260 ) * Rs. 10 = Rs. 80 (A)

MMV for Material B = ( 7870 ) * Rs. 20 = Rs. 160 (F)

Rs. 80 (F)

Material Sub-usage VarianceWhen a product is produced from a mixture of two or more kinds of material, there

may arise material sub-usage variance. It should be noted that material sub-usage

variance is calculated only when quantity of wastage or output is not given. When

these quantities are given, this variance will be the same as material yield variance.

This variance is also known Material Revised Usage Variance or Material Quantity

Variance.

There can be two possibilities :

1. Total quantity of material consumed and standard quantity are not equal, butmix ratios are also different;

2. Total quantity of material consumed and standard quantity are not equal, butmix ratios are equal.

MSUV = ( SQRSQ ) * SP


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Material Yield VarianceAccording to C.I.M.A., London Material yieldvariance is that portion of direct material usage variance which is due to the

difference between the standard yield and the actual yield obtained

MYV = ( AYSY ) * SR

SR = Total cost of Standard Mix

Net Standard Output

Example- 3 Calculate Material Sub-usage Variance :

Standard Mix Actual Mix

Material A 100 kg. @ Rs. 5 per kg. 120 kg. @ Rs. 7 per kg.

Material B 150 kg. @ Rs. 10 per kg. 180 kg. @ Rs. 9 per kg.

250 kg. 300 kg.

Solution Here total of standard mix (250 kg) and actual mix (300 kg) are different,

but material mix ratio ( 2 : 3 ) is same. Therefore, RSQ for each material has been

calculated as follows :

Material Sub-Usage Variance = ( SQRSQ ) * SP

RSQ = Total Actual Mix * Particular Standard Mix Material / Total Standard Mix

RSQ for Material A = 300 * 100 / 250 = 120 kg

RSQ for Material B = 300 * 150 / 250 = 180 kg

AQ and RSQ of each material is same. Therefore,

MSUV for Material A = ( 100120 ) * Rs. 5 = Rs. 100 (A)

MSUV for Material B = ( 150180 ) * Rs. 10 = Rs. 300 (A)

Rs. 400 (A)


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Some authors use AQ in place of RSQ in the above formulate because RSQ and AQ

are equal.

Example 4Calculate Material Variance from the following details available-

Standard Actual for 10 Mixes

Material X 40 kgs. @ Rs. 6 Material X 600 kgs. @ Rs. 4

Material Y 60 kgs. @ Rs. 4 Material Y 400 kgs. @ Rs. 6

Process Loss 20% Process Loss 30%

Solution - First of all standards will be set for 10 mixes as follows :

Standard for 10 Mixes Actual for 10 Mixes

Material X : 40 * 10 * 6 = Rs 2400 600 * 4 = Rs 2400

Material Y : 60 * 10 * 4 = Rs 2400 400 * 6 = Rs 2400

Total 1000 kgs Rs 4800 1000 kgs Rs 4800

Loss 200 kgs 300 kgs

Output 800 kgs 700 kgs

(i) Calculation of Material Cost Variance (MCV) :MCV = TSCTAC

TSC = Actual Output * SR

SR = Total Cost of Standard Mix / Net Standard output

SR = 4800/800 = Rs. 6 per unit,

TSC = 700 * 6 = Rs. 4200, TAC = Rs. 4800(given)

(iv) Calculation of Material Mix Variance (MMV)

MMV = ( SQMAQM ) * SP


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MMV for Material X = ( 400600 ) * 6 = Rs. 1,200 (A)

MMV for Material Y = ( 600400 ) * 4 = Rs. 800 (F)

Rs. 400 (A)

(v) Calculation of Material Yield Variance (MYV)

MYV = ( AYSY ) * SR

MYV = ( 700800 ) * 6 = 600 (A)

Verification : MCV = MPV + MMV + MYV

600 (A) = 400 (F) + 400 (A) + 600 (A)

Material Price

Possible causes

Inefficient buying or failure to make timely purchases Increase in market price Emergency purchases Bulk purchases Change in transport cost Non-availability of standard quality Loss of cash discount Change in the method of material collection


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Direct Labour Variance

The standard direct labor cost per unit is calculated as follows

Labour Cost Variance - According to C.I.M.A. London, Labour CostVariance is the difference between standard cost of labour specified and actual

cost of labour employed.

LCV = ( Total Standard Labour CostTotal Actual Labour Cost )

Labour Rate Variance According to C.I.M.A. London, Labour RateVariance is that portion of labour cost variance which is due to the difference

between standard rate specified and actual rate paid.

LRV = ( Standard rate per hourActual rate per hour )

Labour Efficiency Variance - According to C.I.M.A. London, LabourEfficiency Variance is that portion of labour cost variance which is due to the

difference between standard labour hours for output achieved and actual

labour hours spent. it is also known as Labour Time Variance, Labour

Quantity Variance, Labour Usage Variance, Labour Spending Variance, etc.

LEV = ( Standard TimeActual Time ) * Standard rate per hour

Here, Actual time means hours obtained on subtracting abnormal idle-time hours from

labour hours actually paid for.

Labour Idle Time VarianceIdle time variance is that portion of labour costwhich arises due to abnormal idle time of the workers specified. This idle time


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is possible due to many reasons, such as, workers sitting free because of

machine break-down, power failure, etc. it should be noted that this variance

always shows adverse position.

LITV = ( Abnormal Idle Time * Standard rate per hour )

Varification - LCV = LRV + LEV + LITV

Labour Yield Variance - When the actual yield is less or more than thestandard yield, it gives rise to labour yield variance.

LYV = ( Actual YieldStandard Yield ) * Standard rate per unit

Here, Standard Yield = Total actual time * Std. yield from Std. mix

Total standard time

Standard rate per unit = Std. cost of standard mix / Std. yield from Std. mix

Example5 Calculate Labour Yield Variance from the following details :

Standard Actual

Skilled 180 workers @ Rs. 3 per hour 160 workers

Unskilled 120 workers @ Rs. 1 per hour 140 workers

Budgeted hours for one month 200. actual hours during the month 180; Budgeted

production 5,000 units less standard loss 20%, Actual production 4,200 units.

Solution - Standard production (yield) = 5,000 units20% (1,000) = 4,000 units

Actual production (AY) = 4,200 units

Calculation of Standard Hours Calculation of Actual Hours

Budgeted hours No. of workers Total Hr Actual hour No. of worker Total Hr

Skilled 200 * 180 = 36,000 180 * 160 = 28,800

Unskilled 200 * 120 = 24,000 180 * 140 = 25,200


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Total 300 60,000 300 54,000

Labour Yield Variance = ( AYSY ) * SR per unit

Standard Yield (SY) = Total actual time * Std. yield from Std. mix

Total standard time

SY = 54,000 hours * 4,000 units / 60,000 hours = 3,600 units

SR = Standard cost of standard mix / Standard yield from standard mixStandard

Wages :

Skilled workers = 36,000 hours * Rs. 3 = Rs. 1,08,000

Unskilled workers = 24,000 hours * Rs. 1 = Rs. 24,000

Total = Rs. 1,32,000

SR = Rs. 1,32,000 / 4,000 = Rs. 33

LYV = ( 4,2003,600 ) * Rs. 33 = Rs. 19,800 (F)

Labour Mix Variance - Different types of workers are generally required in aproduction, e.g., skilled, unskilled, men, women, children, etc. keeping in view

the production efficiency of the factory and to control the labour cost, a

standard mix ratio is specified for various type of workers. But in actual

practice it is not possible to follow this standard because of some difficulties (

such as non-availability of desired type of workers, etc. ) Thus, labour mix

variance arises. It is also known as Gang Composition Variance.

It can be calculated in following two situations :

1. When the totals of standard labour mix and actual labour mix are same but thetwo mix ratios are different.

2. When the totals of standard labour mix and actual labour mix are different butthe two mix ratios are also different.


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When the totals of standard labour mix and actual labour mix are different but the two

mix ratios are same, there will be no labour mix variance.

First Situation LMV = ( Standard time mixActual time mix ) * Std. rate per hour.

Second Situation LMV = ( RSTActual Time ) * Standard rate per hour

Here, RST ( Revised Standard Time )

RST = Total actual time * Standard time of particular labour

Total standard time of all the labour

Example 6The budget of labour hours for the week ending June 30, 2011 is of 50

hours. The other details are as follows ;

Standard Actual

Grade A 100 workers @ Rs. 3 per hour 120 workers @ Rs. 2.50 per hour

Grade B 200 workers @ Rs. 1 per hour 180 workers @ Rs. 1.50 per hour

The actual production is for 50 hours during the week. Calculate Labour Mix

Variance.

Solution - Calculation of Standard Time Calculation of Actual Time

Grade A workers 100 * 50 = 5,000 Hours 120 * 50 = 6,000 Hours

Grade B workers 200 * 50 = 10,000 Hours 180 * 50 = 9,000 Hours

Total 15,000 Hours 15,000 Hours

As the total of standard labour time mix (15,000 hours) and actual labour time mix

(15,000 hours) is same, but standard labour mix ratio (1 : 2) and actual labour mix

ratio (2 : 3) are different, therefore situation first is applicable

Labour Mix Variance = ( Standard time mixActual time mix ) * Std. rate per hour

LMV for Grade A workers = ( 5,0006,000 ) * Rs. 3 = Rs. 3,000 (A)


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LMV for Grade B workers = ( 10,0009,000 ) * Rs. 1 = Rs. 1,000 (F)

Total = Rs. 2,000 (A)

Example7 In above Example No. 6 let assumed that the actual number of grade B

workers is 210 in place of 180. then calculate labour mix variance.

Solution- Calculation of Standard Time Calculation of Actual Time

Grade A workers 100 * 50 = 5,000 Hours 120 * 50 = 6,000 Hours

Grade B workers 200 * 50 = 10,000 Hours 210 * 50 = 10,500 Hours

Total 15,000 Hours 16,500 Hours

As the totals of standard labour time mix (15,000 hours) and actual labour time mix

(16,500 hours) are different, and standard labour mix ratio (1 : 2) and actual labour

mix ratio (60 : 105) are also different, therefore second situation applicable

Labour Mix Variance = ( RSTAT ) * SR

RST = Total actual time * Standard time of particular labour

Total standard time of all the labour

RST for Grade A workers = 16,500 * 5,000 / 15,000 = 5,500 hours

RST for Grade B workers = 16,500 * 10,000 / 15,000 = 11,000 hours

LMV for Grade A workers = ( 5,5006,000 ) * Rs. 3 = Rs. 1,500 (A)

LMV for Grade B workers = ( 11,00010,500 ) * Rs. 1 = Rs. 500 (F)

Total = Rs. 1,000 (A)

Example8 Calculate Direct Labour Variance from the following :

Standard Actual

Workman A : 20 hours @ Rs. 3 = Rs. 60 30 hours @ Rs. 4 = Rs. 120

Workman B : 20 hours @ Rs. 7 = Rs. 140 25 hours @ Rs. 6 = Rs. 150


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40 hours Rs. 200 55 hours Rs. 270

In actual production, 3 hours (included in above) have been lost on account of

machine breakdown.

Solution

(i) Labour Cost Variance = Total Standard labour CostTotal Actual LabourCost

LCV = ( Rs. 200Rs. 270 ) = Rs. 70 (A)

(ii) Labour Rate Variance = ( Std. rate per hrActual rate per hr ) * Actual time

LRV for A = ( Rs. 3Rs. 4 ) * 30 hours = Rs. 30 (A)

LRV for B = ( Rs. 7Rs. 6 ) * 25 hours = Rs. 25 (F)

Rs. 5 (A)

(iii) Labour Efficiency Variance = ( Standard timeActual time ) * SR per hour

LEV for A = ( 20 hours27 hours ) * Rs. 3 = Rs. 21 (A)

LEV for B = ( 20 hours22 hours ) * Rs. 7 = Rs. 14 (A)

Rs. 35 (A)

(iv) Labour Idle time Variance = Idle time * Standard Rate per hour

LITV for A = 3hours * Rs. 3 per hour = Rs. 9 (A)

LITV for B = 3 hours * Rs. 7 per hour = Rs. 21 (A)

Rs. 30 (A)

Verification

Labour Cost Variance = Labour rate Variance + Labour Efficiency Variance +

Labour Idle time Variance

Rs. 70 (A) = Rs. 5 (A) + Rs. 35 (A) + Rs. 30 (A)


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Labour Efficiency

Possible causes

Inefficient/Untrained workers Machinery breakdown Poor quality of material Inefficient supervision Hours lost in waiting, delay in routing material, tools, instructions and

improper production scheduling

Poor working conditions Change in design, quality standard of product.

Conclusion

A standard cost is a predetermined cost of manufacturing, servicing, or marketing an item

during a given future period

It is based on current and projected future conditions

The norm is also dependent on quantitative and qualitative measurements

Standards may be based on engineering studies looking at time and motion.

The formulated standard must be accurate and useful for control purposes.

Standard Costing Final

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