Standard Costing & Variance Analysis · 2021. 1. 10. · Standard Costing & Variance Analysis...

Standard Costing & Variance Analysis

Chaturanga Ratnasinghe

BSc (Eng), MBA (Aus), ACA, ACMA, SAT,

CIMA (passed finalist)

infinitylearningspace.lk

Standard Costing

Objectives of Standard Costing

1. Providing a basis for assessing performance and efficiency

2. Controlling costs by assigning standards and scrutinizing variances

3. Assistance in setting budgets

4. Being readily available, can be used as a substitute for actual unit costs. Thereby can be used in WIP valuations, decision making and pricing.

5. For motivation purpose of staff

6. Providing guidance on possible methods of improving performance


Standard Costing

Types of Standards

1. Basic Standards

2. Current standards

3. Ideal Standards

4. Currently Attainable Standards

Standard Cost Card• The standard cost card provides the unit cost if standard quantities of

resources were used at standard prices.


Cost Variances

Direct (Raw) Material Cost Variances

Material Price Variance = Actual Qty {Std Price - Actual Price}

Material Usage Variance = Std Price {Std Qty for actual production – Actual Qty}

Total Direct Material Variance = Material Price Variance + Material Usage Variance

If multiple raw materials are used, Usage variance can be further divided into Material Mix Variance and Material Yield Variance (discussed later)


Cost Variances

Direct (Raw) Material Cost Variances

Question 1

Product X uses a standard direct material qty of 20 kg of Material ‘A’ at Rs. 50 /- per kg. During the month of January, 2,000 units of ‘X’ was produced using 41,200 kg of material ‘X’ at a cost of Rs. 1,890,000/-.

Calculate:

• Material Price Variance

• Material Usage Variance

• Total Material Variance


Cost VariancesDirect (Raw) Material Cost VariancesQuestion 2

T Ltd. uses a standard costing system and following extracts have been made from its standard cost card.

9 kg @ Rs. 0.70 = Rs. 6.30 per unit

Budgeted production in February was 750 units. Following actual data was available later on.

Actual production = 780 units; Material purchased = 7,100 kg at Rs. 5,200; Material issued for production = 6,950 kg; Calculate material cost variances


Cost Variances

Labour Cost Variances

Labour Rate Variance = Actual hrs {Std Rate - Actual Rate}

Overall Labour Efficiency Variance = Std Rate {Std hrs for actual production (paid) – Actual hrs}

a) Idle Time Variance = Std Rate x Idle Time= Std Rate x (Paid no of hrs – Worked no of hrs)

b) Labour Efficiency Variance = Std Rate {Std hrs for actual production (worked) – Actual

hrs}


Cost Variances


Question 1The budget for product Z includes labour cost of Rs. 117,600/- , based on 4 hours per unit. During April, 3350 units were produced which was 150 units less than the budget. Labour cost incurred was Rs. 111,850/-and the actual no of labour hours worked was 13,450.

Calculate: Labour Rate VarianceLabour Efficiency Variance


Cost Variances


Question 2The standard cost card of Product ‘A’ reveals 3 hours of skilled labour required at Rs. 25 per hour. During the last month, 5,000 units of ‘A’ were produced at a cost of Rs. 400,000/-. (20,000 hours were paid for but only 18,000 hours were actually worked).

Calculate: • Labour Rate Variance• Overall Labour Efficiency Variance • Idle time variance• Real efficiency variance


Cost Variances

Variable Production Overhead Cost Variances

VPOH Expenditure Variance = Actual hrs {Std Rate - Actual Rate}

VPOH Efficiency Variance = Std Rate {Std hrs for actual production (worked) – Actual hrs}

Note: Here rate means Overhead absorption / recognizing rate


Cost Variances


Question 1

The standard cost card of Product ‘A’ displays 3 hours of labour required per unit at a variable overhead cost of Rs. 15/- per hour. During the last month, 5,000 units of ‘A’ were produced at an actual overhead cost of Rs. 210,000/- for 18,000 hours of work.

Calculate: • VPOH Expenditure Variance• VPOH Efficiency Variance


Cost Variances


Question 2

Extracts from V Ltd. is given below.

Calculate: • VPOH Expenditure Variance• VPOH Efficiency Variance

Budget Actual

Production 520 units 560 units

VPOH cost Rs. 3,120 Rs. 4,032

Labour hours worked 1,560 2,240


Cost Variances

Fixed Production Overhead (FPOH) Cost Variances

FPOH Expenditure Variance = Budgeted FPOH – Actual FPOH

FPOH Volume Variance = Standard FOAR per unit (Actual qty – Budgeted qty)

FPOH Volume Variance = Standard FOAR per hour (Actual hrs – Budgeted hrs)

FOH Volume Efficiency Variance = Standard FOAR per hour (Std hrs for actual production – Actual hrs)


Cost Variances

Fixed Production Overhead (FPOH) Cost Variances

Question

A company budgeted to produce 1,000 units of product Y during the month of December. Expected time per unit is 5 hours and the budgeted FPOH is Rs. 200,000/-. Actual FPOH turned out to be Rs. 204,500/-. 1,100 units had been manufactured in 5,400 hours of work.

Calculate: • FPOH Expenditure Variance• FPOH Volume Capacity Variance• FPOH Volume Efficiency Variance• FPOH Volume Variance


Sales Variances

Sales Price Variance = Actual qty of sale (Actual SP – Std SP)

Sales Volume Contribution Variance = Std Contribution per unit (Actual qty - Budgeted qty)

Note: Contribution per unit = Selling Price – VC per unit


Sales Variances

Question

Information relevant to product ‘X’ manufactured and sold by B Ltd. is given below

Standard per unit

(Rs.)

Actual per unit (Rs.)

Selling Price 30 32

D/M 9 12

D/L 6 5

VOH 3 5

Total variable cost (18) (22)

Contribution 12 10


Sales Variances

Question (contd…)

Budgeted sales volume was 2,000 units but actually sold 300 units less than that.

Calculate: Sales Price VarianceSales Volume Contribution Variance


Advanced VariancesMaterial Mix and Yield Variances

Example:Extracts from standard cost card of Product ‘M’ is given below.

Material X 2 kg @ Rs. 5 per kg 10/-Material Y 3 kg @ Rs. 8 per kg 24/-

During the previous quarter, 2,200 kg of material X at a cost of Rs. 9.800/- and 2,700 kg of material Y at a cost of Rs. 23,300/- were used to manufacture 1,000 units of ‘M’.

Calculate: Mix Variance, Yield Variance and Material Price Variance (both for individual material and overall)


Advanced VariancesSales Mix and Qty Variances

Example:ABC Ltd. manufactures and sells 3 products namely X, Y and Z. Budgeted figures are given below.

Calculate: • Sales Mix Variance• Sales Quantity Variance• Overall Sales Volume variance

ProductUnit

Selling Price

Unit full cost

Profit per unit

Budgeted sales units

Actual sales units

X 6,000 4,000 2,000 500 700Y 9,000 6,000 3,000 300 300Z 11,000 7,000 4,000 200 500


Standard Costing

Issues and criticisms of standard costing

• Inconsistency with modern management approaches

• Over-emphasizing importance of direct labour

• Changing cost structure

• Delay in feedback reporting


Reconciliation of budgeted profit and actual profit

Question 1

Details pertaining to the month of December are given below.Actual Budget

Sales volume (units) 2,450 2,500

Unit selling price (Rs.) 110/- 100/-

Production volume (units) 2,700 2,500Direct Material

kg 5,300 5,000

Price per kg 6/- 5/-

Direct labour

Hrs per unit 0.55 0.5

Rate per hour 38/- 40/-

Fixed Overhead

Production 103,000 100,000

Administration 31,000 30,000


Integrated accounting system

Question 2Standard Cost card for product W is given below.

Rs.Direct material

X - 2 kg @ 100/- 200Y - 1 kg @ 150/- 150

Direct Labour (3 hrs @ 90/-) 270VOH (3 hrs @ 20/-) 60Total standard variable costs 680Standard Contribution Margin 200Standard Selling Price 880

Company estimated to produce and sell 10,000 units of W and budgeted FOH for the month was Rs. 1.2 Mn


Integrated accounting system

Question 2 (Contd…)Actual results for the month:

Rs. ‘000Sales (9,000 units @ 900/- ) 8,100Direct Material

X - 19,000 kg @ 110/- 2,090Y - 10,100 kg @ 140/- 1,414 3,504

Direct Labour – 28,500 * 96/- per hr 2,736VPOH - 28,500 * 18 513 (6,753)Contribution 1,347Fixed POH (1,100)Profit 247

Actual production and sales for the month = 9,000Manufacturing overheads are charged to the production based on direct labour hoursRequired: Show the accounting treatment for variances.

Standard Costing & Variance Analysis · 2021. 1. 10. · Standard Costing & Variance Analysis...

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