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      Concept of Standard cost
• Standard is the pre-determined cost based on
  technical estimates for materials, labour and
  overheads for a selected period of time.

• The standard cost is a predetermined cost which
  determines what each product or service should
  cost under given circumstances
    Concept of Standard costing
•  Standard costing is the preparation of standard
   cost and comparing them with actual costs for
   any variances and analysing the causes of
   variations to maintain maximum efficiency in
   production. It involves following steps:
1. Setting of standard costs for different elements
   of costs i.e. material, labour etc.
2. Ascertainment of actual costs.
3. Comparing standard costs with actual costs to
   determine differences or variances
4. Analysing variances for ascertaining reasons
5. Reporting of these variances and analysis
    Advantages of Standard Costing
•   Effective cost control
•   Helps in planning
•   Provides incentives
•   Facilitates delegation of authority
•   Eliminates wastage
 Limitations of Standard Costing
• The system may not be appropriate to the
• The staff may not be capable of operating the
• A business may not be able to keep standards up
  to date.
• Inaccurate and unreliable standards cause
  misleading results
• It is expensive
            Types of Standards
• Basic Standards: these are established for an indefinite
  period of time. It is similar to an index number against
  which all later results are measured. Variances from
  basic standards show trends of deviation of the actual
• Current Standards: such standards remain in operation
  for a limited period of time and are related to current
  conditions. These are of three types- Ideal Standards,
  Expected Standards and Normal Standards.
          Setting Standard Costs
•    Standard costs are set for each element of cost i.e.
     materials, labour and overheads. These are described
1.   Material price standard – this is a forecast of the
     average prices of material for future period
2.   Material usage standard – how much material and of
     what quality is to be used
3.   Labour rate standard – this standard is determined
     having regard to the current rates of pay and any
     anticipated variations
4. Labour time standard
5. Overhead Standard
                Standard Hour
• Production may be expressed in diverse type of units
  such as kilograms, tonnes, litres etc. when a company is
  manufacturing different types of products, it is difficult
  to aggregate the production, which cannot be expressed
  in the same unit. Therefore it is essential to have a
  common unit in which different types of production
  can be expressed. As time factor is common to all
  operations, a common practice is to express the various
  units in terms of time, known as – standard hour. It is
  the output or amount of work which should be done in
  one hour.
             Variance Analysis
•    There are various types of variances, these are:
1.   Material Cost Variance.
2.   Material Price Variance.
3.   Material usage Variance.
4.   Material Mix Variance.
5.   Labour Cost Variance.
6.   Labour Rate Variance.
7.   Labour Efficiency (or time) Variance.
8. Variable overhead variance.
9. Fixed overhead variance.
• Material cost variance = standard cost of actual
                           output – actual cost
                   MCV = SC – AC
  MCV = (SQ x SP) – (AQ x AP)

• Material Price Variance = (SP – AP) x AQ
 Reasons for material price variance
• Change in the market prices of materials.
• Failure to purchase the specified quality, thereby
  resulting in a different price paid.
• Change in the quantity of materials, thereby
  leading to lower/higher quantity discount.
• Inefficient purchasing.
• Change in delivery costs.
• Rush purchases
• Purchase of a substitute material on account of
  non-availability of the material specified.
• Change in the rates of excise duty, purchase tax
     Material Usage (or Quantity)
• “ that portion of the material cost variance
  which is due to the difference between the
  standard quantity specified and the actual
  quantity used.
           MUV = (SQ-AQ) x SP
Reasons for Material Usage Variance
•   Use of defective or sub-standard materials.
•   Carelessness in the use of materials.
•   Pilferage.
•   Poor workmanship.
•   Defect in the plant and machinery.
•   Change in the design or specification of the
•   Change in the quality of materials.
•   Use of substitute materials.
•   Use of non-standard material mixture.
•   Yield from materials in excess of or less than
    standard yield.
            Material Mix variance
• It is sub variance of material usage variance. It arises only where
  more than one type of material is used for producing the finished
  goods. A company may be using a mixture of materials which
  does not comply with the predetermined standard mixture. This
  gives rise to material mix variance. The formula for it is:
  MMV = (revised standard quantity – actual
             quantity) x SP
  RSQ = Standard quantity of one material         x Total of AQ of all
        Total of standard quantities of all material      material
• From the following data, calculate material mix
  variance, price variance and usage variance.
        RM                Standard               Actual
         X       40 units @ Rs.50 P/U   50 units @ Rs.50 P/U

         Y       60 units @ Rs.40 P/U   60 units @ Rs.45 P/U

       Total            100 units              110 units
• Calculation of RSQ:
  X = 40 x 110 = 44 units
  Y = 60 x 110 = 66 units
MMV = (RSQ – AQ) x SP
  X = (44 – 50) x 50 = Rs. 300 (A)
  Y = (66 – 60) x 40 = Rs. 240 (F)
                        Rs 60 (A)
• MPV = (SP- AP) x AQ
   X = (50 – 50) x 50 = Nil
   Y = ( 40 – 45) x 60 = Rs. 300 (A)
                         Rs. 300 (A)
• MUV = (SQ – AQ) x SP
    X = (40 – 50) x 50 = Rs. 500 (A)
    Y = (60 – 60) x 40 = Nil
                         Rs. 500 (A)
         Labour Cost Variance
• This is the difference between the standard
  labour cost and the actual labour cost.
  LCV = SC – AC
  LCV = (St. hours for actual output – st. rate) x
            (actual hours – actual rate)
            Labour rate variance
•    This is that portion of the labour cost variance which
     is due to the difference between the standard rate and
     the actual rate.
     Labour rate variance = (SR – AR) x AH
•    Reasons for labour variance:
1.   Change in the basic wage rates.
2.   Employing workers of grades different from the
     standard grades specified.
3.   Unscheduled overtime.
4.   New workers not being paid at full rates.
      Labour Efficiency (or Time)
• This is that portion of the labour cost variance
  which is due to the difference between lobour
  hours specified for actual output and the actual
  labour hours expended.
   LEV = ( SH – AH ) x SR
    Reasons for Labour Efficiency
• Poor working conditions.
• Defective tools and plant & machinery.
• Inefficient workers.
• Incompetent supervision.
• Use of defective and non- standard materials.
• Time wasted by factors like waiting for
  materials, tools or machine break-down, etc.
• Insufficient training of workers
• Insufficient training of workers.
• Change in the method of operation.
          Labour Mix Variance
• This variance is similar to material mix variance. It
  arises only when more than one grade of workers are
  employed and the composition of actual grade of
  workers differ from those specified.
  LMV = (revised st. hours – actual hrs ) x standard
  RSH = st. hrs of the grade x total actual hrs.
            total st. hrs
• Coates India Ltd. Manufactures a particular product,
  the standard direct labour cost of which is Rs. 120 per
  unit. Its manufacture involves the following:
  Grade of workers Hrs.         Rate       Amount
            A           30        2          60
            B           20        3           60
                         50                  120
  During a period, 100 units of the product were
  produced, the actual labour cost of which was as
• Grade of workers       Hrs       Rate         Amount
        A                3200       1.5          4800
        B                1900       4.00         7600
                         5100                   12400
  Labour cost variance          Labour efficiency variance
  Labour rate variance          Labour mix variance
• LCV = SC – AC
        = (120 x 100) – 12400 = Rs. 400 (A)
• LRV = (SR –AR) x AH
    A = (2 – 1.5) x 3200 = Rs. 1600 (F)
    B = (3 – 4) x 1900 = Rs. 1900 (A)
• LEV = (SH – AH) x SR
     A = (3000 – 3200) x 2 = Rs. 400 (A)
     B = (2000 – 1900) x 3 = Rs.300 (F)
Check: LCV = LRV + LEV.
• LMV = (RSH* – AH) x SR
   A = (3060 – 3200) x 2 = Rs. 280 (A)
   B = (2040 – 1900) x 3 = Rs. 420 (F)
                           Rs. 140 (F)
          Overhead Variances
• Overhead is the aggregate of indirect materials,
  indirect labour and indirect expenses. Analysis
  of variances of these is called Overhead
  Variances. Overhead variances have been
  classified into fixed and variable overhead
         Overhead Cost Variance
• This is the total overhead variance and can be described as the
    difference between total standard overhead and total actual
    OCV = St. overhead – actual overhead
            (St. hours for actual output x st. overhead
           absorption rate) – Actual overhead
St. hrs for actual output = budgeted output x actual hrs
                              budgeted hrs
St. overhead absorption rate = budgeted overhead
                                   budgeted hrs
• Budgeted output            10000 units
• Budgeted hrs               10000
• Budgeted overhead          Rs. 20000
• Actual overhead            Rs. 22000
• Actual output              12000 units.
Calculate overhead cost variance.
• SOAR = budgeted overhead = 20000
           budgeted hrs         10000
       = Rs. 2 per hr
• SHAO = budgeted hrs x actual output
         budgeted output
       = 10000 x 12000 = 12000 hrs
OCV = (12000 x 2) – 22000 = Rs 2000 (F)
• Overhead Cost Variance is divided into Variable
  overhead and Fixed Overhead Variance.
• Variable Overhead (VO) Variances: it may be defined
  as the difference between standard variable overhead
  and actual variable overhead.
Variable overhead cost variance = (St. hrs for actual
  output x St. variable overhead rate) – actual overhead
Variable Overhead Cost variance is sub-divided into
  following two variances
Variable Overhead Expenditure Variance

• This is also known as Spending Variance or Budget
  Variance. It rises due to the difference between
  standard variable overhead allowed and actual variable
  overhead incurred:
  V.O. Expenditure Variance = (St. variable overhead
  rate x actual hrs) – actual overhead cost.
   Variable overhead efficiency variance

• This variance arises due to the difference between
  standard hours allowed for actual output and actual
  hours. The reasons for this variance are the same which
  give rise to labour efficiency variance.
V.O. efficiency variance = (St. hrs for actual output –
  actual hrs) x St. variable overhead rate.
       Fixed overhead variances.
• Fixed Overhead Cost variance:
  (St. hrs for actual output x St. F.O. rate) – Actual F.O.
• Fixed Overhead Cost Variance is sub-divided into
  following two variances:
• Fixed Overhead Expenditure Variance
  = (Budgeted F.O. – Actual F.O.)
• Fixed Overhead Volume Variance
  = (St. hrs for actual output – budgeted hrs) x St.rate

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