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
• Inaccurate and unreliable standards cause
• 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
4. Labour time standard
5. Overhead Standard
• 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
• 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
MUV = (SQ-AQ) x SP
Reasons for Material Usage Variance
• Use of defective or sub-standard materials.
• Carelessness in the use of materials.
• 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
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
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
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 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
St. overhead absorption rate = budgeted overhead
• 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
= 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
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