# STANDARD COSTING

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```					Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING

STANDARD COSTING

Introduction:
It is a tool of cost control. Under standard costing, performance standards are
set for all areas of operation within the organisation. This is done in consultation
with various departmental heads. When actual performance takes place, actual
data is compared with standards. If there is a difference between actuals and
standards, the difference is calculated and analysed to find reasons thereof.
Deviation of actuals from standards are called variances. Such variances may
be favourable or adverse for the business.

MATERIAL COST VARIANCES:
Material standards are set in relation to material price and material quantity. If
more than one material is used, standard is also set as regards the mix ratio
between materials. This is done in consultation with production manager and
purchase manager. Suppose it is decided that for making one unit of product, 5
kgs of raw materials should be used at Rs.12 per kg. Then, standard material
cost = 5 kgs x Rs.12 per kg. = Rs.60
When actual production takes place, actual data is compared with standard.
Suppose one unit of product was actually produced using 6.5 kgs of material
purchased at Rs.15 per kg.
Actual material cost = 6.5 kgs x Rs.15 per kg = Rs.97.5

Total variance = 37.5 (adverse)

This variance can be further analysed to find its reasons as under:
Y
Price
(Rs. Per kg)
AP   15
SP   12

0            5      6.5          X
SQ       AQ          Quantity (Kgs.)

Various material variances are calculated as under:
1)   Total material cost variance = SQ x SP – AQ x AP
2)   Material price variance = (SP – AP) x AQ
3)   Material usage variance = (SQ – AQ) x SP

In case more than one material is used, Material usage variance is further
analysed as:
1.   Material yield / sub-usage variance = (SQ – SQ in actual input) SP
2.   Material mix variance = (SQ in actual input – AQ) SP

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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING

Notes:
1.     While solving the problem, prepare the following table:
Usage

Yield                   Mix

Ratio           SQ               SQ in total             AQ         SP   AP
input
M1            XX                                                       XX       XX   XX
M2            XX                       .                   .           XX       XX   XX
Input         XX                                Total input    Total input
(-) Loss      XX                       .                               XX
Output        XX          Actual output                      Actual output
2.    Given quantity ratios are to be entered in ratio column.

3.     Material is a variable cost and so, given ratios are to be applied to actual output
to get standard quantity for actual output. (Standard always depends on actual
output)
4.     If any of the above variances are negative, they are said to be adverse and if
positive, they are said to be positive.
5.     Total material cost variance = Material price variance + Material usage variance
6.     Material usage variance = Material yield variance + Material mix variance
Illustration 1
80 Kgs of material A at a standard price of Rs 2 per Kg and 40 Kgs of material B
at a standard price of Rs 5 per Kg were to be used to manufacture 100 Kg of a
chemical. During a month 70 Kgs of material A priced at Rs 2.10 per Kg. and 50
Kg. of material B priced at Rs 4.50 per Kg. were actually used and the output of
the chemical was 102 Kgs. Find out the material variances.

Solution:                                 Usage

Yield                   Mix

Ratio         SQ           SQ in            AQ         SP   AP
total
input
A                    80           81.6            80               70    2   2.1
B                    40           40.8            40               50    5   4.5
Input               120          122.4           120              120
(-) Loss             20           20.4                             18
Output              100            102                            102

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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING

Total Material Cost Variance = (SQ X SP) – (AQ X AP)
A = (81.6 X 2) – (70 X 2.1) = 16.2 (Favourable)
B = (40.8 X 5) – (50 X 4.5) = 21     (Adverse)

Material Price   Variance = (SP – AP)AQ
A     =     (2-2.1) 70 =    7   (Adverse)
B     =     (5-4.5) 50 =    25  (Favourable)
18  (Favourable)

Material usage variance = (SQ – AQ) SP
A     =    (81.6 – 70) 2 = 23.2 (Favourable)
B     =    (40.8 – 50) 5 = 46    (Adverse)

Material yield variance/Sub usage variance = (SQ – SQ in total input)SP
A     =     (81.6 – 80) 2 =    3.2 (Favourable)
B     =     (40.8 – 40) 5 =    4 (Favourable)
7.2 (Favourable)

Material Mix Variable      =    (SQ   in total input – AQ) SP
A    =     (80 – 70)2 =    20     (Favourable)
B    =     (40 – 50)5 =    50     (Adverse)

Price variance occurs at the time of purchase. It occurs on the entire
quantity purchased. However, it may be calculated immediately at the
time of purchase on quantity purchased or it may be calculated later, as
and when materials are used. If price variance is calculated at the time
of purchase,
Material price variance = (SP – AP of purchases) AQ purchased

If price variance is calculated at the time of consumption,
Material price variance = (SP – AP of consumption) AQ consumed

Material usage variance occurs at the time of usage (i.e. consumption)
and so it is always calculated at the time of consumption and is based
on quantity consumed.

Illustration 2
Eskay Ltd. produces an article by blending two basic raw materials. The
following standards have been set up for raw materials:
Material         Standard Mix         Standard price per
kg.
A                  40%                   Rs 4.00
B                  60%                   Rs 3.00
The standard loss in processing is 15% During Sept 1990, the company
produced 1,700 Kg of finished output.

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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING

The position of stock and purchases for the month of Sept 1990 is as under:
Material Stock on           stock on       Purchased during
1.9.90           30.9.90            Sept, 90.
Kg                 Kg          Kg        Cost Rs
A       35                  5           800         3,400
B       40                 50         1,200         3,000
Calculate the materials variances.
Assume first in first out method for the issue of material. The opening stock is
to be valued at standard price.

Solution:
A                                B
Qty   CPU Amount              Qty     CPU Amount
Op. Stock                    35      4     140             40        3   120
(+) Purchases               800   4.25    3400           1200      2.5  3000
835           3540           1240           3120
(-) Clg. Stock                5   4.25   21.25             50      2.5   125
Consumed                    830        3518.75           1190           2995
Usage

Yield             Mix

Ratio     SQ           SQ in       AQ          SP          AP
total
Input
A            40         800           808          830          4 3518.75/830
B            60        1200          1212         1190          3   2995/1190
Input       100        2000          2020         2020
(-) loss     15         300                        320
Output       85        1700                       1700

Total Material cost variance = SQ X SP – AQ x AP
A     =    (800 X 4) – (830 X 3518.75/830) = 318.75 (Adverse)
B     =    (1200 X 3) – (1190 X 2995/1190) = 605 (Favourable)
286.25 (Favourable)
Material Price Variance:
(A)If calculated at the time of purchase=(SP–AP of purchase)AQ purchased.
A     =    (4 – 4.25) 800   =    200 (Adverse)
B     =    (3 – 2.5) 1200 =      600 (Favourable)
400 (Favourable)
(B) If calculated at the time of consumption=(SP–AP of consumption)AQ
Consumed
A     =    (4 – 3518.75/830) 830 =     198.75 (Adverse)
B     =    (3 – 2995/1190) 1190 =      575    (Favourable)
376.25 (favourable)

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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING

Materials usage variable = (SQ – AQ) SP
A    =     (800 – 830) 4  =    120 (Adverse)
B    =     (1200 – 1190)3 =    30   (Favourable)

Material yield variance = (SQ – SQ in total input) SP
A     =     (800 – 808)4   = 32 (Adverse)
B     =     (1200 – 1212)3 = 36 (Adverse)

Material Mix variance= (SQ in total Input – AQ) SP
A    =     (808 – 830) 4   = 88(Adverse)
B    =     (1212 - 1190) 3 = 66 (Favourable)

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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING

LABOUR COST VARIANCES:
Labour standards are set as regard time and wage rate. If there are more than
one type of worker, standards are also made for the composition of the various
types of workers. This is done in consultation with production manager and
personnel manager. Suppose it is decided that to manufacture one unit of a
product, a worker should take 6 hours and he should be paid at Rs.2.50 per
hour.
So, standard labour cost per unit = 6 hours x Rs.2.5 per hour = Rs.15
When actual production takes place, actual data is compared with standard.
Suppose one unit of product was actually produced in 8 hours paid at Rs.3 per
hour. Actual labour cost per unit = 8 hours x Rs.3 per hour = Rs.24.
Total labour cost variance = 15-24 = Rs.9 (adverse)
This variance can be further analysed as follows:

Y
Wage rate
(Rs. Per hr)
AR 3
SR 2.5

0           6     8           X
SH     AH         Time (hours)

Various labour variances are calculated as under:
1.     Total labour cost variance = SH x SR – AHp x AR
2.     Labour Wage rate variance = (SR – AR) AHp
3.     Labour usage variance = (SH – AHp) SR

If idle time has taken place, then labour usage variance is further
divided into labour efficiency variance and labour idle time variance.
If there are more than one category of workers, usage variance is
further divided into efficiency variance, mix variance (and also idle time
variance, if there be). This is done as under:
1.     Labour efficiency/yield/sub-usage variance = (SH – SH in total AHw)
SR
2.     Labour mix variance = (SH in total AHw - AHw) SR
3.     Labour idle time variance = (AHw – AHp) SR = idle time x SR

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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING

NOTES:
1.  Prepare the following table:
Usage

Yield                  Mix           Idle time

Ratio            SH       SH in            AHw      Idle           AHp SR AR
total                    time
AHW
I           XX                                       XX       XX             XX     XX   XX
II          XX               .            .          XX       XX             XX     XX   XX
Total       XX               .   Total AHw      Total AHw     XX             XX
Output      XX   Actual output                                      Actual output

2.     The ratio of time in which workers should be utilised to manufacture a product
is entered in the ratio column.

3.     Labour is a variable cost and so, given ratios are to be applied to actual output
to get standard time for actual output. (standard always depends upon actual
output)

4.     Labour time is measured in terms of labour hours and not hours.
Labour hours = number of workers x number of hours.

5.     If any of the above variances are negative, they are said to be adverse and if
positive, they are said to be favourable.

6.     Total labour cost variance = Labour rate variance + labour usage variance

7.     Labour usage variance = Labour efficiency variance + Labour mix variance +
Labour idle time variance.

8.     Mix variance is also called gang variance

9.     Efficiency variance is also called yield variance or sub-usage variance

10.    Idle time is calculated based on standard ratio of workers and not
actual ratio of workers.

11.    In absence of idle time, AHw = AHp

Illustration 3.
The following was the composition of a gang of workers in a factory during a
particular month, in one of the production departments. The standard
composition of workers and wage rate per hour were as below:

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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING

Skilled:         Two workers at a standard rate of Rs.20 per hour each.
Semi-skilled:    Four workers at a standard rate of Rs.12 per hour each.
Unskilled:       Four workers at a standard rate of Rs.8 per hour each.
The standard output of the gang was four units per hour, of the product.
During the month in question, however, the actual composition of the gang and
hourly wage rates paid were as under:
Nature of workers      No. of workers          Wage rate paid per worker
per hour engaged
Skilled                      2                       Rs.20
Semi-skilled                 3                       Rs.14
Unskilled                    5                       Rs.10
The gang was engaged for 200 hours during the month, which included 12
hours when no production was possible due to machine break-down.810 units
of the product were recorded as output of the gang during the month.
You are required to compute the total variance in labour cost during the month
and analyse the variance into sub-variances.
Solution:                                Usage

Yield         Mix         Idle time

Ratio   SH      SH in total       AHW       Idle         AHP       SR AR
AHw                     Time
Skilled     2x1=2    405             376       376    2x12=24     2x200=400    20   20
Semi-       4x1=4    810             752       552    4x12=48     3x200=600    12   14
skilled
Unskilled   4x1=4    810             752       952    4x12=48     5x200=1000    8   10
Total          10   2025            1880      1880        120           2000
Output          4    810                                                 810
Total Labour Cost variance = SH X SR – AHP X AR
Skilled        = 405 X 20 – 400 X 20 =    100 (Favourable)
Semi-skilled   = 810 X 12 – 600 X 14 =   1320 (Favourable)
Unskilled      = 810 X 8 – 1000 X 10 =   3520 (Adverse)
Labour wage rate variance = (SR – AR) AHp
Skilled        = (20 – 20) 400 =           0
Semi–Skilled   = (12 -14) 600 =         1200 (Adverse)
Unskilled      = (8 – 10) 1000 =        2000 (Adverse)
Labour usage variance = (SH – AHp) SR
Skilled        = (405 – 400)20 =                  100 (Favourable)
Semi–Skilled   = (810 – 600)12 =                 2520 (Favourable)
Unskilled      = (810 – 1000)8 =                 1520 (Adverse)
1100 (Favourable)

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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING

Labour Yield / Efficiency variance = (SH – SH in total AHw) SR
Skilled         = (405 – 376) 20 =          580 (Favourable)
Semi–skilled    = (810 – 752) 12 =          696 (Favourable)
Unskilled       = (810 - 752) 8 =           464 (Favourable)
1740 (Favourable)

Labour Mix / Gang Variance = (SH in total AHw – AHw)SR
Skilled        = (376 – 376) 20 =            0
Semi-Skilled   = (752 – 552) 12 =         2400 (Favourable)
Unskilled      = (752 – 952) 8 =          1600 (Adverse)
800 (Favourable)

Labour Idle time variance = (AHw – AHp)SR OR Idle time x SR
Skilled        = 24 x 20 =               480 (Adverse)
Semi-skilled   = 48 x 12 =               576 (Adverse)
Unskilled      = 48 x 8 =                384 (Adverse)

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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING

Before the start of the year, budget for fixed overheads and output is prepared
and recovery rate is determined as follows:
Fixed overheads recovery rate = Budgeted fixed overheads
Budgeted output
When actual production takes place, fixed overheads are recovered in the cost
books based on fixed overheads recovery rate.
Fixed overheads recovered = Fixed overheads recovery rate x Actual
output
The actual fixed overheads may not match with budgeted fixed overheads as
well as recovered fixed overheads. Hence variances arise.

Cost

Volume                  Expenditure/Budget

Fixed overheads               Budgeted fixed         Actual fixed
(R)                           (B)                    (A)

Fixed overheads cost variance = (R) – (A)
Fixed overheads volume variance = (R) – (B)
Fixed overheads expenditure/budget variance = (B) – (A)

If information about budgeted and actual hours is also given:
In such case, volume variance can be further divided into efficiency and
capacity variance.
Find standard hours for actual output.
Find standard rate per hour.

Efficiency                    Capacity

Standard hours                actual hours           budgeted hours
for actual output

Fixed overheads efficiency variance
= (standard hours for actual output – actual hours) Std. rate / hour

Fixed overheads capacity variance
= (Actual hours – budgeted hours) Std. rate / hour

If information about budgeted and actual days is given:
In such case also, volume variance can be further divided into efficiency and
capacity variance.
Find standard days for actual output.
Find standard rate per day.

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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING

Efficiency                      Capacity

Standard days                 actual days        budgeted days
for actual output

Fixed overheads efficiency variance
= (standard days for actual output – actual days) Std. rate / day

Fixed overheads capacity variance
= (Actual days – budgeted days) Std. rate / day

If information about budgeted and actual hours as well as days is
given:
In such case, volume variance can be further divided into efficiency, capacity
and calendar variance.
Find standard hours for actual output.
Find standard hours in actual days.
Find standard rate per hour.

Efficiency          Capacity               Calendar

Standard hours       Actual hours      Standard hours       budgeted hours
for actual output                       in actual days

Fixed overheads efficiency variance
= (standard hours for actual output – actual hours) Std. rate / hour

Fixed overheads capacity variance
= (Actual hours – Standard hours in actual days) Std. rate / hour

Fixed overheads calendar variance
= (standard hours in actual days – Budgeted hours) std. rate / hour

Illustration 4.
The following information is available from the records of a factory:
Budget           Actual
Fixed overhead for June              Rs 10,000        Rs 12,000
Production in June (units)               2,000             2,100
Standard time per unit(hours)               10
Actual hours worked in June                               22,000
Compute:
i)     Fixed overhead cost variance         ii)   Expenditure variance
iii)   Volume variance                      iv)   Capacity Variance
v)     Efficiency variance.

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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING

Solution:
Budget                       Actual
Fixed overheads (Rs.)        10,000                       12,000
Output (units)                2,000                        2,100
Hours                 2000 x 10 = 20,000                  22,000

Step 1 Fixed overheads recovery rate = Budgeted fixed overheads
Budgeted output
= Rs. 10000 = Rs.5/unit
2000 units
Step 2 Fixed overhead recovered = Recovery rate x Actual output
= Rs.5/unit x 2,100 units
= Rs.10,500

Cost

Volume                            Expenditure

(Recovered Fixed                (Budgeted Fixed                 (Actual fixed
Rs.10,500                       Rs.10,000                       Rs.12,000

Step 3  Std. hrs for actual output
Output                std hrs.
1                     10
2,100                ?(21,000)

Step 4  Std. rate per hour = Budgeted fixed overheads
Budgeted hours
= Rs.10,000 = Rs.0.5/hr.
20,000hrs.

Efficiency                        Capacity

Standard hours                    actual hours             budgeted hours
for actual output
21,000                          22,000                 20,000

Fixed overheads cost Variance
= Recovered fixed overheads – Actual fixed Overheads
= 10,500 – 12,000 = 1,500 (Adverse).

Fixed overheads Volume Variance
= Recovered fixed overheads – Budgeted fixed overheads
= 10,500 - 10,000 = 500 (Favourable)

Fixed overheads expenditure/Budget variance

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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING

= Budgeted fixed overheads – Actual fixed overhead
= 10,000 – 12,000 = 2,000 (Adverse)

Fixed overheads efficiency Variance
= (Std hrs actual output – Actual hrs) std rate per hr.
= (21,000 – 22,000) 0.5 = 500 (Adverse)

Fixed overheads capacity variance
= (Actual hrs. – Budgeted hrs.) Std. rate per hour
= (22,000 - 20,000) 0.5 = 1000 (Favourable)

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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING

In case of variable overheads, budgets or standards are set on per unit basis.
Thus, if in the question, we are given that variable cost of Rs.10000 is budgeted
for an output of 500 units, it is to be understood that the variable overheads
budgeted is Rs.20 per unit and not Rs.10000 in total. Thus, if the actual
quantity is not 500 units, standard will be revised for actual output.

Hence, first find budgeted variable overheads per unit
Budgeted variable overheads per unit = budgeted variable overheads
Budgeted output

Find standard variable overheads for actual output
Standard variable overheads for actual output
= Budgeted variable overheads per unit x actual output

Variable overheads cost variance
=Standard variable overheads for actual output – Actual variable overheads

Illustration 5.
AB company Ltd is having Standard Costing system in operation for quite some
time. The following data relating to the month of April, 1994 is available from
the cost records:
Budgeted      Actual
Output (in units)                   30,000     32,500
Variable overheads (Rs)             60,000     68,000
You are required to work out the relevant variance (on the basis of output)

Solution:
Budgeted variable overheads per unit = Budgeted variable overheads
Budgeted output
= Rs.60000 = Rs.2/unit
30,000 units

Standard variable overheads for actual output = Rs.2/unit x 32,500 units
= Rs.65,0000.
Variable overheads cost variance
=Standard variable overheads for actual output – Actual variable overheads
= 65,000 – 68,000 = 3,000 (Adverse)

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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING

SALES VARIANCES:
Sales budgets are prepared for the period in respect of sales quantity and
selling price. The actual sales for the period are directly compared with
budgeted sales. However, while comparing, it is to be checked that the length
of the period of budget and actual data is same. i.e. if budgeted sales are given
for one year but actual sales are only for a quarter, then they cannot be directly
compared and hence, budgets are adjusted for actual period and then
compared.
Notes:
1.     Prepare the following table:
Volume

Quantity            Mix

SSQ           SSQ in total          ASQ         SSP        ASP
ASQ
A                     XX                                 XX        XX         XX
B                     XX                                 XX        XX         XX
C                     XX                                 XX        XX         XX
TOTAL                 XX       TOTAL ASQ          TOTAL ASQ

2.     Various sales variances are calculated as under:
a)   Total sales variance = SSQ x SSP – ASQ x ASP
b)   Sales price variance = (SSP – ASP) ASQ
c)   Sales volume variance = (SSQ – ASQ) SSP

3.     If there are more than one product being sold, sales volume variance is
further divided into the following:
a)    Sales quantity / sub-volume variance = (SSQ – SSQ in total ASQ) SSP
b)    Sales mix variance = (SSQ in total ASQ – ASQ) SSP

4.     Total sales variance = sales price variance + sales volume variance

5.     Sales volume variance = Sales quantity variance + sales mix variance

6.     Since sales is an income, negative variance denotes favourable
variance and positive variance denotes adverse variance.
Illustration 6.
PH Ltd furnishes the following information relating to budgeted sales and actual
sales for April 1991 :
Product Sales Quantity Selling Price Per unit
Units             Rs
Budgeted Sales:         A        1,200             15
B          800             20
C        2,000             40

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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING

Actual Sales
A          880          18
B          880          20
C        2,640          38
Calculate the following variances:
i)     Sales Quantity Variances ii) Sales Mix Variances
iii)   Sales Price Variance iv) Total Sales Variance.
Solution:
Volume

Quantity        Mix

SSQ     SSQ in Actual     ASQ          SSP        ASP
sales
A      1200           1320        880           15         18
B       800           880         880           20         20
C      2000           2200       2640           40         38
4000           4400       4400
Total Sales Variance = SSQ x SSP – ASQ x ASP
A = (1200 x 15) – (880 x 18)   = 2160 (Adverse)
B = (800 x 20) - (880 x 20)    = 1600 (Favourable)
C = (2000 x 40) – (2640 x 38)  = 20320 (Favourable)
19760 (Favourable)
Sales price Variance = (SSP – ASP) ASQ.
A = (15 – 18) 880 = 2640 (Favourable)
B = (20 – 20) 880 = 0
C = (40 – 38) 2640= 5280 (Adverse)
Sales Volume variance = (SSQ – ASQ) SSP.
A = (1200 – 880) 15 = 4800 (Adverse)
B = ( 800 – 880) 20 = 1600 (Favourable)
C = (2000 – 2640) 40 = 25600 (Favourable)
22400 (Favourable)
Sales Qty/Sale Volume variance = (SSQ – SSQ in Actual Sales) SSP.
A = (1200 – 1320) 15 = 1800 (Favourable)
B = (800 – 880) 20   = 1600 (Favourable)
C = (2000 – 2200) 40 = 8000 (Favourable)
11400 (Favourable)
Sales mix Variance = (SSQ in Actual Sales – ASQ) SSP.
A = (1320 – 880) 15 = 6600 (Adverse)
B = ( 880 – 880) 20 =    0
C = (2200 – 2640) 40 = 17600 (Favourable)
11000 (Favourable)

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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING

PROFIT VARIANCES:
Variance in profit arises due to cost as well as sales. Let us consider the
following example:
2000 units were budgeted to be sold @ Rs.30 each. Cost budgeted was Rs.24
per unit. 1900 units were sold @ Rs.32 each. Cost incurred was Rs.25
Budgeted profit = 2000 (30 – 24) = Rs.12000
Actual profit = 1900 (32 – 25)     = Rs.13300
Increase in Profit                 = Rs.1,300
Variance in profit = Rs.1300 (favourable)

This variance in profit of Rs.1,300 is due to cost factor and sales. To analyse the
effect of cost on profit, keep selling price constant.
Budget           Actual
Selling Price             30               30
- Cost                    24               25
Profit                    6                5
Therefore, if cost increases by Re. 1, profit decreases by Re.1. Increase in cost
is Re.1 (adverse) and decrease in profit is also Re.1 (adverse). This means that
profit variance due to cost is same as cost variance. In the above example,
Profit variance due to cost = cost variance=(24–25) X 1900* = 1900 (adverse)
* In all the cost variances, the given ratio was always revised for actual output.
Variance in profit due to sale can be analysed in two parts – Selling price and
sales volume.
Let us analyse the effect of change in selling price on profit. For this, keep the
cost constant.
Budget                   Actual
Selling Price                 30                      32
Cost                          24                      24
Profit                        6                       8
Therefore, if selling price increases by Rs.2, profit also increases by Rs.2.
Change in selling price is Rs.2 (favourable) and change in profit is also Rs.2
(favourable). Thus, profit variance due to selling price is same as selling price
variance.
Profit variance due to selling price = sales price variance = (SSP – ASP) X ASQ.
=      (30 – 32) X 1900 = 3800 (favourable)
Effect of change in sales volume on profit:
Keep cost and selling price constant. Let us analyse the effect of change in sales
quantity on profit.
1 unit      2 units
Selling price (@ Rs.30 p.u.)        30          60
Cost (@ Rs.24 p.u.)                 24          48
Profit                                6         12
Increase in sales due to change in quantity is Rs.30 but increase in profit is Rs.6
only. Thus sales volume variance is Rs.30 (Favourable) but profit variance due
to sales volume is Rs.6 (favourable) and so not the same.

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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING

Thus, Sales volume variance = (SSQ – ASQ) x SSP
Profit variance due to sales volume = (SSQ – ASQ) x Std. Profit
In the above example, Profit variance due to sales volume = (2000 – 1900) 6
Total variance in profit = profit variance due to cost + profit variance due to
selling price + profit variance due to sales volume = 1900 (adverse) + 3800
(favourable) + 600 (adverse) = 1300 (Favourable)

Illustration 7
The standard cost data of three products X, Y and Z manufactured by a
company are given below together with the budgeted sales and unit selling
price for 1995-96:                    X         Y        Z
Budgeted sales (Units)        25,000 20,000 15,000
Selling price per unit ( Rs)    40       60       80
Cost per Unit(Rs)               28        48      64
The cost department of the company gathered the following details for 1995-
96:                              X            Y         Z
Actual Sales (Units)           20,000      22,000     16,000
Average sales realisation
per unit (Rs)                     42         56          81
Actual cost per unit (RS)         30         50          63
You are required to determine:
a)     the Budgeted profit and the actual profit for 1995-96;
b)     the variance in profit analysed into
i)     Cost Variance;
ii)    Sales Price Variance
iii)   Sales Volume Variance.

Solution
SSP       Std. cost        Std. Profit     SSQ         Profit
X          40          28                12         25000       300000
Y          60          48                12         20000       240000
Z          80          64                16         15000       240000
Budgeted profit 780000

ASP        Actual cost        Actual        ASQ          Profit
profit
X         42             30              12         20000        240000
Y         56             50               6         22000        132000
Z         81             63              18         16000        288000
Actual profit   660000

Profit variance due to cost = (Std. cost – Actual cost) ASQ
X     =     (28-30) 20000 = 40000 (Adverse)
Y     =     (48-50) 22000 = 44000 (Adverse)
Z     =     (64-63) 16000 = 16000 (favourable)

18
Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING

Profit variance due to sales price=Sales price variance=(SSP–ASP) ASQ
X     =     (40-42) 20000     =     40000 (favourable)
Y     =     (60-56) 22000     =     88000 (Adverse)
Z     =     (80-81) 16000     =     16000 (Favourable)
Profit variance due to sales volume = (SSQ – ASQ) Std. profit
X     =     (25000-20000)12=        60000 (Adverse)
Y     =     (20000-22000)12=        24000 (Favourable)
Z     =     (15000-16000)16=        16000 (Favourable)
Statement reconciling budgeted and actual profit
Particulars                                                Rs.       Rs.
Budgeted profit                                                7,80,000
(-) decrease in profit due to
Adverse profit variance due to cost                     68000
Adverse profit variance due to sales price              32000
Adverse profit variance due to sales volume             20000    120000
Actual profit                                                   660000

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