Chapter 11 Standard Costing
1, MATERIAL COST VARIANCE = Standard Material Cost — Actual Material Cost
= SQxSP - AQx AP
= WN (1) - WN (2)
ce Material Usage Variance
= AQ x SP — AQ x AP. sapere
= WN (3) — WN (2) WN (1) ~ WN (3)
Material Mix Variance Material Yield Variance
= RAQ x SP ~ AQ x SP = SQ x SP — RAQ x SP
= WN (4)-WN (3) WN (1) - WN (4)
Working Notes:
WN Column No. @) @ @. @
‘Computation SQxSP AQ x AP AQxSP RAQ xSP
[Material A
Material B, etc.
Total
Meaning of Terms / Abbreviations used: Note: Material Purchase Price Variance (MPPV) |
S02 ae eee Material Price Variance is computed for the actual quantity |
= Expected consumption for actual output. of materials consumed. If such Price Variance is computed
AQ = Actual Quantity of Material Consumed. for the actual material quantity purchased, it is called 25 |
RAQ = Revised Actual Quantity, Le. Material Purchase Price Variance. It is computed 2s — |
= Actual Quantity re-written in standard proportion. MPPV = PQ x SP ~ PQ AP
sP Standard Price per unit of material consumed. | Where PQ = Purchase Quantity,
AP = Actual Price per unit of material consumed. SP = Standard Prices, and AP = Actual Prices.
LABOUR COST VARIANCE = SH x SR ~ AH x AR = WN (1) — WN (2)
Labour Rate Variance Labour Efficiency Variance
x SR - AH x AR = SH x SR—AH x SR
WN (3) - WN (2) = WN (1) ~ WN (3)
Labour Mix Variance Labour Sub-efficiency Variance
= RAH x SR~ AH x SR = SHX SR RAHN SR
= WN (4) - WN (3) = WN (1) — WN (4)
Working Notes:
WN Column No.
Computation
Grade A
Grade 8, etc.
as
FTR.AL Meaning of Terms / Abbreviations used:
Note: Labour Idle Time Variance (LITV)
is given, Labour
7 Sanaard Hours, Le, When infermation on tale time is given, Labour EM
= Expected time for actual output. Variance (LEV) is aterativelysub-
1rd Costs facilitate pricing decisions as also ~ eae ns suby oy
2, Pricing Decisions: ip ais cost is pre-determined based on accept oe Is efficiency,
"espn ere sinetion and measurement of variances from standards is possible wit, the tal g
3, Variance Ferret performance orto revise the standards, wherever applicable,
Cost, with a rs ion: By analysing the variances, the decision-maker can focus on significant dey,
ment by Exception:
standard Costs are us
: Sic lat
4. Manageimsnd take corrective action. Managers can concentrate on critical areas of activity Where vast fy
standards and | Standard Costs facilitate control by exception. ehcas a
reported.
iu involved therein,.
Define the term Standard Costing and oiltline the steps'l
. d use of Standard Costs, thelr comparison with
ion: Standard Costing refers to “the preparation an st i
ma pages of Variances to their causes and points of incidence.’ i
2. Steps: Standard Costing involves the following steps ~
* (a) Setting up of Standards,
(b) Ascertainment of Actual Costs, ;
(© Comparison of Actual and Standard costs to determine Variances, and
(@) Investigation of variances and taking appropriate action thereon wherever necessary.
Instalation ofa Standard Costing System involves the following preliminary steps —
1, Responsibility Centres: The key areas of operation in the Firm should be identified into Responsibility Centes we
Cearly defined roles, e.g. Cost Control, Revenue Maximization, etc.
2. Classification of Accounts: The various heads of expense accounts should be classified and codified for cain
‘and comparison of Actual Costs with Standard Costs. This will also help the process Of computerised accounting.
3. Selection of Standards: For operational requirements, a suitable type of standard should be selected.
‘+ Length of Period: The duration, for which the standards are to be used, should be determined.
‘8 What are the areas or aspects wherein expectations or Stindard® are laid doin aA
For variance analysis and
——
Control purposes, expectations are laid down in the followi
areas ~
Sales Materials Cost Labour Cost VOH and FOH
Consumption Quantity | » Hours, i.e.Time * Expenditure
Purchase Price ‘© Wage Rate © Rate per unit and / of Rate PF
Mix or Combination |» Mix or Combination hour pert
Yleld / Wastage * Efficiency / Idle Time | « Processing Time or
a a Ung Be bac at at
2. SETTING UP STANDARDS ES
& How at Standerds cadainoan sone
6% Vo OL You mam YEE WERE: emmys ee
Basis of
Classification
Time period to
which they relate Type of Cost Type of
Types of le jcal (Quantity
* Ideal Standard: * Basic Standards | * Material Cost © Physical ((
Standards |? Normal Standards © Current Standards Time) Standards |
Standards * Labour Cost Standards. | « Monetary (Price
* OH Cost Standards Rate) Standal Standard Costin
raticaars —
Teorey sal Standards
attainable wig the level of performance
4, conditions best quay tthe best” oF ideal Set-up, i.e.
| Sklled labour pes at favoursoe prices, highly
|-——_ StandangeauiPment& laycor ‘volume, etc, i aeewiebis
b efficiency sffeiency ane On the maaan These standards focus on the practical
2
rces, fections,
OF “resources, i.e. slency, after considering normal imper
[anatnment | Tse are coe enetaimum cose 7 lowe (not minimisation) of cost per unit.
3, atainment | Thes Standards me noty alnable and hence
Variances from be
d
‘These are attainable with reasonable effort anc
the dare ken seriousty" hence constitute a good Benchmark fr control_
. ana hi dol Pt Indicate the | Here, are deviations from normal
|* Gevartonces:| ane Dracioat’ EY could have Seid expectations Henne they are disposed off
Method of disposing: ep ME IS ne logical | based on the policy of the Company. [Refer
2 Of these varlance? Question 36 for of variances.)
¥ tsnglbh tren Base sa “
rds
Normal Standat =
These represent the level io ee ced
attainable under normal operating conditions,
29. normal efficiency, normal sales / pr
Wad, > Bre . ie came
| [pn These Sandaras eUeY Standards | _ Gurertstentas
Period been ine. flect the costs ‘that
incurred i would have | These Standards reflect — the
f base periogy’ |" @ Certain past Period (le. the | anticpati o Management's
! hese star
| change indards
i are used for ite
are tkely to remain constant os which
ange Soa! OES oF eas tat underge
tore he ~| Change from one period to another
3. Short vs, Sc Standards are set on a long-term basis and Current Standards get revise from period to period, |
Long Run_| are seldom revised, They ate necessarily set on a short-term
These costs relate to base year, which is These are the costs, whi
chosen for comparison Firposes, like Price | ineur if the anticipated are paid for the
|4 Effect Indices, ~Cost Inflation Indices, etc. Basic ‘goods and services and the usage
resent what should be
Ut ‘beleved to be necessary ne Broduce the |
attained in the present period. planned output, |
|S Suita “T Suited ont to businesses having a small range of Generaly used by all types “of busin =
bility product's Jong production runs. variance analysis and decision-making, |
im sic analy si Babs Seis aka coe
Tae bacon
#k Standards are set on a |
z
= 12K = 1,050 = “45.
7.5K + 525 ~ 12K ~ 1, :
Upon simplifying, we have, 6K + 420 + a : = ao units.
On solving the above, 1.5K = 60 or K= 40 students’ Handbook on Cost Acco
Total AQ = 40 +70 = 110 units, Rewriting 110 units inthe rato 1:1, RAQ for A and Bis 55 units each
4 7 ,
5, Variance Computation Chart
x SP ‘AQ x AP a i
te 4) (2) @) RR
ven) 50 x 12 = 600 (WN 3) 40 x 15 = 600 (WN 3) 40 x 12 = 480 )
# 1 — fi 1) 50 x 15 = 750 (given) 70 x 20 = 1,400 (given) 70 x 15 = 1,050
8 : Rs.1,350 Rs.2,000 Rs.i,530
N 4) 55 x fg <0
HAP are given in the question. SQ for A and AQ for B is also available in the oa, Bag
Note: Al Prices SP
‘ ing Note Table given above, the Material Cost Variances (for A and B) are com
Aer completing the Working aot te Cost Variance = (1) (2) = Nil + 650 A = 650A Puted below .
Material
terial Price Variance sage Vai
wo) = 1208 + 350A = 470A =(1)-(3) = 120F + 300A = ten 4
Material Mix Variance Material Ye
= (4)-()=45A = (== ee
‘Answer: (A) 50 kgs (B) 40 kgs (C) Rs.120A, (D) Rs.350A, (E) Rs.120F, (F) Nil, (G) Rs.650A.
| >» 2. Labour Cost Variances. = + =
5: Labour Cost Variances - Various methods of classification
Given the following data, compute the relevant variances —
Particulars Skilled ‘Semi-skilled Un-skiled
Number in Standard gang (for 40 hour week) 16 6 3
Standard rate per hour (Rs.) 3 2 1
‘Actual number in the gang (for 42 hour week) 4 9 2
Actual rate of pay (Rs.) 4 |
3 |
nthe week, the gang as a whole produced 900 Standard Hours. However, during the week, 4 hours per worker was considered
idle time due to machine breakdown.
Solution: Working Notes:
1. Idle Time Variance = Abnormal (Actual) Idle Hours x Standard Rate.
For Skilled Labour: (14 x 4)x Rs3 = 168A,
For Semi-skilled Labour: (9% 4) x Rs.2
For Unskilled Labour: (2% 4) x Ret
Total Idle Time Variance
of Standard Hours (SH, 3. Computation of Revised Actual Hours.
Total Standard Hours (Given) = 900 hours Total AH = (14x42) + (9x42) + (2x42) = 1,050 DUH
Grade
Stance Hi, ce Semi-skilled —_Unskilled | Grade Skilled ‘Semi-skilled
Standarg 6 3 | Standard Mix 16 5
Hous S76hows 216hours 108 hours —_| Ran 672 hours _ 252 hours
___4. Variance Computation Chart
SH x SR AH Xx AR ‘AH x SR
pee (a): (3)
1728 | (14 x 42) RS.4= 2,352 | (14 a2) x ReSoH, 764 672 x RS.3=
ieee re (9 x 42) * RS.3=1,134| (9 x 42) x RS.2 = 756 252 x Rs2=
“Rayer *42) x R5.2= 168 | (2x 42) x Rol = 84 126 x Rs.l
2,268 RS.3,654 Rs.2,604 Ce y ‘Standard Costing
ow pces! Labour Cost Variance = (1) ~ (2) = 1,386 A
Labour Rati Variance = (3) (9) _ 1,050 A
Labour Efficiency Variance = (1) ~ (3) = 336A
Classification based on Classification based on
rs Grade (Mix) of Labour Idle Time Analysis
ur Mix Var,
=(@)~(@) 2425 Labour Sub-eff Var. Idle Time Var. Revised Eff. Var.
=()-(4)= 378A WNi = 248.0 (bal.fig) = 88 A
(Loe SNS
+ Vari:
lable OH Cost Variances
station 6: VOH Cost Variances
‘om the following information ining to Janus calculate th ‘i
Particulars Produeton (unig he Overhead Variances —
ae ariable Overheads (Rs.) Hours worked
[petal — 250 1 (See Note 1)
1, Standard time for T unit 4,500 (See
eS "S20 hour. 2. This neioes 300 ous abroeoT ig RS si Gee hee
Solution: 1. Basic Calculations
(@)VOH Standard Rate per hour = Budgeted VOH Rs 7,800
Budgeted Hours“ (30020) hous” ~ RS-2-30 per hour.
\VOH Standard Rate it = Cudgeted VOH_ _ Rs.7,800__
i mer” Budgeted Output "Soo ane ~ RES per unt.
; 2. Variance Computation Chart
Alternative 1: Computation based on Time Alternative 2: Computation based on Output
SH x SR AVOH ‘AH x SR AO x SR ‘AVOH ‘SOx SR
L (2) Q) _@) (a) (2)
| (25020) Rs.1.30 ph | Rs.7,000 | 4,500 hrsxRs.1.30 ph | 250 unitsxRs.26 pu | Rs.7,000 | 4500 Frs_ F
= R5.6,500 (Given) = RS5850 =R56500 | (even) | PFs pu “AS2S pu
= RS5.850
Variances: VOH Cost Variance = (1) - (2) = 500A
VOH Expenditure Variance = (3) ~ (2) = 1,450 A — =O) @)= oF
VOH Idle Time Variance VOH Revised
= 300 x 1,30 = 390A (Dake) = 1.040 F
2.000
Number of working days 4 eee Se
Production in units tin February Ve $1,800.
Fixed Overhead in RS. a+ per nour, Actual Hour Worked
Budgeted Fixed Overhead Rate 4, Basic Calculations
(given)
NH Rs.30,000__ « Re.1 per hour.
Solution: Budgeted OT = po hous 000 hrs isthe balancing Aoure,
= Hou ation, BH = 30,
(@) FOH standard Rate Per ROU" Budgeted HOME. onthe above quent! ei ————— ae .
Students FO! Rs.30,000
Budgeted FOH _ _ _R8.30,000__ Rs 450 per unit,
() FOH Standard Rate per unit = Gydgeted Output 20,000 units
2. Variance Computation Chart
Ao x SR AFOH BFOH AH x SR PFOM = eran
@ @) (3) @
31,500 hrs x Re.1 ph
nits x RS.1.50 PU | Rs31,000 | Rs.30,000 ie s.30,000 x 2? ~
2,000 Rs 33,000 = Rs.31,500 Fhe
FOH Cost Variance = (1) ~ (2) = 2,000 F
variances:
FOH Expenditure Variance = (3) ~ (2) = 1,000 A FOH Volume Variance = (1) ~ (3) ='3,000 F
FOH Capacity FOH Efficiency rn
Variance = (4) - (5) Variance = (1) - (4) Variance age
= 900A = 1,500 F =2A00e”)
Wiustration 8: FOH Variances at Es % gis 25 :
‘A. Company ie normal eapacity of 120 machines, working 8 hours per day of 25 days in a month. The Fixed Overhead!
are
1 Rs.1,44,000 per month. The standard time required to manufacture one unit of product is 4 hours. in
ooear worked 24 days of 40 machine hours per day and produced 5,305 units of output. The Actua Fixed salad
Rs.1 42,000, From the above, compute all FOH related variances. Overheads
1, Basic Calculations
‘Solution:
(2) Budgeted Hours = 120 machines x 8 hours x 25 days = 24,000 machine hours.
24,000 hours.
ARO NOUS _ = 6,000 units.
(©) Budgeted Output = Fours per unit
(©) FOH Standard Rate per hour = a aerated
_ Budgeted FOH
(d) FOH Standard Rate per unit = iiecans Gee
2. Variance Computation Chart
®
AO x SR AFOH BFOH AH x SR PFOH = BFOH x=
(4) (2) (3) (4) (5)
5,305 units x Rs.24 pu | Rs,1,42,000 | Rs.1,44,000 | (24 x 840) hrs x Rs.6 ph 24 2 ps1388
= RS.1,27,320 (Given) (Given) = Rs.1,20,960 ——
Variances: FOH Cost Variance = (1) ~ (2) = 14,680 A
FOH Expenditure Variance = (3) ~ (2) = 2,000 F FOH Volume Variance = (1) - (3) = 14,6804
Ba Capacity FOH Efficiency Fou ea
Variance = (4) - (5) Variance = (1) - (4) Variance = (5) =|
= 17,280. = 6,360 F = 5,760 A
‘Mustration : VOH aid FOH Variances aR Sani
Vinak Ltd has furnished the followin Information for the month of August,
Particulars get
ieee, meee
rs I
Fed Overhead 30,000
Variable Overhead. Rs.45,000
Working Days. Rs.60,000
Calculate the variances. 25
10.20 Standard Costing
rs = Rs.2,000 A
Its ome ance =Rs.400. | (4) Overheads Capacity Variance Rs. ee :
2 str Rua : jency Variance = Rs.1,01
(ate HOUS for ACtUAl Produ = Rs.6,400 | (5) Overheads Efficiency Va enn
yom Seo eenmae (6) Standard Hours for Actual Production _=1,000
at : :
Budget Ratios / Control Ratios
pate: Rtivity Se SR Rais se
sora Cr Sy
© and Eficen, er
ion Y Ratio are. Control-Ratios or Bu
10n Chart. awe ioweve
iysrtion 12: Budget Ratiog
foeite Efficiency and Capaci
using the FOH Variance
ven here.
No7
roduction
« jutgeted Pr
hours
ae | Hours worked 500
rd Hou
acc ee
2. Capacity Ratio — _ Actua Hours
‘Budgeted Hoe =——_500 hours .
Budgeted Hours” = tap units x8 hoursy ~ 78-125%
nstation 13: Budget Ratios ion
wn Rte of 8 Concem 895.8% wie ily Ratiois 105% Wht ine Moo
Solution: The relationship is Activity (or Volume) Ratio = Ca —
on substitution,
i Ratio = —Actual Output _ 5,000 units
> 1 ™ ee .
mor 1Nolume Ratio = = Aci Oui 6.000 rts = 83.23%
83.33% =
83.33%
On solving, we have, Efficiency Ratio = Bat = 112.11%
[station 15: Budget Ratios FOH Compitations” aa 5 .
AcomPany manufactures two ets X and Prout Xreques ous to praduce wie Prd Yrgutes 1
tz He ing os o ae ca oe ae
Mt
i i Y. The Budgeted Hours are 1,88,000 for the year”
acnKtr® in the Production Department to produce X and
Cepacity, Activity and Efficiency Ratio and establish their inter-rlatioship.
lution: OH Computation Chart, ghen below =
Solution: Budget-Ratios can be easily computed using the F oa ies
1H Volume Variance related ratios are to be cor _
RR FOH vo fae puted, the
ag
Gat @) — 2 2 “AN x SR
f AO x SR. mit Se ed AH = Actual Hours,
Time Factor ‘SH = Standard oiirs __— S po
“Ctded in above ous 4,86,000_ 22 days 8 hours x 100 men | e564.
Not Applicable | _1,86,000_
Canoe ornate | Tao = 17,600 hours. this question.)
Hours ony @ rs | Computation | 15,500 hous