Standard costing and Variance analysis

Introduction
The management evaluates the performance of a company by comparing it with some predetermined measures Therefore, it can be used as a process of measuring and correcting actual performance to ensure that the plans are properly set and implemented

Salient feature of SC
1. Set the predetermined standards for sales margin and production costs 2. Collect the information about the actual performance 3. Compare the actual performance with the standards to arrive at the variance 4. Analyze the variances and ascertaining the causes of variance 5. Take corrective action to avoid adverse variance 6. Adjust the budget in order to make the standards more realistic

APPLICATION OF S.C
1. A sufficient volume of std products or components should be produced. 2. Method ,procedure and materials should be capable of being standardized 3. A sufficient no. of costs should be control .

Difference between SC and BC

CAUSES OF DIFFERENCES SCOPE EXTENSIVE/INTENSIVE CO-ORDINATION LEVELS BASIS VARIANCE ANALYSIS PROJECTION SC LIMITED TO OPERATING INTENSIVE NO SC AT ATTAINABLE TECHNICAL DETAIL COST ACCOUNTS BC INTEGRATED PLAN ACTION EXTENSIVE YES AC AT MAX. PAST ACTUAL TO FUTURE LESS FINAL ACCOUNTS

 SC- An estimated or predetermined cost of performing an operation or producing a good or service, under normal conditions.

Advantages
A properly developed standard costing system with full participation and involvement creates a positive, cost effective attitude through all levels of management. The standard system encourages reappraisals of methods, materials and techniques that help to reduce the unfavorable variances. The standard costing system helps to draw management's attention towards those items which are not proceeding according to plan. Standard costing system makes the whole organization cost-conscious as it gives the focus to the standard cost and variance analysis. Standard costing system provides a basis for incentive scheme to workers and supervisors. Standard costing system simplifies the cost control procedures. Standard costing acts as an effective tool for business planning, budgeting, marginal costing , inventory valuation etc.

LIMITATION
1) Setting of standard is a very difficult task and it involves a high degree of technical skill. Therefore it is costly and will be expensive from the point of view of small concern. (2) Conditions of the business are charging. Hence , standard must be revised from time to time otherwise they lose importance. (3) Fixation of standard is not possible for every type of work or operation. It cannot be implemented in those industries which do not produce any standard product. (4) Sometimes it creates adverse psychological effects. if the it is set at a high level its non-achievement results in frustration and builds up resistance. It acts as a discouragement rather than incentive for better efficiency. (5) It is partly determined on the basis of past experience and partly on the basis of forecast of future expenses. Thus uncertainties are around standard and determination of correct standard is very difficult.

Variance analysis
A variance is the difference between the standards and the actual performance When the actual results are better than the expected results, there will be a favourable variance (F) If the actual results are worse than the expected results, there will be an adverse variance (A)
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Materials cost variance

Material Price variance

Material Usage variance

Labour cost variance

Labour rate variance

Labour Efficiency variance

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Variable Overhead variance

VO Expenditure variance

VO Efficiency variance

Fixed Overhead variance

Fixed Expenditure variance

Fixed Volume variance

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Cost variance
Cost variance = Price variance + Quantity variance Cost variance is the difference between the standard cost and the Actual cost Price variance = (standard price actual price)*Actual quantity A price variance reflects the extent of the profit change resulting from the change in activity level Quantity variance = (standard quantity actual quantity)* standard cost A quantity variance reflects the extent of the profit change resulting from the change in activity level

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Three types of cost variance

Material cost variance Labour cost variance Variable overheads variance

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Material and labour variance

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Material cost variance

Material price variance
= (standard price actual price)*actual quantity

Material usage variance

= (Standard quantity actual quantity)* standard price = (Standard quantity for actual production actual quantity production) * standard price

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Labour cost variance

Labour rate variance
= (standard price actual price)*actual quantity

Labour efficiency variance

= (standard quantity actual quantity)*standard price = Standard quantity for actual production actual quantity used) * standard price

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Material cost variance

Material price variance = (standard price actual price)*actual quantity = ($3 - $3.2)*2400 = $480 (A) Material usage variance = (Standard quantity actual quantity)* standard price = (Standard quantity for actual production actual quantity production) * standard price = (4*800 2400)*$3 = $2400 (F)

4000 units 1000 units

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Material cost variance

Material price variance Material usage variance Total Material cost variance $480 (A) $2400 (F) $1920 (F)

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Labour cost variance

Labour rate variance

= (standard price actual price)*actual quantity = ($5 - $6)*3200 = $3200 (A)

Labour efficiency variance

= (standard quantity actual quantity)*standard price = Standard quantity for actual production actual quantity used) * standard price = (3* 800 3200)*$5 = $4000 (A)
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3000 units 1000 units

Labour cost variance

Labour rate variance $3200 (A) Labour efficiency variance $4000 (A) Total labour cost variance $7200 (A)

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Overheads variance

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Overheads variance
Variable overheads variance Fixed overheads variance

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Variable overheads variance

Variable overheads variance is the difference between the standard variable overheads absorbed into the actual output and the actual overheads incurred

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Actual VO

Budgeted VO (SP * Actual hours worked

Absorbed VO (SP* standard hours for actual output

VO expenditure variance/ VO spending variance

VO efficiency variance

Total VO variance (under-/over- absorbed)

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Variable overheads variance

Variable overheads variance
= variable overheads absorbed actual variable overheads incurred

Variable overheads expenditure variance

= standard variable overheads for actual hours worked Actual variable overheads incurred

Variable overheads efficiency variance

= Standard variable overheads for standard hours of output Actual variable overhead absorbed = (standard hours for actual output Actual hours worked)* standard price
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Variable overheads variance

Variable overheads variance = variable overheads absorbed actual variable overheads incurred = $4800 - $5500 = $700 (A) Variable overheads expenditure variance = standard variable overheads for actual hours worked Actual variable overheads incurred = ($2* 3200 hr) - $5500 = $900 (F)
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 Variable overheads efficiency variance = Standard variable overheads for standard hours of output Actual variable overhead absorbed = (standard hours for actual output Actual hours worked)* standard price = (3 hr *800 units 4 hr *800 Actual hour per unit = $3200 units)*$2 hr/800 units = $1600 (A)

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Actual contribution

Budgeted contribution (Standard margin * Actual Volume)

Budgeted contribution (Standard margin* Standard volume)

Sales margin price variance

Sales margin volume variance

Total sales margin variance

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Fixed overhead variance

Fixed overheads variance = Fixed overheads absorbed Actual fixed overheads incurred = ($1*3*800) - $2600 = $200 A Fixed overheads expenditure variance = Budgeted fixed overheads Budgeted overheads absorbed = $3000 - $2600 = $400 F Fixed overheads volume variance = Absorbed fixed overheads Budgeted overheads absorbed = ($1*3*800) - $3000 = $600 A
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