Strategic Cost Management

USOL, PU, Chandigarh

19 November , 2013
Standard costing
Management control can be exercised only if
benchmarks or norms exists against which
actual performance can be measured

For an organization as a whole, the strategic
planning exercise provides the basis for
developing performance expectations.
Standard, Standard Cost and Standard
Costing
A standard is a predetermined estimate of
quantities of input namely material, labour, and
others and the prices or usage rates.

Acc to Chartered Institute of Management
Accountants (CIMA), A standard is a
predetermined measurable quantity set in
defined conditions against which actual
performance can be compared, usually for an
element of work, operations or activity.

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Standard cost: are carefully predetermined costs that
are usually expressed on a per unit basis. They are
target costs basically.
Acc to CIMA, a predetermined calculations of how
much costs should be under specified working
conditions
It is built up from an assessment of the value of the
cost elements and correlates technical specifications
and the quantification of material, labour and other
cost to the prices/ wage rates expected to apply during
the period in which the standard cost is intended to be
used
Standard Costing
Standard costing: acc to CIMA, a technique which uses
standard for costs and revenue for the purpose of control
through variance analysis

Utilities of Standard costing
Cost control
Revenue decisions and diagnosis
inventory valuation
motivation
Aid to record keeping and cost reduction
management by exception
performance measurement




Variance and variance analysis
Variance: acc to CIMA, the difference
between planned, budgeted or standard costs
and actual costs.

Variance analysis: acc. to CIMA, the analysis
of variance arising in a standard costing
system into their constituent parts
Types of VA
Variance analysis
DM variance
DL variance
Overhead variance
DM cost variance analysis
Material cost
variance
Price
variance
Usage
variance
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Usage
variance
Yield
variance
Mix
variance
formulae
DM cost variance: difference between
standard cost of actual quantity of goods
manufactured and the actual material cost
It shows the saving or excess cost in purchase
and use of direct material.

DM variance= (SC* actual output)- actual
material cost of input
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Material price variance: is the difference
between the standard price and the actual
price of materials used in the production.

Material price variance= AQ( SP- AP)
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Material usage variance: difference between
standard quantity of material prescribed for
actual production and actual quantity used
Represents the efficiency with which the
materials have been used in the manufacturing
process.
Material usage variance= SQ used in actual
production- actual quantity used
Standard quantity used in actual production=
Standard material quantity* actual
production/standard production

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Material yield variance: is a subdivision of the
material usage variance
Difference between standard quantity of
production based on actual input and actual
quantity produced
= Standard cost( standard yield/output based on
actual input- actual output)
Standard output based on actual input= Standard
output* actual material input/ standard material
input
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Material mix variance: difference between
standard mix of materials and the actual mix
of materials.
Highlights the cost incidence of the difference
between the actual quantity used quantity
that should have been used if the total
quantity of input was mixed in accordance
with standard proportion.
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= standard cost of standard mix- standard cost
of actual mix

Standard mix= standard quantity of each
material in a mix* actual total input/ standard
total quantity of materials in a mix.
DL cost variance analysis
DL cost
variance
Efficiency
variance
Mix
variance
Idle time
variance
Rate
variance
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DL cost variance: difference between standard
direct labour cost of actual quantity of goods
produced and the actual direct labour cost

= (SR* Standard lab hr. used)- (AR*actual
direct labour used)
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Direct labour rate variance: difference
between standard wage rate and the actual
wage rate per hour of labour employed in
manufacturing.
= Actual hours( SR- AR)
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Direct labour mix variance: sub division of
direct labour usage variance
Difference between standard composition and
the actual composition of direct labour.
= standard cost of standard mix- standard cost
of actual mix
Standard mix= standard time for each grade of
labour* actual time taken/ standard total time
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Direct labour idle time variance: difference
between actual hours paid and hours actually
worked

= standard wage rate per hour* abnormal idle
hours
Overhead variance
Overhead
variances
Variable overhead
variance
Variable overhead
spending
variance
Variable overhead
efficiency
variances
Fixed overhead
variance
Fixed overhead
budget variances
Fixed overhead
volume variances
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Variable overhead spending variance=
(Standard variable overhead rate* actual hours
worked)- actual variable overhead

Standard variable overhead rate per hour=
Budgeted variable overhead/ budgeted hours
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Variable overhead efficiency variance
is the difference between the standard time
allowed for actual production and actual time
taken.
Highlights the cost incidence of the difference
between the actual efficiency and the standard
efficiency
=Standard variable overhead rate per hour( actual
output in terms of standard hours- Actual hours
worked)
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Fixed overhead variance analysis
difference between the budgeted fixed
overhead and actual fixed overhead
= (standard fixed overhead rate* actual
production)- actual fixed overheads
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Fixed overhead budget variance
=budgeted fixed overhead- actual fixed
overheads
Fixed overhead volume variance=
Standard fixed overhead rate( budgeted output-
actual output)

Thank you!