Mrs Kamlesh Standard cost is A predetermined cost

: Mrs. Kamlesh

� Standard cost is: A predetermined cost. Used for cost-control. And the technique is known as standard costing.

� It is the preparation of standard costs; � Applying them to measure the variations; � Analysing the causes of variations; � With a view to maintain maximum efficiency in production.

Standards � Are common in business � Are often imposed by government agencies (and called regulations) Standard costs � Are predetermined unit costs � Used as measures of performance

§ Standards and budgets are both � Pre-determined costs � Part of management planning and control

§ A standard is a unit amount whereas a budget is a total amount � Standard costs may be incorporated into a cost accounting system

� Requires input from all persons who have responsibility for costs and quantities � Standards costs need to be current and should be under continuous review

� Differences between total actual costs and total standard costs � Unfavorable variances occur when too much is paid for materials and labor or when there are inefficiencies in using materials and labor � Favorable variances occur when there are efficiencies in incurring costs and in using materials and labor �A variance is not favorable if quality control standards are sacrificed

Variances must be analyzed to determine their significance � First, determine the cost elements that comprise the variance � For each manufacturing cost element, a total dollar variance is computed. Then this variance is analyzed into a price variance and a quantity variance §

Variances Material cost Labour cost Overheads cost

� Cost per unit which should be incurred � Based on the purchasing department’s best estimate of the cost of raw materials � Includes related costs such as receiving, storing, and handling

� Quantity of direct materials used per unit of finished goods � Based on physical measure such as pounds, barrels, etc. • Considers both the quantity and quality of materials required � Includes allowances for unavoidable waste and normal storage

§ Materials variances may be caused by a variety of factors, including both internal and external factors � Investigating materials price variances begins in the purchasing department, but the variance may be beyond the control of purchasing (for ex. , prices rise faster than expected) � Investigating materials quantity variance begins in the production department, but the variance may be beyond the control of production (for ex. , faulty machinery)

Material cost variances Usage variance Mix variance Price variance Yield variance

� Material cost variance(MCV): Difference between the standard cost of materials for actual output and actual cost of materials used. MCV=Standard Cost of Materials for Actual Output-Actual Cost of Materials Used � Material price variance(MPV): Material cost variance which is due to difference between standard cost of materials used for the output achieved and the actual cost of materials used. MPV=Actual usage(Standard Price-Actual Price)

� Material Usage Variance(MUV): Material cost variance which is due to the difference between standard quantity of materials specified for the actual output and the actual quantity of materials used. MUV=Standard Price(standard quantityactual quantity) � Material Mix Variance(MMV): That potion of material usage variance which is due to the difference between standard and the actual composition of a mixture.

Material Yield Variance(MYV): That portion of the material usage variance which is due to the difference between the standard yield specified and actual yield obtained

Labour variances may be caused by a variety of factors � Labor price variances usually result from either paying workers higher wages than expected or misallocating workers (for ex. , using skilled workers in place of unskilled workers) § � Labor quantity variances relate to the efficiency of workers and are usually related to the production department

Direct labour price standard � Rate per hour incurred for direct labor � Based on current wage rates adjusted for anticipated changes, such as cost of living adjustments � Includes employer payroll taxes, and fringe benefit §

Labour cost variance Efficiency variance Mix variance Rate variance Yield variance

� Labour Cost Variance(LCV): It is the difference between the standard cost of labour allowed for the actual output and the actual cost of labour employed. LCV=Standard Cost of Labour-Actual Cost of Labour � Labour Rate Variance(LRV): That portion of the labour cost variance which arises due to the difference between the standard rate specified and the actual rate paid.

LRV=Actual Time Taken(Standard Rate. Actual Rate) Labour Efficiency Variance(LEV): That part of labour cost variance which arises due to the difference between the standard labour hours specified for the output achieved and the actual labour hours spent. LEV=Standard Rate(Standard Time for Actual Output-Actual Time paid for)

� Labour Mix Variance (LMV): that portion of labour efficiency variance which is due to the change in the composition of labour force. � Labour Yield Variance(LYV): that part of labour efficiency variance which arises due to the difference between yield that should have been obtained by actual time utilised on production and actual yield obtained.

§ For manufacturing overhead, a standard predetermined overhead rate is used � The predetermined rate is computed by dividing budgeted overhead costs by an expected standard activity index � The standard manufacturing overhead rate per unit is the predetermined overhead rate times the activity index quantity standard (for example, direct labor hours)

§ Manufacturing overhead variances may be caused by a variety of factors � The controllable variance relates to variable manufacturing costs and usually is the responsibility of the production department • May result from either higher than expected use of indirect materials, indirect labor or supplies or increases in indirect manufacturing costs such as fuel

� The volume variance may be the responsibility of the production department (inefficient use of direct labor hours) or may come from outside the production department (lack of sales orders)

Total overheads variance Variable overheads Fixed overheads

Variable overheads variance Expenditure variance Efficiency variance

Fixed overheads variance Capacity variance Volume variance Expenditure variance Calendar variance Efficiency variance

� Overhead Cost Variance(OCV): It is the difference between the standard cost of overheads allowed for the actual output achieved and the actual overhead cost incurred. OCV=Actual Output x Standard Overhead Rate Per Unit-Actual Overhead Cost � Actual Overhead=Actual Output x Actual Overhead Rate Per Unit

� Variable Overhead Variance(VOV): It is the difference between the standard variable overheads cost allowed for the actual output achieved and the actual variable overheads cost. VOV=Actual Output x Standard Variable Overhead Rate-Actual Variable Overheads

� Variable Overhead Expenditure Variance: Actual Hours Worked x Standard Variable Overhead Rate Per Hour-Actual Variable Overhead Rate � Variable Overhead Efficiency Variance: (Standard Hours for Actual Production. Actual Hours)Standard Variable Overhead Rate Per Hour

� Fixed Overhead Variance(FOV): It is that portion of total overhead cost variance which is due to the difference between the standard cost of fixed overhead allowed for the actual output and fixed overhead cost incurred. FOV=Actual Output x Standard Fixed Overhead Rate Per Unit-Actual Fixed Overheads.

� Fixed Expenditure Variance(FEV): it is that portion of the fixed overhead variance which is due to the difference between the budgeted fixed overheads and the actual fixed overheads incurred. FEV=Budgeted Fixed Overheads-Actual Fixed Overheads. � Volume Variance=Actual Output x Standard Rate-Budgeted Fixed Overheads

� Capacity Variance: It is that portion of volume variance which is due to working at higher or lower capacity than the budgeted capacity. Capacity Variance=Standard Rate(Revised Budgeted Units-Budgeted Units) � Calendar Variance: Its that portion of the volume variance which is due to the difference between the number of working days and the number of actual working days.

� Calendar Variance=Increase or Decrease in Production due to more or less working days at the Rate of Budgeted Capacity x Standard Rate Per Unit. � Efficiency Variance: It is the difference between the budgeted efficiency and actual efficiency achieved. Efficiency Variance=Standard rate per unit(actual production-standard production)

Reporting variances � All variances should be reported to appropriate levels of management as soon as possible so that corrective action can be taken. � The form, content, and frequency of variance reports vary considerably among companies � Variance reports facilitate the principle of “management by exception” � In using variance reports, top management normally looks for significant variances §