2. Standard Cost ?
Standard cost are predetermined cost that are
developed from analysis of both:
- Past operating cost, quantities and times
- future cost and operating conditions
3. Standard cost flow
Standard cost of direct material, direct labour,
other direct expenses and manufacturing
overheads to be calculated.
At the end of the period / activity actual cost to
be compared with standard cost
4. Management cycle
Managers use standard cost throughout
the management cycle as follows:
Planning stage standard cost aid
in the development of budgets
Executing stage standard cost,
quantities and time are applied to work
performed
5. Management cycle
cont………….
Reviewing stage actual costs are compared
with standard cost to determine variances to
improve operations
Reporting stage, a variance repot provide
information on operations and managerial
performance
6. Significance of standard cost ?
In today’s global competitive environment new
standards / measurements help to managers
- reduce operating cost
- reduce processing time
- improve quality
- improve customer satisfaction
- improve on-time delivery
7. Standard cost cont; …..
Standard costs are used with job/order costing
or with process costing
Standard costs usually express as cost per
unit of finished product or cost per process
8. Standard cost cont ;………
Standard cost is based on ;
- engineering estimations
- forecasted demand
- worker out put
- time and motion studies
- type and quality of direct materials
9. Standard cost per unit
Consists of:
- direct material cost standard
- direct labour cost standard
- other direct cost standard
- variable manufacturing overhead cost
standard standard
-fixed manufacturing overhead cost standard
10. Variance Analysis
There are four steps
- compute variances
- determine the causes of variances
- identify the performance achieved
- take actions to correct the problems
12. Example
Income statement of ABC for the is quarter of 2013 is
given below
Sales (18,000 units)
Rs. 720,000
Less; cost of sales
direct material
432,000
direct labour
116,600
other direct expenses 30,000
factory over head
44,000
admin & selling O/H 32,000 655,800
Net profit
64,200
13. Standard cost and Actual cost
Standard output and sales for the period was 20,000 and
standard cost and cost profit is given below.
direct material
Rs. 22.50
direct labour
6.60
other direct expenses
1.50
factory over head -fixed
1.50
variable
1.00
Admin& selling 1.50
total standard cost
34.00
standard Profit
4.00
Selling price
38.00
14.
Labour was paid @ the rate of Rs.2.20 per
hour and material price was Rs.8.00 per unit.
Factory overhead (actual )include
Rs.28,000fixed and the balance amount is
variable. There was no inventory at the
beginning or at the end of the year the
company employees labour hour rate as the
basis of absorption of the fixed overhead.
Calculate the variances- cost, revenue and
profit
And prepare a reconciliation statement.
16. Cost Variances
A. Total cost variance (TSC-TAC)
Rs. 612,000 – 655,800 = Rs. 43,800 UF
Material cost variance
(SMC- AMC)
Rs. 405,000- 432,000 = Rs. 27,800 UF
a. Material price variance (SR-AR) x AQ
Rs. 7.50-8.00 x 54,100 = Rs. 27,050 UF
b. Material usage variance (SQ-AQ) x SR
54,000- 54,100 x Rs.7.50 = Rs. 750 UF
17. Cost Variances
cont;….
2. Labour cost variance (SLC-ALC)
Rs. 108,000- 116,600 = Rs. 8,600
UF
a. Labour rate variance (SR- AR) x AH
Rs. 2.00-2.20 x 53,000 = Rs. 10,600 UF
b. Labour efficiency variance (SH- AH) x SR
54,000- 53,000 x Rs. 2.00 = Rs.2000 F
3. Direct expenses variance (SC-AC)
Rs. 27,000 -30,400 =3,400 UF
18. Cost Variances
cont;…
4. Fixed overhead variance
(SFO charged to the production- AFO incurred)
Rs. 27,000 -28,000 = 1,000 UF
a. Fixed overhead spending variance (Budgeted OH – Actual OH)
Rs. 30,000-28,000 = 2,000 F
b. Fixed overhead efficiency variance (SH-AH) x FOH rate per hour
54,000- 53,000 x Rs. 0.50 Rs. 500 F
c. Capacity Variance (Normal capacity in hours- actual hours utilized) x
FOH rate per hour
60,000 -53,000 x Rs.0.50 = Rs.3,500 UF
19. Cost Variances Cont;….
5. Variable overhead variance (SVOC- AVOC)
Rs. 18,000 – 16,000 = Rs. 2,000 F
a. Variable overhead spending variance (Actual OH- Standard OH at
actual hours)
Rs 16,000 – 17,666.67 = Rs.1,666.67 F
b. Variable overhead efficiency variance (SH-AH) x VOH rate per hour
54,000- 53,000 x Rs. 1/3 = Rs.333.33 F
20. Cost Variances Cont;….
6. Admin. & Selling expenses variance (SC-AC)
Rs. 27,000- 32,000 = Rs. 5,000 UF
a. Admin. overhead spending variance (Budgeted OH – Actual OH)
Rs. 30,000- 32,000 = Rs. 2,000 UF
b. Capacity variance (Normal out put- actual out put) x Standard OH
rate per unit
20,000-18,000 x Rs.1.50 = Rs. 3,000 UF
21. Sales variances
B. Sales revenue variance (BS-AS)
Rs. 760,000 -720,000 = Rs. 40,000 UF
a. Sales price variance (SSP-ASP) x AQ
Rs. 38- 40 x 18,000 = 36,000 F
b. Sales volume variance (SQ- AQ) x SSP
20,000 – 18,000 x Rs.38 = Rs. 76,000 UF
22. Profit variances
C. Profit variance (S.profit- A.profit)
Rs. 80,000- 64,200 = Rs. 15,800 UF
a. Sales price variance = Rs. 36.000 F
b. Sales volume variance (SQ- AQ) x S. profit per unit
20,000- 18,000 x Rs.4 = Rs.8,000 UF
c. Cost variance = Rs. 43,800 UF
23. Profit Reconciliation
Budgeted sales Revenue
Sales price variance
Sales volume variance
Actual sales
Less; Standard cost of actual sales (18,000 units)
D. material
D. Labour
Other D. expenses
Factory OH - Fixed
- Variable
Admin, & Selling expenses
Budgeted net profit
760,000
36,000
(76.000)
720,000
(405,000)
(108,000)
( 27,000)
( 27,000)
( 18,000)
27,000)
108,000
next page
24. Cont;…..
Cost variances;
Material price
Material Usage
Labour rate
Labour efficiency
Direct expenses
Fixed OH spending
Fixed OH efficiency
Fixed OH capacity
Variable OH spending
Variable OH efficiency
Admin. OH spending
Admin. OH capacity
Actual profit
F
2,000
2,000
500
1,666.67
333.33
UF
27,050
750
10,600
3,400
3,500
2,000
3,000
(43,000)
Rs. 64,200
