Standard Costing & Variance Analysis!

Definitions• Standard Cost: (CIMA) “Standard cost is the pre-

determined cost based on the technical estimates for materials, labour and overhead for a selected period of time for a prescribed set of working conditions.”

• Standard Costing: (CIMA) “the preparation of standard costs and applying them to measure the variations from the actual costs and analyzing the causes of variations with a view to maintain maximum efficiency of the operations so that any remedial action may be taken immediately.

Variance Analysis

• Cost Variance: is the difference between the standard cost and the actual costs.

• Variance Analysis: is the resolution into constituent parts and the explanation of the variances.

Favorable & Unfavorable Variances.Controllable & Uncontrollable Variances

What all could be the reasons for the

actual manufacturing cost or the sales/profit to vary from their standard costs and

price/profit?

Favorable & Unfavorable Variances• Favorable variances(F) arise

when actual costs are less than budgeted costs or actual sales/profit exceed budgeted.• Un favorable variances(U) arise when actual costs exceed budgeted

or actual sales/profit are less than budgeted.

ProfitProfit Revenue CostsRevenue CostsActual > Expected Actual > Expected F F F F U UActual < ExpectedActual < Expected U U U U F F

Standard Costs

Benchmarks formeasuring performance.

The expected levelof performance.

Based on carefullypredetermined amounts.

Used for planning labor, materialand overhead requirements.

Standard Costs are

Setting Standard Costs

Accountants, engineers, personnel administrators, and production managers combine efforts to set standards

based on experience and expectations.

Standards vs. Budgets

Are standards the same as budgets?

A standard is the expected cost for one unit.

A budget is the expected cost for all units.

The price variance is computed on the entire quantity

purchased.

The quantity variance is computed only on the quantity

used.

How will the material price variance and material usage be computed if the quantity purchased is different from

the quantity used?

Material Cost Variance

• Material cost variance arises due to variance in the price of material or its usage.

• This can be calculated by using the following formula,• Material Cost Variance = (SQ x SP) – (AQ x AP) ,

• Where,SQ = Standard quantity for the actual outputSP = Standard price per unit of materialAQ = Actual quantityAP = Actual price per unit of material

• A positive result implies favorable variance and a negative result implies unfavorable variance (adverse variance).

Material Price Variance • Material price variance may arise due to number of reasons like

fluctuations in market prices, error in buying due to wrong purchasing policy etc,

• This can be calculated by using the following formula,• Material Price Variance = (SP – AP) x AQ

• Where,SP = Standard price per unit of materialAQ = Actual quantityAP = Actual price per unit of material

• A positive result implies favorable variance and a negative result implies unfavorable variance (adverse variance).

Material usage Variance• Material Usage variance is the difference between the actual

quantities of raw materials used in production and the standard quantities that should have been used to produce the product,

• MUV may arise due to number of reasons like Pilferage of materials , Wastage , Sub-standard or defective materials etc,

• This can be calculated by using the following formula,• Material Usage Variance = (SQ – AQ) x SP

Material Mix Variance• MMV is calculated when a product uses mixture of

different raw materials,

• MMV is that portion of the materials quantity variance, which is due to the difference between the standard and actual composition of a mixture.

• It can be represented by the following formula:• Material mix variance =

• (Standard cost of actual quantity of the standard mixture – Standard cost of actual quantity of the actual mixture) or (Revised SQ – AQ) x SP

Practical Problems

1. A furniture company uses sunmica tops for tables. It provides the following data:St. Quantity for sunmica per table 4 sq. ftSt. price per sq. ft of sunmica Rs. 5Actual prod. Of tables 1000Sunmica actually used 4,300 sq.ftActual purchase price per sq. ft Rs. 5.50.Calculate Material variances.

St. price x St. Quantity 5 x 4000 = 20000St. price x Actual Quanity 5 x 4300 = 21500Actual Pricex Actual Quanity 5.5 x 4300 = 23650

Material Cost Variance -3650Material Usage Variance -1500Material Price Variance -2150

2. From the following information calculate (i) material cost variance (ii) material price variance (iii) Material Usage variance

Standard output 100 unitsStandard Material per unit 3 Ibs

Standard price per Ib. Rs. 2Actual output 80 units

Actual price Rs. 5.50Actual materials used 250 Ibs

Material Cost Variance 65Material Usage Variance -60Material Price Variance 125

3. From the following information calculate (i) material cost variance (ii) material price variance (iii) Material Usage variance

Quantity of material purchased 3000 unitsValue of material purchased Rs. 9000

St. quantity of raw material req. p.u. 25 unitsStandard rate of material unit Rs. 2 per

Opening stock of material NilClosing stock of material 500 unitsFinished production during the period 80 units

St. price x St. Quantity 2 x 2000 = 4000St. price x Actual Quanity 2 x 2500 = 5000Actual Pricex Actual Quanity 3 x 2500 = 7500

Material Cost Variance -3500Material Usage Variance -1000Material Price Variance -2500

4. The standard output of the production house has been set at 1000 pieces per month. However actually 1020 pieces were produced. Following is the data for actual and standard production.

Standard Actual ResultsUsage 1.5 sq. ft per pad 1.3 sq. ft per padPrice Rs. 0.15 per sq. ft Rs. 0.18 per sq. ftCalculate all material variances.St. price x St. Quantity 0.15 x 1530 = 229.5St. price x Actual Quanity 0.15 x 1326 = 198.9Actual Pricex Actual Quanity 0.18 x 1326 = 238.68

Material Cost Variance -9.18Material Usage Variance 30.6Material Price Variance -39.8

St. price xSt. Quantity 1 x 300000 = 300000St. price xActual Quanity 1 x 280000 = 280000Actual PricexActual Quanity 0.9 x 280000 = 252000

Material Cost Variance 48000Material Usage Variance 20000Material Price Variance 28000

5. A mfg. concern, which has adopted standard costing, furnishes the following information:

Standard:Material for 70 kg. Of finished products 100 kgs.Price of materials Rs. 1 per kg.Actual:Output 210,000 kgsMaterial used 280,000

kgs.Cost of materials Rs. 2,52,000Calculate all material variances.

Material Mix Variance

• Material Mix Variance= [Revised St. Qty – Actual Qty] x St. PriceRev. St. Qty = St. Qty of 1 Mat. x Actual Total

Standard Total

From the following information regarding a standard product, compute 1. Mix 2. Price 3. Usage Variance:

Raw Material Standard ActualX 40 units @ Rs. 50 p.u. 50 units @ Rs. 50 p.u.Y 60 units @ Rs. 40 p.u. 60 units @ Rs. 45 p.u.

Total 100 units 110 unitsRev.ST. QtySt. PriceSt. QtyAct.PriceAct. Qty

Revised St. Qty X 40/ 100 x 110 = units 44 50 40 50 50Revised St. Qty Y 60/ 100 x 110 = units 66 40 60 45 60Material Mix Variance

For X -300For Y 240 -60 MMV

Material Usage VarianceFor X -500For Y 0 -500 MUV

Material Price VarianceFor X 0For Y -300 -300 MPV

From the following information regarding a standard product, compute 1. Mix 2. Price 3. Usage Variance:

Material

Standard Actual

Qty. Rs. p.u. Total QtyUnit Price Total

A 4 1.00 4.00 2 3.50 7.00

B 2 2.00 4.00 1 2.00 2.00

C 2 4.00 8.00 3 3.00 9.00

Total 8 7.00 16.00 6.00 8.50 18.00

St. PriceSt. Qty Act.Price Act. QtyRevised St. Qty A 4/ 8*6= units 3.00 1.00 4 3.50 2Revised St. Qty B 2/ 8*6= units 1.50 2.00 2 2.00 1Revised St. Qty C 2/ 8*6= units 1.50 4.00 2 3.00 3Material Mix Variance

For A 1For B 1 -4 MMVFor C -6

Material Usage VarianceFor A 2For B 2 0 MUVFor C -4

Material Price VarianceFor A -5For B 0 -2 MPVFor C 3

Material variances

• Labour Cost Variance SH*SR – AH*AR • Labour Usage/Efficie. Var (SH-AHactual)*SR• Labour Rate Variance (SR-AR)* AH• Idle time Variance SR*Idle time

Labour Variances

Practice ProblemA firm gives you the following data:

Standard time per unit 2.5 hoursActual hours worked 2,000 hoursStandard rate of pay Rs. 2 per hour25 % of the actual hours has been lost as idle time.Actual output 1,000 unitsActual wages Rs. 4,500

Calculate all labour variances.

St. Rate 2 LUV 2000FSt. Hrs 2500 LPV -500UActual Rate 2.25 ITV 1000FActual Hrs 2000 LCV 500FIdle time 500

Practice ProblemsCompute the Labour variances from the

information given below:Standard time 3 hours per unitStandard rate of wages Rs. 6 per hourActual production 700 unitsActual time taken 2000 hoursActual Wages Rs. 14000 Idle time 50 hours

St. Rate 6 LUV 900F

St. Hrs 2100 LPV -2000U

Actual Rate 7 LCV -1400U

Actual Hrs 2000 IDV 300

Idle time 50

Labor Efficiency Variance- Causes

UnfavorableEfficiencyVariance

Poorlytrainedworkers

Poorquality

materials

Poorlymaintainedequipment

Poorsupervisionof workers

Responsibility for Labor Variances

I am not responsible for the unfavorable labor

efficiency variance!

You purchased cheapmaterial, so it took more

time to process it.

You used too much time because of poorly

trained workers and poor supervision.

Overhead Variances• Overhead variances arise due to the difference

between actual overheads and absorbed overheads. The estimate of budget of the overheads is to be divided into fixed and variable elements. i.e.

1.Variable overhead variances.– Variable overhead budget or expenditure variance, and– Variable overhead efficiency variance.

2.Fixed overhead variances.

Formulas1. Variable overhead variances.

(Standard variable o/h for actual prodn. – Actual variable o/h)2. Variable overhead budget or expenditure variance,

(Budgeted variable overhead for actual hours – Actual variable overhead) i.e. AH*BR – Actual Cost

3. Variable overhead efficiency variance.Standard variable overhead rate per hour [Std. hours for actual output – Actual hours] i.e. (SH-AH) *SR

4. Fixed Overhead VarianceBudgeted FO- AFO

Sales Variances

• Sales Margin Price Margin = (AP-BP)*AQ• Sales Margin Volume variance = (AQ-BQ)*BC• Total Sales Margin variance = AQ*AC – BQ*BC