Standard Costing

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Standard

Costing
Learning Outcomes

 Familiarity with the concept of variance analysis


Able to compute material variances
Able to compute material price variances
Able to compute material usage variances
Variance
• It is the difference between the standard cost
and actual cost.
• Variable can be favourable as well as
unfavourable.
Variance
Variance Analysis

Variance analysis is the process of analysing variances by


sub-diving the total variance in such a way that management
can assign responsibility for any off standard performance.

According to CIMA, London “Variance analysis is the process


of computing the amount of variance and isolating the causes
of variance between actual and standard”.
Types of Variance
• Material cost variance
• Labour cost variance
• Overhead cost variance
Types of Variances

 Favourable Variances
When actual cost is less than standard cost, it is
known as favourable variance.

 Unfavourable Variances
When the actual cost is more than standard cost, it is
known as unfavourable variance.
 Controllable Variances
 Uncontrollable Variances
Types of Variances
 Controllable Variances
If a variance can be regarded as the responsibility of a
particular person, with the result that his degree of
efficiency can be reflected in the size, then it is said
to be controllable variance.
 Uncontrollable Variances
If a variance arises due to certain factors beyond the
control of management, it is known as
uncontrollable variances.
Types of Variances
Methods Variance
If variances arises because of the use of different
method of production which will give rise to
different amount of cost, such a variance is known
as methods variance.
Revision Variance
After setting standards, sometimes standard cost has
to be revised on account of unavoidable changes.
The standard cost once set is nit disturbed again,
instead a revision variance is created (Diff between
standard cost & revised standard cost).
Material Cost Variance
(MCV)
This is the difference between the standard cost of
direct materials specified for the output achieved
and actual cost of direct materials used.
It is calculated as:
MCV= Standard cost of actual output-Actual cost
Where, standard cost= Std. Qty for actual
output*Std.price
Actual cost= Actual qty* actual price
Cause of variance
• The cause for material price variance can be
many including changes in the prices, poor
purchasing procedures, deficiencies in price
negotiation.
Material cost variance
(Importance)
• It gives an idea of how much more or less cost
has been incurred when compared with the
standard cost.
• This analysis of variance is an important tool
to be a tab on the deviations from the
standard set by the company.
MCV
Material Price Variance
(MPV)

This is the portion of material cost variance which is


due to the difference between the standard price
specified and actual price paid.
It is calculated as;
MPV= (Std.price-Actual price)*Actual Qty
According to given example,
MPV= (5-5.50)*4300
=2150 (A)
Material Usage/Qty Variance
This is that portion of MCV , which is due to the
difference between the std quantity specified and
the actual quantity used.
It is calculated as;
Material usage variance= (Std.qty for actual output-
actual qty) *std price
In the previous example,
It is MUV= (4000-4300)*5
=1500 (A)
Formula
• MUV = SQ –AQ *SP
SQ = STANDARD QUANTITY
AQ = ACTUAL QUANTITY
SP = STANDARD PRICE
Causes for material usage variance
Substandard or defective products

Pilferage

Wastage

Difference in material quantity


Interpretation
• When the MCV is negative, that means Actual
most > standard cost. Therefore the variance
will be unfavourable.
• When the MCV is positive, that means Actual
cost < standard cost. Therefore the variance
will be favouarble.
MCQs
Difference between standard and actual cost
is known as:
• Variance
• Profits
• Total cost
• None of these
MCQs
Difference between standard and actual cost
is known as: (a)
• Variance
• Profits
• Total cost
• None of these
The total cost variance is divided into:
a. Material variance
b. Labour Variance
c. Overhead variance
d. All of these
The total cost variance is divided into: (D)
a. Material variance
b. Labour Variance
c. Overhead variance
d. All of these
• Material variance is calculated as the
difference between:
a. Standard overhead cost-actual overhead cost
b. Standard cost of material and actual cost of
material
c. Standard labour cost-actual labour cost
d. None of these
• Material variance is calculated as the
difference between: (B)
a. Standard overhead cost-actual overhead cost
b. Standard cost of material and actual cost of
material
c. Standard labour cost-actual labour cost
d. None of these
Thank you

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