Presented by:

Mr. Jaswant Singh

Mr. Kadir Shaikh
Ms. Jigyasa Soni
Ms. Vibhavari Pawar
1.Definition of Standard Cost & Standard Costing.
2.Developing OR Setting Standards.
3.Variance Analysis.
4.Material Variance.
5.Labour Variance.
6.Overhead Variance.
7.Sales Variance.
8.Profit Variance.
9.Disposition of Variance.
10.Limitations of Standard Costing.
11.Control Ratios.
 Definition of Standard Cost &
Standard Costing.
 Standard Cost
• A predetermined cost which is calculated from
management’s standards of efficient operation and the
relevant necessary expenditure. It may be used as a basis
for price fixing and for cost control through variance
analysis.
 Standard Costing
• The preparation and use of standard costs, their comparison
with actual costs, and the analysis of variance to their
causes and points of incidence.
 Developing OR Setting Standards.
• All factors related with standard setting should be
considered in the establishment of standards.
• Standards must be established for a definite period of time
so that they can be effective in performance evaluation,
control and analysis of costs.
• Standards are usually used for six- or twelve- month
period.
• Standards are developed for:
Materials
Labour
Overhead
Sales
Advantages of Standard Costs
 Variance Analysis.
• The function of standards in cost accounting is to indicate
variances between standard costs which are allowed and
actual costs which have been recorded.
• Variances as the difference between a standard cost and the
comparable actual cost incurred during a period.
• Variance analysis can be defined as the process of
computing the amount of, and isolating the cause of
variances between actual costs and standard costs.
• Variance analysis involves two phases:
Computing of individual variances
Determination of the cause(s) of each variance.
 Material Variance.
Material Standard is developed on two basis
1. Material Quantity Standard
2. Material Price Standard
The following variances constitute materials variances:
 Material Usage(Quantity) Variance.
The material quantity or usage variance results when actual
quantities of raw materials used in production differ from
standard quantities that should have been used to produce
the output achieved. It is that portion of the direct material
cost variance which is due to the difference between the
actual quantity used and standard quantity specified.
MUV= (AQ-SQ)x SP
MUV= Material Usage Variance
AQ= Actual Quantity
SQ= Standard Quantity
SP= Standard Price
Causes Of Material Usage Variance:

1. Poor materials handling

2. Inferior workmanship by machine operator
3. Faulty equipment
4. Cheaper, defective raw material causing excessive
scrap.
5. Inferior quantity control inspection
6. Pilferage
7. Wastage due to inefficient production method.
 Material Price Variance
A materials price variance occurs when raw materials are
purchased at a price different from standard price. It is that
portion of the direct materials which is due to the difference
between actual price paid and standard price specified and
cost variance multiplied by the actual quantity.
MPV=(AP-SP)x AQ
MPV= Material Price Variance
AP= Actual Price
SP= Standard Price
AQ= Actual Quantity.
Causes Of Material Price Variance:

1. Recent changes in purchase price of materials.

2. Failure to purchase anticipated quantities when
standard were established
3. Not taking cash discounts anticipated at the time of
setting standard, resulting in higher prices
4. Substituting raw material differing from original
materials specifications
5. Freight cost changes & changes in purchasing &
storekeeping costs.
 Material Cost Variance.
It is the difference between the actual cost of direct materials used
and standard cost of direct materials specified for the output
achieved. This variance results from differences between quantities
consumed and quantities of materials allowed for production and
from difference between prices paid and prices predetermined.
MCV=(AQ x AP)-(SQ x SP) OR MCV= MUV+MPV
MCV= Material Cost Variance
AQ= Actual Quantity
AP= Actual Price
SQ= Standard Quantity
SP= Standard Price
MUV= Material Usage Variance
MPV= Material Price Variance
 Labour Variance.
Labour standards are also established for both cost and
quantity(efficiency). For standard cost purpose, direct labour is
treated separately from indirect labour, which is included in the
factory overhead. Two standards are usually developed for labour
costs:
1. Labour usage (efficiency) standard
2. Labour cost (rate) standard
The following variances constitute labour variances:
 Labour Efficiency Variance
If actual direct labour hours required to complete a job differ
from the number of standard hours specified, a labour
efficiency variance results.
LEV= (AH-SH for the actual output) x SR
LEV= Labour Efficiency Variance
AH= Actual Hours
SH= Standard Hours for the actual output
SR= Standard Rate per hour
Causes Of Labour Efficiency Variance:
1. Machine Breakdown
2. Inferior raw material
3. Poor supervision
4. Poor employee performance
5. Lack of timely material handling
6. Inefficient production scheduling
7. Inferior engineering specifications
8. New inexperienced employees
9. Inefficient training to workers
10.Poor working conditions
 Labour Rate Variance
When actual direct labour hour rates differ from standard
rates, the result is a labour rate variance. Favorable rate
variance arise whenever actual rates are less than standard
rates; unfavorable variances occur when actual rates exceed
standard rates.
LRV= (AR-SR) x AH
LRV= Labour Rate Variance
AR= Actual Rate
SR= Standard Rate
AH= Actual Hours
Causes Of Labour Rate Variance:
1. Recent labour rate changes in the industry
2. Employing a man of a different grade as mentioned
in the standard
3. Labour strike
4. Labour layoff
5. Employee sickness
6. Paying high for overtime then mentioned in the
standard.
 Labour Cost Variance
It denotes the difference between the actual direct wages paid
and the standard direct wages specified for the output
achieved.
LCV=(AH x AR- SH x SR) OR LCV= LEV+LRV
LCV= Labour Cost Variance
AH= Actual Hours
AR= Actual Rate
SH= Standard Hours
SR= Standard Rate
LEV= Labour Efficiency Variance
LRV= Labour Rate Variance
 Overhead Variance.
The analysis of factory overhead variances is more complex
than variance analysis for direct materials and direct labour.

Overhead cost variance

Fixed overhead Variable overhead

variance variance

Fixed Variable Variable

Fixed overhead
overhead Overhead Overhead
expenditure
volume Expenditure Efficiency
variance
variance Variance Variance

Calendar Efficiency Capacity

Variance Variance Variance
 Total Overhead Cost Variance
Overall overhead variance is the difference between the actual
overhead cost incurred and the standard cost of overhead
for the output achieved.

Total Overhead Cost Variance = (Actual overhead

incurred- Standard hours for the actual output x
standard overhead rate per hour)
OR
Total Overhead Cost Variance = Actual overhead
incurred – (Actual output x standard overhead rate per
unit)
 Variable Overhead Variance.
It is the difference between actual variable overhead cost and
standard variable overhead allowed for the actual output
achieved.

Variable Overhead Variance = Actual overhead cost –

(Actual output x variable overhead rate per unit)
OR

Variable Overhead Variance = Actual overhead cost –

(Standard hours for actual output x standard variable
overhead rate per hour)
 Fixed Overhead Variance
It indicates the difference between the actual fixed overhead
cost and the standard fixed overhead cost allowed for the
actual output.

Fixed overhead variance = Actual overhead cost – fixed

overhead absorbed

OR

Fixed overhead variance = Actual overhead cost –

(Standard hours for actual output x standard fixed
overhead rate per hour)
 Variable Overhead
Expenditure(Spending Or Budget)
Variance
It indicates the difference between actual overhead and
budgeted variable overhead based on actual hours work

Variable Overhead Expenditure Variance = (Actual

variable overhead – budgeted variable overhead)
 Variable Overhead Efficiency
Variance
When the actual quantity produced and the standard quantity
fixed might be different because of higher or lower
efficiency of workers employed in the manufacturing of
goods.

Variable Overhead Efficiency Variance = (Actual hours –

standard hours for actual output) x Standard variable
overhead rate per hour.
 Fixed overhead expenditure
(spending or budget) variance
It indicates the difference between actual fixed overhead and
budgeted fixed overhead. If actual fixed overhead costs are
greater than budgeted fixed costs, an unfavorable variance
results because actual costs exceeds the budget.

Fixed overhead expenditure variance = (actual fixed

overhead-budgeted fixed overhead)
 Fixed Overhead Volume variance
Volume variance relates to only fixed overhead this varianc
arises due to the difference between the standard fixed
overhead cost allowed for the actual output and the
budgeted fixed overhead based on standard hours allowed
for actual output achieved during the period.
Fixed Overhead Volume variance = (actual production-
budgeted production) x standard fixed overhead rate
per unit
OR
Fixed Overhead Volume variance = (budgeted overhead
applied to actual output-budgeted fixed overhead based
on standard hour allowed for actual output)
Causes of overhead volume variance

1. Failure to utilize normal capacity.

2. Lack of sales order.
3. Too much idle capacity.
4. Inefficient or efficient utilization of existing capacity.
5. Machine breakdown.
6. Defective materials.
7. Labour troubles.
8. Power failures.
 Fixed Overhead Calendar Variance
It is that portion of volume variance which is due to the difference
between the number of actual working days in the period to which the
budget is applicable and budgeted number of days in budget period.
Calendar Variance =(number of actual working days – no. of
budgeted working days) x Standard Fixed Overhead rate per
day.

Hour basis
Calendar Variance = (Revised budget capacity hours – Budgeted
hours) x Standard fixed overhead rate per hour

Output basis
Calendar variance = (Revised budget quantity in terms of actual no.
of days worked – Budgeted quantity) x Standard fixed overhead
rate per unit
Fixed Overhead Efficiency Variance
It is that portion of volume variance which arises when actual
hours of production used for actual output differ from
standard hours specified for that output.

Fixed Overhead Efficiency Variance = (Actual hours –

Standard hours for actual production) x Standard Fixed
Overhead rate per hour
OR
Fixed Overhead Efficiency Variance = (Actual production
– Standard production as per actual time available) x
Standard Fixed overhead rate per unit
 Fixed Overhead Capacity Variance
It is that part of fixed overhead volume variance which is
due to difference between the actual capacity (in hours)
worked during the given period and the budgeted capacity
(in hours)

Fixed overhead capacity variance = (Actual capacity hours

- Budgeted capacity hours) x Standard Fixed overhead
rate per hour
Variance Relationships
 Sales Variance.
It is the difference between the actual value of sales
achieved in the given period and budgeted value of sales.
Sales variance can be calculated by using any one of the
following:-

1. Sales Variance based on TURNOVER

2. Sales variance based on MARGIN
 Sales Variance Based on Turnover
Variance based on turnover shows the difference
between total sales and total budgeted sales
 Sales Value Variance
This variance shows the difference between actual sales value
and budgeted sales value.
Sales Value Variance= (Actual value of sales- Budgeted
value of sales)
Actual Sales= Actual quantity sold x Actual selling price
Budgeted Sales= Standard quantity x standard selling price

OR

Sales Value Variance= (Actual quantity x Actual selling

price)- (Selling quantity x Standard selling price)
 Sales Price Variances
This variance is due to the difference between actual selling
price and standard or budgeted selling price.

Sales price variance = (Actual selling price – Budgeted

selling price) x Actual quantity
 Sales volume variance
It arises when the actual quantity sold is different form the
budgeted quantity.

Sales volume variance = (Actual quantity – Budgeted

quantity) x Budgeted selling price
 Sales Variance Based on Margin
The Sales Variances using margin approach show the
difference in actual profit and budgeted profit.
 Sales Margin Variance
It indicates the aggregate or total variance under the margin
method.

Sales Margin Variance= Actual profit- Budgeted profit.

 Sales Margin Price Variance
It is one part of total sales margin variance and arises due to
the difference between actual margin and budgeted margin
per unit. It is significant to note that, assuming cost of
production being constant, the difference in the actual
margin and budgeted margin will only be because of the
difference between actual selling price and budgeted selling
price.

Sales margin price variance=(Actual margin per unit-

Budgeted margin per unit) x Actual quantity.
 Sales Margin Volume Variance
It shown as the difference between Actual Sales Units &
Budgeted Sales Unit.

Sales Margin Volume Variance=(Actual Quantity-

Budgeted Quantity) x Budgeted Margin/ unit

OR

Sales Margin Volume Variance=((Standard Profit on

Actual Quantity of Sales – Budgeted Profit.)
 Profit Variance.
• Profit variance analysis, often called “gross profit analysis“,
deals with how to analyze the profit variance that
constitutes the departure between actual profit and the
previous year’s income or the budgeted figure. The primary
goal of profit variance analysis is to improve performance
and profitability in the future
• Profit, whether it is “gross profit” or “contribution margin”,
is affected by at least three basic items: sales price, sales
volume, and costs. In addition, in a multi product firm, if
not all products are equally profitable, profit is affected by
the mix of products sold.
 Standards In Profit Variance
Analysis

To determine the various causes for a favorable variance

(an increase) or an unfavorable variance (a decrease) in
profit, we need some kind of yardstick to compare against
the actual results. The yardstick may be based on the prices
and costs of the previous year, or any year selected as the
base period. Some companies summarize profit variance
analysis data in their annual report by showing departures
from the previous year’s reported income.
 Ways to Calculate PV
• The sales price variance measures the impact on the firm’s
contribution margin (or gross profit) of changes in the unit selling
price. It is computed as:
Sales price variance = (Actual price - Budget price) × Actual sales

• The cost price variance, however, is simply the summary of price

variances for materials, labor, and overhead. (This is the sum of
material price, labor rate, and factory overhead spending variances.)
Cost price variance = (Actual cost - Budget cost) × Actual sales

• The sales volume variance indicates the impact on the firm’s profit of
changes in the unit sales volume. This is the amount by which sales
would have varied from the budget if nothing but sales volume had
changed.
Sales volume variance = (Actual sales - Budget sales) × Budget
price
 Disposition of Variance.
Variance may be disposed off in either of the following two ways:
1. Inventories and the cost of goods sold may be adjusted to reflect the
actual costs.
2. Variances may be transferred to the profit and loss account.

Under the first method, all variances are allocated between the inventory
accounts and cost of goods sold accounts. This method, in fact,
converts the accounts balances from standard costs to actual historical
costs.
Under the second method, the variances are considered as profit or loss
items in the period in which they occurred. The work-in-process,
finished goods inventory, and cost of goods sold are stated at standard
costs.
Unfavorable cost variances are deducted from the gross profit at
standard costs. Favorable cost variances are added to the gross profit
calculated at standard costs.
 The treatment of variances
It depends on factors such as:

1. Size of variance

2. Accuracy of standard costs

3. Cause of variances such as incorrect standard costs.

4. Timing of variances

5. Type of variances
 Limitations of Standard Costing
1. Predetermined nature of standard cost- The accuracy of standard
costs is limited by the knowledge and skill of the people who created
them and they contain the prejudices of their makers.

2. Difficult to select type of standard- if the standards are too low, they
defeat the objective of standard costing and bring the operating
efficiency down. If they are too high, they can create ill- will and
encourage employees to beat the system by fair means or foul.

3. Requirement for good programme of standard costing- Both the

management and operating personnel should have full confidence in
it and standards should be fair and workable.
 Control Ratios
Control ratios are useful to management to know whether the deviations
of actual from budgeted results are favorable or unfavorable. These
control ratios are expressed in percentage. The ratio is taken as
favorable if it is 100% or more. In case it is less than 100% the ratio
is considered as unfavorable.

1. Activity Ratio= Standard hrs for actual production X 100

Budgeted hours

1. Capacity Ratio= Shows the relationship between actual working

hours and budgeted working hours.

2. Efficiency Ratio= Standard hours for actual production X 100

Actual hours worked
THANK YOU.