MODULE V

STANDARD COSTING
AND VARIANCE
ANALYSIS
Standard costing is important to
determine what a product should cost, and
if the actual cost is more than the
determined cost, then why it is so & what
to do next.
STANDARD COST
It is a predetermined cost.
It is a determination of what should be the
cost, in advance of production.
 Definition
CharteredInstitute of Management
Accountants, London defines standard cost
as:

◦ “ Standard cost is the predetermined

cost based on a technical estimate for
materials, labour and overhead for a
selected period of time and for a
prescribed set of working conditions.”
Standard costing
It is the preparation of standard costs and
applying them to measure the variations
from actual costs and analysing the causes
of variations with a view to maintain
maximum efficiency in production. It is a
technique which uses standards for costs
and revenues for the purpose of control
through variance analysis.
Preliminaries to establishment of
standard costs.

Establishment of cost centres

Types of standards
Setting the standards
Variance analysis
The deviation of the actual cost or profit
or sales from the standard cost or profit or
profit or sales is known as “variance”.
Favourable variance:
When actual cost is less than standard cost
When actual profit is more than standard
profit.
It shows the efficiency of the organisation

Unfavourable variance:
When actual cost is more than the standard
cost
When actual profit is less than standard cost
It shows the inefficiency
Uncontrollable variance:
It arise due to the influence of external factors
which are out of control of organisation.

Controllable variance:
It arise due to the inefficiency
It can be controlled by taking corrective
actions.
Elements:
Analysis of variance can be done in:

 Direct material variance

 Direct labour variance
 Overhead variance
 Sales variance
Material variance:
Material cost variance
Material price variance
Materials usage or quantity variance
Material mix variance
Material yield variance.
 Material Cost
Variance
(MCV)

Material Material
usage or Price
Quantity Variance
Variance (MPV)

Material Mix Material yield

Variance variance
(MMV) (MYV)
NOTE: Notes and problems of this
module will be shared in the group.