Standard Costing

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Objectives of Standard Costing

Planning
Cost control
Responsibility accounting
Decision making
Inventory valuation
Motivation of managers
Budgetary Control and Standard
Costing

1. Budgets lay down the policy of the company and the responsibilities
of the managers. Standard costing sets the standard cost per each
unit of product within the framework of budgets
2. Budgetary control aims at coordination of the activities of an
organization whereas standard costing sets the targets of control for
individual cost units
3. Both aim at motivating the managers to achieve the objectives
4. Budgetary control can operate independently and can also extend
support to standard costing whereas standard costing works well
with budgetary control
5. Budgetary control and standard costing are inter related but not
interdependent.
Standard Costing - Criticisms
It is difficult to fix a standard price of inputs if price fluctuations
are frequent.
The purchase managers tend to buy in bulk and hold inventories
to secure favourable prices.
A change in technology will call for a revision of standards
It is claimed that standard costing has become inapplicable in
the light of activity based costing
It is difficult to determine the standard volume of output precisely
It is difficult to set standards in certain industries
It is argued that it is not an easy task to fix responsibility on the
managers.
Variance Components

Total C o s t V arin a c e

M aterial C os t V arian c e L ab ou r C o s t V aria n c e O verh e ad V a rian c e

Material Cost Variances
1. Material Yield Variance
2. Material Mix Variance
3. Material Usage Variance
4. Material Price Variance
5. Revision of Mix Variance
6. Revision of Price Variance
Material Cost Variances - Causes
Price Variances:
Change in price of materials
Change in transportation costs
Emergent purchases at increased cost
Failure to obtain discounts
Change in the quality of materials
Usage Variances:
Excessive or saving in wastage or scrap
Inferior or superior quality of materials
Machine maintenance and working conditions
Change in material mix
Material substitution
 Material Mix Variance(MMV)
One of the reasons for material usage variance is change in
the composition of the materials mix. It results from a variation
in the material mix used in production.
Material Mix Variance = Standard Price (Revised Standard
Quantity – Actual Quantity)
i.e. SP (RSQ - AQ)
 Material Yield Variance(MYV)
Yield variance is the difference between actual output and standard
output of a production or manufacturing process, based on standard
inputs of materials and labor. The yield variance is valued at standard
cost.

Yield Variance=SC∗(Actual Yield − Standard Yield)

where:
SC = Standard unit cost
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Labour Cost Variances - Causes
Labour Efficiency Variances:
Change in the quality of materials
Change in the machine maintenance program
Efficiency of labour
Substitution of skilled or unskilled labour
Overtime working
Machine breakdown or non availability of materials
Labour Rate Variance:
Substitution of skilled or unskilled labour
Change in labour rates
Labour Variances
Direct labour variances arise when actual labour costs are different from standard labour
costs. In analysis of labour costs, the emphasis is on labour rates and labour hours.
Labor cost variances
Labour cost variance (also termed as direct wage variance) is the difference
between the standard direct wages specified for the activity achieved and the
actual direct wages paid. The formula for labour cost variance is:

Labor cost variance ( LCV) = SC- AC

LCV= (SH x SR) – (AH x AR)

SC = St. labor cost of actual out put

AC = Actual labor cost
SH = St. Hr for actual out put,
SR= St. rate per hour
AH= Actual hours, AR = Actual rate per hour
Labor rate variance( LRV)
This is that portion of the wages variance which is due to the
difference between the actual rate and standard rate of any
specified. It is calculated like the materials price variance.
Labor rate variance = (SR-AR) x Actual hours
Labor Efficiency Variance(LEV)
Also termed as labour time variance, is that portion of the direct wages
variance which is due to the difference between the standard labour
hours specified and the actual labour hours expended. Obviously, this
variance provides a key to the control of workers’ efficiency and labour
cost. In effect, it is a usage variance. The computation of variance is as
follows:

LEV = (SH-AH) x SR
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Investigation of Variances: Factors
considered
Magnitude of variances
Whether variances arise regularly
Huge adverse variances
Weigh the cost of investigation
Accuracy of calculation of variances
Frequent changes in prices
Continuous improvement program used
Technological changes introduced
Variances are non controllable in nature
Whether findings on analysis to be acted upon or not