THE INSTITUTE OF CHARTERED

ACCOUNTANTS OF INDIA

ICITSS: Information Technology

Course
BATCH NO :36

Submitted by – Hitesh Kalal

 STANDARD COSTING

Standard cost is defined in the CIMA Official Terminology as “'the

planned unit cost of the product, component or service produced in a
period. The standard cost may be determined on a number of bases.
The main use of standard costs is in performance measurement,
control, stock valuation and in the establishment of selling prices.”
 Why Standard Costing is Needed?

• Prediction of future cost for decision

making
• Provide target to be achieved
• Used in budgeting and performance
evaluation
• Interim profit measurement and inventory
valuation
 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.

• Favurable and unfavorable variances

• Controllable and uncontrollable variance
TYPES OF VARIANCES
• Controllable variances are those which can be controlled under
the normal operating conditions if a responsibility centre takes
preventive measures and acts prudently.
• Uncontrollable variances are those which occurs due to
conditions which are beyond the control of a responsibility centre
and cannot be controlled even though all preventive measures are
in place .
FAVOURABLE &UNFAVOURABLE VARIANCES

• Favourable variances(F) arise when actual costs are

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

Profit Revenue Costs

Actual > Expected F F
Actual < Expected
PROCESS OF STANDARD COSTING

• Setting of Standards
• Ascertainment of actual costs
• Comparison of actual cost with standard cost
• Investigate the reasons for variances
• Disposition of variances
Application of standard costing
1.Process industries
2.Service industries
3.Engineering industries
4.Textile industries
5.Extraction industries
ADVANTAGES&DISADVANTAGES

Dis
Ad • Difficulty in
• TO MEASURE setting
EFFICIENCY standards
• To fix prices • Not suitable
and formulate for small
policies business
• For effective • Not suitable
cost control to all
• Management industries
by exception • Difficult to fix
• Valuation of responsibility
stocks • Technological
changes