Standard Costing and Variance Analysis (Cost,

Revenue and Profit)

1

Standard Cost ?

Standard cost are predetermined cost that are developed from analysis of both:

- Past operating cost, quantities and times

- future cost and operating conditions

Standard cost flow

Standard cost of direct material, direct labour, other direct expenses and manufacturing overheads to be calculated.

At the end of the period / activity actual

cost to be compared with standard cost

Management cycle

Managers use standard cost throughout

the management cycle as follows:

Planning stage standard cost aid in the development of budgets

Executing stage standard cost, quantities and time are applied to work performed

Management cycle cont………….

Reviewing stage actual costs are compared with standard cost to determine variances to improve operations

Reporting stage, a variance repot provide information on operations and managerial performance

Significance of standard cost ? In today’s global competitive environment

new standards / measurements help to managers

- reduce operating cost - reduce processing time - improve quality - improve customer satisfaction - improve on-time delivery

Standard cost cont; …..

Standard costs are used with job/order costing or with process costing

Standard costs usually express as cost per unit of finished product or cost per process

Standard cost cont ;………

Standard cost is based on ; - engineering estimations - forecasted demand - worker out put - time and motion studies - type and quality of direct materials

Standard cost per unit

Consists of: - direct material cost standard - direct labour cost standard - other direct cost standard - variable manufacturing overhead cost

standard standard -fixed manufacturing overhead cost

standard

Variance Analysis

There are four steps - compute variances - determine the causes of variances - identify the performance achieved - take actions to correct the problems

Variances Analysis

Cost variances

Revenue variances

Profit variances

Example

Income statement of ABC for the is quarter of 2013 is given below

Sales (18,000 units) Rs. 720,000

Less; cost of sales

direct material 432,000

direct labour 116,600

other direct expenses 30,000

factory over head 44,000

admin & selling O/H 32,000 655,800

Net profit 64,200

Standard cost and Actual costStandard output and sales for the period was 20,000 and standard cost and cost profit is given below.

direct material Rs. 22.50

direct labour 6.60

other direct expenses 1.50

factory over head -fixed 1.50

variable 1.00

Admin& selling 1.50

total standard cost 34.00

standard Profit 4.00

Selling price 38.00

Labour was paid @ the rate of Rs.2.20 per hour and material price was Rs.8.00 per unit. Factory overhead (actual )include Rs.28,000fixed and the balance amount is variable. There was no inventory at the beginning or at the end of the year the company employees labour hour rate as the basis of absorption of the fixed overhead.

Calculate the variances- cost, revenue and profit

And prepare a reconciliation statement.

Solution

Workings

Cost element Standard Actual

Input Rate Total Input Rate Total

(Rs.) (Rs.) (Rs.) (Rs.)

D. Materials 54,000 units 7.50 405,000 54,100 units 8.00 432,800

D. Labour 54,000 units 2.00 108,000 53,000 units 2.20 116,600

Other D. expenses 18,000 units 1.50 27,000 NA NA 30,400

Factory overheads:

Fixed 54,000 hours 0.50 27,000 53,000 -- 28,000

Varaible 54,000 hours 1/3 18,000 53,000 -- 16,000

Admin. & Selling

Exp. 18,000 units 1.50 27,000 18,000 -- 32,000

612,000 655,800

Cost Variances

A. Total cost variance (TSC-TAC) Rs. 612,000 – 655,800 = Rs. 43,800 UF

Material cost variance (SMC- AMC) Rs. 405,000- 432,000 = Rs. 27,800 UF

a. Material price variance (SR-AR) x AQ Rs. 7.50-8.00 x 54,100 = Rs. 27,050 UF

b. Material usage variance (SQ-AQ) x SR 54,000- 54,100 x Rs.7.50 = Rs. 750 UF

Cost Variances cont;….

2. Labour cost variance (SLC-ALC)

Rs. 108,000- 116,600 = Rs. 8,600 UF

a. Labour rate variance (SR- AR) x AH

Rs. 2.00-2.20 x 53,000 = Rs. 10,600 UF

b. Labour efficiency variance (SH- AH) x SR

54,000- 53,000 x Rs. 2.00 = Rs.2000 F

3. Direct expenses variance (SC-AC)

Rs. 27,000 -30,400 =3,400 UF

Cost Variances cont;…

4. Fixed overhead variance

(SFO charged to the production- AFO incurred)

Rs. 27,000 -28,000 = 1,000 UF

a. Fixed overhead spending variance (Budgeted OH – Actual OH)

Rs. 30,000-28,000 = 2,000 F

b. Fixed overhead efficiency variance (SH-AH) x FOH rate per hour

54,000- 53,000 x Rs. 0.50 Rs. 500 F

c. Capacity Variance (Normal capacity in hours- actual hours utilized) x

FOH rate per hour

60,000 -53,000 x Rs.0.50 = Rs.3,500 UF

Cost Variances Cont;….

5. Variable overhead variance (SVOC- AVOC)

Rs. 18,000 – 16,000 = Rs. 2,000 F a. Variable overhead spending variance (Actual OH- Standard

OH at

actual hours)

Rs 16,000 – 17,666.67 = Rs.1,666.67 F

b. Variable overhead efficiency variance (SH-AH) x VOH rate per hour

54,000- 53,000 x Rs. 1/3 = Rs.333.33 F

Cost Variances Cont;….

6. Admin. & Selling expenses variance (SC-AC)

Rs. 27,000- 32,000 = Rs. 5,000 UF

a. Admin. overhead spending variance (Budgeted OH – Actual OH)

Rs. 30,000- 32,000 = Rs. 2,000 UF

b. Capacity variance (Normal out put- actual out put) x Standard OH

rate per unit

20,000-18,000 x Rs.1.50 = Rs. 3,000 UF

Sales variances

B. Sales revenue variance (BS-AS) Rs. 760,000 -720,000 = Rs. 40,000 UF

a. Sales price variance (SSP-ASP) x AQ

Rs. 38- 40 x 18,000 = 36,000 F

b. Sales volume variance (SQ- AQ) x SSP

20,000 – 18,000 x Rs.38 = Rs. 76,000 UF

Profit variances

C. Profit variance (S.profit- A.profit) Rs. 80,000- 64,200 = Rs. 15,800 UF

a. Sales price variance = Rs. 36.000 F

b. Sales volume variance (SQ- AQ) x S. profit per unit

20,000- 18,000 x Rs.4 = Rs.8,000 UF

c. Cost variance = Rs. 43,800 UF

Profit Reconciliation

Budgeted sales Revenue 760,000Sales price variance 36,000Sales volume variance (76.000)Actual sales 720,000Less; Standard cost of actual sales (18,000 units) D. material (405,000) D. Labour (108,000) Other D. expenses ( 27,000) Factory OH - Fixed ( 27,000) - Variable ( 18,000)Admin, & Selling expenses 27,000)Budgeted net profit 108,000 next page

Cont;…..

Cost variances; F UF Material price 27,050 Material Usage 750 Labour rate 10,600 Labour efficiency 2,000 Direct expenses 3,400 Fixed OH spending 2,000 Fixed OH efficiency 500 Fixed OH capacity 3,500 Variable OH spending 1,666.67 Variable OH efficiency 333.33 Admin. OH spending 2,000 Admin. OH capacity 3,000 (43,000) Actual profit Rs. 64,200