TITLE

Subheading

Presented by:Waseem Ahmed Khan

Quaid-i-Azam University ISBD.

waseem_mallot@yahoo.com

SubjectManagement Accounting

Topic :

Standard Costing: Setting

Standards and Analysis of Variance

Standard cost Predetermined cost of manufacturing a unit Like a norm and can be accepted as standard

Pounds of materialsHours of labor required%age of plant capacity to be used

Purposes of standard costs Establishing budgets Controlling cost and motivating and measuring efficiencies Promoting possible cost reduction Simplifying costing procedures and accelerating cost reports Assigning cost to materials, work in process, and finished goods

inventories Forming the basis for establishing bids and contracts and for

setting sales price

Setting standards: Physical Standards:

1) Basic standards yard stick against which both

expected and actual performances are compared

2) Current standards I. Expected actual standards: set for an expected level

of operations and efficiency

II. Normal standards: set for normal level of operations

III. Theoretical standards: an ideal level and constitute goals to be aimed for rather than performances

IV. Materials and labor costs: based on normal current conditions,

Setting standards continue…

IV Factory over head: based on normal conditions of efficiency and volume

V Standard established for a definite period of time

VI Standards must not be too loose or too tightMaterials cost standards

1)A materials price standards: determining the expected price of a unit of material.

Price Standards: Checking the performance of purchasing department

Measuring the effects of increases and decreases on the company’s profits

Price variance: Difference b/w actual and standard price

Materials cost standards continue..

materials quantity standards: the amount of direct materials that should be required to complete a single unit of product

Materials quantity variance: comparison of actual quantity of materials used and the standard quantity allowed

Labor cost standards:

established to control labor costs

Direct labor rate standard: standard means calculating an expected hourly rate for labor costs.

Direct labor rate Variance: measures any deviation from standard in the average hourly rate paid to direct labor workers

Direct labor time standard: the standard time required to manufacture a unit of product under normal working conditions

Labor efficiency variance: This variance measures the productivity of labor time

FOH Cost StandardsStandard FOH rates deal with estimated

direct and indirect FOH and its applications to jobs and products

Overhead Budget:Provide a budget allowance for specific,

predetermined level of activityFlexible Budget:

Allowance for various level of Activities

Maximum limit Amount set up in flexible budget

Fixed Expense: remain fixed within a normal range

of activity Vary per UnitNo. Of Units fixed OH Variable Expense: increase with increase in volume Remain fixed per unitVariable OH VariancesDifference of Actual Variable Costs and

Flexible Budget (Applied) Variable OH

Fixed OH Variances:Difference between budgeted Fixed FOH and

Absorbed Fixed OH.Benefits of Variance Analysis:Measure the success of failure of its control of

OH.Standard FOH rate:Predetermined rate based usually on Direct

Labor hours.Other Bases For FOH rate: Direct Labor

Dollar and Machine Hours

FOH VariancesOverall or net FOH Variance:Difference between actual and Applied FOH

Methods for Variance Analysis

Two Variance Method:1) Controllable Variance: Difference

between actual variance and Budget Allowance based on Standard hours

2) Volume Variance: Difference Between budget Allowance and Standard Expenses

Standard Expense = (Standard hours Standard OH rate)

Three Variance Method:

1)Spending Variance: Difference between actual expenses and Budget Allowance based on actual hours worked

2) Idle Capacity Variance: Difference between budget allowance based on actual hours and actual hours worked multiplied by Standard OH rate

3) Efficiency Variance: Difference b/w actual hours worked multiply by Standard OH rate and Standard hours allowed times standard OH rate

Four Variance Method:

1)Spending Variance:2)Variable Efficiency Variance:

Difference b/w actual hours worked and standard hours multiply by VOH rate

Sum of spending and variable efficiency variance equals to controllable variance

3) Fixed Efficiency Variance: difference b/w Applied Fixed OH and Fixed Standard OH4) Idle Capacity Variance:

Mixed and Yield Variances: Mix Variance:

Difference b/w Standard Cost of formula materials and the standard cost of materials actually used

Yield Variance:Yield: the amount of prime product

manufactured from given amount of materials

Yield Variance: difference b/w actual production and expected production

Material Variance:1) Price Variance: Difference b/w actual

price and applied standard price on the capacity

2) Mix Variance: results from combining materials in a ratio different from standard material specification

3) Yield Variance:4) Quantity Variance: difference b/w

Actual quantity used and standard quantity allowed

Total Quantity Variance: difference of actual quantities at standard prices to actual output quantity at standard material cost

Labor Variance:

1) Rate Variance: difference b/w standard and actual rates

2) Efficiency Variance:3) Yield Variance:

FOH Variance:1) Spending Variance:2) Idle Capacity Variance3) Efficiency Variance4) Yield Variance