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Introduction to cost control – cost reduction- fields covered by cost reduction- tools and techniques for cost reduction

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- 1. Budgeting and Budgetary control – Standard costing and variance analysis: Cost control and cost reduction: Introduction to cost control – cost reduction- fields covered by cost reduction- tools and techniques for cost reduction
- 2. Standard costing and variance analysis • A standard refers to an indicator which is used to evaluate performance, quality etc. • Standard cost is a predetermined cost. It is a determination in advance of production, of what should be the cost. When standard costs are used for the purpose of cost control, the technique is known as standard costing. • Standard costing is a cost accounting technique which compares the results of actual production with the basic standard, as anticipated, in terms of costs so as to determine the reasons for discrepancies between the anticipated and actual costs.
- 3. Setting up standard costs • Standards in respect of various elements of costs.
- 4. Standard material cost
- 5. Standard Material Cost • The cost of materials for any product depends upon the quantity of materials and prices of materials. the setting of standard costs for direct materials involves; • standard material quantity • Standard material price • Standard cost of material= Standard Quantity x Standard Price SCM= SQ x SP
- 6. Standard Labour Cost • The standard labour cost is equal to the standard time for each operation multiplied by standard labour rate. Setting of standard cost of direct labour involves; – Fixation of standard time – Fixation of standard rate • Standard Labour Cost = Standard Labour Hours x Standard Labour Rate –SLC = SLH x SLR
- 7. Standard Overheads • Setting of standard cost of overheads involves; – Overheads are divided into fixed and variable. Standard overheads rate is determined for these on the basis of past records ad future trend of prices. It is calculated for a unit of for an hour – Standard Variable Overhead Rate= Standard Variable Overhead for the budgeted period Budgeted production. Units or budgeted hours for the budgeted period – Standard fixed Overhead Rate= Standard fixed Overhead for the budgeted period Budgeted pdn. Units or budgeted hours for the budgeted period
- 8. Standard hour • Is the quantity of output, or an amount of work, performed in one hour
- 9. Standard cost card • When standards are set for each element of cost, a standard cost card is prepared. In this card, the standards set for various elements of cost in respect of a product or job are shown.
- 10. Analysis of variances • The deviation of actual from standard is called variance. In other words, variance is the difference between the actual performance and standard set. • When the actual cost is less than standard cost , it is known as favorable variance. • When the actual cost is exceeds standard cost, it is known as unfavorable variance or adverse variance. • In accounting language, unfavorable variance and favorable variances are known as debit and credit variances respectively.
- 11. Classification and computation of variances Material variances Labour variances Overhead variances Sales variances
- 12. Material variances • In case of materials, the following may be the variances; – Material cost variances – Material price variances – Material quantity variance – Material mix variance – Material yield variances
- 13. Material cost variances • It is the difference between the standard cost of material specified and the actual cost of materials used. • Material cost variances = standard cost of materials- actual cost of materials used. • Material cost variances = material price variance+ material usage or quantity variance • Material cost variances= (SQ x SP)-(AQ x AP) • If the actual cost is more than the standard cost, it would result in an adverse variance and vice versa
- 14. Material price variances (MPV) • The material price variance is the difference between the standard price specified and the actual price paid multiplied by actual quantity of material purchased. • MPV= AQ x (SP-AP). • If the actual price is more than the standard price, the variance would be adverse and in case the standard price is more than the actual price, it shall result in a favorable variance
- 15. Material quantity variances • It indicates the deviation caused from the standard due to differences in quantities used. It is that portion of the material cost variance which is due to the difference between the standard quantity of the material specified for the actual output and the actual quantity of materials used. • MUV= SP x (SQ for actual output-AQ) • If the actual quantity is more than the standard quantity, it would cause an unfavorable variance and vice versa
- 16. • When more than one type of material is used , the total usage variance will be classified into material mix variance and material yield variance
- 17. Material Mix Variance (MMV) • It is the difference between the standard mix of materials fixed and actual mix of materials used. If the standard mix of material fixed and the actual mix or proportion of materials used are the same , the MMV will be zero. • MMV = SP ( Revised standard quantity- actual quantity) • Revised standard quantity= • SQ for each material x total AQ Total SQ OR total AQ x standard mix ratio When the actual quantity is less than the revised one, there is a favorable variance and vice versa.
- 18. Material Yield Variance (MYV) • It represents that portion of total usage variance which is due to the difference between the standard output and the actual output. If the actual output is more than the standard, then the variance would be favorable and vice versa. • MYV= SC per unit x (standard yield- actual yield)
- 19. Labour variances In case of labour, the following may be the variances;
- 20. Labour Cost variance (LCV) • It is the difference between the standard direct wages specified for the activity achieved and the actual wages paid • LCV= SC-AC • (ST x SR – AT x AR) • If the actual cost is less than standard cost, the variance is favorable and vice versa.
- 21. Labour Rate Variance • This is the difference between the standard and actual direct labour rate per hour for the total hours worked. • LRV= AT(SR-AR) • If the actual rate paid is less, the variance is favorable and the vice versa.
- 22. Labour Efficiency Variance • It is the difference between the actual hours taken to produce the actual output and the standard hours that this output should have taken, multiplied by the standard rate per hour. • LEV = Standard Rate( Standard Time- Actual Time) • LEV= SR (ST-AT) • If the actual time is less than the standard time or actual production is more than standard production, the variance is favorable and vice versa.
- 23. Labour Mix Variance • When the actual composition of labour is not accordance with the standard mix, this variance arises. • LMV=Standard Rate(Revised Standard Time-Actual time) • LMV=SR(RST-AT) • RST= Total Actual Time x Standard Time • Total standard time. • RST= actual hours (total) x standard ratio • If the actual hours taken are lesser than the revised standard hours, the variance is favorable and vice versa
- 24. Labour Idle Time Variance • The idle time variance represents the difference between hours paid and hours worked, i.e., idle hours multiplied by the standard wage rate per hour. • LITV= abnormal Idle time x standard rate per hour • Idle time variance will be always unfavourable or adverse.
- 25. Labour Yield Variance • It is the difference between the standard labour output and the actual output • LYV= Standard cost per unit( standard output for actual time – Actual output) • LYV= SC ( SO for AT- AO) • If the actual production is more than the standard production, it would result in favorable variance and vice versa
- 26. Overhead Variances • Overhead expenses may relate to production overhead expenses, administrative overhead expenses and selling and distribution expenses. These expenses include both variable and fixed elements • For the purpose of computing overhead variances, overhead expenses are classified into variable and fixed overhead expenses on the basis of their behavior to the levels of activity.
- 27. • Overhead variance may be classified into two broad categories, • Variable overhead variance • Fixed overhead variance
- 28. Variable Overhead cost variance • It is the difference between the standard cost of overhead allowed for the actual output and the actual cost of overhead incurred for the actual output achieved. • OCV= SVC- AVC • Standard variable overhead rate= budgeted variable overhead budgeted hours • OCV= (actual output x standard overhead rate per hour) – actual overhead cost. • OCV= (Standard hours for actual output x standard overhead rate per hour)- (actual overhead cost)
- 29. • The variable overhead variances may be classified into; – Variable overhead expenditure variance – Variable overhead efficiency variance
- 30. Variable overhead expenditure variance • It is the difference between the standard variable overhead rate and the actual variable overhead rate duly multiplied by actual hours. • Variable overhead expenditure variance represents efficiency in the use of services or excess costs. An unfavorable variance indicates excessive use of services or increase in the cost of services. • Variable overhead expenditure variance= (standard variable overhead rate per hour x actual hours worked) – actual variable overheads. • VOEV= AVOH-SVOH for actual hours worked
- 31. Variable overhead efficiency variance • The variable overhead efficiency variance is calculated by taking the difference in standard output and actual output multiplied by the standard variable overhead rate. • Variable overhead efficiency variance = (standard variable overhead rate x standard quantity) – actual quantity • Variable overhead efficiency variance=standard time for actual production x standard variable overhead rate per hour – actual hours worked x standard variable overhead rate per hour • Variable overhead efficiency variance = standard rate x ( standard quantity – actual quantity)
- 32. Fixed overhead cost variance • Is that portion of total overhead cost variance which is due to the difference between the standard cost of fixed overhead allowed for the actual output achieved and the actual fixed overhead cost incurred. • FOV= (standard fixed overhead rate x actual output)-actual fixed overheads • FOV= actual output x ( fixed overhead rateactual fixed overheads)
- 33. • Fixed overhead variance may be classified into the following types ; • Fixed overhead expenditure variance • Fixed overhead volume variance • Fixed overhead efficiency variance • Fixed overhead capacity variance • Fixed overhead calendar variance
- 34. Fixed overhead expenditure variance • Also called budget variance • Obtained by comparing the total fixed overhead actually incurred against the budgeted fixed overhead cost • FOEV= budgeted fixed overheads- actual fixed overheads.
- 35. Fixed overhead volume variance • It is the difference between overhead absorbed on actual output and those on budgeted output • FOVV= (actual output x SR) – budgeted fixed overheads • FOVV= SR x (actual output- standard output) • FOVV= standard rate per hour ( standard hours produced- budgeted hours)
- 36. Fixed overhead efficiency variance • This arises due to the difference between budgeted efficiency to production and actual efficiency achieved. • FOEV= standard rate per hour x actual hours worked) standard hours for actual output • FOEV= standard rate x (actual output in units- standard output in units)
- 37. Fixed overhead capacity variance • The capacity variance represents the part of volume variance which arises due to working at higher or lower capacity than standard capacity. • FOCV= SR x( budgeted quantity – standard quantity)
- 38. Fixed overhead calendar variance • It arises due to the volume variance which is due to the difference between the no. of working days anticipated in the budgeted period and the actual working days • FOCV= std. no of working days- actual no of working days) x overheads in the budgeted period • Std. no. of days in the budgeted period total fixed
- 39. Sales Variances • Arises due to the difference between target sales and actual sales. The sales variances can be calculated under two methods; – Value method – Profit or sales margin method
- 40. Value method • Value method is used to denote variances arising out of changes in sales price, quantity mix etc.
- 41. a) Sales value variance • This is based on the sales value , also called value variance or sales variance • It represents the difference between the actual sales and budgeted sales • SVV= budgeted sales – actual sales
- 42. Standard price variance • Difference between actual price and the standard price of sales • SPV= actual quantity sold x (actual pricestandard price)
- 43. Sales volume variance • Due to the difference between the standard quantity and actual sales quantity • SVV= SP (AQ-SQ)
- 44. Sales mix variance • It arises due to the changes made in standard mix of difference articles sold. • SMV= standard value of actual mixstandard value of revised standard mix. • standard value of revised standard mix.= total qty. of actual sales mix x standard qty. • Total qty. of std. sales mix
- 45. Profit or sales margin variance • The profit or sales margin variance arises because of the difference between the total budgeted profit and actual profit • SMV= standard or budgeted marginactual margin
- 46. • Profit or sales margin variance may be classified into; • Sales margin price variance • Sales margin volume variance • Sales margin quantity variance
- 47. Sales margin price variance • That portion of total margin variance which is due to the difference between the standard price of the quantity of sales affected and the actual price of those sales • SMPV= actual profit- standard profit • SMPV= actual quantity of sales x (actual profit per unit – standard profit per unit)
- 48. Sales margin volume variance • It is that portion of total variance which is due to the difference between the budgeted quantity and the actual quantity of sales. • SMVV= standard profit x (actual quantity of sales – standard quantity of sales) • SMVV= Standard profit on actual quantity of sales- standard profit on standard quantity of sales
- 49. Sales margin quantity variance • The standard quantity is the difference between budgeted profit on budgeted sales and expected profit on actual sales • SMQV= standard profit per unit x (standard proportion for actual salesbudgeted quantity of sales)
- 50. Sales margin mix variances • The sales mix variances arise when the company manufactures and sells more than one type of product • SMMV= standard profit per unit x ( actual quantity of sales – standard proportion of actual sales)

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