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Standard costing
 

Standard costing

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    Standard costing Standard costing Presentation Transcript

    • 1 Standard Costing and Variance Analysis (Cost, Revenue and Profit)
    • 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 cost Standard 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 W orkings Cost element Standard Input Actual Rate Total (Rs.) Input (Rs.) Rate (Rs.) Total (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 Fixed 54,000 hours 0.50 27,000 53,000 -- Varaible 54,000 hours 1/3 18,000 53,000 -- 16,000 18,000 units 1.50 27,000 18,000 -- 32,000 30,400 Factory overheads: 28,000 Admin. & Selling Exp. 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 Sales price variance Sales volume variance Actual sales Less; Standard cost of actual sales (18,000 units) D. material D. Labour Other D. expenses Factory OH - Fixed - Variable Admin, & Selling expenses Budgeted net profit 760,000 36,000 (76.000) 720,000 (405,000) (108,000) ( 27,000) ( 27,000) ( 18,000) 27,000) 108,000 next page
    • Cont;….. Cost variances; Material price Material Usage Labour rate Labour efficiency Direct expenses Fixed OH spending Fixed OH efficiency Fixed OH capacity Variable OH spending Variable OH efficiency Admin. OH spending Admin. OH capacity Actual profit F 2,000 2,000 500 1,666.67 333.33 UF 27,050 750 10,600 3,400 3,500 2,000 3,000 (43,000) Rs. 64,200