System for Computing and Analyzing
Costs and its Operations in an
Historical Cost Vs. Standard Cost
Original cost/value of an asset or
liability at the time of transaction.
– June 2013: 20 units were bought on RS 40/unit
– July 2013: current price RS 50/unit
– It will be recorded as Rs. 800 NOT Rs. 1000 in balance
Doesn’t value appreciation /
depreciation of asset but, cost.
Unhelpful while comparing corporate
No set standards.
HISTORICAL COSTING: LIMITATIONS
Cost of product occurred or incurred
at the time of production.
Incurred on Direct Material, Direct Labor
and Factory Overheads.
• Standard: measure, criteria. (Example: ISO)
• Variances: Standard cost Vs. Actual cost
Predetermined, planned or expected
cost under anticipated conditions.
When the actual
cost is less than
standard cost ,
it is known as
standards cost, it
is known as
The deviation of actual
performance from standard is
Role: Provide reasons for off-standard
Purpose: Improved operations, error
corrections and deployment of resources
effectively -> reduced costs.
How much more or less material cost had
been incurred when actual are
compared to the standards?
DIRECT MATERIAL VARIANCE:
Direct material costs (price and quantity variances)
(Actual Quantity X Actual Price) – (Actual Quantity X Standard Price)
(Actual Quantity X Standard Price) – ( Standard Quantity X Standard Price)
How much wage is paid on the output achieved?
How much time has been taken to achieve the output?
DIRECT LABOR VARIANCE:
Direct labor costs (wage rate and efficiency variances)
(Actual Hours X Actual Rate) – (Actual Hours X Standard Rate)
(Actual Hours X Standard Rate) – (Standard Hours X Standard Rate)
How much fixed and variable overheads have been
charged actually than standard?
FACTORY OVERHEADS VARIANCE:
Manufacturing/Factory Overheads (fixed and variable)
For Variable Overhead Variance:
(Actual Output X Standard Rate) – (Actual Output X Actual Rate)
For Fixed Overhead Variance:
(Actual Output X Standard Fixed Overhead) – (Actual Output X
Actual Fixed Overhead)
analysis of data
Good for cost
STANDARD COSTING: BENEFITS
Not an easy task
to set the
should not only be
STANDARD COSTING: LIMITATIONS