This presentation covers the topic of Standard Costing in Cost Management and Accounting

1. Standard costing
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2. Standard
 The
word standard means a criterion (principle,
measure).
 A standard figure is one against which one can
measure an actual figure to see the deviation.
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3. Standard Rate
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The word Standard Rate is the numerical proportion
prevailing between two sets of things.
A firm has three ‘standard of things’ available on which to
base standard rates: Money, Physical inputs and Physical
outputs.
Money
Money/output, e.g.
Re./unit of
materials
Physical
Inputs
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Money/output, e.g.
Re./unit of product
Input/output, e.g. labour/machine
hrs./unit of product
Physical
Outputs

4. Standard Cost
 Standard
cost is ‘a predetermined cost which is
compared in advance of production on the basis of
specifications of all the factors affecting costs and
used in standard costing.’
 In other words, standard cost is a predetermined
cost that should be attained under a given set of
operating conditions.
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5. Standard Costing
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Standard costing is a technique which is used in many
industries, where production is of repetitive nature.
Standard costing is developed due to the shortcomings of
historical costing.
CIMA, London, defines standard costing ‘as the
predetermined cost based on technical estimates of materials,
labour and overheads for selected period of time and for the
prescribed set of working conditions’.
Standard costing is that technique in which the standard cost
is determined before starting the production.

6. Standard costing system
 The
management evaluates the performance
of a company by comparing it with some
predetermined measures
 Therefore, it can be used as a process of
measuring and correcting actual performance
to ensure that the plans are properly set and
implemented
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7. Objectives Of Standard Costing
 To
establish control
 To set standards for various elements of cost
 To fix responsibility
 To make budgetary control more effective
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8. Procedures of standard costing
system
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Set the predetermined standards for sales margin and
production costs
Collect the information about the actual performance
Compare the actual performance with the standards to
arrive at the variance
Analyze the variances and ascertaining the causes of
variance
Take corrective action to avoid adverse variance
Adjust the budget in order to make the standards more
realistic

9. Functions of standard costing
system
 Valuation
–
Assigning the standard cost to the actual output
 Planning
–
Use the current standards to estimate future sales
volume and future costs
 Controlling
–
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Evaluating performance by determining how
efficiently the current operations are being carried
out

10.  Motivation
–
Notify the staff of the management’s expectations
 Setting
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of selling price

11. Variance
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12. Variance analysis
A
variance is the difference between the
standards and the actual performance
 When the actual results are better than the
expected results, there will be a favourable
variance (F)
 If the actual results are worse than the
expected results, there will be an adverse
variance (A)
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13. Classification Of Variances
 Functional
Basis
 Measurement Basis
 Result Basis
 Controllability Basis
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14. Functional Basis
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15. Measurement Basis
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16.  Absolute
variance: Difference between the
standard cost and the actual cost in terms of money
is known as absolute variance.
 Relative
variance: difference is expressed as a
percentage of the standard cost, it is known as
relative variance.
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17. Result basis
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18. Cost variance
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19. Cost variance
•Cost variance = Price variance + Quantity variance
Cost variance is the difference between the standard cost and the
Actual cost
•Price variance = (standard price – actual price)*Actual quantity
A price variance reflects the extent of the profit change
resulting from the change in activity level
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•Quantity variance = (standard quantity – actual quantity)*
standard cost
A quantity variance reflects the extent of the profit change
resulting from the change in activity level

20. Three types of cost variance
 Material
cost variance
 Labour cost variance
 Variable overheads variance
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21. Material and labour variance
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22. 22

23. 23

24. Material cost variance
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It is the difference between the standard direct material
cost of the actual production volume and the actual cost
of direct materials.
Material cost variance = (Standard quantity of input for
actual production × SP) – (Actual quantity of input ×
AP)
Material cost variance = Material price variance +
Material usage variance

25. Material cost variance
Material price variance
= (standard price – actual price)*actual quantity
= ($3 - $3.2)*2400
= $480 (A)
 Material usage variance
= (Standard quantity – actual quantity)* standard price
= (Standard quantity for actual production – actual
quantity production) * standard price
4000 units
= (4*800 – 2400)*$3
1000 units
= $2400 (F)
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26. Material cost variance
 Material
price variance
 Material usage variance
 Total Material cost variance
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$480 (A)
$2400 (F)
$1920 (F)

27. Material price variance
 This
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is that portion of the material cost variance
which is due to the difference between the standard
price specified and the actual price paid.
 If the actual price is higher than the standard price,
it would result in adverse price variance and if the
actual price is lower than standard price, the result
is favorable price variance.
 Material price variance = (standard price – actual
price) x actual quantity of materials

28. Material Usage Variance
 This
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is that portion of material cost variance which
is due to the difference between the standard
quantity of actual production and the actual quantity
used.
 Material usage variance
= (Standard quantity – actual quantity) x standard
price
= (Standard quantity for actual production – actual
quantity production) x standard price

29. Material Mix Variance
 This
is that portion of usage variance which is due
to the difference between the standard and actual
composition of mixture.
 Material Mixture Variance = Standard price
[Actual quantity in standard mix (i.e. RSQ) – Actual
quantity]
 Revised Standard quantity = Total actual quantity
consumed ×
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30. Material Yield Variance
 This
variance arises due to the difference between
the standard yield specified and actual yield
obtained.
 Material yield variance = [(Standard loss in terms
of actual input) – (Actual loss on actual input)] ×
(Average standard price)
 Material yield variance = Material usage variance
– Material mix variance
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31. Material Sub-usage Variance
 When
a product is produced from a mixture of two
or more kinds of material, there may arise material
sub-usage variance.
 Material sub-usage variance = (Standard Quantity
– Revised Standard Quantity) × Standard Price
 It can be seen from this formula that material subusage variance is the analysis of variance in basic
standard quantity of each material.
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32. Labour Variances
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33. Formulas Of Labour Variances
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Labour rate variance = (standard price – actual price) x actual
hours
Labour Idle Time Variance = [(actual hrs.- idle time) x standard
price] – (actual hrs. x standard price)
Labour Gang variance = [revised(actual hrs.- idle time) x standard
price] – [(actual hrs.- idle time) x standard price]
Labour Yield variance = [revised(actual hrs.- idle time) x standard
price x (actual output/standard output)] - [revised(actual hrs.- idle
time) x standard price]
Labour sub-efficiency variance = (standard hrs. x standard price)
- [revised(actual hrs.- idle time) x standard price x (actual
output/standard output)]

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Labour Cost Variance = (standard hrs. x standard price) –
(actual hrs. x actual price)
Labour Usage variance = standard price x (standard hrs. –
actual hrs.)
Labour efficiency variance = (standard hrs. x standard price) [revised(actual hrs.- idle time) x standard price]

35. Labour Rate Variance
 This
is that portion of the labour cost variance
which is caused by the use of actual wage rate other
than predetermined.
 Labour
rate variance = Actual labour time
(Standard wage rate – Actual wage rate)
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36. Labour Efficiency Variance
 It
is the difference between the standard time and
the actual time spent multiplied by standard wage
rate.
 Labour
efficiency variance = Standard wage rate
(Standard labour time – Actual labour time)
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37. Labour Idle Time Variance
 It
is that portion of labour cost variance which is
due to the abnormal idle time of workers.
 While calculating labour efficiency variance,
abnormal idle time is deducted from the actual time
spent to determine the real efficiency of the
workers.
 Idle
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time variance = Abnormal idle time ×
Standard wage rate

38. Labour Gang Variance
 This
variance arises due to the change in the
composition or mix of a group of workers as
compared to the standard composition or mix.
 Labour
gang variance = (Revised standard time –
Idle time) × Standard rate per hour
 Here, RST= Total actual time x
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39. Labour Yield Variance
 It
is computed on the basis of the increase or
decrease in the actual yield or output when
compared to the standard.
 Labour
Yield Variance = [Actual yield – Standard
yield in units expected from the actual hours
worked] × Standard labour cost per unit
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40. Labour Usage Variance
 Labour
Usage Variance is the measure of difference
between standard hours and actual hours,multiplied
by the standard rate.
 Labour
Usage variance = (standard hrs. –
actual hrs.) x standard price
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41. Labour Cost Variance
 Labor
cost variance can be defined as the
deviation of the actual direct wages paid from
the direct wages specified for the standard
output.
 Labour Cost Variance= (Standard time x
Standard price)-(Actual time x Actual price)
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42. Overheads variance
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43. I.
Variable Production Overhead
Variance
 Standard
Variable Overheads= Actual
Production * Standard Rate
 Standard Rate = Budgeted Variable
Overheads/Budgeted Production
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44. II. Fixed Production Overhead
Variances
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45.  Fixed
Production Overhead Cost or Total
Variance
Total Variance =( Actual Production * Standard
Recovery Rate)- Actual Overheads
 Fixed
Production Overhead Expenditure
Variance
Expenditure Variance=( Standard Recovery rate
* Budgeted Production)- Actual Overhead
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46.  Fixed
Production Overhead Volume
Variance
Volume Variance = Standard Fixed OverheadBudgeted fixed Overhead
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47. SALES
 Sales
variances an b calculated in two ways:
A. The turnover or the volume method
B. The profit or the margin method
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48. A. The Turnover or The Value Method
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49.  Value
Variance= Actual Sales- Budgeted Sales
 Price Variance= Actual Sales – Standard Sales
 Volume Variance= Standard Sales- Budgeted
Sales
 Quantity Variance= Revised Standard Sales –
Budgeted Sales
 Mixed Variance= Standard Sales – Revised
Standard Sales
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50. B. Profit Method
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51. Application Of Standard Costing
 Process
industries
 Service industries
 Engineering industries
 Textile industries
 Extraction industries
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52. Advantages Of Standard Costing
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Formulation of price and production policies
Comparison and analysis of data
Management by exception
Delegation of authority and responsibility
Cost consciousness
Better capacity to anticipate
Better economy, efficiency, and productivity
Preparation of periodical financial statements
Facilities budgeting

53. Limitations Of Standard Costing
 High
degree of technical skill
 Segregation of variances into controllable and noncontrollable factors
 Duplication in recording,
 Either too strict or too liberal.
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54. “THANK YOU”
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