1. 1
Standard costing

2. 2
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

3. 3
Procedures of standard costing
system
 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

4. 4
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
– Evaluating performance by determining how
efficiently the current operations are being carried
out

5. 5
 Motivation
– Notify the staff of the management’s expectations
 Setting of selling price

6. 6
Variance

7. 7
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)

8. 8
Profit variance
Selling and
administrative
Cost variance
Total production
Cost variance
Total sales margin variance
Sales margin
Price variance
Sales margin
volume variance
Materials
cost
variance
Labour
Cost
variance
Variable
Overhead
variance
Fixed
Overhead
variance

9. 9
Materials cost variance
Material Price variance Material Usage variance
Labour cost variance
Labour rate
variance
Labour Efficiency
variance

10. 10
Variable Overhead variance
VO Expenditure variance VO Efficiency variance
Fixed Overhead variance
Fixed Expenditure variance Fixed Volume variance

11. 11
Cost variance

12. 12
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
•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

13. 13
Three types of cost variance
 Material cost variance
 Labour cost variance
 Variable overheads variance

14. 14
Material and labour variance

15. 15
Material cost variance
 Material price variance
= (standard price – actual price)*actual quantity
 Material usage variance
= (Standard quantity – actual quantity)* standard price
= (Standard quantity for actual production – actual
quantity production) * standard price

16. 16
Labour cost variance
 Labour rate variance
= (standard price – actual price)*actual quantity
 Labour efficiency variance
= (standard quantity – actual quantity)*standard price
= Standard quantity for actual production – actual
quantity used) * standard price

17. 17
Example

18. 18
ABC Ltd. makes and sells a single product. The company uses a
Standard marginal costing system. It plans to produce and sell 1000
units in May 2005. A budget statement is produced as follow:
Budgeted income statement for the month ended 31 May 2005
$ $
Sales ($50*1000) 50000
Less: Variable cost of goods sold
Direct materials ($3*4000) 12000
Direct labour ($5*3000) 15000
Variable overheads ($2*3000) 6000 33000
Budget contribution 17000
Fixed overhead 3000
Budget profit 14000

19. 19
The actual sales and production is 800 units. The actual income
statement is shown as follows:
Income statement for the month ended 31 May 2005
$ $
Sales ($60*800) 48000
Less: Variable cost of goods sold
Direct materials ($3.2*2400) 12000
Direct labour ($6*3200) 15000
Actual Variable overheads 5500 32380
Contribution 15620
Fixed overhead 2600
Net profit 13020

20. 20
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
= (4*800 – 2400)*$3
= $2400 (F)4000 units
1000 units

21. 21
Material cost variance
 Material price variance $480 (A)
 Material usage variance $2400 (F)
 Total Material cost variance $1920 (F)

22. 22
Labour cost variance
 Labour rate variance
= (standard price – actual price)*actual quantity
= ($5 - $6)*3200
= $3200 (A)
 Labour efficiency variance
= (standard quantity – actual quantity)*standard price
= Standard quantity for actual production – actual quantity used) *
standard price
= (3* 800 – 3200)*$5
= $4000 (A)
3000 units
1000 units

23. 23
Labour cost variance
 Labour rate variance $3200 (A)
 Labour efficiency variance $4000 (A)
 Total labour cost variance $7200 (A)

24. 24
Overheads variance

25. 25
Overheads variance
 Variable overheads variance
 Fixed overheads variance

26. 26
Variable overheads variance
 Variable overheads variance is the difference
between the standard variable overheads
absorbed into the actual output and the actual
overheads incurred

27. 27
Actual VO
Budgeted VO
(SP * Actual
hours worked
Absorbed VO
(SP* standard
hours for actual
output
VO expenditure variance/
VO spending variance
VO efficiency variance
Total VO variance
(under-/over- absorbed)

28. 28
Calculation on overhead absorbed
 Step 1
 Step 2
POAR =
Budgeted overheads
Budgeted activity level in standard hours
Overhead absorbed = POAR * Standard hours for actual
number of units produced

29. 29
Variable overheads variance
 Variable overheads variance
= variable overheads absorbed – actual variable overheads
incurred
 Variable overheads expenditure variance
= standard variable overheads for actual hours worked – Actual
variable overheads incurred
 Variable overheads efficiency variance
= Standard variable overheads for standard hours of output –
Actual variable overhead absorbed
= (standard hours for actual output – Actual hours worked)*
standard price

30. 30
Example

31. 31
ABC Ltd. makes and sells a single product. The company uses a
Standard marginal costing system. It plans to produce and sell 1000
units in May 2005. A budget statement is produced as follow:
Budgeted income statement for the month ended 31 May 2005
$ $
Sales ($50*1000) 50000
Less: Variable cost of goods sold
Direct materials ($3*4000) 12000
Direct labour ($5*3000) 15000
Variable overheads ($2*3000) 6000 33000
Budget contribution 17000
Fixed overhead 3000
Budget profit 14000

32. 32
The actual sales and production is 800 units. The actual income
statement is shown as follows:
Income statement for the month ended 31 May 2005
$ $
Sales ($60*800) 48000
Less: Variable cost of goods sold
Direct materials ($3.2*2400) 12000
Direct labour ($6*3200) 15000
Actual Variable overheads 5500 32380
Contribution 15620
Fixed overhead 2600
Net profit 13020

33. 33
POAR =
Budgeted overheads
Budgeted activity level in standard hours
Overhead absorbed = POAR * Standard hours for actual
number of units produced
= $2 *3 hr per unit * 800 units
= $6000
3000
= $2
Standard hr per unit = 3000 hr /1000 units

34. 34
Variable overheads variance
 Variable overheads variance
= variable overheads absorbed – actual variable
overheads incurred
= $4800 - $5500
= $700 (A)
 Variable overheads expenditure variance
= standard variable overheads for actual hours worked
– Actual variable overheads incurred
= ($2* 3200 hr) - $5500
= $900 (F)

35. 35
 Variable overheads efficiency variance
= Standard variable overheads for standard
hours of output – Actual variable overhead
absorbed
= (standard hours for actual output – Actual
hours worked)* standard price
= (3 hr *800 units – 4 hr *800 units)*$2
= $1600 (A) Actual hour per unit = $3200 hr/800 units

36. 36
Variable overheads variance
 Variable overheads expenditure variance $900 F
 Variable overheads efficiency variance $1600 A
 Total Variable overhead variance $400 A

37. 37
Sales variance

38. 38
Actual
contribution
Budgeted contribution
(Standard margin * Actual
Volume)
Budgeted
contribution
(Standard margin*
Standard volume)
Sales margin price variance Sales margin volume variance
Total sales margin variance

39. 39
Sales variance (Marginal costing)
 Total sales margin variance
= actual contribution – budgeted contribution
= [(Actual selling price – Standard cost of sales )*Actual sales
volume] – Budgeted contribution
 Sales margin price variance
= (Actual contribution per unit – Standard contribution per unit) *
Actual sales volume
 Sales margin volume variance
= (Actual volume – Budget volume)* Standard
contribution per unit

40. 40
Sales variance (Absorption costing)
Sales margin price variance
= (Actual profit margin per unit – Standard profit margin
per unit) * Actual sales volume
Sales margin volume variance
= (Actual volume – Budget volume)* Standard profit
margin per unit

41. 41
Example

42. 42
ABC Ltd. makes and sells a single product. The company uses a
Standard marginal costing system. It plans to produce and sell 1000
units in May 2005. A budget statement is produced as follow:
Budgeted income statement for the month ended 31 May 2005
$ $
Sales ($50*1000) 50000
Less: Variable cost of goods sold
Direct materials ($3*4000) 12000
Direct labour ($5*3000) 15000
Variable overheads ($2*3000) 6000 33000
Budget contribution 17000
Fixed overhead 3000
Budget profit 14000

43. 43
The actual sales and production is 800 units. The actual income
statement is shown as follows:
Income statement for the month ended 31 May 2005
$ $
Sales ($60*800) 48000
Less: Variable cost of goods sold
Direct materials ($3.2*2400) 12000
Direct labour ($6*3200) 15000
Actual Variable overheads 5500 32380
Contribution 15620
Fixed overhead 2600
Net profit 13020

44. 44
Sales variance (Marginal costing)
 Total sales margin variance
= actual contribution – budgeted contribution
= [(Actual selling price – Standard cost of sales )
*Actual sales volume] – Budgeted contribution
= [($60 - $33)*800] - $17000
= $21600 - $17000
= $4600 (F) $33000/1000 units

45. 45
Sales variance
 Sales margin price variance
= (Actual contribution per unit – Standard contribution
per unit) * Actual sales volume
= [($60 - $33) – ($50 - $33)]*800
= $8000 F
 Sales margin volume variance
= (Actual volume – Budget volume)* Standard
contribution per unit
= (800 -1000)*$17
= $2800 (A)
$33000/1000 units
$17000/1000 units

46. 46
Sales variance (Marginal costing)
 Sales margin price variance $8000 F
 Sales margin volume variance $3400 A
 Total sales variance $4600 F

47. 47
Sales variance (Absorption costing)
 Sales margin price variance
= (Actual profit margin per unit – Standard profit margin per unit) *
Actual sales volume
= [($60-$36) – ($50-$36)]*800
= $8000 F
 Sales margin volume variance
= (Actual volume – Budget volume)* Standard profit margin per
unit
= (800-1000)*$14
= $3400 A
(33000+3000)/1000 units
$14000/1000 units

48. 48
Sales variance (Absorption costing)
 Sales margin price variance $8000 F
 Sales margin volume variance $2800 A
 Total sales variance $5200 F

49. 49
Fixed overhead variance

50. 50
Actual FO Budgeted FO
Absorbed VO
(SP* standard
hours for actual
output
FO expenditure variance/
FO spending variance
FO volume variance
Total FO variance
(under-/over- absorbed)

51. 51
Fixed overhead variance
 Fixed overheads variance
= Fixed overheads absorbed – Actual fixed overheads
incurred
 Fixed overheads expenditure variance
Budgeted fixed overheads – Budgeted overheads
absorbed
 Fixed overheads volume variance
= Absorbed fixed overheads – Budgeted overheads
absorbed

52. 52
Example

53. 53
ABC Ltd. makes and sells a single product. The company uses a
Standard marginal costing system. It plans to produce and sell 1000
units in May 2005. A budget statement is produced as follow:
Budgeted income statement for the month ended 31 May 2005
$ $
Sales ($50*1000) 50000
Less: Variable cost of goods sold
Direct materials ($3*4000) 12000
Direct labour ($5*3000) 15000
Variable overheads ($2*3000) 6000 33000
Budget contribution 17000
Fixed overhead 3000
Budget profit 14000

54. 54
The actual sales and production is 800 units. The actual income
statement is shown as follows:
Income statement for the month ended 31 May 2005
$ $
Sales ($60*800) 48000
Less: Variable cost of goods sold
Direct materials ($3.2*2400) 12000
Direct labour ($6*3200) 15000
Actual Variable overheads 5500 32380
Contribution 15620
Fixed overhead 2600
Net profit 13020

55. 55
Fixed overhead variance
 Fixed overheads variance
= Fixed overheads absorbed – Actual fixed overheads incurred
= ($1*3*800) - $2600
= $200 A
 Fixed overheads expenditure variance
= Budgeted fixed overheads – Budgeted overheads absorbed
= $3000 - $2600
= $400 F
 Fixed overheads volume variance
= Absorbed fixed overheads – Budgeted overheads absorbed
= ($1*3*800) - $3000
= $600 A

56. 56
FO Variance in marginal and
absorption costing
 In marginal costing:
– Fixed overheads are charged as period costs
instead of charging to product in marginal costing.
– It is assumed that the fixed overheads remain
unchanged with the change in the level of activity.
Single fixed overhead expenditure variance will be
used

57. 57
 In absorption costing
– Fixed overheads are charged to the products and
included in the valuation of closing stock.
– Total fixed overheads variance is divided into fixed
overheads price variance and fixed overheads
volume variance

58. 58
Profit reconciliation statement

59. 59
Profit reconciliation statement
 Profit reconciliation statement is used to sum
up all variances
 It can help the top management to explain the
major reasons for the difference between
budgeted and actual profits
 The sales margin variance and fixed
overheads variance are different between
absorption and marginal costing system

60. 60
Marginal costing

61. 61
Profit Reconciliation Statement
$ $ $
Budgeted profit 14000
Sales variances
Sales margin price 8000 F
Sales margin volume 3400 A 4600 F
Materials cost variance
Materials price 480 A
Material usage 2400 F 1920 F
Labour cost variance
Labour rate 3200 A
Labour efficiency 4000 A 7200 A
Variable overhead variance
VO Expenditure 900 F
VO Efficiency 1600 A 700 A
Fixed overhead expenditure variance 400F 980 A
Actual profit 13020

62. 62
Absorption costing

63. 63
Profit Reconciliation Statement
Budgeted profit 14000
Sales variances
Sales margin price 8000 F
Sales margin volume 2800 A 5200 F
Materials cost variance
Materials price 480 A
Material usage 2400 F 1920 F
Labour cost variance
Labour rate 3200 A
Labour efficiency 4000 A 7200 A
Variable overhead variance
VO Expenditure 900 F
VO Efficiency 1600 A 700 A
Fixed overhead variance
FO expenditure 400F
FO Volume 600 A 200 A 980 A
Actual profit 13020

64. 64
Reasons for variances
 Material price variance
– Price changes in market conditions
– Change in the efficiency of purchasing dept. to
obtain good terms from suppliers
– Purchase of different grades or wrong types of
materials

65. 65
 Materials usage variance
– More effective use of materials/ wastage arising
from the efficient production process
– Purchase of different grade or wrong types of
materials
– Wastage by the staff
– Change in production methods
Reasons for variances

66. 66
 Labour rate variance
– Non-controllable market changes in the basic wage
rate
– Use of higher/lower grade of workers
– Unexpected overtime allowance paid
Reasons for variances

67. 67
 Labour efficiency variance
– Purchase of different grade or wrong types of materials
– Breakdown of machinery
– High/low labour turnover
– Changes in production method
– Introduction of new machinery
– Assignment wrong type of worker to work
– Adequacy of supervision
– Changes in working condition
– Change in motivation methods
Reasons for variances

68. 68
 Variable overheads expenditure variance
– It may be caused by the non-controllable change in the price
level of indirect wages or utility rates since the predetermined
rate is set
– It is meaningless to interpret this kind of variance on its own.
One should look various components of the fixed overheads
Reasons for variances

69. 69
 Variable overheads efficiency variance
– Both the variable overheads and direct labour cost
vary with the direct labour hours worked
Reasons for variances

70. 70
 Fixed overheads expenditure
– It is meaningless to interpret this kind of variance on
its own.
– It may be caused by the change in the price levels
of rent, rates and other fixed expenses
Reasons for variances

71. 71
 Fixed overhead volume variance
– When the level of activity is higher than the
budgeted level, there is a favourable variance
Reasons for variances

72. 72
 Sales margin price variance
– Change in the pricing strategies of the company
– Response to the change of pricing policies of its
competitors
– Higher profit margin with growing demand for the
product
– Lower profit margin for simulating sales
Reasons for variances

73. 73
 Sales margin volume variance
– Change in prices and demand
– Change in the market share of its competitiors
Reasons for variances