Standard Costing

Standard Costing system is a tool which is used to control over the cost of production, SC attempts to keep the cost at minimum level by planning and controlling, Under this system the cost of production of each unit is predetermined on some scientific basis, And then management try to control the actual costs not to exceed to predetermined standard, If actual cost exceed to standard then variance are calculated and then reason are find out to control the costs in future

Advantages of SC
Helpful in controlling, Helpful in measurement of operating efficiency, Helpful in policy making, Encourages for maximum utilization of resources, Help to reduce wastage, Helpful in coordination among various cost centers,

Limitations of SC
Fixation of standard is not possible for every type of operation, Wrong standards may result in wastage of time, money, Need of services of experts for accurate determination of standards which increases total cost and thus cost of production, Fixation of standards are not fixed in nature but subject to review time to time as per the need of time, this makes it time consuming, Despite of above limitations, standard costing system is a unique system in itself and must be used for efficient control purpose.

System of Standard Costing

Following steps are taken out for the development of a sound system of standard costing .
1- Establishment of a cost centre, 2- Determination of standards, 3- Setting of standards, 4- Setting of time period, 5- Collection of actual cost data, 6- Analysis of variance

1- Establishment of a cost centre

Under this first that cost centre is to be identified for which the standards are to be determined for cost control purpose, Because there are many cost centers like production centre, service departments, administrative departments, selling and distribution departments,

2- Determination of standards,
There are various types of standards, First it is to be determined that which type of the standard is to be used for control purpose, These standards are .

1- Ideal standards: cost under such standard is determined under ideal conditions which are rarely fulfilled. For example mileage of a bike. Such standards fails to consider normal material wastage and idle labour time, power failure. 2- Attainable standards: are based on past performance and standards are set on the basis of past performance for future. Such standards may be lower than what can be achieved with reasonable efforts. Such standard consider the usual production problems such as normal material wastage and idle labour time, power failure. 3- Basic Standards: are used for basically those costs which are fixed in nature and not influenced by changes in material cost , labour cost. Thus they are used for a long period of time. 4- Normal Standards: set the costs under normal working conditions and consider the expected changes over a long period of time.

3- Setting of standards,
After determining the type of standard to be used for comparison purpose, The next step is to setting of standards for various types of costs, These standards may be set for Material, Labour of Overheads or for all.

4- Setting of Time Period

A particular period is to be determined for which actual costs is to be compared with standard.

5- Collection of actual cost data,

The actual cost on target cost centre incurred for a particular time period is collected through cost accounting records,

6- Analysis of variance
A variance representing the difference between standard cost and actual cost incurred is to be calculated, Variance ensures whether costs are being kept under control or not, On the basis of variance the probable causes for deviation are identified, And the responsibilities are assigned for deviations.

Variance Analysis
Types of Variance Material Variance
Material Price Variance Material Usage Variance Material Mix Variance Material Yield Variance

Labour Variance
Labour Cost Variance Labour Rate Variance Labour Efficiency Variance Labour Mix Variance Labour Idle time Variance

Overheads Variance
Variable overheads Variance Variable over. Efficiency vari. Fixed over. variance Fixed over. Volume variance

Other Variance
Calendar Variance Sales value Variance Sales price Variance Sales volume variance Profit Variance

Material Cost Variance

Material cost variance arises due to variance in the price of material or its usage. This can be calculated by using the following formula, Material Cost Variance = (SQ x SP) (AQ x AP) , Where,
SQ SP AQ AP = Standard quantity for the actual output = Standard price per unit of material = Actual quantity = Actual price per unit of material

A positive result implies favorable variance and a negative result implies unfavorable variance (adverse variance).

Material Price Variance

Material cost variance may arise due to number of reasons like fluctuations in market prices, error in buying due to wrong purchasing policy etc, This can be calculated by using the following formula, Material Price Variance = (SP AP) x AQ Where,
SP AQ AP = Standard price per unit of material = Actual quantity = Actual price per unit of material

A positive result implies favorable variance and a negative result implies unfavorable variance (adverse variance).

Material usage Variance

Material Usage variance is the difference between the actual quantities of raw materials used in production and the standard quantities that should have been used to produce the product, MUV may arise due to number of reasons like Pilferage of materials , Wastage , Sub-standard or defective materials etc, This can be calculated by using the following formula, Material Usage Variance = (SQ AQ) x SP

Material Mix Variance

MMV is calculated when a product uses mixture of different raw materials, MMV is that portion of the materials quantity variance, which is due to the difference between the standard and actual composition of a mixture. It can be represented by the following formula: Material mix variance = (Standard cost of actual quantity of the standard mixture Standard cost of actual quantity of the actual mixture) or (SQ AQ) x SP

Illustration 1
A manufacturing concern which has adopted standard costing furnishes the following information;

Standard:
Materials to be used 100 kg for 70 Kg of finished product; Price of materials is Rs. 1 per Kg

Actual;
Output is Materials used Cost of materials

2,10,000 Kgs 2,80,000 Kgs Rs. 2,52,000

Calculate; Material cost variance Material price variance Material usages variance

1- Material cost variance

(SQ x SP) (AQ x AP) (3,00,000 x 1) - (2,80,000 x 0.90) = 3,00,000 2,52,000 = 48,000 (f)

2- Material Price Variance

(SP AP) x AQ (1- 0.90) x 2,80,000 = 28,000 (f)

3- Material Usage Variance

(SQ AQ) x SP (3,00,000 2,80,000) x 1 = 20,000 (f) Working Note=
1- SQ = as SQ of material is 100 kg for every 70 kg and actual output is 2,10,000 kg hence SQ = 210000 x 100/70 = 3,00,000 kg. 2- Actual Rate = 2,52,000 / 2,80,000 = 0.90 per kg.

Illustration-2
Following information has been furnished to you;
Material SQ (kg) SP (Rs) AQ (kg) AP (Rs)

A B C

15 12 9 36

6 5 4

18 10 8 36

4 6 3

Calculate; MCV, MPV, MUV, MMV

1- Material cost variance

(SQ x SP) (AQ x AP) A= (15 x 6) - (18 x 4) B= (12x 5) - (10 x 6) C= (9 x 4) - (8 x 3) = (90) - (72) = 18 (f) = (60) - (60) = Nil = (36) - (24) = 12 (f) Total material cost variance Rs. 30 (f)

2- Material Price variance

(SP AP) x AQ A= (6- 4) x 18 B= (5- 6) x 10 C= (4- 3) x 8 Total material Price variance (SQ AQ) x SP A= (15- 18) x 6 B= (12- 10) x 5 C= (9- 8) x 4 Total material mix variance = 36 (f) = 36 (a) = 8 (f) Rs. 34 (f)

3- Material Mix variance

= 18 (a) = 10 (f) = 4 (f) Rs. 4 (a)

4- Material Usage variance

There is no need to calculate MUV because total standard mix and actual mix are same.

Illustration 3
Following information has been furnished to you;
Material SQ (kg) SP (Rs) AQ (kg) AP (Rs)

X Y

60 40 100

50 40

65 55 120

45 50

Calculate; MCV, MPV, TMUV,

1- Material cost variance

(SQ x SP) (AQ x AP) X= (40 x 50) - (65 x 45) = (2000) - (2925) = 925 (a) Y= (60x 40) - (55 x 50) = (2400) - (2750) = 350 (a) Total material cost variance Rs. 1275 (a)

2- Total Material Usage variance

(SQ AQ) x SP X= (40- 65) x50 Y= (60- 55) x 40 Total material mix variance (SQ RSQ) x SP X= (40 48) x 50 Y= (60 72) x 40 = 1250 (a) = 200 (f) Rs. 1050 (a)

(i)- Material Usage variance

= 400 (a) = 480 (a) = 880 (a)

(Ii)- Material Mix variance

(RSQ AQ) x SP X= (48 65) x 50 Y= (72 55) x 40 = 850 (a) = 680 (f) = 170 (a)

Working Note; RSQ= as standard mix of X and Y is in 40: 60 ratio or 2:3 ratio hence actual quantity 120 Kg is to be divided in to 2:3 ratio. That is 48 of X and 72 of Y.

Labour Variance