Standard Costing And Variance Analysis Formulas Pdf
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- Variance Analysis: Material, Labour, Overhead and Sales Variances
- Standard Costing and Variance Analysis
- handout 9 - standard costing and variance analysis
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Variance Analysis: Material, Labour, Overhead and Sales Variances
IntroductionThe success of a business enterprise depends to a greater extent upon how efficiently and effectively it has controlled its cost. In a broader sense the cost figure may be ascertained and recorded in the form of Historical costing and Predetermined costing.
The term Historical costing refers to ascertainment and recording of actual costs incurred after completion of production.. One of the important objectives of cost accounting is effective cost ascertainment and cost control. Historical Costing is not an effective method of exercising cost control because it is not applied according to a planned course of action. And also it does not provide any yardstick that can be used for evaluating actual performance.
Based on the limitations of historical costing it is essential to know before production begins what the cost should be so that exact reasons for failure to achieve the target can be identified and the responsibility be fixed.
For such an approach to the identification of reasons to evaluate the performance, suitable measures may be suggested and taken to correct the deficiencies. Brown and Howard define Standard Cost as a Pre-determined Cost which determines what each product or service should cost under given circumstances. This definition states that standard costs represent planned cost of a product. Standard Cost as defined by the Institute of Cost and Management Accountant, London "is the Predetermined Cost based on technical estimate for materials, labour and overhead for a selected period of time and for a prescribed set of working conditions.
These predetermined costs are compared with actual costs to find out the deviations known as "Variances. Chartered Institute of Management Accountants England defines Standard Costing as "the Preparation and use of standard costs, their comparison with actual costs and the analysis of variances to their causes and points of incidence. Difference between Estimated Costs and Standard CostsAlthough, Pre-determination is the essence of both Standard Costing and Estimated Costing, the two differ from each other in the following respects: Standard Costing 1 It is used on the basis of scientific.
Compare and Contrast between Standard Costing and Budgetary Control :Relationship: The following are certain basic principles common to both Standard Costing and Budgetary Control: 1 Determination of standards for each element of costs in advance. Differences : Though Standard Costing and Budgetary Controls are aims at the maximum efficiencies and Marginal Cost, yet there are some basic differences between the two from the objectives of using the two costs. Budgetary ControlStandard Costing 1 Budgets are projections of financial accounts.
They are "what the cost will be. The following are the important advantages of standard costing : 1 It guides the management to evaluate the production performance. Limitations of Standard CostingBesides all the benefits derived from this system, it has a number of limitations which are given below: 1 Standard costing is expensive and a small concern may not meet the cost.
Responsibility cannot be fixed in the case of uncontrollable variances. Determination of Standard CostsThe following preliminary steps must be taken before determination of standard cost :. According to CIMA. London Cost Centre is "a location. In other words, ideal standard is based on high degree of efficiency.
It assumes that there is no wastage. In practice it is difficult to attain this ideal standard. Basic Standard which is established for use is unaltered over a long period of time. In other words this standard is fixed in relation to a base year and is not changed in response to changes in material costs.
As such it is more realistic than the Ideal Standard. The usefulness of such standards is very limited for the purpose of cost control. Hence the responsibility for setting standard is vested with the Standard Committee. It consists of a Purchase Manager i Material Usage Standard: Material Usage Standard is prepared on the basis of material specifications and quality of materials required to manufacture a product.
While setting of standards proper allowance should be provided for normal losses due to unavoidable occurrence of evaporation, breakage etc. When this type of standard is used, it is essential to consider the important factors such as market conditions, forecasting relating to the trends of prices, discounb etc.
Setting Standards for OverheadsThe following problems are involved while setting standards for overheads: 1 Determination of standard overhead cost 2 Estimating the production level of activity to be measured in terms of common base like machine hours, units of production and labour hours.
Setting of overhead standards is divided into fixed overhead. The determination of overhead rate may be calculated as follows : When productions are of different types, all products cannot be expressed in one unit. Under such circumstances, it is essential to have a common unit for all the products. Time factor is common to all the operation. ICMA, London, defines a Standard Time as a "hypothetical unit pre-established to represent the amount of work which should be performed in one hour at standard performance.
This Standard cost is presented for each unit cost of a product. The total Standard Cost of manufacturing a product can be obtained by aggregating the different Standard Cost Cards of different proceses. These Cost Cards are useful to the firm in production planning and pricing policies.
The term "Variances" may be defined as the difference between Standard Cost and actual cost for each element of cost incurred during a particular period. The term "Variance Analysis" may be defined as the process of analyzing variance by subdividing the total variance in such a way that management can assign responsibility for off-Standard Performance. The variance may be favourable variance or unfavourable variance. When the actual performance is better than the Standard, it resents "Favourable Variance.
The material cost variance is further classified into: I Material Price Variance Note: This Variance will be favourable when standard cost of actual material is more than the Standard material cost for actual output, and Vice Versa. This product increases engine efficiency and improves gasoline mileage by creating a more complex burn in the combustion process. Careful controls are required during the production process to ensure that the proper mix of input chemicals is achieved and that evaporation is controlled.
If controls are not effective, there can be loss of output and efficiency. The Standard cost of producing a litre batch of Gas Gain is Rs. The Standard Material Mix and related standard cost of each chemical used in a litre batch as follows: ChemicalsMix The quantities of chemicals purchased and used during the current production period are shown below.
A total of batches of Gas Gain were manufactured during the current production period. X Y Z products company determines its costs and chemical usage variations at the end of each production period.
This variances arise from the following reasons: - - - - - Material a Change in wage rate. It is that portion of the Labour Cost Variance which arises due to the difference between standard labour hours specified and the actual labour hours spent.
The usual reasons for this variance are a poor supervision b poor working condition c increase in labour turnover d defective materials. It may be calculated as following:Note: If actual time taken is more than the specified standard time, the variance represents unfavourable and vice versa.
In other words, idle time occurs due to the difference between the time for which workers are paid and that which they actually expend upon production. This variance arises due to the differences between the actual gang composition than the standard gang composition. In other words, the variance is the difference between the standard fixed overheads allowed for the actual production and the actual fixed overheads incurred. The variance can be calculated as follows: d Fixed Overhead Capacity Variance: This is that portion of volume variance which is due to working at higher or lower capacity than the budgeted capacity.
In other words, fixed overhead capacity variance arising due to a particular cause, i. This is calculated as follows : Overheads e Fixed Overhead Efficiency Variance: It is that portion of the Volume Variance which shows the lower or higher output arising from the efficiency or inefficiency of the workers.
This is an outcome of the performance of the workers and is calculated as : III. Overhead Variances Illustration: 9A Company has normal capacity of machines working 8 hours per day of 25 days in a month. The budgeted fixed overheads of a month are Rs. The Standard time required to manufacture one unit of product is 4 hours. In a particular month, the company worked for 24 days of machine hours per day and produced 4, units of the product. The actual fixed overheads incurred were Rs The Variances so far analysised are related to the cost of goods sold.
Quantum of profit is derived from the difference between the cost and sales revenue. Cost Variances influence the amount of profit favourably or adversely depending upon the cost from materials, labour and overheads.
In addition, it is essential to analyse the difference between actual sales and the targeted sales because this difference will have a direct impact on the profit and sales. Therefore the analsysis of sales variances is important to study profit variances. Sales Variances can be calculated by Two methods:I. Sales Value Method. Sales Margin or Profit Method. Sales Value MethodThe method of computing sales variance is used to denote variances arising due to change in sales price, sales volume or the sales value.
The sales variances may be calssified as follows : There is a difference between standard quantity and actual quantity so the standard will be revised in proportion to actual '! Thus, this variance arises only where more than one product is sold. It is calculated as follows: The Cost Accountant believes that monthly report would be more meaningful to everyone, if the company adopts flexible budgeting and prepares more detailed analysis.
Required:Determine the flexible budget variances. The Material Cost Variance is the difference between the Standard cost of materials for the Actual Output and the Actual Cost of materials used for producing actual output. Material Price Variance may be calculated If actual cost of materials used is more than the standard cost the variance is adverse.
And on the other hand. Material Usage Variance is calculated as follows: 3 3Material Mix Variance MMV : It is the portion of the material usage variance which is due to the difference between the Standard and the actual composition of mix. Material Mix Variance is calculated under two situations as follows : a When actual weight of mix is equal to standard weight to mix b When actual weight of mix is different from the standard mix.
Standard Costing and Variance Analysis
Standard costing and the basics of variance analysis were encountered in F2. In F5 you will have to cope with the following:. Standard costing. A standard cost for a product or service is a predetermined unit cost set under specified working conditions. Standard costing is less suited to organisations that producenon-homogenous products or where the level of human intervention ishigh. Restaurants traditionally found it difficult to apply standardcosting because each dish is slightly different to the last and there isa high level of human intervention.
In fast growing business world, major goal of organizations is to reduce the cost of production and control the cost as there are limited resources in business and manufacturing concern. Cost accounting has numerous significant tools in order to attain these goals such as standard costing. Standard costs are extensively recognized in all countries of world. It is an effectual procedure to control cost and assist to accomplish organizational goal. Standard costs are realistic estimates of cost based on analyses of both past and projected operating costs and conditions. In this procedure, standard cost of the product and services is determined in advance and comparing it with actual cost variance to ascertain and analyse.
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A measure of the variance between standard and actual performance Standard costing uses estimated costs exclusively to compute all Evaluating—For variance analysis The flexible budget formula determines total budgeted costs for a.
handout 9 - standard costing and variance analysis
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