WHAT’S STANDARD COSTING

• Technique which establishes predetermined estimates of costs of a product or service
• Then, compares these predetermined costs with ACTUAL COSTS, as they are incurred
• PREDETERMINED COSTS = STANDARD COSTS
• Difference between standard costs and actual costs = VARIANCE

STANDARD COST

• Planned cost for a unit of production
• Calculated in advance, based on:
• Expected prices of labour, materials
• Expected overhead costs
• Expected level of activity
• Note: standard cost is not average of past cost, but is a TARGET COST for a future period, which should be attained

TYPES OF STANDARDS

4 TYPES OF STANDARDS

• Basic standards (established for use over Long period of time, from which current standard developed)
• Ideal standard (can be attained under the most favorable conditions)
• Attainable standards (standard which can be attained if a standard unit of work is carried out efficiently)
• Current standard (established for use over short period of time, related to current conditions)

BENEFITS OF STANDARD COSTING

• Corrective actions can be taken, given useful control information
• Technical analysis to set standards lead to better methods, greater efficiency and lower costs
• Workers are more cost conscious
• Simplify record keeping and inventory valuation
• Clear targets lead to high motivation

VARIANCE ANALYSIS

VARIANCE ANALYSIS

• Variance analysis subdivides the difference between standard cost and actual cost into the detailed differences
• Detailed differences = material, labour, overheads, etc
• Provides details of the causes of the off standard performance
• Hence, management can improve operations and efficiency
• Variances can be FAVOURABLE OR ADVERSE

COST VARIANCES

• If actual is lower than standard = favourable

SALES VARIANCES

• If actual is higher than standard = favourable

DIRECT MATERIAL COST VARIANCE =TOTAL DIRECT MATERIAL VARIANCE

• Difference between standard d.material cost and actual material cost
• Divided into :
• 1) price variance
• 2) usage variance

D.MATERIAL PRICE VARIANCE

• Difference between actual quantity of direct material used at standard price and actual cost of direct material
• (SP - AP) AQ

D.MATERIAL USAGE VARIANCE

• Difference between standard direct material cost for actual production and standard cost of actual quantity used
• (SQ-AQ)x SP

CAUSES OF FAVOURABLE PRICE VARIANCE

• Actual price is lower than budgeted price
• Decrease in market price due to competition
• Inferior quality of material at lower cost
• Buy during special offers
• Higher discount due to bulk buying

CAUSES OF ADVERSE PRICE VARIANCE

• Actual price is higher than budgeted price
• Increase in market price due to increase in tax
• Superior quality at higher price
• Buy at higher price in times of scarcity
• Loss of anticipated discount

CAUSES OF FAVOURABLE MATERIAL USAGE

• =Actual quantity used is lower than budgeted
• Lower material loss than expected
• Improvement in production system
• Higher skilled labour force
• Lower usage due to superior quality of material

CAUSES OF ADVERSE MATERIAL USAGE VARIANCE

• =Actual quantity is more than budgeted quantity
• More loss than expected
• Unskilled labourforce lead to wastage
• Losses due to using inferior quality of material
• Poor inventory control leading to theft

SALES VARIANCE

• Actual sales - budgeted sales
• Used to measure sales performance, in order to understand market conditions

WHY ACTUAL SALES MAY DIFFER FROM PLANNED SALES?

• Selling price different = sales price variance
• Volume sold different than planned = sales volume variance

FORMULAE TO MEMORIES

• Sales price variance = (AP-SP) * AQ
• Sales volume variance = (AQ - SQ) *SP

CAUSES OF FAVOURABLE PRICE VARIANCE

• Favourable price = actual price is higher than budgeted price
• Scarcity leading to increase in price
• Increase in demand leading to increase in price
• Increase in cost passed on to consumer

CAUSES OF ADVERSE SALES PRICE VARIANCE

• = actual price is lower than budgeted price
• Excess supply = lower prices
• Sales promotion
• Poor quality production, sold at lower prices

CAUSES OF FAVOURABLE SALES VOLUME VARIANCE

• = actual qty exceeds planned qty
• Why?
• Agressive marketing
• No other substitute on market
• High quality leading to high demand
• Decrease in cost = sell at lower price = increase in volume sold

ADVERSE SALES VOLUME VARIANCE

• = actual volume is less than budgeted volume
• Why?
• Selling at high price
• Inferior quality of goods
• New substitutes available
• Consumer taste changes

SALES VOLUME BEING HIGHER OR LOWER THAN BUDGETED

HOW TO MEASURE INCREASE/DECREASE IN STANDARD PROFIT?

NOTE

• Sales volume variance different from sales volume profit variance
• Sales volume profit variance = (AQ- SQ) * Std profit per unit

FIXED PRODUCTION OVERHEAD VARIANCE

Untitled Slide

FIXED PRODUCTION OVERHEAD VARIANCE

• Overhead expenditure variance
• Overhead volume variance: (I) volume capacity variance and (ii) volume efficiency variance