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NOTES BY HOMERA ASHRAF
Standard Costing and Variance Analysis

Standard Cost
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
...
"
Advantages of Standard Costing
The following are the important advantages of standard costing :
(1) It guides the management to evaluate the production performance
...

(3) Standard costing is useful in formulating production planning and price policies
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(5) It facilitates eliminating inefficiencies by taking corrective measures
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(2) Due to lack of technical aspects, it is difficult to establish standards
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(4) Fixing of responsibility is’ difficult
...

(5) , Frequent revision is required while insufficient staff is incapable of operating this
system
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Budgetary Control
Standard Costing
(1) Budgets are projections of financial (1) Standard Costing is a projection of cost
accounts
...

(2) As a statement of both income and (2) Standard costing is not used for the
expenses it forms part of budgetary control
...

(3) Budgets are estimated costs
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"
cost should be
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construction work
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figures
...

 Classification of Accounts: Classification of accounts for the purpose of identifying
each expense and revenue by function and deciding the responsibility of such
expenses and revenues
...
In this context, generally five types of standard are
available, viz
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Types of Standard
Standard may be classified into the following five types:
 Basic Standard: Basic standard is a standard which is established for us over a long
period of time
...
In
this type of standard, a base year is chosen for comparison purpose
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 Ideal Standard: Ideal Standard is a standard which may be attained under most
favourable conditions
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 Normal Standard: Normal standard is a standard which can be achieved under
normal operating conditions this standard is difficult to set as it require significant
degree of forecasting
...
This is an attainable and realistic standard
...
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
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The variance may be favourable variance or unfavourable variance
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" Similarly,
where actual performance is below the standard it is called as "Unfavourable Variance
...

(A) Cost Variance: Total Cost Variance is the difference between Standards Cost for the
Actual Output and the Actual Total Cost incurred for manufacturing actual output
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Direct Material Variances/ Material Cost Variances (MCV): 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
...

(1) Material Price Variance (MPV) : MPV is the difference between the standard cost
of actual quantity and actual cost for actual quantity
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MUV =
SP x (SQ - AQ)
(3) Material 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
...
This
variance arises due to spoilage, low quality of materials and defective production
planning etc
...
" This variance may be
calculated as under:
MYV =
SR x ( AY - SY)
Where, AY= Actual Yield, SY = Standard Yield and
Standard Rate is calculated as follows :

Standard Rate = Standard cost of standard mix / Net standard output
...
MCV = MPV + MUV
2
...

Question 1

II
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Labour Cost Variance = Standard Cost of Labour - Actual Cost of Labour
(or)
Labour Cost Variance = {SR x SH for AO} - { AR x AH}
Where, SR = Standard Rate, ST = Standard Hour, AO = Actual Output, AR = Actual Rate,
AT = Actual Hour
...
This variances
arise from the following reasons:
(a) Change in wage rate
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(c) Payment of overtime
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It is expressed as follows :
LRV = AH ( SR - AR)
(c) Labour Efficiency Variance (LEV): Labour Efficiency Variance otherwise known as
Labour Time Variance
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The usual reasons for this variance are (a) poor supervision (b) poor working condition (c)
increase in labour turnover (d) defective materials
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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
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This variance arises due to the differences between the actual gang composition than the
standard gang composition
...
This variance is calculated in two ways:
(i) When Standard and actual times of the labour mix are same: The formula for its
computation may be as follows :
LMV = Standard cost of standard labour mix - Standard cost of Actual labour mix
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It may be
calculated as follows :
LMV = (RSH - AH) x SR
Where, Revised Standard Hour (RSH) = Total Actual Hour/ Total standard hour X actual
hour
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Labour Yield Variance arises due to the variation in labour cost
on account of increase or decrease in yield or output as compared to relative standard
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Labour Cost Variance = Labour Rate Variance + Labour Efficiency Variance
2
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Overhead Variances (concept only as per syllabus)
Overhead may be defined as the aggregate of indirect material cost, indirect labour cost
and indirect expenses
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The Overhead Cost Variance may be calculated as follows:
Overhead Cost Variance = Standard overhead rate per unit - Actual overhead cost
Classification of Overhead Variance
Overhead Variances can be classified as :
I
...
Fixed Overhead Variance:
(a) Fixed Overhead Cost Variance
(b) Fixed Overhead Expenditure Variance
(c) Fixed Overhead Volume Variance
(d) Fixed Overhead Capacity Variance
(e) Fixed Overhead Efficiency Variance
(f) Fixed Overhead Calendar Variance
REFER TO CALCUTTA UNIVERSITY RECOMMENDED BOOK



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