AFM 31130AFM 31130

Standard Costing &Variance Analysis

ByIsuru Nadeesha Manawadu

B.Sc in Accounting Sp. (USJP), ACA,

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Standard costStandard cost is a predetermined estimated unit cost used for stock valuation & control.

Standard cost cardStandard cost card shows full details of the standard cost of each product.

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Standard Costing

Standard costing is a control technique which compares standard costs and revenues with actual results to obtain variances which are used to stimulate improved performance.

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Standard costing involves:

• The setting of standards.

• Ascertaining actual results.

• Comparing standards and actual costs to determine the variances.

• Investigating the variances and taking appropriate action where necessary.

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Types of Standards

• Ideal Standards• Attainable standards• Current Standards• Basic Standards

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Total Profit Variance

Sales Variance

Production Cost Variance

Non Production Cost Variance

Selling Price Variance

Sales Volume Variance

DM Total Variance

DL Total Variance

VPOH Variance

FPOH Variance

Marketing Cost Variance

Administration Cost Variance

DM Price Variance

DM Usage Variance

DL Rate Variance

DL Efficiency Variance

VPOH Expenditure Variance

VPOH Efficiency Variance

FPOH Expenditure Variance

FPOH Volume Variance

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1. Direct Material Variances 1.1 Direct Material Price Variance:

Actual Quantity x Actual Price   -   Actual Quantity x Standard Price     Actual Cost      -   Standard Cost of Actual Quantity

1.2 Direct Material Usage Variance:

Actual Quantity x Standard Price   -   Standard Quantity x Standard PriceStandard Cost of Actual Quantity   -   Standard Cost of Standard Quantity

or

(Actual Quantity - Standard Quantity) x Standard Price

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Question 01

Araliya PLC manufactured 10,000 bags of cement during the month of January. Following details on raw materials purchased and consumed during the period given bellow:

Material Quantity Used SU per bag Actual Price Standard Price Limestone 100 tons 11 KG Rs. 75/ton Rs.70/ton Sand 250 tons 26 KG Rs. 10/ton Rs.14/ton

Calculate; i.Material price variance ii.Material Usage Varianceiii.Material Total Variance

SU: Standard Usage

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2. Direct Labour Variances

2.1 Direct Labor Rate Variance:

  Actual Quantity x Actual Rate   -   Actual Quantity x Standard Rate      Actual Cost      -   Standard Cost of Actual Hours

2.2 Direct Labor Efficiency Variance:

Actual Hours x Standard Rate   -   Standard Hours x Standard Rate Standard Cost of Actual Hours    -     Standard Cost

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Question 02

Araliya PLC is a company which produces denims and it has manufactured and sold 10,000 denims during a period. Information relating to the direct labor cost and production time per unit is as follows:

AH Per Unit SH Per Unit AR Per Hour SR Per Hour Direct Labor 0.50 0.55 Rs. 12 Rs. 10

Calculate;i.Direct Labour rate variance ii.Direct Labour Efficiency Varianceiii.Total Direct Labour Variance

AH – Actual Hours, SH – Standard Hours, AR – Actual Hours, SR – Standard Rate

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3. Variable Cost Variances

3.1 Variable Overhead Expenditure Variance:

 Actual Manufacturing Variable Overheads Expenditure

LessActual hours   x   Standard Variable Overhead Rate per hour

3.2 Variable Overhead Efficiency Variance:

Standard hours   x   Standard Variable Overhead Rate per hourLess

Actual hours   x   Standard Variable Overhead Rate per hour

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Question 03Araliya Sports LTD is a small manufacturing company specializing in the production of cricket bats. Araliya Sports LTD currently manufactures 2 types of bats:Araliya Plus - a hand-crafted bat designed for professional use.Araliya Gold - a machine-manufactured cheaper bat designed for casual cricket.Following is a break-up of the standard variable manufacturing overhead costs:

Araliya Plus Araliya Gold Number of Hours 2 direct labor hours 1 machine hour Overheads: Indirect Labor Rs.10 -

Polish Rs.5 Rs.1 Sand paper Rs. 1 -

Glue Rs. 1 Rs. 0.5 Machine lubricants - Rs. 0.5 Electricity Rs. 3 Rs. 10 Total Rs.20 Rs. 12

(Rs.10 per direct labor hour) (Rs.12 per machine hour) Following information relates to the actual data from last month:Variable Manufacturing Overheads Rs.175,000 Direct Labor Hours10,000 Machine Hours 5,000 Production (units) – Araliya Plus 4,500 Production (units) - Araliya Gold 5,200Calculate; Variable overhead expenditure variance and efficiency variance.

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4. Fixed Overhead Variances

4.1 Fixed Overhead Total Variance (FOTV): 

FOTV= Actual Fixed Overheads - Absorbed Fixed Overheads

4.2 Fixed Overhead Expenditure Variance:

Actual Fixed Overheads - Budgeted Fixed Overheads

4.3 Fixed Overhead Volume Variance:

Absorbed Fixed overheads - Budgeted Fixed Overheads

Actual Output x FOAR* - Budgeted Output x FOAR*

* Fixed Overhead Absorption Rate per unit of output

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Question 04Araliya PLC is a manufacturing company specializing in the production of automobiles. Information from its last budget period is as follows:

Actual Production 275,000 units Budgeted Production 250,000 units Standard Fixed Overhead Absorption Rate Rs. 2,000 per unit.Actual fixed overhead Rs. 600 Mn

Calculate i.Fixed overhead total varianceii.Fixed overhead expenditure varianceiii.fixed overhead volume variance

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1. Sales Variances

1.1 Sales Price Variance:

 Actual Price x Actual Units Sold   -   Standard Price x Actual Units Sold Actual Sales Revenue    -    Standard Revenue of Actual Units Sold

or(Actual Price - Standard Price)   x   Actual Units Sold

1.2 Sales Volume Variance:

Sales Volume Variance (where absorption costing is used): (Actual Unit Sold - Budgeted Unit Sales)   x   Standard Profit Per Unit

Sales Volume Variance (where marginal costing is used):(Actual Unit Sold - Budgeted Unit Sales)   x   Standard Contribution Per Unit

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Question 05

Araliya PLC is a fertilizer producer which specializes in the manufacture of NHK-II (a chemical fertilizer).

Following information relates to the sale of fertilizer by Araliya PLC during the period:

Material Quantity Actual Price Standard Price NHK-II 200 tons Rs. 380/ton Rs. 400/ton

Budgeted quantity of sales is 210 tons and standard variable cost per unit is Rs. 250.

Calculate;Sales price varianceSales volume variance

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Limitations of Standard Costing & Variance Analysis

Non Standardized ProductionService OrganizationsAssigning ResponsibilitiesReporting DelayBehavioral Issues