standard costing and performance measures

7/31/2019 Standard Costing and Performance Measures

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STANDARD COSTING ANDPERFORMANCE MEASURES

Presented by

Prabhath Chowdary(26)

Uma Kanth(27)Sai Srinivas(28)

Satish Reddy(29)

Shilpa Inampudi(30)


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Standard cost

Standard cost is a predetermined cost which is assumed by afirm to act as actual cost for product inputs like direct material

and direct labor. Standard costing can be divided into three features:

1. Set a predetermined or standard cost

2. Measure the actual cost incurred in theproduction process

3. Compare actual cost with standard cost. Anydifference is considered as cost variance and this isused for controlling costs.


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Standards can be set through two methods:

1. Analysis of Historical Data

2. Task Analysis

Standards are of two types:

1. Perfection Standards

2. Practical Standards


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Direct-Labor Standards: Standard Direct-Labor Quantity:

It is considered as the number of direct-labor hoursneeded to manufacture one unit of product.

Standard Direct-Labor Rate:

It is the total hourly cost of compensation paid to a

worker, including fringe benefits.


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Cost Variance: Direct-Material Variance:

Direct material involves the variance that occurred between thequantity of direct materials and the price involved for direct materials.

Direct-Material Price Variance:

Direct material price variance gives the difference between thestandards set for price of direct materials and the actual price incurred forthe direct materials.

Formula for direct material price variance isDirect-Material Price Variance = PQ (AP SP)

Where PQ = Quantity Purchased

AP = Actual Price

SP = Standard Price


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Direct-Material Quantity Variance:

Direct material quantity variance gives the difference betweenthe standards set for materials allowed and the actual quantity of

materials used.Formula for direct material quantity variance is

Direct-Material Quantity Variance = SP (AQ SQ)

Where AQ = Actual Quantity

SQ = Standard Quantity


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Direct-Labor Variance:

Direct labor variance involves direct labor rate variance anddirest labor efficiency variance.

Direct-Labor Rate Variance:Direct labor rate variance gives the difference between the

standard costs set as payment for a worker and the actual paymentgiven to the worker.

Formula for direct labor rate variance is

Direct-Labor Rate Variance = AH (AR

SR)

Where AH = Actual Hours used

AR = Actual Rate per hour

SR = Standard Rate per hour


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Direct-Labor Efficiency Variance:

Direct labor efficiency variance gives the difference betweenthe standard hours allowed and actual hours used by the worker.

Formula for direct labor efficiency variance is

Direct-Labor Efficiency Variance = SR (AH SH)

Where SR = Standard Rate per hour

AH = Actual Hours used

SH = Standard Hours allowed


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Unfavorable Variance:

When the actual costs exceed the standard costs, then thevariance occurred is said to be Unfavorable Variance

Favorable Variance:

When the actual costs incurred are less when compared to thatof the standard costs set, then the variance occurred is said to beFavorable Variance


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Significance of Cost Variances: Size of Variances

Recurring Variances

Trends

Controllability

Project Monitoring


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Costs of Investigation include:

1. Time spent by investigation manager and theemployee in the department where the investigation occurs

2. Disruption of production process3. Corrective actions taken to eliminate the cause of a

variance.

Benefits of Investigation:

1. Reduced future production costs if the unfavorable

variance is eliminated

2. Cost saving associated with the lowering of coststandards when the cause of a favorable variance is discovered.


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Advantages of Standard Costing:

Criticisms of Standard Costing:


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Reduced importance of labour standards and variances Emphasis on material and overhead costs:

Cost drivers

Shifting Cost structures:

High Quality and Zero defects

Non- Value-Added Costs

Shorter Product Life Cycles

Real-Time Information Systems

Nonfinancial measures for Operational Control:

Benchmarking

Adapting Standard-Costing Systems:


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OPERATIONAL PERFORMANCEMEASURES RAW MATERIAL AND SCRAP

INVENTORY

MACHINERY

PRODUCT QUALITY

PRODUCTION AND DELIVERY

PRODUCTIVITY


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