Standard Costing

Presented By: AshutoshMishra, Ashok Gupta, Athar Jawaid, Avinash Tiwari, Chandan Kumar

Flow of Presentation

MeaningTypes of Standard & RevisionProcedure of setting standard

cost :• Material• Labour• OverheadAdvantagesLimitationsReferences

What is Costing ?

Costing (or cost-benefit analysis) is the process of analyzing the costs and benefits of different options to determine what approach should be taken to a

particular conflict. what solution or resolution should be

chosen once various options are being considered.

Historical Cost & it’s Limitations

Historical cost systems are associated with recording of historical or actual cost. Historical costing is the ascertainment of costs after they have been incurred.Ineffective in cost control.No standards or goals so

cost reduction isn’t an option.

Not reliable for management tasks.

What is Standard ?

A Standard may be a norm or a measure of comparison in terms of specific items such as Pounds or kilos for material. Labour hours required. Plant capacity used in hours.

Real Life Examples :ISO – International Standards for Business, Government & Society.

CMMI – Process improvement approach from Carnegie Mellon University, USA.

NBA – an AICTE program for institution evaluation.

A Standard Cost is a planned cost for a unit of product or service rendered.

In the words of Backer and Jacobsen, “Standard cost is the amount the firm thinks a product or the operation of the process for a period of time should cost, based upon certain assumed conditions of efficiency, economic conditions and other factors.”

Standard Costing

Classification of Standards

Theoretic Normal

Basic Currently Attainable

The two principal considerations for classification of standards are :

†Attainability of standards.

†Frequency with which the standards are revised.

This is the standard which represents a high level of efficiency. Ideal standard is fixed on the assumption that favourable conditions will prevail and management will be at its best. The price paid for materials will be lowest and wastes etc. will be minimum possible. The labour time for making the production will be minimum and rates of wages will also be low. The overhead expenses are also set with maximum efficiency in mind. All the conditions, both internal and external, should be favourable and only then ideal standard will be achieved.

Ideal standard is fixed on the assumption of those conditions which may rarely exist. This standard is not practicable and may not be achieved.

Basic standard is established for a long period and is not adjusted to the preset conations. The same standard remains in force for a long period. These standards are revised only on the changes in specification of material and technology productions. It is indeed just like a number against which subsequent process changes can be measured. Basic standard enables the measurement of changes in costs.

BasicThe changes in manufacturing costs can be measured by taking basic standard, as a base standard cannot serve as a tool for cost control purpose because the standard is not revised for a long time.

Normal standard has been defined as a standard which, it is anticipated, can be attained over a future period of time, preferably long enough to cover one trade cycle. The standard attempts to cover variance in the production from one time to another time. An average is taken from the periods of recession and depression.

Normal

The normal standard concept is theoretical and cannot be used for cost control purpose. Normal standard can be properly applied for absorption of overhead cost over a long period of time.

It is presumed that conditions of production will remain unchanged. In case there is any change in price or manufacturing condition, the standards are also revised. Current standard may be ideal standard and expected standard.

A current standard is a standard which is established for use over a short period of time and is related to current condition. It reflects the performance that should be attained during the current period. The period for current standard is normally one year.

Current

Revision of Standards

We need to revise the standards which follow for better control. Even standards are also subjected to change like the production method, environment, raw material, and technology.

Standards may need to be changed to accommodate changes in the organization or its environment. When there is a sudden change in economic circumstances, technology or production methods, the standard cost will no longer be accurate.

The difference between the actual costs and the standard costs are known as variances.

Standard costing and the related variances is a valuable management tool. If a variance arises, management becomes aware that manufacturing costs have differed from the standard (planned, expected) costs.

• If actual costs are greater than standard costs the variance is unfavourable.

• If actual costs are less than standard costs the variance is favourable.

Variance analysis involves two phases :Computation of individual variances.Determination of the cause of each variance.

Developing or Setting

Standards

Setting up standards is based on the past experience. The total standard cost includes direct materials, direct labour and overheads. Normally, all these are fixed to some extent. The standards should be set up in a systematic way so that they are used as a tool for cost control.

Materials

Labour

Overhead

When we want to purchase some material what are the factors we consider. If material is used for a product, it is known as direct material. On the other hand, if the material cost cannot be assigned to the manufacturing of the product, it will be called indirect material.Therefore, it involves two things: Quality of material Price of the material

The procedure for purchase of materials, minimum and maximum levels for various materials, discount policy and means of transport are the other factors which have bearing on the materials cost price.It includes: Cost of materials Ordering cost Carrying cost

Materials Cost Variance

Usage Variance Price Variance

Mix Variance Yield Variance

Material cost variance is the difference between actual cost of direct materials used & standard cost of direct materials specified for the output achieved.FormulaMCV=(AQ*AP)-(SQ*SP)φAQ=actual quantityφAP=actual priceφSQ=standard quantity

for actual outputφSP=standard price

From the following data given calculate,a. Materials cost varianceb. Materials price variancec. Materials usage variance

Numerical

Quantity of materials purchased

3000 units

Value of materials purchased

Rs.9000

Std. quantity of materials required per ton of output

30 units

Std. rate of material Rs.2.50 per unit

Opening stock of materials Nil

Closing stock of materials 500 units

Output during the period 80 tons

Labour cost variance is the difference between the actual direct wages paid & standard direct wages specified for output achieved.Formula :LCV=(AH*AR)-(SH*SR)φAH=actual hoursφAR=actual rateφSH=standard hoursφSR=standard rate

Labour Cost Variance

Efficiency Variance Idle Time Variance

Rate Variance

Mix Variance Yield Variance

From the following data given calculate,a. Labour cost varianceb. Labour rate variancec. Labour efficiency

varianced. Labour mix variancee. Labour yield variancef. Labour efficiency sub-

variance

Numerical

Per unit(hr)

Rate per hr(Rs.)

Total(Rs.)

Skilled worker

5 1.50 7.50

Unskilled worker

8 0.50 4.00

Semi-skilled worker

4 0.75 3.00

Rate per hr(Rs.) Total(Rs.)

Articles produced 1000

unitsSkilled worker

4500hrs.2.00 9000

Unskilled worker

10000hrs.

0.45 4500

Semi-skilled worker 4200hrs

0.75 3150

Overhead Cost Variance

Fixed Overhead Variance Variable Overhead VarianceThere are various other branches of these two variances as listed below :• Fixed overhead

expenditure variance.• Fixed overhead volume

variance.Variable overhead

expenditure variance.Variable overhead

efficiency variance.

Numerical:Budgeted hrs. for month of march’99 = 180 hrs.Std. rate of article produced per hr. = 50 unitsBudgeted fixed overheads = Rs.2700Actual production = 9200 unitsActual hrs. of production = 175 hrs.Actual fixed overhead costs = Rs.2800Calculate overhead cost variances.

AdvantagesφFinding of varianceφCost controlφRight decisionsφEliminating inefficienciesφEfficiency measurement

Limitations It cannot be used in those

organizations where non-standard products are produced.

The process of setting standard is a difficult task, as it requires technical skills.

There are no inset circumstances to be considered for fixing standards.

The fixing of responsibility is not an easy task.

References

The Internet.

Management Accounting – James MartinManagement Accounting – D Westra, M Kane & SrikanthAccounting for management – Dr.Jawahar Lal