Mrs. Chathuri Senarath

Control technique that reports variances by comparing actual costs to pre-set standards so facilitating action through management by exception.

 The greatest benefit from its use can be gained if there is a degree of repetition in the production process.  It is therefore most suited to mass production and repetitive assembly work.

1. Developing standards 2. Compares standards with actual (variance) 3. Generate information (variance analysis) 4. Stimulate improved performance

 What is a standard ?  The difference between a standard and a budget ?  How to set the standards ? Manufacturing Vs Service  Standards, is it suitable for modern organizations ?

A predetermined unit cost  Pre-determine  Estimate  For future period  Per unit

Standard cost card Product: A CostRequirementRs Direct Materials XRs 2.00 per kg6 kgs12.00 YRs 3.00 per kg2kgs6.00 ZRs 4.00 per liter1 lit4.00 Others Direct labour Grade IRs 4.00 per hour3 hrs12.00 Grade IIRs 5.40 per hour5 hrs Variable production overheadsRs 1.00 per hour8 hrs8.00 Fixed production overheadsRs 3.00 per hour8 hrs24.00 Standard full cost of production95.00

A budget usually refers to a department's or a company's projected revenues, costs, or expenses.budgetrevenuesexpenses A standard usually refers to a projected amount per unit of product, per unit of input (such as direct materials, factory overhead), or per unit of output. For example, a manufacturer will have budgets for its manufacturing or factory overhead departments. Let's assume that the budgeted manufacturing overhead for the upcoming year is expected to be $1,000,000 in order to produce the expected 100,000 identical units of product. The standard cost of manufacturing overhead per unit of product is $10 ($1,000,000 divided by 100,000 units)manufacturing overhead

 Depends on the type of organization

 Normal items looked at are;  Material  Labour  O/H  Sales & we look at price/rate or volume/qty

 Past prices or rates (past trends)  Estimates received from material or labour suppliers  Level of quality planned (specifications: High or low quality material, high or low skilled workers).  Agreements or possible agreements with trade unions  National legislations (Ex: minimum wage rate acts, price controls)  Types of overheads and the current methods used.  Specific external factors [Competitors, Customers (level of demand, price elasticity), Suppliers]  General external factors [Political / Economical (inflation and interest rates) / Social and Legal / Technical]

 Past performance  Competitor performance  Planned Performance  Level of performance gives:  Ideal standard  Attainable standard  Current standard  Basic standard

Few issues  Difficult to establish a measurable cost unit  Every cost unit will be different / heterogeneous  High levels of human involvement

 McDonaldization  Diagnostic Reference Grouping Exceptional cases

Stable Vs Dynamic environment Cost control or Cost management Labour centric or Realistic Aggregate Vs Individualistic Standards and Behavioral implications

Standard items Actual items

Per Unit Materials 1· Labour 1· Variable 1· Fixed 1·6 hrs Total cost Selling price 40·00  Budget Production= 5000 units  Budget Sales = 5000 units Materials 10,300 kgs 38,720 Labour 11,420 hours 71,200 Overhead: Variable 29,650 Fixed 83,800 Sales revenue164,800  Actual production = 6000  Actual sales = 4300 Standard Info. Actual Info. Important points to remember : Are we looking at per unit or a total comparison… At what activity level… We can break it down to…

 Direct Material variance  Direct Labour variance  Variable O/H variance  Fixed O/H variance  Sales variance

Total Direct Material Variances Usage VariancePrice Variance

Std material x Actual no of -Actual Cost per unit units produced cost incurred

Std material Cost Per Kg Actual Material cost per Kg Actual material purchased or used* Std material x Actual units – Actual Raw Std raw material usage per units produced material used cost per Kg Material Usage variance

 Material price variance 4 – 38720/10300 X = 2480Fav  Material usage variance 1.5X6000 – x 4 = 5200Adv

Total Direct Labour Variances Efficiency VarianceRate VarianceIdle time Variance

Std labour x Actual No units - Actual labour Cost per unit produced cost incurred

Std labour – Actual labour Actual hours worked rate Per hour rate per hour Labour efficiency Variance Std labour x Actual units – Actual hours Std labour hrs per unit produced actively worked rate per hr. Labour : Idle time Variance Idle hrs X Std labour rate per hour

 Labour rate variance /11420 X = 14100Adv  Labour efficiency variance 1.6 X 6000 – 9150 X 5 = 2250Fav  Idle time variance 2270 X 5 = Adv

Total Variable O/H cost Variances Efficiency Variance Expenditure Variance

Std variable O/H x Actual units - Actual variable O/H Cost per unit produced cost incurred

Std variable O/H - Actual variable O/H Actual active expenditure per expenditure per hrs worked hr active hrs * Variable O/H efficiency Variances Std hrs per x no of units - Actual active Std variable O/H Unit produced hrs per hour

 Variable O/H expenditure variance /9150 X 9150 = 6775 Adv  Variable O/H efficiency variance 1.6 X 6000 – 9150 X 2.5 = 1125Fav

Fixed Overhead

 Fixed O/H is different to other items ?  If the Fixed O/H is calculated in per unit terms…  We already have the name …

Fixed O/H x Actual activity - Actual fixed O/H Absorption level cost incurred rate per unit

Total Fixed O/H cost Variances Volume Variance Expenditure Variance

Bug. Fixed O/H cost - Actual fixed O/H cost Bud units – Actual units fixed O/H absorption rate per unit Fixed O/H volume variance

 Fixed O/H expenditure variance 12X = 23,800 Adv  Fixed O/H volume variance 5000 – 6000 X 12 = 12,000Fav

Sales Variances Volume VariancePrice Variance

Std selling price - Actual price Actual no of units sold per unit per unit (Budgeted sales units - Actual sales units) Std profit per unit (Budgeted sales units – Actual sales units) Std contribution per unit Sales Volume variance (Budgeted sales units - Actual sales units) Std revenue per unit

 Sales price variance ( /4300) 4300 = 7200 Adv  Sales volume variance * (5000 – 4300) X 10 = 7,000 Adv * (5000 – 4300) X 22 = 15,400 Adv * (5000 – 4300) X 40 = 28,000 Adv

Operating Statement Budgeted profit xxxx Sales volume variance xxx/(xxx) Standard profit xxxx Sales price variance xxx/(xxx) Cost Variances Adverse Favorable Material - price usage Labour - rate efficiency idle Variable O/H - expenditure efficiency Fixed O/H - expenditure volume xxx/(xxx) Actual profit xxxx

 Profit statement (Absorption costing)  Profit statement (Marginal costing)  Contribution statement  Cost statement

Profit statement (Absorption costing) Budgeted profit xxxx Sales volume variance xxx/(xxx) Sales price variance xxx/(xxx) Cost Variances Adverse Favorable Material - price usage Labour - rate efficiency idle Variable O/H - expenditure efficiency Fixed O/H - expenditure volume xxx/(xxx) Actual profit xxxx

Sales 200,000 Less Cost of sales Op. Stock - Production 150,000 -Cl. Stock - (150,000) Gross profit 50,000 Adj. Under or Over Absorbed Less- Non production cost Net profit 50,000

Sales 164,800 Less Cost of sales Op. Stock Production 223,370 -Cl. Stock (1700X30) (172,370) Gross profit (7,570) Adj. Under or Over Absorbed Less- Non production cost Net profit (7,570)

c. Operating Statement Budgeted profit 50,000 Sales volume variance (7000) Standard profit 43,000 Sales price variance (7200) Cost Variances Adverse Favorable Material - price 2480 usage 5200 Labour - rate efficiency 2250 idle Variable O/H - expenditure 6775 efficiency 1125 Fixed O/H - expenditure volume (43370) Actual profit (7570)