1. Standard costing

2. Standard costing system
The management evaluates the performance of a company by comparing it with some predetermined measures
Therefore, it can be used as a process of measuring and correcting actual performance to ensure that the plans are properly set and implemented

3. Introduction
Standard cost the estimated cost of a process, resource, or item used in a manufacturing enterprise, entered in an account and compared with the actual cost so that anomalies are readily detectable.

4. Introduction Standard costing
An estimated or predetermined cost of performing an operation or producing a good or service, under normal conditions. Standard costs are used as target costs (or basis for comparison with the (actual costs), and are developed from historical data analysis or from time and motion studies.

5. Procedures of standard costing system
Set the predetermined standards for sales margin and production costs
Collect the information about the actual performance
Compare the actual performance with the standards to arrive at the variance
Analyze the variances and ascertaining the causes of variance
Take corrective action to avoid adverse variance
Adjust the budget in order to make the standards more realistic

6. Functions of standard costing system
Valuation
Assigning the standard cost to the actual output
Planning
Use the current standards to estimate future sales volume and future costs
Controlling
Evaluating performance by determining how efficiently the current operations are being carried out

7. Functions of standard costing system
Motivation
Notify the staff of the management’s expectations
Setting of selling price

8. Variance

9. Variance analysis
A variance is the difference between the standards and the actual performance
When the actual results are better than the expected results, there will be a favourable variance (F)
If the actual results are worse than the expected results, there will be an adverse variance (A)

10. Cost variance

11. Cost variance Cost variance = Price variance + Quantity variance
Cost variance is the difference between the standard cost and the
Actual cost
Price variance = (standard price – actual price)*Actual quantity
A price variance reflects the extent of the profit change
resulting from the change in activity level
Quantity variance = (standard quantity – actual quantity)*
standard cost
A quantity variance reflects the extent of the profit change

12. Three types of cost variance
Material cost variance
Labour cost variance
Variable overheads variance

13. Material and labour variance

14. Material cost variance
Material price variance
= (standard price – actual price)*actual quantity
Material usage variance
= (Standard quantity – actual quantity)* standard price
= (Standard quantity for actual production – actual quantity production) * standard price

15. Labour cost variance Labour rate variance
= (standard price – actual price)*actual quantity
Labour efficiency variance
= (standard quantity – actual quantity)*standard price
= Standard quantity for actual production – actual quantity used) * standard price

16. Overheads variance Variable overheads variance
Fixed overheads variance

17. Variable overheads variance
Variable overheads variance is the difference between the standard variable overheads absorbed into the actual output and the actual overheads incurred

18. Fixed overhead variance
Fixed overheads variance
= Fixed overheads absorbed – Actual fixed overheads incurred
Fixed overheads expenditure variance
Budgeted fixed overheads – Budgeted overheads absorbed
Fixed overheads volume variance
= Absorbed fixed overheads – Budgeted overheads absorbed

19. Reasons for variances Material price variance
Price changes in market conditions
Change in the efficiency of purchasing dept. to obtain good terms from suppliers
Purchase of different grades or wrong types of materials

20. Reasons for variances Materials usage variance
More effective use of materials/ wastage arising from the efficient production process
Purchase of different grade or wrong types of materials
Wastage by the staff
Change in production methods

21. Reasons for variances Labour rate variance
Non-controllable market changes in the basic wage rate
Use of higher/lower grade of workers
Unexpected overtime allowance paid

22. Reasons for variances Labour efficiency variance
Purchase of different grade or wrong types of materials
Breakdown of machinery
High/low labour turnover
Changes in production method
Introduction of new machinery
Assignment wrong type of worker to work
Adequacy of supervision
Changes in working condition
Change in motivation methods