1. Standard Costing & Variance Analysis!

2. Definitions
Standard Cost: (CIMA) “Standard cost is the pre-determined cost based on the technical estimates for materials, labour and overhead for a selected period of time for a prescribed set of working conditions.”
Standard Costing: (CIMA) “the preparation of standard costs and applying them to measure the variations from the actual costs and analyzing the causes of variations with a view to maintain maximum efficiency of the operations so that any remedial action may be taken immediately.

3. Variance Analysis
Cost Variance: is the difference between the standard cost and the actual costs.
Variance Analysis: is the resolution into constituent parts and the explanation of the variances.
Favorable & Unfavorable Variances.
Controllable & Uncontrollable Variances

4. What all could be the reasons for the actual manufacturing cost or the sales/profit to vary from their standard costs and price/profit?

5. Material Cost variance Material Price Variance Material Usage Variance
Types of Variances
1. Material Variance
Material Cost variance
Material Price Variance
Material Usage Variance
Material Mix Variance
Material Yield Variance
2. Labour Variance
Labour Cost Variance
Labour Rate Variance
Labour Efficiency Variance
Labour Mix Variance
Idle Time Variance
3. Overhead Variance
Overhead Cost Variance
Variable overheads Var.
Variable o/h efficiency var.
Variable o/h expenditure var.
Fixed overhead variance
4. Other Variances
Calendar Variance
Sales Value variance
Sales price variance
Sales volume variance
Profit Variance

6. Favorable & Unfavorable Variances
Favorable variances(F) arise when actual costs are less than budgeted costs or actual sales/profit exceed budgeted.
Un favorable variances(U) arise when actual costs exceed budgeted or actual sales/profit are less than budgeted.
Profit Revenue Costs
Actual > Expected F F U
Actual < Expected U U F

7. Standard Costs Standard Costs are
Based on carefully predetermined amounts.
Standard Costs are
Used for planning labor, material and overhead requirements.
The expected level of performance.
Benchmarks for measuring performance.

8. Setting Standard Costs
Accountants, engineers, personnel administrators, and production managers combine efforts to set standards based on experience and expectations.

9. Standards vs. Budgets A standard is the expected cost for one unit.
A budget is the expected cost for all units.
Are standards the same as budgets?

10. The price variance is computed on the entire quantity purchased.
How will the material price variance and material usage be computed if the quantity purchased is different from the quantity used?
The price variance is computed on the entire quantity purchased.
The quantity variance is computed only on the quantity used.

11. Material Cost Variance
Material cost variance arises due to variance in the price of material or its usage.
This can be calculated by using the following formula,
Material Cost Variance = (SQ x SP) – (AQ x AP) ,
Where,
SQ  = Standard quantity for the actual output
SP  = Standard price per unit of material
AQ  = Actual quantity
AP  = Actual price per unit of material
A positive result implies favorable variance and a negative result implies unfavorable variance (adverse variance).

12. Material Price Variance
Material price variance may arise due to number of reasons like fluctuations in market prices, error in buying due to wrong purchasing policy etc,
This can be calculated by using the following formula,
Material Price Variance = (SP – AP) x AQ
Where,
SP  = Standard price per unit of material
AQ  = Actual quantity
AP  = Actual price per unit of material
A positive result implies favorable variance and a negative result implies unfavorable variance (adverse variance).

13. Material usage Variance
Material Usage variance is the difference between the actual quantities of raw materials used in production and the standard quantities that should have been used to produce the product,
MUV may arise due to number of reasons like Pilferage of materials , Wastage , Sub-standard or defective materials etc,
This can be calculated by using the following formula,
Material Usage Variance = (SQ – AQ) x SP

14. Material mix variance =
MMV is calculated when a product uses mixture of different raw materials,
MMV is that portion of the materials quantity variance, which is due to the difference between the standard and actual composition of a mixture.
It can be represented by the following formula:
Material mix variance  =
(Standard cost of actual quantity of the standard mixture – Standard cost of actual quantity of the actual mixture) or (Revised SQ – AQ) x SP

15. Practical Problems
A furniture company uses sunmica tops for tables. It provides the following data:
St. Quantity for sunmica per table 4 sq. ft
St. price per sq. ft of sunmica Rs. 5
Actual prod. Of tables
Sunmica actually used 4,300 sq.ft
Actual purchase price per sq. ft Rs
Calculate Material variances.

17. From the following information calculate (i) material cost variance (ii) material price variance (iii) Material Usage variance
Standard output units
Standard Material per unit 3 Ibs
Standard price per Ib. Rs. 2
Actual output units
Actual price Rs. 5.50
Actual materials used Ibs

18. From the following information calculate (i) material cost variance (ii) material price variance (iii) Material Usage variance
Quantity of material purchased units
Value of material purchased Rs. 9000
St. quantity of raw material req. p.u. 25 units
Standard rate of material unit Rs. 2 per
Opening stock of material Nil
Closing stock of material units
Finished production during the period 80 units

19. The standard output of the production house has been set at 1000 pieces per month. However actually 1020 pieces were produced. Following is the data for actual and standard production.
Standard Actual Results
Usage 1.5 sq. ft per pad sq. ft per pad
Price Rs per sq. ft Rs per sq. ft
Calculate all material variances.

20. A mfg. concern, which has adopted standard costing, furnishes the following information:
Material for 70 kg. Of finished products kgs.
Price of materials Rs. 1 per kg.
Actual:
Output ,000 kgs
Material used ,000 kgs.
Cost of materials Rs. 2,52,000
Calculate all material variances.

21. Material Mix Variance Material Mix Variance
= [Revised St. Qty – Actual Qty] x St. Price
Rev. St. Qty = St. Qty of 1 Mat. x Actual Total
Standard Total

22. From the following information regarding a standard product, compute 1
From the following information regarding a standard product, compute 1. Mix 2. Price 3. Usage Variance:

23. From the following information regarding a standard product, compute 1
From the following information regarding a standard product, compute 1. Mix 2. Price 3. Usage Variance:
Material
Standard
Actual
Qty.
Rs. p.u.
Total
Qty
Unit Price A 4
1.00
4.00 2
3.50
7.00 B
2.00 1 C
8.00 3
3.00
9.00 8
16.00
6.00
8.50
18.00

24. Material variances Labour Variances Labour Cost Variance SH*SR – AH*AR
Labour Usage/Efficie. Var (SH-AHactual)*SR
Labour Rate Variance (SR-AR)* AH
Idle time Variance SR*Idle time

25. Practice Problem A firm gives you the following data:
Standard time per unit 2.5 hours
Actual hours worked 2,000 hours
Standard rate of pay Rs. 2 per hour
25 % of the actual hours has been lost as idle time.
Actual output 1,000 units
Actual wages Rs. 4,500
Calculate all labour variances.
St. Rate 2
LUV
2000 F
St. Hrs
2500
LPV
-500 U
Actual Rate
2.25
ITV
1000
Actual Hrs
LCV
500
Idle time

26. Practice Problems
Compute the Labour variances from the information given below:
Standard time 3 hours per unit
Standard rate of wages Rs. 6 per hour
Actual production 700 units
Actual time taken 2000 hours
Actual Wages Rs  
Idle time 50 hours
St. Rate 6
LUV
900 F
St. Hrs
2100
LPV
-2000 U
Actual Rate 7
LCV
-1400
Actual Hrs
2000
IDV
300
Idle time 50

27. Labor Efficiency Variance- Causes
Poorly trained workers
Poor quality materials
Unfavorable Efficiency Variance
Poor supervision of workers
Poorly maintained equipment

28. Responsibility for Labor Variances
You used too much time because of poorly trained workers and poor supervision.
I am not responsible for the unfavorable labor efficiency variance!
You purchased cheap material, so it took more time to process it.

29. Overhead Variances
Overhead variances arise due to the difference between actual overheads and absorbed overheads. The estimate of budget of the overheads is to be divided into fixed and variable elements. i.e.
Variable overhead variances.
Variable overhead budget or expenditure variance, and
Variable overhead efficiency variance.
Fixed overhead variances.

30. Formulas Variable overhead variances.
(Standard variable o/h for actual prodn. – Actual variable o/h)
Variable overhead budget or expenditure variance, (Budgeted variable overhead for actual hours – Actual variable overhead) i.e. AH*BR – Actual Cost
Variable overhead efficiency variance.
Standard variable overhead rate per hour [Std. hours for actual output – Actual hours] i.e. (SH-AH) *SR
Fixed Overhead Variance
Budgeted FO- AFO

31. Sales Variances Sales Margin Price Margin = (AP-BP)*AQ
Sales Margin Volume variance = (AQ-BQ)*BC
Total Sales Margin variance = AQ*AC – BQ*BC