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Standard Costing

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Standard Costing & Variance Analysis! Definitions Standard Cost: (CIMA) Standard cost is the pre-determined cost based on the technical estimates for materials ... – PowerPoint PPT presentation

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Title: Standard Costing


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
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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 gt Expected
F F U Actual lt Expected U
U F
7
Standard Costs
Based on carefullypredetermined amounts.
Standard Costs are
Used for planning labor, materialand overhead
requirements.
The expected levelof performance.
Benchmarks formeasuring 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
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 1000
  • Sunmica actually used 4,300 sq.ft
  • Actual purchase price per sq. ft Rs. 5.50.
  • Calculate Material variances.

16
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17
  • From the following information calculate (i)
    material cost variance (ii) material price
    variance (iii) Material Usage variance
  • Standard output 100 units
  • Standard Material per unit 3 Ibs
  • Standard price per Ib. Rs. 2
  • Actual output 80 units
  • Actual price Rs. 5.50
  • Actual materials used 250 Ibs

18
  • From the following information calculate (i)
    material cost variance (ii) material price
    variance (iii) Material Usage variance
  • Quantity of material purchased 3000 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 500 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 1.3 sq. ft per pad
  • Price Rs. 0.15 per sq. ft Rs. 0.18 per sq. ft
  • Calculate all material variances.

20
  • A mfg. concern, which has adopted standard
    costing, furnishes the following information
  • Standard
  • Material for 70 kg. Of finished products 100
    kgs.
  • Price of materials Rs. 1 per kg.
  • Actual
  • Output 210,000 kgs
  • Material used 280,000 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. Mix 2. Price 3.
Usage Variance
23
From the following information regarding a
standard product, compute 1. Mix 2. Price 3.
Usage Variance
Material Standard Standard Standard Actual Actual Actual
Material Qty. Rs. p.u. Total Qty Unit Price Total
A 4 1.00 4.00 2 3.50 7.00
B 2 2.00 4.00 1 2.00 2.00
C 2 4.00 8.00 3 3.00 9.00
Total 8 7.00 16.00 6.00 8.50 18.00
24
Labour Variances
Material variances
  • Labour Cost Variance SHSR AHAR
  • Labour Usage/Efficie. Var (SH-AHactual)SR
  • Labour Rate Variance (SR-AR) AH
  • Idle time Variance SRIdle 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 F
Actual Hrs 2000 LCV 500 F
Idle time 500
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. 14000 
  • Idle time 50 hours

St. Rate 6 LUV 900 F
St. Hrs 2100 LPV -2000 U
Actual Rate 7 LCV -1400 U
Actual Hrs 2000 IDV 300
Idle time 50
27
Labor Efficiency Variance- Causes
Poorlytrainedworkers
Poorqualitymaterials
UnfavorableEfficiencyVariance
Poorlymaintainedequipment
Poorsupervisionof workers
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
laborefficiency variance! You purchased
cheapmaterial, so it took moretime 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. AHBR 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 AQAC BQBC
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