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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, 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.

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

What all could be the reasons for the actual

manufacturing cost or the sales/profit to vary

from their standard costs and price/profit?

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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

Standard Costs

Based on carefullypredetermined amounts.

Standard Costs are

Used for planning labor, materialand overhead

requirements.

The expected levelof performance.

Benchmarks formeasuring performance.

Setting Standard Costs

Accountants, engineers, personnel

administrators, and production managers combine

efforts to set standards based on experience and

expectations.

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?

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.

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).

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).

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

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

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.

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- 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

- 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

- 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.

- 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.

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

From the following information regarding a

standard product, compute 1. Mix 2. Price 3.

Usage Variance

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

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

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

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

Labor Efficiency Variance- Causes

Poorlytrainedworkers

Poorqualitymaterials

UnfavorableEfficiencyVariance

Poorlymaintainedequipment

Poorsupervisionof workers

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.

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.

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

Sales Variances

- Sales Margin Price Margin (AP-BP)AQ
- Sales Margin Volume variance (AQ-BQ)BC
- Total Sales Margin variance AQAC BQBC