m7 macs final
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MODULE 7
STANDARD COSTING
&
VARIANCE ANALYSIS
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Standard Cost
It is a predetermined cost. It is a determination
in advance of production, what should be the
cost.
When the standard costs are used for the
purposes of cost-control, the technique is knownas the standard costing.
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Defn. Standard CostICMA
Standard cost is the predetermined cost based on
a technical estimate for materials, labour and
overhead for a selected period of time and for a
prescribed set of working conditions.
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Defn. Standard Costing
It is the preparation of standard costs and
applying them to measure the variations from
actual costs and analysing the causes of variations
with a view to maintain maximum efficiency in
production. It is a technique which uses
standards for costs and revenues for the purpose
of control through variance analysis.
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LIMITATIONS OF STANDARD COSTING
1. It is costly, as the setting of standards needs high
technical skill.
2. Keeping of up-to-date standard is a problem. Periodic
revision of standard is a costly thing.
3. Inefficient staff is incapable of operating the system.
4. Since it is difficult to set correct standards, it is difficult
to ascertain correct variance.
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5. Industries, which are subject to frequent changes in
technological process or the quality of material, need aconstant revision of standard. But revision of standard is
more expensive.
6. For small concerns, standard costing is expensive.
7. It is difficult to apply this method where producing takes
more than one accounting period. Standard costing may not
be effective in industries which deal in non-standardised
products or jobs according to customers requirements.
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TECHNIQUE OF STANDARD COSTING
MAY COMPRISE:
Ascertainment of standard costs.
Measurement of actual costs.
Comparison of the actual costs with the standard costs to
find our the variances.
Analysis of variances
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NEED FOR SETTING STANDARDS
Standards are usually set for a six-or-twelve
month period. Sometimes a longer period is used
but rarely a shorter period. The success of
standard costing depends upon the establishment
of correct standards and standards should be
established for each element of cost.
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All factors related with standards-setting should be
considered in the establishment of standards.
whatever methods is used, standards must be established
for a definite period of time so that they can be effective
in performance evaluation, control and analysis of costs.
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SETTING OF STANDARDS FOR MATERIALS
Direct Material Cost: Standard material cost is equal to
the standard quantity multiplied by the standard price.
The setting of standard costs for direct materials
involves:
(i) fixation of standard material quantities
(ii) standard material prices.
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Standard material quantity: In ascertaining standard
quantity of materials , the standard specification of materials
should be planned by the engineering department after
consulting the past records. While setting standards an
allowance should be made for the normal wastage of
materials. The purpose of determining standard quantity of
materials should be to achieve maximum economies in
material usage. 11
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SETTING OF STANDARDS FOR MATERIALS
The standard prices of materials should be determined for the
various types of material needed for the production. This is
done by the cost accountants in collaboration with the
purchase department.
Standard price for each item of material is established after
carefully studying the market conditions and forecasting the
trend of prices for a future period.
The object of fixing standard prices.
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NEED FOR SETTING STANDARDS
Labour Standards:
As in the case of direct materials, labour standards are also
established for both cost and quantity (efficiency). For standard
cost purposes, direct labour is treated separately from indirect
labour, which is included in the factory overhead. Two
standards are usually developed for labour costs:
(i) Labour usage ( or efficiency) standard
(ii) Labour cost ( or rate) standard
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Standard Costing Vs. Budgetary Control
To establish S.Costs,
budgeting is essential forforecasting the level ofoutput.
Standards are based on
technical assessments It is applied to
manufacturing of aproduct, process or
providing a service. S.costs set up targets
which are to be attainedby actual performance.
Budgetary control can be
prepared on the basis ofpast figures adjusted tofuture trends.
Budgets are based on
past actuals adjusted tofuture trends
Deals with theoperations of a dept of
business as a whole. Set up maximum limits
of expenses above whichthe actual expenditure
should no exceed. 14
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S. costs are projection of
cost accounts
It reveals Variance
Analysis in detail
according to theiroriginating causes,
They say what the costs
should be under specific
conditions of production
performance
Budgets are projection of
financial accounts
Variances are not
revealed through the
accounts but are revealedin total
Budgets are anticipated
or expected costs meant
to be used for forecastingrequirements of material,
labour, cash, etc.
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VARIANCE ANALYSIS
The deviations of the actual cost or profit or sales from the
standard cost or profit or sales is known as variance.
When actual cost is less than standard cost or actual profit is
better than standard profit it is known as favourable variance
& its a sign of efficiency of the orgn.
When actual cost is more than standard cost or actual profit or
turnover is less than standard profit or turnover it is called
unfavourable or adverse variance & its an indicator of
inefficiency of the orgn.16
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Analysis of variance is done with respect to the
each element of cost and sales following; viz
1. Direct material variances
2. Direct labour variances
3. Overhead variances
4. Sales variances
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MATERIAL VARIANCES
1. Material Cost Variance
2. Material price variance
3. Material usage or quantity variance
4. Material mix variance
5. Material yield variance
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MCV= (SQ x SP AQ x AP)
MPV=AQ(SR-AR)
MYV=
SR(AY-SY)MMV=SR(SQ-AQ)
or SR(RSQ-AQ)
MUV= SR(SQ-AQ)
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MATERIAL VARIANCES
MCV = MPV + MUV
MUV = MMV + MYV
MCV = MPV = MMV + MYV
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