Standard Costing with CA Megha Shah

By CA MEGHA SHAH ([email protected])

CA Megha Shah

STANDARD COSTING

STANDARD COSTING


CA Megha Shah Standard is a benchmark which is used for

measuring performance of activity under evaluation.

Example: To produce 1 unit of X number of output, Y units of inputs is required as per the standard.

Standard cost is a predetermined calculation of how much cost will incur under specified condition to produce 1 unit.

Standard costing is a technique which is used to control cost and revenues by using variance analysis.

Meaning of standard and standard cost and standard costing


CA Megha Shah This technique is mainly use to take vital decisions

by top management, This technique identify the controllable and

uncontrollable factors and so assist to concentrate on controllable factors only and analyse whether corrective actions are required to be undertake or not.

It assists in identifying department wise performance and performance based incentives. It will encourage employees to achieve the budgets and optimum utilization of resources.

It supports Management by Exception concept

Benefits of Standard Costing:


CA Megha Shah A budget or standard formulation is difficult and

require high level of technical and forecasting skills. It is used mainly for the manufacturing industries

and not used for the service sector Frequent change in budget due to internal and

external factors will lead to confusions and may defeat the overall objective of this technique. If there is change in the budgets very frequently because of the change of the internal or external changes of the factors, the frequent change in budget may lead to confusions and objective of using this technique can’t be achieved.

Limitations of Standard Costing:


CA Megha Shah

Process of standard costing

Preparation of Standard

Cost Statement

Actual Data Collection

Comparison between Standard

Cost , Actual Cost and

calculation of variances

Analysis of the variance

and undertaking corrective

actions where

required

In this article, we will discuss on the first two steps i.e. data collection and calculation of variance.


CA Megha Shah This is the most complex, vital and decisive step of

standard costing. If the standards are set wrong, the final analysis of the variances are erroneous which leads to inappropriate decision of corrective actions. So account manager, production manager, procurement manager and technical team together determines the standards for the given period by forecasting future sales, revenues and expected material, labour and overhead cost. The standard set should be feasible and practicable. Data Collection Calculation of Variances Variance Analysis and corrective steps

Preparation of Standard Cost Statement:


CA Megha Shah

Example of Standard cost statement:

Particulars Standard Rate Standard CostRaw Material

RM 1 3000 10 30000RM 2 2000 15 30000RM 3 1500 22 33000

LabourSkilled workers 400 120 48000Semi skilled workers 1200 80 96000Unskilled workers 2000 20 40000

Variable Overhead 3600 28 100800Fixed Overhead 3600 22 79200Total Cost 17300 317 457000

Standard Cost Statement for 5000 units


CA Megha ShahThere are two plans available for the data collection:

Single plan: In single plan, the actual data is collected at the time transaction take place and hence immediately the variances can be calculated and corrective steps are undertaken immediately. However, it is comparatively costly plan than partial plan.

Partial Plan: In partial plan, the actual data is collected after the end of the predetermined period and then variances are calculated. At the end of the period, the corrective steps are undertaken.

Depending upon the nature of the organisation, management’s approach and undertaking cost-benefit analysis of both the plans, the management should choose one plan which is most appropriate for their business requirements.

Step I - Actual Data Collection


CA Megha ShahParticulars Partial Plan Single PlanCalculation Frequency

It is calculated at the end of the period

It is calculated at the time transaction take place (eg.MPV- purchase of material, MUV – Consumption of material)

Corrective steps Action period

The corrective actions are taken after the end of the period

The corrective actions are taken as and when transaction take place

RM Price variance Calculation base

RM price variance is calculated by using actual quantity consumed

RM price variance is calculated by using actual quantity purchased

RM inventory valuation

The valuation of Raw Material is taken by using Actual cost

The valuation of Raw Material is taken by using Standard cost

WIP & Finished goods valuation

The valuation of WIP and finished goods are taken by using Standard cost

The valuation of WIP and finished goods are taken by using Standard Cost

Variances adjustment in books

Variances Account adjusted to WIP Control Account

Variances Account adjusted to respective cost account

Eg. Entries at the time of purchase of RM

RM Control A/C DrTo General Ledger A/C

RM Control A/C DrMaterial Purchase Price Variance A/C Dr(If adverse)

To General Ledger A/CTo Material Purchase Price Variance (if Favourable)

Difference between Single plan and partial plan:


CA Megha Shah Material Variance Labour Variance Variable Overhead Variance Fixed Overhead Variance Sales Variance (Total and Margin Approach) Sales Variances - Market size & share

Variance Planning v/s Operational Variance

Step II - Calculation of variances:


CA Megha Shah

Material Variance

AQ*AM*AP (A)

AQ*AM*SP (B)

AQ*SM*SP (C)

SQ*SM*SP (D)

Material Price

variance (E) =B-A

Material mix variance (F)=C-B

Material Sub-usage variance (G) =D-C

Material usage (Yield) variance (H)=F+G or=D-B

Material cost variance

(I)=H+E or D-A


CA Megha ShahHere, AQ = Actual Quantity SQ = Standard Quantity for Actual output AM = Actual Mix SM = Standard Mix AP = Actual Price SP = Standard Price


CA Megha Shah The student should start working from left side to right side. Each component

of actual will be replaced with the standard. The first box on the left side will contain all the actual components which is to be replaced with standard components as we move to right side. The first component to be replaced is price followed by mix and quantity.

Depending upon the changing factor, the variance will be determine. Suppose, the changing factor is Price, the variance would be “Material Price Variance”

If by deducting the values, outcome is positive, the variance is favourable which indicate the performance of that particular factor is above the standard and if outcome is negative, the variance is unfavourable which indicates the performance is below the standard. In both the cases, the reasons should be find out and if its due to controllable factor, the corrective steps should be taken. And if its due to non-controllable factor, it should be ignored and the if the same is expected in future also, the standards should be altered accordingly.

If no detail of input mix is given or only one material is being used, then ignore the mix variance.

Comments for Material, Labor and variable Overhead Variance


CA Megha Shah

Labour Variance

AHP*AM*AR(A)

AHW*AM*SR (C)

AHW*SM*SR (D)

SH*SM*SR (E)

Labour Rate variance (F) =B-A

Labour Normal Idle Time

variance (G)=C-B

Labour Sub efficiency variance (I) =E-D

Labour Efficiency variance

(J)=G+H+I or =E-B

Labour cost variance

(K)=F+J or E-A

AHP*AM*SR(B)

Labour mix variance (H)=D-C


CA Megha ShahHere, AH(W) = Actual Hours Worked (or Effective

working hours) AH(P) = Actual Hours Paid (Actual labour

hours paid to worker including lunch timeetc) SH = Standard Hour for Actual Output AM = Actual Mix SM = Standard Mix AR = Actual Labour Rate SR = Standard Labour Rate

Labor Variance


CA Megha Shah

Variable Overhead Variance

AHP*AR (A)

AHP*SR(B)

AHW*VOAR(C)

SH*VOAR(D)

Variable O)H Expense variance (E) =B-A

Variable O/H Idle Time

Variance(F)=C-B

Variable O/H Subefficiency

variance (G) =D-C

Variable O/H Efficiency Variance(H)=F+G or=D-B

Variable Overhead Cost Variance

(I)=H+E or D-A


CA Megha Shah

VARIABLE OVERHEAD VARIANCEVariable Overhead Variance

AHP*AR (A)

AHP*SR(B)

AHW*VOAR(C)

SH*VOAR(D)

Variable O)H Expense variance (E) =B-A

Variable O/H Idle Time

Variance(F)=C-B

Variable O/H Subeff iciency

variance (G) =D-C

Variable O/H Eff iciency Variance

(H)=F+G or=D-B

Variable Overhead Cost Variance

(I)=H+E or D-A


CA Megha ShahHere, AH(W) = Actual Hours Worked (or Effective

working hours) AH(P) = Actual Hours Paid (Actual labour

hours paid to worker including lunch timeetc)

SH = Standard Hour for Actual Output AR = Actual Variable Overhead Rate VOAR = Variable Overhead Absorption Rate

Variable Overhead Variance


CA Megha Shah

Fixed Overhead Variance (Without considering Calender Variance)

Actual Fixed Overhead

(A)

AHP*FOAR (C)

AHW*FOAR (D)

SH*FOAR (E)

Fixed O/H Expenses variance (F) =B-A

Fixed O/H Capacity variance (G)=C-B

Fixed O/H Sub efficiency variance

(I) =E-D

Fixed O/H Efficiency variance

(J)=G+H+I or =E-B

Fixed Overhead Cost variance

(K)=F+J or E-A

Budgeted Overhead

(B)

Fixed O/H Idle Time Variance

(H)=D-C


CA Megha ShahHere, Budgeted Overhead= Standard Hour for STANDARD

OUTPUT*FOAR AD=Actual days worked FOAR/day= Budgeted Overhead/Standard days

required for standard output AHP = Actual Hour Paid AHW = Actual Hour Worked SH = Standard Hour for ACTUAL OUTPUT FOAR = Fixed Overhead Absorption Rate (Budgeted

overhead/ standard days required for budgeted output)

Fixed Overhead Variance


CA Megha Shah All variances calculated above are of variable nature. And hence it

doesn’t have any impact of standard output to be produced during a period on variances. However, in case of fixed cost, total fixed cost is determined first and by dividing total fixed cost by standard output, FOAR can be calculated. Therefore only in Fixed Overhead process will be different.

Here we will begin with actual fixed overhead, and next cell will be of Budgeted Overhead for the standard output. It can be calculated by multiplying standard hours for the standard quantity and FOAR.◦ If day wise detail is not given, then follow the rest of the tables as per labour

variances calculation. (Table )◦ If day wise detail is given, then the next cell will be actual days worked and

FOAR per day, and then rest of the procedure to be follow as per labour variance calculation.

Depending upon the changing factor, the variance will determine. Suppose, the changing factor is rate, the variance would be “Fixed Overhead Expenditure Variance”

Comments for Fixed Overhead Variance (Cont..)


CA Megha Shah If by deducting the values, outcome is positive, the variance

is favourable which indicate the performance of that particular factor is above the standard and if outcome is negative, the variance is unfavourable which indicates the performance is below the standard. In both the cases, the reasons should be find out and if its due to controllable factor, the corrective steps should be taken. And if its due to non-controllable factor, it should be ignored and the if the same is expected in future also, the standards should be altered accordingly.

If no detail of input mix is given or only one material is being used, then ignore the mix variance. And if no information of ideal time is given, ignore the ideal time variance. If day wise details is not given, ignore calendar variance.

Comments for Fixed Overhead Variance


CA Megha Shah

Fixed Overhead Variance (All)

Actual Fixed Overhead

(A)

AD*FOAR/day (C)

AHW*FOAR (E)

SH*FOAR (F)

Fixed O/H Expenses variance (G) =B-A

Fixed O/H Capacity variance (I)=D-C

Fixed O/H Sub efficiency variance

(K) =F-E

Fixed O/H Efficiency variance

(L)=H+I+J+K or =F-B

Fixed O/H cost variance

(M)=G+L or F-A

Budgeted Overhead

(B)

Fixed O/H Idle Time Variance

(J)=E-D

AHP*FOAR (D)

Fixed O/H Calender

variance (H)=C-B


CA Megha ShahHere, Budgeted Overhead= Standard Hour for STANDARD

OUTPUT*FOAR AD=Actual days worked FOAR/day= Budgeted Overhead/Standard days

required for standard output AHP = Actual Hour Paid AHW = Actual Hour Worked SH = Standard Hour for ACTUAL OUTPUT FOAR = Fixed Overhead Absorption Rate (Budgeted

overhead/ standard days required for budgeted output)

Fixed Overhead Variance


CA Megha Shah

Sales Variance (Total)

AQ*AM*AS (A)

AQ*AM*SS(B)

AQ*SM*SS (C)

SQ*SM*SS (D)

Sales Price variance (E) =A-B

Sales mix variance (F)=B-C

Sales Quantity variance (G) =C-D

Sales Volume variance

(H)=F+G or=B-D

Total Sales variance

(I)=H+E or=A-D


CA Megha ShahHere, AQ = Actual Quantity sold SQ = Standard Quantity Sold AM = Actual Mix SM = Standard Mix AS = Actual Sales price SS = Standard Sales Price

Sales Variance (Total approach)


CA Megha Shah Contradictory to the cost variance, in revenue variance, we will do

actual – standard. Depending upon the changing factor, the variance will determine.

Suppose, the changing factor is price, the variance would be “Sales Price Variance”

If by deducting the values, outcome is positive, the variance is favourable which indicate the performance of that particular factor is above the standard and if outcome is negative, the variance is unfavourable which indicates the performance is below the standard. In both the cases, the reasons should be find out and if its due to controllable factor, the corrective steps should be taken. And if its due to non-controllable factor, it should be ignored and the if the same is expected in future also, the standards should be altered accordingly.

If no detail of input mix is given or only one material is being used, then ignore the mix variance.

Comments for Sales Variance


CA Megha Shah

Sales Variance (Margin)

AQ*AM*AP (A)

AQ*AM*SP (B)

AQ*SM*SP (C)

SQ*SM*SP (D)

Sales Margin Price

variance (E) =A-B

Sales margin variance (F)=B-C

Sales Margin Quantity variance

(G) =C-D

Sales Margin Volume variance (H)=F+G or=B-D

Total Sales Margin variance (I)=H+E or=A-D


CA Megha Shah Here, AQ = Actual Quantity sold SQ = Standard Quantity Sold AM = Actual Mix SM = Standard Mix AP = Actual Profit SP = Standard Profit

Sales Variance (Margin approach)


CA Megha Shah

Sales Variances - Market size & share Variance

AQ*SM*SP(A)

Share in Actual Size*WASP(B)

SQ*SM*SP(C)

Market Share

variance (D) =B-A

Market Size Variance(E)= C-B

Sales Margin Quantity variance F=D+E


CA Megha Shah

Planning v/s Operational Variance

Actual Figures

(A)

Revised Standard Figures

(B)

Original Standard figures

(C)

Operational Variances

D=B-A

Planning Variance(E)= C-B

Controllable Variance

Uncontrollable Variance

Controllable Variance


CA Megha Shah

Your doubts or suggestions are welcome on 09979509282 or [email protected]

Date post:	18-Jan-2017
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Standard Costing with CA Megha Shah

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