www.gaganpareek.com1/10/2009

Dr Gagan Pareek alias Dr Harish Pareek M.Com, A.I.C.W.A, PhD

Area of Expertise : Accounting & Finance, Credit Risk Management Strategic Management

Corporate Trainer & Key Resource Person : In the area of Finance and Strategy, Leadership, Team Building and Motivation

Email: contact@gaganpareek.com ; Mobile:+919831865258

Research: Awarded PhD degree on “Operation of NBFCs in India- a changing profile “ in the Dept of Commerce, Calcutta University. Industry Exp: Having 12 years of experience in the area of accounting and finance, credit and risk analysis. Worked for companies like Kesoram Industries Ltd (B.K. Birla Group of Companies), UTI-ISL, Magma Fincorp Ltd. He has also been associated with academic research for the last 9 years.

1/10/2009 www.gaganpareek.com

Standard Costing• It is a technique which uses standards for cost

and revenues for the purpose of control through variance analysis.

Standard costing involves:– Ascertainment and use of standard costs– Measurement of actual costs– Comparison of standard costs and actual costs to

calculate variances– Analysis of variances and taking appropriate actions

for the purpose of control

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Standard CostingThe deviation of the actual from the standard is known as variance. Variance may be favourable or adverse.

Variance may be analyzed in respect of sales, and each element of cost.– Direct Material– Direct Labour– Overheads

• Variable• Fixed

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Cost Variances

Cost Variance is the total variance for each element of costs – material ,labour, overhead

Cost Variances

Direct Material Direct Labour Over Head

Cost Variance Cost Variance Cost Variance

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Direct Material Variance

Direct Material Cost Variance

Direct Material Price Variance Direct Material Usage Variance

Direct Material Mix Direct Material YieldVariance Variance

Direct Material Cost Variance: It is the difference between the standard cost of direct material specified for the output achieved and the actual cost of direct material used.

= (Total Standard cost for actual output) – Total Actual Cost = ( Std. Price x Std Quantity for _ ( Actual Price x Actual

actual output) quantity)

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Direct Material Variance ( Contd )

Direct Material Price Variance : That portion of direct material cost variance which is due to the difference between the standard price specified and actual price paid.

= ( Actual Qty used) x ( Std Price – Actual Price )

Direct Material Usage Variance : That portion of direct material cost variance which is due to the difference between the standard quantity specified and the actual quantity used.

= ( Std. Rate ) x ( Std. qty for actual output – Actual qty )

Direct Material Mix Variance: That portion of direct material usage variance which is due to the difference between the standard and actual composition of a mixture.

= ( Std. Price ) x (Revised Std. Qty – Actual Qty)

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Direct Material Variance ( Contd )

where, Revised Std Qty = (Total weight of Actual Mix) x Std. Qty

( Total Weight of Std. Mix )

Material Yield Variance : It is that portion of direct material usage variance which is due to the difference between the standard yield specified and the actual yield obtained.

= ( Std. Cost per unit ) x ( Std. Output for Actual Mix

- Actual Output )

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Direct Labour Variance

Direct Labour Cost Variance

Direct Labour Rate Variance Direct Labour Efficiency Variance

Direct Labour Mix Direct Labour YieldVariance Variance

Direct Labour Cost Variance: It is the difference between standard direct wages specified for the activity achieved and the actual direct wages paid.

= ( Std. cost for actual output ) - ( Actual Cost ) = ( Std rate x Std Time for Actual Output) – ( Actual rate – Actual Time )

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Direct Labour Variance ( Contd ) Direct Labour Rate Variance : That portion of direct labour cost

variance which is due to the difference between the standard rate of pay specified and the actual rate paid.

= Actual Time x ( Std. Rate – Actual Rate )

Direct Labour Efficiency Variance: That portion of direct labour cost variance which is due to the difference between the standard labour hours specified for the activity achieved and the actual labour hours expended.

= Std Rate x ( Std. Time for Actual Output – Actual Time)

Direct Labour Mix Variance : This variance arises if during a particular period, the grades of labour used in production are different from those budgeted.

= Std. Rate x ( Revised Std. Time – Actual Time )1/10/2009 www.gaganpareek.com

Direct Labour Variance ( Contd )

where, Revised Std. Time = (Total Actual Time ) x Std. Time

( Total Std. Time) Direct Labour Yield Variance : It is the variance in labour cost on

account of increase or decrease in yield or output as compared to the relative standard.

= Std. Cost per unit x ( Std. Output of _ Actual

Actual mixture output )

Total Direct Labour Efficiency Variance : In those cases where there is an idle time variance ;

Total Direct Labour efficiency variance = ( Idle Time variance ) + (Direct Labour efficiency variance)

Idle Time Variance = Idle Time x Std. Rate 1/10/2009 www.gaganpareek.com

Overhead Variances

Certain Important terms related to Overhead Variances: Standard Overhead rate per unit = Budgeted Overheads

Budgeted Output Standard Overhead rate per hr = Budgeted Overheads

Budgeted Hours Standard hrs for Actual Output = Budgeted hrs x Actual Output

Budgeted Output Standard Output = Budgeted Output x Actual Hrs

Budgeted hrs Recovered Overheads = (Std rate per hr) x (Std hrs for actual output) Budgeted Overheads = (Std. Rate per unit) x (Budgeted Output) Standard Overheads = (Std. rate per unit) x (Std. Output

for actual time)

Actual Overheads = (Actual rate per unit) x (Actual output)1/10/2009 www.gaganpareek.com

Overhead Variance ( Contd ) Overhead Cost Variance

Variable Overhead Cost Fixed Overhead Cost Variance Variance

Fixed Overhead Expenditure Fixed Overhead Volume Variance Variance

Fixed Overhead Efficiency Fixed Overhead Capacity Variance Variance

Overhead Cost Variance = Recovered Overheads – ActualOverheads

Variable Overhead Cost Variance: = Recovered Variable Overheads – Actual Variable Overheads

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Variable Overheads ( Contd )

Fixed Overhead Cost Variance :

= Recovered fixed Overheads – Actual Fixed Overheads Fixed Overhead Expenditure Variance:

= Budgeted Fixed Overheads – Actual Fixed Overheads Fixed Overhead Volume Variance :

= Recovered Fixed Overheads – Budgeted Fixed Overheads Fixed Overhead Efficiency Variance :

= Std Fixed Overhead x ( Std. Hrs for _ Actual rate per hour Actual production Hours ) Fixed Overhead Capacity Variance :

= Std Fixed Overhead x ( Actual Hrs _ Budgeted Rate per hr Worked Hours )

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Sales Variance Sales Variance

With Reference to Turnover With Reference to Profit

Value Variance

Price Volume

Mixture Quantity

With Reference to Turnover: Value Variance = Budgeted Sales – Actual Sales Price Variance = Actual Qty Sold x ( Std. Price – Actual price) = (Standard Sales – Actual Sales) Volume Variance = Std. Price x ( Budgeted Qty – Actual Qty )

= Budgeted Sales – Standard Sales1/10/2009 www.gaganpareek.com

Sales Variance ( Contd ) Mix Variance :- Based On Quantity : Mix Variance = Std. Price x ( Revised Std. Qty – Actual Qty.) = Revised Std. Sales – Std. Sales- Based on Value : Mix Variance = Revised Std. Sales – Std. Sales where, Revised Std. Sales = Budgeted Ratio of Sales x Std. Sales where, Budgeted Ratio of Sales = Budgeted Sales of a Product

Total Budgeted Sales Quantity Variance = Budgeted Sales – Revised Std. Sales

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Sales Variance ( Contd )

With Reference to Profit : Value Variance = Budgeted profit – Actual Profit Price Variance = Std. Profit – Actual Profit

= Actual Qty Sold x ( Std. Profit – Actual Profit per unit )

Volume Variance = Budgeted Profit – Standard Profit

= Std. Rate of Profit x ( Budgeted Qty – Actual Qty )

Mix Variance = Revised Std. Profit – Std. Profit Quantity Variance = Budgeted profit – Revised Std. Profit

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References

• Banerjee .B, Cost Accounting Theory & Practice, 12th Edition,, Prentice Hall India

• Horngreen/ Datar /Foster ,Cost Accounting , 11th Edition, Prentice Hall Business Publishing

• Maheshwari.S.N. & Maheshwari.S.K. Accounting for Management,, Vikas Publishing House

• Arora. M.N. Cost & Management Accounting, 8th Edition, Vikas Publishing House.

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