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3 STANDARD COSTING, , , , , , , , _ THEORY AND ILLUSTRATIONS, , , , , , , , fe OUTLINE, No. Topic Page, 1. Meaning 110, 1.1 | Introduction, 1.2 Definition, 1.3 Stages, 2. Standard Costs 111 |, , 2.1 Definition ‘ . |, 2.2 Standard Costs Vs. Historical Costs, 2.3 Limitations of Historical Costs, 2.4 Standard Cost Vs. Estimated Cost, 3. Establishment of Standard Costs ; ane 111, 4. Types of Standards, , 112, 4.1. Quantity Standard and Price Standard, 4.2 Other Types of Standards, 5, Total Standard Cost 113, 6. Standard Direct Material Cost 113, 6.1 Standard Quantity of Material (SQ), 6.2 Standard Mixture of Material (SM), 6.3 Standard Price of Materials (SP), 7. Standard Direct Labour Cost 114, 7.1 Standard Time, 7.2 Standard Hour (SH), 7.3 Standard Composition (Mix) of Labour, 7.4 Standard Rate of Wages (SR), 8. Standard Overheads (SO) 115, 9. Standard Cost Sheet 115, 10. Cost Variances 115, , 10.1. Introduction, 10.2 Computation, a Pp!, , , , , , Se

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—, , , , , , standard Costing, , 113, is the Standard most i 3, It is consis : ov, Ee ne Rats i Gath It is consistent, practical, realistic and capable of attainment. It acts, short run Perform better. It is helpful to the management in planning and control in the, , istorical Standard: istorical St : ‘ : :, (4) ae dk ce i z Historical Standard is the Standard which has been attained in the past., ys Standard is based on an actual performance in the past which may be inefficient., , tea et is useful in the initial stages of setting up a Standard Costing System, since, such Standard can be fixed on the basis of actual data available., , 5. TOTAL STANDARD COST, , , , The Total Standard Cost of a product is made up of, * Standard Direct Material Cost, * Standard Direct Labour Cost and, , * Standard Overheads (both Fixed and Variable)., Let us see how these Standard Costs are established., , 6. STANDARD DIRECT MATERIALCOST, , The establishment of Standard Direct Material Cost means fixing the Standard Quantity of Materials, and also the Standard Price of Materials., , 6.1. STANDARD QUANTITY.OF MATERIAL [SQ], , Fixing Standard Quantity of each raw material is a highly technical matter. Quantity Standards are, fixed by Production engineers. Standards are fixed of the quantity of input required for obtaining a, unit of output. For example, the Production Engineer may determine that 120 units of raw material, are required to be consumed to obtain 100 units of output. This automatically determines the Standard, Waste or Scrap. Thus, in the above example the Standard Waste or Scrap will be 20 units. If the, actual consumption of raw materials is more than the Standard, say 130 units, it shows inefficiency, which must be thoroughly investigated. If the actual consumption of raw materials is less than the, Standard, say 110 units, it indicates efficiency of the production department. The comparison of the, Standard Quantity of Material with the Actual Consumption is made by working out the Materials, Usage Variance. The standard quantity for a given actual output is worked out as shown below, Standard Quantity [SQ] for Actual Output, = Standard Quantity of Material Required to Produce | unit of Output x Actual Output; or, , 2 Standard Input_ x Actual Output, Standard Output, , CMa Ty PN ake aie all =a deawess GALL, , When two or more materials are required to manufacture a product, the production engineer has to, fix the Standard Ratio or Mixture of each material. Thus, for example, the engineer may determine, that the ‘Standard Mixture of Raw Material to manu facture 100 units of output is Material A-50 units, and Material B-80 units. Thus,, , 7 Standard Input of A, Standard Mixture of Material A [SM] = ‘Standard Input of all Materials (A + B), The actual ratio of consumption of each material is compared with this Standard ratio or mixture by, working out the Material Mixture Variance., , 6.3. STANDARD PRICE OF MATERIALS [SP], , Standard Price of all raw materials is determined by the accounts manager with the co-operation of, the purchase manager. The Standard Price may be fixed on the basis of historical prices or expected

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Prices. The expected price should be fixed on the basis of the stocks in hand, the purchase ordg,, , placed, the price trends and so on. The actual prices of materials are compared with the Standarg ;, , prices by working out the Material Price Variance., , 7. STANDARD DIRECT LABOUR COST, , %, , The establishment gf Standard Direct Labour Cost means fixing the Standard Time and also the, , Standard Rate of Wages., , CAUSE las Ut, , Standard Time means the time expected to be required for the workers to complete a job or ty, produce one unit of output. Fixing Standard Time is a technical matter. Standard Time is fixed by, Work Study Engineers. Standard Time is fixed on the basis of Time and Motion Study, Average of, Past performance, Test Runs and so on. Thus, the Engineer may determine that 120 Labour Hours, are required to manufacture 100 units of output. Ifthe actual time spent for producing a unit is more, than the Standard, say 130 Labour Hours, it shows inefficiency of labour which must be thoroughly, investigated. If the actual time spent is less than the Standard, say 110 Labour Hours, it indicates, efficiency of the labour force. The comparison of the Standard Time with the Actual Time spent is, made by working out the Labour Efficiency (Time) Variance., , Gr eA) Asks LUM Sgl, , When the concern produces different products, Standard Time is expressed in terms of Standard, Hours. A Standard Hour denotes the amount of work done in one hour under Standard conditions., CIMA has defined Standard Hour as- “a hypothetical hour which represents the amount of work, which should be performed in one hour under standard conditions”. Thus, if 100 units of a productAare produced in 20 hours, a Standard Hour denotes 5 units of product A. If 200 units of product B, are produced in 20 hours, a Standard Hour in this case denotes 10 units of product B. The standard, hours for a given actual output are worked out as shown below, Standard Hours [SH] for Actual Output, = Standard Hours of Labour Required to Produce | unit of Output x Actual Output; or, , _ Standard Hours, ~ Standard Output, , 7.3. STANDARD COMPOSITION (MIX) OF LABOUR, , When two or more grades or types of workers (say Skilled and Semi-skilled) are required to, manufacture a product, the engineer has to fix the Standard Composition (Mix) of labour. Thus, tor, , example, the engineer may determine that the Standard Composition of Labour to manufacture 100, units of output is Men 50 No. and Boys 80 No. Thus,, , x Actual Output, , 7 . _ Standard Hours of Men, Standard Composition (Mix) of Men= Standard Hours of All (Men + Boys) Labour, , The actual composition (mix) of worker is compared with this Standard Composition (mix) by working, out the Labour Composition (Mix) Variance., , 7.4. STANDARD RATE OF WAGES [SR], , Standard Wages of all workers are determined by the accounts manager with the co-operation of the, personnel manager. The Standard Wages may be fixed on the basis of historical data or expecte, , rates of wages. The expected wages should be fixed on the basis of the present agreement with, workers’ union, the allowances and benefits expected and so on. The actual wages paid are compared, with the Standard Wages by working out the Labour Rate (Wage) Variance.

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115, 8. STANDARD OVERHEADS [SO], , Standard Overhead means the Standard Rate for Abs, or per unit, depending, , sorption of O, on the meth¢, , ! verheads, This r., od of absorption, Thus,, , ate may be per hour, , , , ,, «a Quad Budgeted Overheads (BO : Standard Overhead Rate (per hour) = . a LQ) ‘ a, ! ) Budgeted Hours (BIT : (a0! 1x, , : eel Budgeted Overheads (BO Le ‘, , andard Overhead Rate (per unit) — —— —wCgeted Overheads (BO) idles / \, Standard Overhead Rate (per unit) = Budgeted Quantity of Output (BO) ‘4 ~ EN, Above formulas can be used to calculate the se arately the Standard Fj teads: Sa {oH, ! é a separa Standa xed O ads 2 anda, Variable Overheads. Thus, 7 = ‘ verte ar nate >,, Standard Fixed Oy, , , , erhead Rate (pet how)’ Budgeted Fixed Overheads (BFO), , Budgeted Hours (BH) =, , Standard Variable Overhead Rate (per hour) = Budgeted Variable Overheads (BVO) Nateble Dyetheaty BM), , Budgeted Hours (BH), 9. _ STANDARD Cost SHEET, , , , , , , the data can be presented in a Standard Cost Sheet, , as follows., EXHIBIT 1: STANDARD COST SHEET: OF PRODUCT Xxx, , Element of Cost Formula TOR, Standard Direct Materials Standard Quantity x Standard Price XXX, Standard Direct Wages Standard Hours x Standard Wage Rate _XXX, STANDARD PRIME COST XXX, Standard Variable Overheads Standard Hours x Standard VOH Rate XXX, Standard Fixed Overheads Standard Hours x Standard FOH Rate XXX, STANDARD OVERHEADS XXX, STANDARD COST aX, [Prime Cost + Overheads], , , , , , , , , , Once the Standard cost for each element is determined, the next step is to compare it w, Cost and find out the difference. Such difference between actual cost and stand:, Costing as Cost Variance., , ith the actual, lard cost is known in, , , , 10. COST VARIANCES, , 10.1. INTRODUCTION, , ance is é the Standards set. The deviation of the actual, pedro ate Pied vlad eee A Variance is thus the difference between the, Sate ie | Cost during a given period. CIMA has defined Cost Variance as- the, aoe ey ie ” rd cost and the comparable actual cost during a period.” A Variance, Coen peruse nei vourable When the actual performance is better than the Standard, the, id ate taaable When the actual performance is below the Standard, the Variance, , ‘ariance is sai :, , is said to be unfavourable or adverse.

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HAO Cost and Management Accounting (M.Com. Part-I: SEM.), , 10:2: ‘COMPUTATION, , Variances are computed in respect of cach clement of cost viz. Material, Labour and Overheads, Further, Variances are computed for both Quantity and Prices. Thus, there are two basic types of, Variances - Quantity Variance and Price Variance., , Total Cost Variance is defined by CIMA as- “the difference between the standard cost value of, output achieved in d period and the total actual cost incurred." Thus, Total Cost Variance, , = Standard Cost of Output - Actual Cost of Output [SC - AC], , = (Standard Quantity x Standard Rate) - (Actual Quantity x Actual Rate) [(SQ x SR) -(AQx AR)|, Quantity Variance, , = (Standard Quantity x Standard Rate) - (Actual Quantity x Standard Rate) [(SQ x SR) - (AQ x SR), Thus, in Quantity Variance, Standard Rate is multiplied with the difference between Actual anq, Standard Quantity [(SQ - AQ) x SR]., , Rate Variance, , = (Actual Quantity x Standard Rate) - (Actual Quantity x Actual Rate) [(AQ x SR) - (AQ x AR)], Thus, in Rate Variances, Actual Quantity is multiplied with the difference between Actual and Standard, Rate [(SR - AR) x AQ]., Let us study in detail the Variances for each element of cost., , , , 41. MATERIAL VARIANCES, , 11.1 . MATERIAL COST VARIANCE [MCV], , (1) Meaning: Material Cost Variance is the difference between the Standard cost of material specified, for the output achieved and the Actual cost of direct material used., , (2) Computation: This is a Total Variance and hence computed as followsMCV = Standard Cost for Standard Quantity - Actual Cost for Actual Quantity, = (SQ x SP) - (AQ x AP) [I], = Standard Cost - Actual Cost (SC - AC) [2], , Note: The variances can be computed by using any of the above methods (see Worksheet 1) i.e., either [1] directly from the information given by using the formula (the direct method) (see Illustrations, 1 to 6) or [2] the total (table) method (see Illustration 11)., , (3) Interpretation: Material Cost Variance is said to be favourable when the Actual Cost is less, than the Standard Cost; and adverse when the Actual Cost is more than the Standard Cost. This, variance is caused by the variations in the quantity and the price. Hence, Material Cost Variance, [Total Variance] is further divided into (a) Materials Usage Variance (Quantity Variance] and, (b) Material Price Variance [Rate Variance]. :, , 11.2 MATERIAL USAGE VARIANCE [MUV], , (1) Meaning: Material Usage Variance is that portion of the Material Cost Variance which is due t, the difference between the Standard Quantity specified for the actual output and the Actual, Quantity used for the actual output., , (2) Computation: Being a Quantity Variance, it is computed in the following manner, MUY = (Standard Quantity - Actual Quantity) x Standard Price =(SQ- AQ) x SP i], = (SQ x SP) - (AQx SP), = Standard Cost for Standard Quantity - Standard Cost for Actual Quantity 2, , (3) Interpretation: If the Actual Price is equal to the Standard Price, Material Cost Variance is, equal to the Material Usage Variance. Material Usage Variance is said to be favourable when the, Actual Quantity used is less than the Standard Quantity; and adverse when the Actual Quantity