A PROJECT REPORT ON

STANDARD COSTING

A PROJECT SUBMITTED TO

UNIVERSITY OF MUMBAI for partial completion of the degree of

M.Com - 2

Under the faculty of Commerce

By

Ms. Malavika Radhakrishnan Menon

Under the Guidance of

Prof. Sandesha Shetty

ROLL NO. 31

DIV - A

S.M Shetty College of Science, Commerce & Management Studies,

Hiranandani Garden, Powai, Mumbai - 400076

(2018-19)
 DECLARATION

I, the undersigned Ms. Malavika Radhakrishnan Menon hereby, declare that

the work embodied in this project work titled “STANDARD COSTING”
forms my own contribution to the research work carried out under the guidance
of Prof. Sandesha Shetty is a result of my own research work and has not
been previously submitted to any other University for any other Degree/
Diploma to this or any other University.

Wherever reference has been made to previous works of others, it has been
clearly indicated as such and included in the bibliography.

I, hereby further declare that all information of this document has been obtained
and presented in accordance with academic rules and ethical conduct.

Ms. Malavika Radhakrishnan Menon

Certified by

Prof. Sandesha Shetty

Date: 5 dec 2019

CERTIFICATE

This is to certify that Ms. Malavika Radhakrishnan Menon has worked and
duly completed his project work for the Degree of Management Studies under
the faculty of Commerce in the subject of FINANCE and his project is entitled
“ STANDARD COSTING” under my supervision.

I further certify that my entire work has been done by the learner under my
guidance and that no part of it has been submitted previously for any degree or
diploma of any University.

It is his own work and facts reported by his personal findings and
investigations.

Signature of the Project Internal Guide

(Prof. Sandesha Shetty)

Date of Submission : 5 Dec, 2019

 ACKNOWLEDGEMENT

To list who all have helped me is difficult because they are so numerous and
depth is so enormous.

I would like to acknowledge the following as being idealistic channels and fresh
dimensions in the completion of this project.

I take this opportunity to thank the University of Mumbai for giving me

chance to do this project.

I take this opportunity to thank our Coordinator Prof. Virendra Singh, for her
moral support and guidance.

I would also like to express my sincere gratitude towards my project guide Prof.
Sandesha Shetty whose guidance and care made the project successful.

I would like to thank my college library, for having provided reference books
and magazines related to my project.

Lastly, I would like to thank each and every person who directly and indirectly
helped me in the completion of the project especially my parents and peers
who supported me throughout my project.
 EXECUTIVE SUMMARY

Standard cost is generally used by manufacturing business, which direct material, labor, and
factory overhead are cleared allocated. On real estate business in this case we use standard
cost based on three costs, raw land, land improvement and interest expense categories instead
of direct material, direct labor and overhead. Developer use these cost to predict the project
cost and estimate the pre-selling price, in accordance with the cost estimation classification
matrix, the variance range is in the expected accuracy rate by testing the variance percentage
between standard cost and actual cost. All these evidences have proved the appropriate using
standard costing in land cost component of real estate development activities but how it
applies this article will analyze in this particular project with using descriptive and
exploratory method.
 INDEX

CHAPTER TITLE PAGE NO.

7
1 INTRODUCTION

RESEARCH METHODOLOGY 48
2

LITERATURE REVIEW 51
3

DATA ANALYSIS, INTERPRETATION &

PRESENTATION 75
4

CONCLUSION & SUGGESTION 80

5

6 BIBLOGRAPHY 84
 CHAPTER NO. 1 : INTRODUCTION

MEANING AND DEFINITION OF COST

Cost Accountancy is comprehensive term used to describe the principles of conventions,

techniques and systems that are employed in a business to plan and control on the utilization of
its resources. This is a branch of accounting which deals with the classification, recording,
allocation, summarization and reporting of current and prospective cost and analyzing their
behavior. In other words, it is a system of accounting which provides information about a certain
control on cost of products and services. It measures the operational efficiency of an enterprise. It
is an internal aspect of an organization. Cost accounting is an accounting which provides cost
data, statement and reports for the purpose of managerial decision making.

The term cost has wide variety of meaning; therefore it cannot be exactly defined. Cost refers to
the expenditure incurred in producing a product or in rendering a service. In monetary terms, it is
a measurement of amount of resources used for the purpose of production of goods and services.
Furthermore, cost always relates to a purpose. The purpose could be products, departments,
projects services or any activity for which monetary measurement of resources is needed. The
term cost cannot be used in isolation and has to be always with a reference to be context of cost
accounting. Thus, costing means determining the cost of product by any technique of process. It
consists of principle and rules which are used for determining,

(a) the cost of producing a product;

(b) the cost of rendering service, and
(c) the cost of performing an activity.
Definition of Cost

Cost accounting system is used to provide information to the management about the cost of
products or services. It helps to find the actual difference between the cost of production and
consumption with the cost of operation, production and activity. Costing is one of the
subdivisions of management accounting. It is a branch of accounting that is designed to evaluate
or calculate the value of goods provided or services consumed.

In an organization, the priority of mangers and organizers is to reduce the cost of product, so that
it can give high profit in minimum cost incurred during production process. Cost and Expenses,
both are different terms, as cost includes all the expense incurred, till the manufacturing process
(which mainly includes labour) is completed. On the other hand, term expenses relates to all the
expenditures that happens after the product is manufactured .

The concept of cost can be understood through the following:

(1) “Accounting from the point at which expenditure is incurred or committed to the
establishment of its ultimate relationship with cost centers and cost units. In the widest usage, it
embraces the preparation of statistical data, application of cost control methods and the
ascertainment of profitability of activities carried out or planned”.

(2) The amount paid; charged, or engaged to be paid for anything brought or taken in charge,
exp., hence whatever as labour self-denial suffering etc. is requisite to secure benefit.

(3) The price paid or required for acquiring, producing, or maintaining something, usually
measured in money, time or energy, experience, or expenditure outlay.

(4) The total spent for goods or services including money time and labour.
(5) CIMA- “The establishment of budgets standard costs and actual costs of operations,
processes, activities or products and the analysis of variance, profitability or the social use of
funds.

ORIGIN AND SCOPE OF COSTING

Cost accounting helps to understand the costs of running a business. Modern cost accounting was
originated during the industrial revolution, when the complexities of running a large scale
business led to the development of system for recording and tracking costs to help business
owners and managers make right decisions. In the early industrial age the modern accountants
use term ‘variable cost’ for the cost incurred in a business because they varied directly with the
amount of production in money spent on labour, raw material, power to run a factory, etc. in
direct proportion to production. Managers could simply total the variable costs for a product and
use this rough guide for decision-making.

There is a cost known as ‘Fixed Cost’ which remains the same during busy period, unlike
variable costs which rise and fall with volume of production. Over the time, the importance of
these “Fixed Costs” has become more important to manager. Fixed costs- includes the
depreciation of plant and equipment, the cost of departments such as maintenance, tooling,
production control, purchasing, quality control, storage and handling, plant supervision and
engineering. In the early twentieth century fixed cost was of little importance to most businesses
but in the twenty-first century, these costs became more important than the variable cost of a
product.

Scope of Cost Accounting

The terms “Costing” and “Cost Accounting” are used many times interchangeably. However, the
scope of cost accounting in broader than that of costing.
Following functional activities are included in the scope of cost accounting:

1. Cost book Keeping: It involves maintaining complete record of all the costs incurred form
their respective departments, products and services. Such recording in preferably done on the
basis of double entry system.

2. Cost Systems: Systems and procedures are advised for proper accounting of cost.

3. Cost Ascertainment: It is an important function in cost accounting which ascertains the cost of
process of products, related jobs and services, pricing, planning and controlling.

4. Cost Analysis: It involves the process of finding out the actual variance from the budgeted
costs and fixation of responsibility for cost increase.

5. Cost Comparisons: Cost Accounting also includes comparisons between two costs i.e., cost of
making different products and activities and cost of same product service over a period of time.

6. Cost Control: Cost Accounting is the utilization of cost information for exercising control. It
involves a detailed examination of each cost in the light of benefit derived from the incurrence of
the cost. Thus we can state that cost is analyzed to know whether the current level of costs is
satisfactory in the light of standards set in advance.

7. Cost Reports: Predication of cost is the ultimate function of cost accounting. These reports are
primates for use by the management at different level
OBJECTIVES AND USES OF COSTS

Objectives

There is a relationship among information needed to management, cost accounting objectives,

techniques and tools used for analysis in cost accounting. Cost accounting has the following
main objectives to serve :

1. Determining Selling Price: The total production cost and cost per unit produced are important
to decide selling price of a product. Cost accounting provides information regarding the cost of
product or service. Other factors such as the quality of product, the condition of market, the area
of distribution, the quality, which can be supplied, etc are also to be given consideration by the
management before deciding the selling price, but the cost of product plays a major role.

2. Controlling Cost: Cost accounting helps in attaining aim of controlling cost by using various
techniques such as budgetary control, standard costing and inventory control. Each item of cost
(material, labour, exp.) is budgeted at the beginning of the period and actual expenses incurred
are compared with the budgeted.

3. Providing Information for Decision Making: Cost accounting help the management in
providing information for managerial decision for formulating operative polices.

These managerial decisions about operating policy formulation, relate to the following matters:

(i) Determination of cost profit volume relationship.

(ii) Make or buy a component

(iii) Shut down or continue operation at a loss.

(iv) Continuing with the existing machinery or replacing them by improved and economical
machines.

4. Ascertaining Costing Profit: Cost Accounting helps in ascertaining the cost profit or loss of
any activities by matching cost with the revenue of the activities.

5. Facilitating, Preparation of Financial and Other Statements: cost accounting helps to produce
cost statement at short intervals as the management may require. The financial statement are
prepared generally once a year or half year to meet the needs of the management in order to
operate the business at high efficiency. It is essential for management to have a review of
production, sales and operating results. Cost accounting provides daily, weekly or monthly
statement of units produced, accumulated cost with analyses. Cost Accounting system provides
information regarding stock of raw material, semi-finished and finished goods.

Uses of Cost Cost information is used generally for two purposes in most of the organizations:

(1) The cost accounting systems provide information to evaluate the performance of an
organizational unit, and

(2) also provide the means for estimating the unit, cost of products or services that the
organization can manufacture or provide to others.

It can be understood as follows:

(a) Performance Measurement: Performance measurement can be done by comparing current
costs with those which were expected -or standard costs, budgeted cost to the degree of knowing
which have been controlled. Deviations of expected with the current- variance can be identified,
evaluated and discussed by managers

(b) Cost of Goods and Services :- In manufacturing companies, the cost of goods must be
measured to determine the cost of items and transferred from work in process inventory to
finished products. The demand for cost system should be measured all the costs of manufacturing
process and allocate a portion of costs to each unit of output. The cost of maintenance and to
manage the manufacturing plants or building should be added to the cost of material and
productive work that requires each unit. This first is called indirect cost and the second is called
direct cost.

(c) Profit Analysis: Information of costs is essential to analyze the profits obtained from a
product or product line. The information of the cost of a product enables managers to assess the
contribution margin - the difference between the price and variable costs and the gross margin-
the difference between the price and the total cost of the product is called profit.

(d) Product Mix: For the companies that offer more than one product or services the cost
information is key to handle the mix of products or services offered to customers. With
information of cost-profit, a manager can lead the effort in sales and advertising for products that
generate greater value.

(e) Price Assignation: Price are determined by the market demand, product differentiation and
adverting of product and services. Manager should change the price or cost of product according
to the market trends /results.

(f) Cost of Service: Many products require the seller to provide additional services to customers.
In such cases the information about the product, in the same manner the companies also offers
services only, unless the cost of services is measured. There is no way to know that whether the
services is profitable, changes in price or advertising is needed or not.

TYPES OF COST

The word ‘cost’ is used in such a wide variety of ways that it is advisable to use it, with an
adjective or phrase which will convey the meaning intended. Certain types of cost are:-

1. Historical Costs are ‘post-mortem’ costs which are collected after they have been incurred.
These cost reports past events and time-lap between event and its report making the information
out-of-date and irrelevant for decision-making.

2. Future Cost is cost expected to be incurred at a later date.

3. Replacement Cost is the cost of replacement in the current market.

4. Standard Cost is a scientifically pre-determined cost which is arrived at assuming a particular

level and of efficiency in utilization of material, labour and indirect services.

5. Estimated Cost is an approximate assessment of what cost will be, it is based on past averages
adjusted to anticipated future changes.

6. Product Cost is the cost of a finished product built up from its cost elements.
7. Production Cost represents prime cost plus adsorbed production overhead.

8. Direct Cost is a cost which can be economically identified with a specific saleable cost unit.
9. Prime Cost is aggregate of direct material cost and direct labour cost (The term ‘direct
expense’ has been excluded from prime cost as per latest CIMA terminology). The term ‘direct’
indicates that elements of cost are traceable to a particular unit of output.

10. Indirect Cost is cost which cannot be directly identified to the unit of output or to the
segment of a business operation.

11. Fixed Cost/Fixed Overhead/Period Cost is the cost which is incurred for a period, and within
certain output and turnover limits, tends to be unaffected by fluctuations in the levels of activity
(output or turnover). Examples are rent, rates, insurance and executive salaries.

12. Variable Cost is the cost which tends to vary with the unit of activity.

13. Opportunity Cost is the value of a benefit sacrificed in favors of an alternatives course of
action.

14. Imputed Cost/National Cost which does not involve actual cash outlay. Imputed cost is
hypothetical cost and it does not appear in financial records. It is relevant for decision-making
Interest on capital is a common type of imputed cost. Financial accounting records recognise too
interest on capital only if it is an actually paid or constitutes a legal liability. The desirability of a
project is being evaluated; failure to consider interest cost may result in an erroneous decision.

15. Programmed Cost: Certain decision reflecting top management policies resulting in periodic
appropriation. For example, expenditure incurred by the company under the 20-Points Program
initiated by the Prime Minister or of decision to send a team to Antarctica. Briefly this is the cost
of management decision and programs.

16. Controllable Cost is the cost which can be controlled by the management.
17. Non-Controllable Cost is the cost which is not subject to control at any level of managerial
supervision.

18. Joint Cost is the cost of process which results in more than one main product.

Standard costs are usually associated with a manufacturing company's costs of direct material,
direct labor, and manufacturing overhead.

Rather than assigning the actual costs of direct material, direct labor, and manufacturing
overhead to a product, many manufacturers assign the expected or standard cost. This means that
a manufacturer's inventories and cost of goods sold will begin with amounts reflecting the
standard costs, not the actual costs, of a product.

Manufacturers, of course, still have to pay the actual costs. As a result there are almost always
differences between the actual costs and the standard costs, and those differences are known as
variance. Standard costing and the related variances is a valuable management tool.

If a variance arises, management becomes aware that manufacturing costs have differed from the
standard (planned, expected) costs.

Situations in Standard Cost:

The following situations can be accruing during standard costing:


1. If actual costs are greater than standard costs: the variance is unfavorable. An unfavorable
variance tells management that if everything else stays constant the company's actual profit will
be less than planned.

2. If actual costs are less than standard costs: the variance is favorable. A favorable variance tells
management that if everything else stays constant the actual profit will likely exceed the planned
profit.

Process of Standard Costing:

Distinguish between a standard and a budget. Identify the advantages of standard costs. Describe
how standards are set.

Discuss the reporting of variances.

The Need for Standards: Standards

• Are common in business

• Are often imposed by government agencies (and called regulations) 


Standard costs

• Are predetermined unit costs

• Used as measures of performance 


Distinguishing Between Standards and Budgets 


Standards and budgets are both

• Pre-determined costs

• Part of management planning and control

A standard is a unit amount whereas a budget is a total amount

• Standard costs may be incorporated into a cost accounting system

Advantages of Standard Costs

• Facilitate management planning

• Promote greater economy by making employees more “ cost- conscious” 


Useful in setting selling prices

• Contribute to management control by providing basis for evaluation of cost control

• Useful in highlighting variances in management by exceptions

• Simply costing of inventories and reduce costs ` 


Standard Cost per Unit

• Sum of the standard costs for direct materials, direct labor, and Manufacturing over
head

• Is determined for each product and often recorded on a standard cost.

• Card which provides the basis for determining variances from standards. 


Variances from standards

• Differences between total actual costs and total standard costs

• Unfavorable variances occur when too much is paid for materials and labor or when there
are inefficiencies in using materials and labor

• Favorable variances occur when there are efficiencies in incurring costs and in using
materials and labor
• A variance is not favorable if quality control standards are sacrificed

Analyzing variances

•Variances must be analyzed to determine their significance


• First, determine the cost elements that comprise the Variance

• For each manufacturing cost element, a total dollar Variance is computed. Then this
variance is analyzed into a price variance and a quantity variance.

The setting of standards is:

a. A managerial accounting decision. b. A management decision


c. A worker decision.

d. Preferably set at the ideal level of performance

Practical study of the organization


Levis Denim

In 1853, Leob Strauss, who later changed his name to Levi, moved to San Francisco and
opened a small wholesale business that supplied miners and workers with work clothes
that were strong and did not tear easily. Later in 1872, as the clothing became popular,
Levi Strauss partnered with an inventor named Jacob Davis. Davis had the interesting
idea of adding copper rivets to the corners of the pockets to the waist overalls Levi
Strauss had produced.

Quality of Levi’s Products:

100-year-old pair of Levi Strauss & Co. jeans recently purchased by the company for
$25,000. The jeans, found last November in an abandoned mine, are one of the two
oldest-known pairs of Levi's in existence.
Research & Development

Company places great emphasis on Research and Development. For this purpose it has
well equipped and modern factory run by qualified staff, which is responsible for the
development of new products and it carries extensive research to improve the quality of
the product.
It is also entrusted with the jobs of testing the raw material to enforce the compliance to
standard specifications.

Quality Control:

Company vigorously pursues the quality in all processes starting from procurement of
the raw material to shipment of finished products to customers.

Basic Products:

Jeans, Shirts, Shorts, coats


Variety for ladies, gents and children Fashionable & latest designing wear Workers
suiting and many more

During my study I found that Levi’s Denim is working under powerful manufacturing
and marketing strategy. The management also employs financial analysis for the purpose
of internal control and to better provide what capital suppliers seek in the financial
condition and performance form the firm. From internal control standpoint, management
needs to undertake financial analysis in order to plan and control effectively. To plan for
future, the financial manager assesses the firm’s present financial position and evaluates
opportunities in relation to this current position. One of the main reasons of their success
is proper investment and financing decision at the right time.

Examples of Standard Cost of Materials and Price Variance

Let's assume that on January 2, 2010 Denim Works ordered 1,000 yards of denim at
$2.90 per yard. On January 8, 2010 Denim Works receives 1,000 yards

of denim and an invoice for the actual cost of $2,900. On January 8, 2010 Denim Works
becomes the owner of the material and has a liability to its supplier. On January 8 Denim
Works' Direct Materials Inventory is increased by the standard cost of $3,000 (1,000
yards of denim at the standard cost of $3 per yard), Accounts Payable is credited for
$2,900 (the actual amount owed to the supplier), and the difference of $100 is credited to
Direct Materials Price Variance. In general journal format the entry looks like this:

The $100 credit to the price variance account communicates immediately (when the
denim arrives) that the company is experiencing actual costs that are more favorable than
the planned, standard cost.

In February, Denim Works orders 3,000 yards of denim at $3.05 per yard. On March 1,
2010 Denim Works receives the 3,000 yards of denim and an invoice for $9,150 due in
30 days. On March 1, the Direct Materials Inventory account is increased by the standard
cost of $9,000 (3,000 yards at the standard cost of $3 per yard), Accounts Payable is
credited for $9,150 (the actual cost of the denim), and the difference of $150 is debited
to Direct Materials Price Variance as an unfavorable price variance:

After the March 1 transaction is posted, the Direct Materials Price Variance account
shows a debit balance of $50 (the $100 credit on January 2 combined with the $150 debit
on March 1). A debit balance in a variance account is always unfavorable—it shows that
the total of actual costs is higher than the total of the expected standard costs. In other
words, your company's profit will be $50 less than planned unless you take some action.
 Date Account Name Debit Credit

Jan. 8, 2010 Direct Materials Inventory 3,000

Accounts Payable 2,900
Direct Materials Price
100
Variance

Date Account Name Debit Credit

Mar. 1, 2010 Direct Materials Inventory 9,000

Direct Materials Price Variance 150
Accounts Payable 9,150

On June 1 your company receives 3,000 yards of denim at an actual cost of $2.92 per
yard for a total of $8,760 due in 30 days. The entry is:

Date Account Name Debit Credit

June 1, 2010 Direct Materials Inventory 9,000

Direct Materials Price
240
Variance
Accounts Payable 8,760

Direct Materials Inventory is debited for the standard cost of $9,000 (3,000 yards at $3
per yard), Accounts Payable is credited for the actual amount owed, and the difference of
$240 is credited to Direct Materials Price Variance. A credit to the variance account
indicates that the actual cost is less than the standard cost.
After this transaction is recorded, the Direct Materials Price Variance account shows an
overall credit balance of $190. A credit balance in a variance account is always
favorable. In other words, your company's profit will be $190 greater than planned due
to the favorable cost of direct materials. Note that the entire price variance pertaining to
all of the direct materials received was recorded immediately. In other words, the price
variance associated with the direct materials received was not delayed until the materials
were used.

Examples of Standard Cost of Materials and Price Variance

Let's assume that on January 2, 2010 Denim Works ordered 1,000 yards of denim at
$2.90 per yard. On January 8, 2010 Denim Works receives 1,000 yards of denim and an
invoice for the actual cost of $2,900. On January 8, 2010 Denim Works becomes the
owner of the material and has a liability to its supplier. On January 8 Denim Works'

Direct Materials

Inventory is increased by the standard cost of $3,000 (1,000 yards of denim at the
standard cost of $3 per yard), Accounts Payable is credited for $2,900 (the actual amount
owed to the supplier), and the difference of $100 is credited to Direct Materials Price
Variance. In general journal format the entry looks like this:

Date Account Name Debit Credit

Jan. 8, 2010 Direct Materials Inventory 3,000

Accounts Payable 2,900
Direct Materials Price
100
Variance

The $100 credit to the price variance account communicates immediately (when the
denim arrives) that the company is experiencing actual costs that are more
favorable than the planned, standard cost.
In February, Denim Works orders 3,000 yards of denim at $3.05 per yard. On March 1,
2010 Denim Works receives the 3,000 yards of denim and an invoice for $9,150 due in
30 days. On March 1, the Direct Materials Inventory account is increased by the standard
cost of $9,000 (3,000 yards at the standard cost of $3 per yard), Accounts Payable is
credited for $9,150 (the actual cost of the denim), and the difference of $150 is debited
to Direct Materials Price Variance as an unfavorable price variance:

Date Account Name Debit Credit

Mar. 1, 2010 Direct Materials Inventory 9,000

Direct Materials Price Variance 150
Accounts Payable 9,150

After the March 1 transaction is posted, the Direct Materials Price Variance account
shows a debit balance of $50 (the $100 credit on January 2 combined with the $150 debit
on March 1). A debit balance in a variance account is always unfavorable—it shows that
the total of actual costs is higher than the total of the expected standard costs. In other
words, your company's profit will be $50 less than planned unless you take some action.

On June 1 your company receives 3,000 yards of denim at an actual cost of $2.92 per
yard for a total of $8,760 due in 30 days. The entry is:

Date Account Name Debit Credit

June 1, 2010 Direct Materials Inventory 9,000

Direct Materials Price
240
Variance
Accounts Payable 8,760

Direct Materials Inventory is debited for the standard cost of $9,000 (3,000 yards at $3
per yard), Accounts Payable is credited for the actual amount owed, and the difference of
$240 is credited to Direct Materials Price Variance. A credit to the variance account
indicates that the actual cost is less than the standard cost. After this transaction is
recorded, the Direct Materials Price Variance account shows an overall credit balance of
$190. A credit balance in a variance account is always favorable. In other words, your
company's profit will be $190 greater than planned due to the favorable cost of direct
materials. Note that the entire price variance pertaining to all of the direct materials
received was recorded immediately. In other words, the price variance associated with
the direct materials received was not delayed until the materials were used.
 Introduction to Standard Costing

A standard cost is planned or forecast unit cost for a product or service, which is
assumed to hold good given expected efficiency and cost levels within an organization.
It represents a target cost and is useful for planning, controlling and motivating within an
organization.

Variance analysis is a budgetary control process, which compares standard or budgeted

costs and revenues with the actual results of an organization, in order to obtain
information regarding any exceptions from budget, this information is also used to
improve performance through control action e.g. correction problems.

Standard costing can be used for

• Budget preparation e.g. planning

• Control through exception reporting e.g. performance measurement

• Stock valuation

• Cost bookkeeping

• Motivating staff 

Under a standard costing system an organisation can value stock at standard cost,
incorporating this within the ledger or cost accounts of the organization, the budget or
forecasts being a memorandum kept outside the ledger accounts. 

 Types of Standard 


• Ideal Standard e.g. attained under the most favourable conditions with no 

allowance for any waste, scrap, idle time or downtime.

• Attainable or Expected Standard e.g. what should be achieved with a reasonable

level of effort given current efficiency and cost levels.

• Loose Standard e.g. loosely set and easy t achieve.

• Basic Standard e.g. first standard ever used by the organization and used as a basis or
yardstick for comparing current standards or monitoring trends over time.

• Historical Standards e.g. standards used historically in previous accounting periods.

Criticism of Standard Costing

1. Sometimes hard to define an ‘attainable standard’.

2. Uncontrollability of performance within operations e.g. discounts lost due to the 


reduction in the quantity ordered or seasonal price fluctuations within the period 

of appraisal.

3. With more automation within operations, they become less valuable as 


information.

4. Feedback not feed forward control e.g. out of date information. 


5. Revisions to standards may be too frequent to guide performance over time.

6. Standard costing is an internal not external control measure e.g. improvement 


also needs to consider competition and customers.

7. Performance measurement would be inadequate as a process if the standard is 


wrong.

8. The reason or cause of the variance are sometimes overlooked or not 


investigated. 


Standard Costing

Costing is the identification of the value of resources used for specified goods or
services. One purpose of costing is to determine what resources were required to provide
the goods or services. A second purpose is to provide a guide to resource usage through
the use of budgets that clearly identify managers' responsibility. It is the second purpose
that is considered in the following discussion.

Methods Of Costing Identified Budgets

Budget figures may be based on actual, budgeted, or standard costs. These categories
are not mutually exclusive. For example, while a standard cost is a budgeted cost, a
budgeted cost is not always a standard cost. An actual cost may or may not be the
budgeted cost.

Allowed for forth coming activity. To establish budgeted costs, actual costs of the
previous year, information from supervisors about where resources might be more
efficiently used, and subjective judgments about the need to conserve resources are often
considered. Standard costs are objectively determined costs that reflect Budgets based on
actual costs reflect expenditures anticipated for the level of resource use. Budgeted costs
are generally described as the best estimate about what should be the effective and
efficient use of resources.

Standard Costs

Standard costs are costs established through identifying an objective relationship

between specified inputs and expected outputs. Therefore, standard costs are generally
related to carefully analyzed phenomena both in the laboratory and in the workplace. For
example, in the factory of a company that produces high-quality cotton shirts for men,
standard costs are used for materials and labor. To establish the standard usage of fabric
for a single shirt, the cutting possibilities are analyzed in the laboratory, where attention
can be given to how much fabric must be used if the shirt is cut as specified. At this
point, the focus is not on how many minutes are needed by an experienced cutter to
meticulously cut the fabric so as to minimize usage. Rather, there is experimentation in
the ways of cutting and the time required for each way considered. Experimentation
continues until the most economical combination of fabric usage and cutting time is
established. That combination is likely to be modified to take account of less than perfect
conditions in the workplace.

The goal of the personnel responsible for setting standard costs is to provide realistic
standards. Workers are to be motivated to achieve output with specified standards. If
standards are unreasonable—either too tight or too loose—the level of discipline
expected is seriously undermined. If standards cannot be achieved with reasonable effort,
workers may become discouraged and become so indifferent that their work quality
deteriorates significantly. If standards are too easy to achieve, there may be an
unnecessary waste of resources.

Standard costing has applications to any type of business activity. The process described
briefly above can be applied, for example, for processing documents in an insurance
company or in a financial services business.
Monitoring Standard Costs

Standard costs are monitored as a basis for determining the extent to which expectations
are realized. Typically, companies plan for reporting weekly or monthly. A commonly
used method is to determine the difference between what the budget allowed and what
was actually spent for the output achieved. This difference is called a variance. For
example, assume that in the factory producing shirts, 12,000 shirts, requiring 30,500
yards of fabric, were cut in a month. The standard usage was 2.5 yards per shirt, for a
total of 30,000 yards. The excess usage would indicate an unfavorable usage variance of
500 yards. Variances are generally presented as units × standard cost for the fabric.
Therefore, if the standard cost for the fabric was $4.75, the variance would be reported
as 500 units × $4.75 = $2,375. A policy must be established about the level of variance
that is to be investigated. Some variation from expectations is allowed, and if standards
are realistic, much of the variation is eliminated over the period of a year—that is,
insignificant favorable variances cancel out insignificant unfavorable variances.

Variances that are determined to be significant are investigated. Careful observation and
discussion with those workers involved in producing the output that led to a variance
will aid in assessing what circumstances appeared to be the explanation. Wise
consideration of what should be done in the future can lead to the elimination of
significant variances.

In an objective review of observations and discussions, questions may arise as to the

appropriateness of the standards established. There may need to be a reconsideration of
the earlier analyses that were the basis for the standards used in the budget followed by
operational personnel.

For an organization to gain optimum value from standard costing, all employees
involved must understand the motivation for such costing and understand the assessment
that will be made. Imposing standard costs without communicating in an honest, candid
manner will undermine much of the perceived value of such costing.
Related Developments

Developments such as continuous improvement, target costs, and push-through

production have changed to some extent the usefulness of traditional standard costing.
However, each of these developments has been implemented in some organizations with
aspects of standard costing included. For example, continuous improvement, in a general
way, introduces a review of what resources were used this year to identify where fewer
resources might be used in the forthcoming year. The task of identifying fewer resources
is a standard-setting task. Target costs are calculated by starting with the cost consumers
are believed to be willing to pay for the completed good or service, then analyzing the
cost in a backward fashion. This process can also involve the basic concept of standard
costing. Push-through production, in which groups have responsibility for a number of
processes, can profit from standard costing as a basis for monitoring resource usage.

One major barrier to implementation of standard costing in the twenty-first century is the
speed of change in how tasks are performed and in the alternative materials available.
Frequent change leads to insufficient time for the careful analyses of inputs and outputs.
Decisions are based solely on judgments and observations. Such decisions may be close
to those established systematically—however, they may not be.

The usefulness of the information provided from analysis of variances related to standard
costs has been challenged. Attention to quality, some critics say, is inadequate in this
traditional analysis. Others have proposed that quality considerations can be
incorporated in standard costing assessment (see Cheatham and Cheatham, 1996).
How to Create a Standard Cost
• Supplier quotations and estimates 


• Previous Invoices/trends 


• Internet/websites of suppliers 


• Discounts for bulk purchases 


Standard Material Price

• Price Seasonality 


• Cost to Manufacture internally 


• Differences between the quality of 


different material
 • Time/motion studies 


• Quality of material e.g. natural 


wastage 


Standard Material Usage

• Specification of standard product 


manufactured 


• Operational wastage expected

• Market rate for grade/type of labor 


Standard Labor Rate

• Internal rates form HR department

ï Bonus schemes/piece work rates in 

current use
 • Idle time expected during operations 


• Time/motion studies 


• Skill/expertise of staff 


Standard Labor Efficiency

• Learning curve 


• Motivation of Staff 


• Remuneration system in place

• Overhead absorption rates obtained by
dividing forecast overhead with an
expected level of activity 


Standard Overhead Rate • Review overhead 


• Understand fixed and variable 


relationship with output, labor hours,
machine hours or % of cost
Methods For Planning And Control

A fixed budget is a budget prepared on the basis of an single estimated production and
sales volume. It does not mean it is never revised or charged, just Fixed at a certain
level of output sold and produced. This tends to be a form of budgeting for a service
organization where a high proportion of total cost if fixed, and therefore does not vary
significantly, with the volume or activity of the service performed. Such a form of
budgeting would be little use for control purposes, when comparing to actual results, if
significant variable cost exists. A fixed budget provides detail of costs, revenues or
resource requirements for a single level of activity.

Flexible budgets are prepared for many different sales and production quantities and can
be used to plan more effectively for an organization e.g. useful at the planning stage for
‘what it?’ analysis. Flexible budgeting recognizes different cost behavior patterns, that
may rise or fall with the volume of production or sales and is a better system for control
purposes. A flexible budgeting system based upon its budget set at the beginning of the
period can be flexed to correspond to the actual activity volume of results for a prepared.
When a budget is flexed it would give an appropriate level of revenue and costs as a
yardstick to compare like for like to actual results, at the same activity level, meaningful
variances can then be reported to the managers responsible for control purposes.

Flexible Budgeting

1. Useful at the planning stage (what if analysis)


2. Can be ‘Flexed’ retrospectively and compared to actual results for control purposes

Variance analysis

By comparing a flexed budget, which has been prepared using standard cost information
to actual results, total variances can be calculated. These reconcilable differences
between the two statements can then be sub-dividend further, calculated, interpreted and
 used to correct problems within the organization to stay on target through control action
by management or employees.

Variances Can Occur For The Following Reasons

• Inaccurate data when creating standards, producing the budget or compiling actual
results

• A standard used which is either not realistic or perhaps out of date,

• Efficiency of how operations were undertaken by management or employees during the

period of assessment

• Random or chance

• Budgetary planning involves the production of budgets or forecasts using realistic

standards for cost and efficiency levels. Budgetary Control identifies areas of
responsibility for management and is the process of regularly comparing actual results
against budget or standards. Because the original budget would have forecast a
different number of units produced or sold, when compared to actual units produced or
sold, a ‘Flexed budget’ would be prepared in order to compare costs and revenues on a
like with like basis. 


Variance Calculations
Did sell (actual) quantity sold x actual price) X Should sell (actual

Sales Price Variance quantity sold x standard price) (X)

Sales Price Variance X

 Units

Did sell (actual quantity sold) X Should sell (budget quantity sold) (X)

X standard profit per

unit*

Sales Volume Profit Variance X

* Standard profit would be used if the organization uses absorption

costing methods, when using marginal costing methods, the standard
contribution volume variance, rather than standard volume profit
variance would be used. The Performa above would be the same
however the difference in units above would be multiplied by the
Sales Volume Profit standard contribution per unit rather than standard profit per unit.
Variance
There is also the calculation of the sales volume revenue variance

Units

Did sell (actual quantity sold) X Should sell (budget quantity sold) (X)

X

X Standard Price

Sales Volume Revenue Variance X

This would be a calculation considered in isolation from an operating

statement e.g. if an organization wants to reconcile the difference
between the original sales budget revenue and actual sales revenue
achieved rather than profit or contribution.
 Did spend (actual quantity purchased X actual price) X Should spend
(actual quantity purchased x standard price) (X)

Material Price Material Price Variance X

Variance
This variance calculation always uses the quantity of material actually
purchased never used, if there is a difference between the two within a
question.
Kg/Litres

Actual production did use X Actual production should use (actual

production x standard usage) (X)

Material Usage price

Variance
Material Usage Variance X

X standard

This variance calculation always uses the quantity of material actually

used never purchased, if there is a difference between the two within a
question.
Did spend (actual hours paid X actual rate) X Should spend (actual hours
paid X standard rate) X
Labor Rate
Labor Rate Variance X
Variance

This variance calculation always uses the actual hours paid for never
hours worked, if there is a difference between the two within a question.
 Hours

Actual production did take X Actual production should take (actual

production x standard hours) (X)

Labor Efficiency X
Variance
Standard rate

Labout Efficiency Variance X

This variance calculation always uses the actual hours worked never
hours paid if there is a difference between the two within a question.
Hours

Actual hours paid for X Actual hours worked (X) Idle time X

X standard
Labor Idle Time
Variance rate

Labor Idle Time Variance X

Only applicable if there is idle time e.g. a difference between labor hours
paid and worked.
Did spend (actual hours worked X actual OH rate) X Should spend
(actual hours worked x standard OH rate) (X)

Variable Overhead Variable Overhead Expenditure Variance X

Expenditure
Variable overhead expenditure within a question will be assumed to be
Variance
driven by labor hours worked never paid if there is a difference between
the two e.g. if production stops and staff are idle then no variable
overhead should be incurred.
Fixed Overhead Variances Further Explained

Traditional absorption costing takes the total budgeted fixed overhead for a period and
divides by a budgeted (or normal) activity level e.g. units, in order to find the overhead
absorption rate. This is a simple method of charging fixed overhead and allows fixed
overhead to be allocated to products, jobs or wor -in-progress.

Overhead absorption rate (OAR)= Budgeted production overhead Normal/

budgeted level of activity

Production Fixed Overhead Control Account

At the end of the period, the overhead ‘absorbed’ or charged to production is compared
to the actual production overhead incurred for the period. Any shortfall in overhead
charged would be an ‘under absorption’ of production overhead (DR profit and loss
accounts CR Production overhead control account). Any ‘Over charge’ to the profit
and loss account during a period would be an ‘over absorption’ of production
overhead (CR profit and loss account DR Production overhead control account).

The sum of the fixed overhead expenditure and volume variance would be equal to the
under or over absorption, when sub-divided, explaining the two different causes as to
how this occurred during a period e.g. under or over spent and/or under or over produced
when compared to the original budget.

The difference between absorption costing and marginal costing organizations, is that the
marginal costing organization makes no attempt to absorb or charge production into a
cost unit or the profit and loss account. It treats production overhead as a period cost
only and does not absorb overhead, but rather charges it entirely to the profit and loss
account for each period. With marginal costing organizations only the fixed overhead
expenditure never the fixed overhead volume variance would be applicable within a
question.
 Investigating Variances

Statistical Methods For Interpretation

Variances can be expressed relatively rather than absolutely, the variance is normally
expressed as a percentage against the standard cost. In a past exam old syllabus the
examiner asked students to express material mix and yield variances, the deviations in
weight rather than values, as a percentage of the standardized weight for the product
being produced.

From the answer of example this would have been calculated as

Tomato ingredient – mix 3kg/31kg = 9.7%(F) Cheese ingredient – mix 3kg/37kg = 8.1%
(A) Yield 1.8kg/61.8kg = 2.9%(A)

These percentages could be plotted on a graph from one period to the next, which would
provide managers with the following advantages.

• Graphical presentation or percentages analyses over time allows easier interpretation

and clearer understanding by managers 


• Presenting variances over time allows trends to be identified easier 


• By working out percentages expressed against standard, it removes changes in

monetary size of the variance caused by changing activity levels, improving 

trend analysis 

 • Example of a variance chart 




• Factors To Consider Before Investigation 


1. The size of it (materiality)


2. The general trend of it e.g. use of control charts for this

3. The type of standard that was used

4. Interdependence with other variances

5. The likelihood of identifying the cause of it

6. The likelihood that if a cause is found then it is controllable

7. The cost and benefits of correcting the cause


8. The cost of the investigation
Planning and operational variances

Planning variances are caused by the budget or standard at the planning stage being wrong. The
budget and standard used would therefore need revising if your operational variances are to be
more realistic.

Operational variances are your normal variance calculations as learned earlier within this
chapter, that is assuming all planning errors within the budget have been adjusted for or removed
and your standard used is realistic.

Process of calculating planning variances

1. Calculate the planning variance and adjust the original budget within the operating
statement for this, before any operational variances are calculated 


2. Adjust the standard cost used in the budget from ex ante to ex post (revised) standard 


3. Now that the original budget and standard cost has been adjusted, the operational 

variance that would be effected by the adjustment, will give a more realistic standard. 


The effects is to sub-divide a variance into 2 parts

1. The planning variance which is beyond the control of staff e.g. planning errors

2. The operational variances which may be within the control of staff

This allows better management information for control purposes

Planning and operational variances are not alternatives to the conventional approach; they just
produce a more detailed analysis. Further analysis of variances into groups e.g. planning which
are to do with poor planning or inadequate standards used compared with actual true favourable
or adverse operational variances, allow managers to be appraised truly on deviations they can
control not those variances which are beyond their control.

Advantages of planning variances

• Highlight between variances which are controllable and uncontrollable

• Help motivate managers and staff

• Help use more realistic standards

• Give a fairer reflection of operational variances

However critism includes still the question of determining a ‘realistic standard’ in the first place
and putting too much emphasis on ‘bad planning’ rather than ‘bad management’ and the analysis
can be more time consuming and costly than the conventional approach.

Causes of variances

Possible causes of the individual variances are:

 • Different sources of supply 


• Unexpected general price increase 


• Alteration in quantity discounts 


• Alternation in exchange rates 


Material price variance (imported goods) 


• Substitution of a different grade of 


material 


• Standard set at mid-year price so one would

expect a favourable price variance for part of
the year and an adverse variance for the first of
the year.
• Higher/lower incidence of scrap 


Material Usage Variance

• Alternation to product design 

ï Substitution of a different grade of material
 • Unexpected national wage award 


• Overtime/bonus payments different 


Wages Rate Variance
from plan 


• Substitution of a different grade of labor

• Improvement in methods or working
conditions 


• Variations in unavoidable idle time 


Labor Efficiency Variance

• Introduction of incentive scheme 


• Substitution of a different grade of labor

Variable Overhead Variance ï Unexpected price changes for overhead items

ï Labor efficiency variances (see above)

 • Changes in prices relating to fixed overhead
items e.g. rent increase 


• Seasonal effects e.g. heat/light in winter. (This

Fixed Overhead Expenditure Variance
arises where the annual budget is divided into
four equal quarters of thirteen equal four-
weekly periods without allowances for
seasonal factors. Over a whole year the
seasonal effects would cancel out.)
• Change in production volume due to change
in demand or alternatives to stockholding
policy 


Fixed Overhead Volume

• Changes in productivity of labor or machinery 


• Production lost through strikes etc.

• Unplanned price increase 


Operating Profit Variance Due To Selling

Prices
• Unplanned price reduction e.g. to try and
attract additional business.
Benchmarking

“Continuous, systematic process for evaluating the products, services and work processes of an
organization that are recognized as representing best practice, for the purpose of organizational
improvement.”

World-class organizations strive to obtain competitive advantage. This can be achieved by using
benchmarking. This is the process of comparing your performance with that of another
organization considered to be the best in its class.

Benchmarking

1. Internal: Compare an internal function to the best found elsewhere internally within the same
organization.

2. ‘Best practice’ or functional: Compare an internal function to that of the best, not necessarily
an organization in the same industry.

3. Competitive: Product/service features compared to that of firms/competition in the same

industry.

4. Strategic: Compare yourself in terms of organizational structure and culture, mission

statement and strategic choices made to the most successful market leader.

Performance Dimensions to Gain Competitive Advantage:

• Quality e.g. aesthetics (imperative to organizations like Dior or Cartier), features,

courtesy and friendliness of staff involved within the purchase stages within the
organization, accuracy of administration. 

 • Speed/flexibility e.g. AA/RAC 24/7, parcel force ‘overnight’ Concorde gave fast
transatlantic flights 


• Cost e.g. if the organizational pursues cost leadership 


• Differentiation e.g. brand recognition for certain product features such as 


image, reliability or functional 

Companies to be the very best much establish where customers perceive differences, set
the very best standards to exceed, establish what the competition is doing and encourage,
manage, knowledge and ideas of staff to exceed standards set. 


The process would involve

1. Select what you want to benchmark/set objectives

2. Consider benefits against the cost of doing it


3. Assign responsibilities to a team

4. Identify potential partners /known leaders

5. Break down of process to complete


6.Test and measure (observation , experimentation or investigation /interview)

7. Gather information

8. Gap analysis

9. Implement changes/programs/communicate

10.Monitor and control

11.Repeat regularly
Benefits of Benchmarking

• Better understanding of competition and customers needs

• Discourages complacency/improves business awareness of managers

• You learn from other organization mistakes

• Don’t need to ‘re-invent the wheel’

• Source of new ideas/faster awareness of innovation

• Fewer complaints and warranty claims

• Leaner more efficient organization in terms of waste and reworks

• Customer satisfaction and brand loyalty in the long-term

• Efficiency and effectiveness of functions or process improved within the 


organization 


• Sales and profitability improved 


 Drawbacks of Benchmarking 


• Deciding and documenting what need to be benchmarked is time consuming

• Getting the information to actually do it may be a problem

• Confidential information could be leaked

• Damn lies and ‘statistics’

• Deciding who is the best in their class

• Keeping employees motivated, as standards once exceeded, will normally be raised 


McDonaldization

Modern manufacturing questions the thought of whether standard costing still plays a valuable
part when considering information for control purposes.

• Dynamic environments

• Customization/differentiation not homogenous products

• Shorter product life-cycles

• Automation

• Higher concern for quantity rather than efficiency 


George Ritver within his book ‘The McDonaldization of Society’ listed the advantages of
producing standard or homogenous products, the pinnacle comparison being McDonalds,
with it’s a fast food strategy of uniformity of operations and delivery on a global basis. A
concept you will find within thousands of companies in the world, especially the larger
 corporations e.g. Audi or V/W Group incorporating hundreds of components, including
the engine, within a large range of cars manufactured. Although surely you would
understand such an idea better through the use of a ‘Big Mac’ right? Standardization of
machinery uniforms and packaging e.g. sachets, drinking cups and paper bags.
Automation of dispensers, cooking processes and staff... have a nice day! Food already
pre-prepared before cooking e.g. cheese sliced, salads prepared, sauces all pre-packed
any easy to open and serve. This is uniformity or standardization. 


Some facts about McDonalds 


• Started as a hot dog stand in 1939 by 2 brother (Richard and Maurice McDonald)

• 30,000 outlets in 119 countries

• One of the first to end waiter service

• Cut their means down to a few standard and homogenous dishes for simplicity

• Plates replaced with cardboard containers to save on washing up

Advantages of McDonadlization ‘standardization reduces cost and improves 

efficincy’



Control e.g. easier to create a pre-defined standard as there is such uniformity within the
specification of the products produced, also easier to manage, organize, train and control workers

• Efficiency e.g. combined with specialization it is the most efficiency way of working
within large organizations

• Predictability e.g. customer always knows what they are buying, giving reassurance and
brand organizations

• Calculability e.g.quantitative not qualitative informations easier to interpret

• Proficiency to staff can be assessed more effectively 


Such a philosophy and its advantages are similar to the classical school of
management, but can have its disadvantages

• Excessive specialization of tasks e.g. work dull and boring

• Removes initiative of workers e.g. reduces innovation and creativity

• Boredom, frustration and de-motivation of workers 


Diagnostic related or reference groups (DRG) ‘Can applied to a Big Mac’ 


• Standard costing is and can be applied to service organizations such as the health service,
accountancy practice or even retail. The diagnostic reference group or healthcare
resource group is a system of classifying hundreds of different medical conditions with
the health sector, as a basis of recognizing that similar medical illnesses require
essentially similar treatment or care. There are around 800 DRGs existing within the
health service.

This enables health service management to 


• Standardize resources e.g. beds/wards/consultancy/medication

• Standardize patient treatment e.g. specifications of how treatment applied

• Standardize codes for insurance companies or standardize payments to the NHS or other
private health providers for payment or charges made

Such standards can also be used by government to benchmark the performance and create league
tables of those hospitals that complete treatments within standard times and costs and those that
do not. The DRG approach also used to remunerate hospitals for each standard treatment they
perform.

Such a system is not without its critics, arguing that surely it is the qualitative factors in patient
treatment more than the quantitative measures that are more important when it comes to patient
care, and not every operation or treatment can be cured in a single best way. If payments are
made to hospitals based on a standard amount or price, this could mean overzealous treatment of
a patient causing overspending; this in itself could affect the level of patient care given.
Characteristics of services :

• Intangibility e.g. no material substance or physical existence of it when compared to a

tangible good

• Legal ownership e.g. no physical evidence often exists, so you can never return it if it
was faulty

• Instant perish ability e.g. unlike goods, services cannot be stored

• Heterogeneity e.g. each time the service is performed even to the same customer it can be
different each time, goods generally are homogenous

• Inseparability e.g. cannot be separated from the person who provides it. It is for the above
reasons, as well as the human influence in the quality and effectiveness of the service
performed, when compared to manufacturing a product, that makes standard costing
more difficult to apply within the service sector. 

 CHAPTER NO. 2 : RESEARCH METHODOLOGY

INTRODUCTION

This chapter focuses on the methodology & the techniques used for the collection,
classification & tabulation of data. It light on the research problem, the objective of study &
its limitations.

RESEARCH METHODOLOGY

Research methodology is a way to systematically solve the problem. It is a game plan for
conducting research. In this we describe various steps that are taken by the researcher.

“All progress is born of inquiry. Doubt is often better than overconfidence, for it leads to
inquiry and inquiry leads to invention.”

Research in a common parlance is a search for knowledge. Research is an art of scientific

and systematic investigation. Thus research comprises defining and redefining problems,
formulating hypothesis or suggested solutions; collecting, organizing and evaluating data,
making deductions and reaching conclusions. Research methodology is the arrangement of
condition for collection and analysis of data in a manner that aims to combine relevance to
the research purpose with economy in procedure. Research Methodology is the conceptual
structure within which research is conducted. It constitutes the blueprint for the collection
measurement and analysis of the data.

Research methodology is a framework for the study and is used as a guide in collecting and
analyzing the data. It is a strategy specifying which approach will be used for gathering and
analyzing the data. it also includes time and cost budget since most studies are done under
these two constraints. The research methodology includes overall research design, the
sampling procedure, the data collection method and analysis procedure.
TYPE OF RESEARCH USED:-

✓ Descriptive Research

In the study descriptive research design has been used. As descriptive research design is the
description of state of affairs, as it exists at present. In this type of research the researcher has
no control over the variables; he can only report what has happened or what is happening

Descriptive research designs are those design which are concerned with describing the
characteristics of particular individual or of the group. In descriptive and diagnostic study the
researcher must be able to define clearly what he wants to measure and must find adequate
method for measuring it.

METHOD OF DATA COLLECTION

After the research problem has been identified and selected the next step is to gather the
requisite data. While deciding about the method of data collection to be used for the
researcher should keep in mind two types of data i.e. primary and secondary.

Primary Data

The primary data are those, which are collected afresh and for the first time, and thus
happened to be original in character. We can obtain primary data either through observation
or through direct communication with respondent in one form or another or through personal
interview.

Methods used in primary data collection-

✓ Observation method

✓ Interview method

✓ Questionnaire method
 Secondary Data

The secondary data on the other hand, are those which have already been collected by
someone else and which have already been passed through the statistical processes. When the
researcher utilizes secondary data then he has to look into various sources from where he can
obtain them. For e.g. books, magazine, newspaper, internet, publications and reports.

In this study data have been taken from various secondary sources like:

• Internet

• Books

• Magazines

• Newspapers

• Journals
 CHAPTER NO. 3 : LITERATURE REVIEW

3.1 DEFINITION OF COST

Institute of Chartered Accountants of Nigeria (ICAN) pack (2006) opined that cost to
Economists is what must be given up in order to obtain something, whereas to the Accountants,
cost is the value of economies resources used in the production of goods, services, income or
profit. This shows that cost is very essential in determining the control of organization activities.
ICAN pack (2006) view cost control as the ability of management to monitor and
supervise expenditure in order to ensure that things are going planned results so that appropriate
corrective actions can be taken on the variance that is bound to arise before it is too late (see
Adniyi 2001).
According to CIMA, cost is defined as; “the amount of expenditure (actual and notional)
incurred on or attributable to a specified thing or activity”.
Cost behavior is the way in which cost per unit of output are affected by fluctuation in the level
of activity.
CLASSIFICATION OF COST
Classification of cost is the identification of items of cost together according to their common
characteristics.
They include;
1. Cost Behavior
2. Controllability
3. Traceability
4. Functional classification
5. Economic characteristics
COST BEHAVIOR
It is the way and manner a particular cost item relates to a small change in the level of activity. It
may also represent the reaction of a particular cost in change in activity level. Using behavior as
a parameter, it is possible to identify four (4) different examples of cost as follows;
a. Variable Cost c. Step Fixed Cost
b. Fixed Cost d. Mixed/ Semi- Variable/ Semi- Fixed Cost
a. Variable Cost:
This can be described as an item of cost that will react proportionally to changes in activity level.
It also represents the cost item that maintains a perfect relationship with the activity level, such
that an increase or decrease in activity level will encourage a corresponding reaction or change in
activity level.

In practice, there are two (2) types of variable cost;

- LINEAR VARIABLE COST
- NON-LINEAR VARIABLE COST
Linear Variable Cost:
This represents items of cost that will react proportionately to changes in activity level, that is, a
particular increase in total cost. It may graphically be illustrated as follows;

Cost
TVC

Activity
Non- Linear Variable Cost:
This represents those items of cost that will not react proportionately to changes in activity level.
In this case, a specified increase in activity level may depict a higher or lower increase in cost
structure. This position may be a s a result of bulk purchase discount or inflation as illustrated
below;

As a result of discount

Cost

Activity

Costas a result of inflation

Cost

Activity
b. Fixed Cost:
This is described as an item of cost that will not react to changes in activity level. It will not be
influenced by level of changes within the relevant range. A relevant range represents specified
level of activity where accurate estimation of cost is possible.

Cost

TFC

Activity

c. Step Fixed Cost:

This will represent an item of cost that will only react whenever a specified level of activity is
exceeded. It is also described as a cost item that will increase significantly to a marginal increase
in level of activity beyond the relevant range.
Cost
SFC

0 Activity
d. Mixed Cost:
A cost item that combines the physical characteristics of both fixed cost and variable cost. That
is, a cost item that is partly fixed and partly variable in nature. All production costs are examples
of mixed cost. A mixed cost can be graphically represented as follows:

i. cost
TVC

TFC

Activity
ii. cost

TVC
TFC

0
Activity
CONTROLABILITY CLASSIFICATION:
A decision maker may also classify cost according to degree of influence that can be exerted on
such items of cost by varying the degree of production, patterns and techniques. Under this
platform, there are two (2) examples of cost as follows;
i. CONTROLLABLE COST:
Those items of cost that can be manipulated or influenced within the control limit of
the operating managers.
ii. NON-CONTROLLABLE COST:
Those items of expenditure that are outside the control limit of the operating
managers. It is instructive to note that controllability classification is for short term.
This is because in the long run, all costs are controllable by the operating manager.
TRACEABILITY CLASSIFICATION
This involves the process of classifying cost according to the ability if a decision maker or
operating manager to relate cost item to any of the cost centre within the organization.
Under this type of cost classification, there are two (2) examples of cost as follows;
- DIRECT COST
- INDIRECT COST
i. DIRECT COST:
This represents those items of cost that are directly incurred in the course of
manufacturing a product or rendering a service. E.g. direct material cost, direct labour
cost, direct expenses.
ii. INDIRECT COST:
Those items of cost that is not traceable to any cost centre within the organization,
except through apportionment. E.g. indirect material cost, indirect labour cost,
indirect expenses.
This type if cost classification will assist management in the areas of cost control and
performance evaluation.
FUNCTIONAL CLASSIFICATION:
Different items of cost may also be classified under specific roles or duty been performed by
such items of cost. The objective of this type of cost classification is for cost identification. The
following are examples of cost;
1. Manufacturing Cost, 4. Selling Cost,
2. Distribution Cost, 5. Repairs and Maintenance Cost,
3. Administrative Cost, 6. Research and Development Cost.
ECONOMIC CHARACTERISTIC CLASSIFICATION:
This represents an integral part of decision making. It is used to ascertain the effect or impact of
a particular cost item on a given decision. Situation in this case, a decision maker will ascertain
the relationship between cost and corresponding decision, based on this parameter. It is possible
to identify the following examples of cost;
- Opportunity Cost - Sunk Cost
- Avoidable Cost - Past Cost
- Traceable Cost - Historical Cost etc.

3.2 COST METHODS AND TECHNIQUES

DEFINITION
COSTING TECHNIQUE:
This is how costing methods are applied to achieve desired goals. The costing techniques
selected depend upon the purpose for which the information is required. This includes standard
and marginal costing.
COSTING METHODS:
These are methods designed to suit the way goods are processed or manufactured or the way
services are provided. There are two (2) broad categories of costing methods. Namely;
1. SPECIFIC ORDER COSTING:
a. Job Costing
b. Contract Costing
c. Batch Costing
 2. CONTINUOUS OPERATION:
a. Process Costing
i. Joint Product
ii. By- Product
iii. Stock Valuation (LIFO, FIFO, AWM)
b. Output Costing
c. Service/ Function Costing

COSTING METHODS

Specific order costing Continuous Operation

Job Costing Batch Costing Contract Costing Process Costing O u t p u t c o s t i n g

Service costing

Joint Product Costing By-Product Costing Stock Valuation

LIFO FIFO AWM

The main categories of cost are; Total Absorption costing, Marginal costing and Standard
costing.

MARGINAL COSTING:
This is a costing technique whereby variable costs are charged to cost units and the fixed costs
attributed to the relevant period is written off in full against contribution for that period which
then provides information to management for effective and efficient planning.
STANDARD COSTING:
This is a technique which establishes predetermined estimate of the cost of products and services
rendered and the compares the predetermined cost with actual cost as they are incurred. Its main
purpose is to provide a basis for control through the process of variance analysis.
The types of variance include;
- Ideal Standard
- Basic standard
- Attainable standard
- Current Standard

i. Ideal Standard:
These are based on perfect operating environment, no wastages, no spoilage, and no
idle time. Variances from this are useful for pointing areas where a close examination
may result in large savings.
ii. Current Standard:
These are based on current working conditions (current wastages and current
inefficiencies). The disadvantage of current standard is that they do not attempt to
improve on current level of efficiency.
iii. Basic Standard:
These are kept unaltered over a long period of time and may be out of date.
iv. Attainable Standard:
These are based on the hope that a standard amount of work will be carried out
efficiently. Some allowance is made for wastage and inefficiencies.
ABSORPTION COSTING:
Under here, all production costs are treated as product costs. These expenses are held as assets of
the company until sold.

3. COST COMPONENTS:
In this case of a manufacturing company, cost will be grouped into the following three:
a. Factory or Product Cost
b. Selling and Distribution Cost
c. General and Administrative Cost
The management’s interest in the control of any organization before now was centered on factory
cost, though great emphasis is still placed on this area, producers have somewhat become aware
that effective planning and control of cost comes withbenefits of significant savings in the area of
selling, distribution and administrative costs.
A. Factory or Production Cost:
This includes direct material cost, direct labour cost and factory overhead. This can be
sub-divided into:
i. Direct Factory Cost: This involves all materials, labour and other expenses
that go into the production of goods.
ii. Indirect Factory Cost: These are costs which are not directly involved in the
production, but also enhance production e.g. factory rates, lubricant oil,
insurance etc.
B. Selling and Distribution Cost:
These are costs which are concerned with the sale and distribution of the finished
products to the distributors or to final consumer e.g. salesmen salaries, commission,
sales, administrative and promotion expenses, freight etc.
C. General and Administration Cost:
These are expenses incurred in the overall administration of the company and they
include general office salaries and expenses incurred in the activities of administrative
travels.
4. PLANNING:
According to Appleby (1996), planning is defined as selecting enterprise goals and department
objectives, then finding ways of achieving them. Cost planning entails establishment of
organizational cost and criteria in order to achieve the organizational objectives.
This is the primary task of management, Weihrich (2001). It is concerned with the future and
relies upon information from sources both internal and external to the organization for it to be
successful.
Information for planning includes cost and financial data, information relating to market and
competitors, production capacities and material supplies.
A plan is a pre-determined course of action which helps to provide purpose and direction for
members of an organization.
Planning comprises of long term or strategic and short term or operational planning which are
distinguished by what is called planning horizon.

A PLAN HORIZON IS SHOWN BELOW:

Strategic planning 5 years

Level of planning

Tactical planning 2-5 years

Operational planning 1-12 months. Time

Operational transaction
now

Planning horizon (Adapted from Haiman Scott. Connor 1982, management, fourth edition)
Planning entails today’s realization of yesterday’s plan. Planning must be flexible to deal with
changing environment.
From the above, it can be seen that “planning leads to the achievement of objectives” for a
business to survive on a changing and dynamic environment and more with time, management
must be able to plan their income and expenditure well.

HIERARCHY OF PLANNING
Plans are usually arranged in hierarchy within the organization. Each plan at a given time serves
two (2) functions. Hierarchy of planning can be divided into three (3) major groups. Goals,
single use plans and standing plan.
Single use plans are used to achieve specific end, once the end is reached, the plan is
discontinued while standing plans are used to carrying out activities that occur frequently in the
organization.
BELOW IS THE HIERARCHY OF PLANNING.
GOALS

PURPOSE

MISSION

OBJECTIVES

STRATEGIES

Non-repetitive activities Repetitive activities

Single use planning Standing plans

Programs Policies, standard procedures, method and rules.

 Project

Budgets
(Adapted from modern business management by Robert C. Appleby)

GOALS: This provides the basic sense of direction for organizational activities. It consists of
mission, purpose, objectives and strategies of the organization. Mission statements are however,
categorized into more specific and certain objectives.
PURPOSE: This is the primary roles as defined by the society in which it operates.

MISSION: This is a broad unique aim formulated by an organization to differentiate it from

other firms.
OBJECTIVES: Brech (1982) refers to objective as prosperity growth and the continued life of
the business.
PROGRAMS: These are the major steps required to reach the objective as well as the order
and time in which the steps will be completed.

3.6 PLANNING TECHNIQUES

In the course of planning how to reach an organization’s objective, it is important that a specific
level of activity will be planned, and in doing this, budgets must be established. This brings us
to the importance of budget in planning of cost.

BUDGETS:
According to Ayinde (1999), budget is defined as a plan expressed in monetary terms.
A plan quantified in monetary terms, prepared and approved prior to a defined period of time
usually showing planned income to be generated and for the expenditure to be incurred during
that period and the capital to be employed to attain a given objective. (CIMA)
Budget relates to forecast because forecast is an essential part of budgeting process. A forecast
is a prediction of future events in the light of circumstance expected to prevail.
To establish a realistic budget, it is important to forecast a wide range of factors including sales
volume, price, wages, materials availability, inflation rates and the overhead costs.

STEPS IN PREPARING BUDGET

Six (6) steps to prepare a budget include;
a. Determine the enterprise’s policy or prepare a statement of basic assumptions in which the
budget is to be based. E.g. company objective for growth, profit, and financial position for
the budget period.
b. Prepare a forecast of the general economic controls, for the industry and for the firm.
c. Prepare the sales budget (or whatever is the key factor)
d. Prepare other functional budget in a logical order following the key factor budget.
e. Prepare the master budget from the financial budget.
f. Formally accept the budget and it becomes the “master budget” and has such an executive
order.

7. TYPES OF BUDGET
The major types of budget include;
(i) Fixed budget:
It is a budget designed to remain unchanged irrespective of the volume of output or
turnover attained. The amounts in the budget remain unchanged even in the face of
change in budgeted activities.
(ii) Flexible budget:
This is designed to adjust the permitted cost to suit the level of activity attained. The
process by which this is done is by analyzing cost in fixed and variable elements so
that the budget may be flexed according to activity attained.
(iii) Rolling budget:
This refers to a system of continuous updating of budgets and determining a budget
for the corresponding time period. In other words, as one period is finishing, another
period is forecasted so a one-year budget would always be available.
(iv) Zero-based budget:
This treats each planning period as an independent planning exercise, going back to
square one.
In this type ofbudget, there is the underlying assumption that expenditure at the cost
centre would be zero.
(v) Operating budget:
This relates to the planning of activities or operations of the organization such as
production, sales and purchases composed of two (2) parts namely;
a. Programmed Activity Budget:
This specifies the operation to be performed during the next year, one logical way
to prepare this kind of budget is to plan each product, its expected revenue and
associate costs.
b. Responsibility Budget:
It specifiesplan in terms of individual responsibilities. The basic purpose of this
kind of budget is to achieve control, comparing actual performance of a
responsible individual with expected performance.
Note that these two ways of discussing operating budget are important because
the programmed budget is primarily a planning process while the other is a
control device.

(vi) Financial budget:

This is concerned with the financial implications of the operating budget, the
expected inflows and outflows, financial position and the operating results. The
important component of financial budget is the cash budget. A balance sheet and
income statement is also required to be prepared.
 (vii) Cash budget:
This requires planning to achieve a worthwhile project,together with the timing of the
estimated cost and cash flows of this project. Itconsiders the requirement for large
sums of fund and their long term implication on the company.
(viii) Sales budget:
This involves the type of goods to be sold, the quantities and the unit prices at which
the goods are to be sold.

Other types of budget include;

- Capital Budget
-Production Budget etc.

8. CONTROL OF COST
Control of cost is an element of management task and it involves the measurement and
correction of the performance of sub-ordinates to ensure that the objective of the enterprise and
plans deemed to attain them are accomplished effectively, efficiently and economically. To
achieve organizational objectives, control of cost must be adequately planned.
The essentials of control are three (3) namely;
(i) Plan
(ii) Comparison – of actual with planned
(iii) Action – to rectify the divergence.
If any of these essentials is missing, then there is no control whatsoever.
Appleby (1996), control will only be effective provided there is no under planning or under
budgeting. It therefore, follows that meaningful control is not possible without planning and
planning without complementary control system is pointless.
Effective control has two (2) aspects;
a. Operational control.
b. Accounting control.
Operational control:
Irrelative of how small an enterprise is, the owner/ manager can control cost through personnel
observation and supervision of operations. As the business grows, such personal control can for a
time be safely delegated to a few supervisors.
With a continual growth, however a point is reached; operational control can no longer be relied
upon to keep waste, inefficiency and cost content consequently, it then becomes necessary to
supplement operational control with accounting control.
Accounting control:
This contemplates creating system of records which will establish accountability for costs and
the employment of costs accounting and statistical report to reveal how people who are
responsible for cost are discharging their responsibilities.

COST ACCOUNTING AND COST CONTROL

Cost accounting varies from general accounting in the extent of detailed data which the former
can provide. A cost accounting system can supply detailed cost data in various areas.
The primary function of cost accounting system is to find out if the cost is useful in details and to
report items in intelligible and timely statements.
Cost control means the regulation of cost of operating a business and is concerned with keeping
cost within acceptable limits.
Cost accounting contributes to control of cost by supplying detailed and accurate data in a
system of pertinent reports, upon which a system of material precaution and operational control
can be systematically created. It should be emphasized that neither a perfect cost accounting
system nor any member of a well-conceived operational control built around it will effect
automatic control.
The effective control of cost of any part of business activity is dependent upon the competence
and vigilance of the person charged with the responsibility for control. One or two incompetent
personnel in strategic positions may nullify the best efforts of numerous highly capable
executives.
9. ELEMENTS OF CONTROL
To achieve control, each of the following elements must be present.
a. To plan and coordinate each of the activities,
b. To measure actual performance,
c. Comparison of actual performance with plan,
d. To analyze by causes the difference between actual results and the budgeted figures.
e. To take appropriate action in order to improve actual performance in future and to revise
the plan.
f. Feedback of deviations or variations to the control unit.
The type of feedback mentioned is that of a relatively small variation between actual and plan so
that corrective actions can be taken to bring operation in line with the plan. This type of feedback
is known as “single loop feedback”. The normal feedback is usually associated with budgetary
control and standard costing systems.
A higher level of feedback exists, called “double loop feedback” which is designed to ensure that
the plan, budget, standard and indeed, the organizational structure and control system themselves
agree with the devices to meet changes in condition.

3.10 COST CONTROL PLAN

There are two (2) major methods of controlling cost employed alongside planning activities.
They are;
a. Budgetary control
b. Standard costing variance.
Both have a common aim of improving managerial control by measuring the actual performance
and comparing it with the target for control purpose. Management control is the process by
which managers assure that resources are obtained and used efficiently and effectively in the
accomplishment of the organizational objectives.
a. Budgetary control
This is a system in which budget is used as a means of planning and controlling of aspects of
production and for selling goods and services. The objectives of budgetary control are as follows;
 i. To plan the policy of the business.
ii. To coordinate the activities of a business do that each part is of an integral total.
iii. To control each function so that the best possible result may be obtained.
iv. To communicate ideas and plans.
v. To ensure the achievement of the organizational objectives.
The essential requirement of budgetary control for a given business, the following condition is a
pre-requisite to successful initiation of budgetary control.
i. Clear and realistic goals,
ii. Full participation of employees of all levels,
iii. Top management support,
iv. An accurate accounting system,
v. A clearly defined policy,
vi. Logical sequence in the budget preparation.

b. Standard costing variance

Whenever an actual figure is compared with a standard set, a difference is often found to exist. If
this difference is valued so that the effect on profit is measured, then the valuation is referred to
as “VARIANCE”.
A variance can be defined as the effect on profit of a given manager’s performance on factor
diverging plans. It is the difference between standard cost and the comparative actual cost
incurred in a given period.
Variance may be ADVERSE (A) or it may be FAVOURABLE (F) that is, where actual cost
incurred is less than standard.
Cost control ultimately depends on action which is based in variances. The following are
variances, which are generally found useful (Principal Variance);
a. Variable Production Cost Variance. Subdivided into;
i. Material Cost Variance (MCV)
ii. Material Price Variance (MPV)
iii. Material Usage Variance (MUV)
 b. Labour Variance:
i. Labour Cost Variance (LCV)
ii. Labour Rate Variance (LRV)
iii. Labour Efficiency Variance (LEV)
iv. Labour Idle time Variance (LITV)

c. Variable Overhead Variance:

i. Variable Overhead Cost Variance (VOCV)
ii. Variable Overhead Rate Variance (VORV)
iii. Variable Overhead Efficiency Variance (VOEV)
d. Fixed Overhead Cost Variance (FOCV)
e. Sales Margin Variance (SMV)

3.11 COST REDUCTION AND COST CONROL

There is need to bear in mind that there is a distinction between these related concepts; cost
reduction and cost controls.
Cost reduction program is a planned attempt to reduce cost below the previously accepted limit
preferably without reducing the quality and effectiveness. It starts with an assumption that
current or planned cost level is too high and looks for ways of reducing item.
Cost control on the other hand includes cost reduction, because it is a managerial effort to attain
cost goals within a particular operational environment. Obviously, management should treat cost
from all directions through cost reduction programs, cost planning and continuous attention to
the cost incurring decision.
When is control needed?
It should be noted that cost control is important and a considerable evidence to show that
effective cost is more essential during profitable period than during periods of economic distress.
When profit begins to roll in, there is the tendency to regard cost with complacency, with the
result that they tend to get out of hand, and then when a business recession starts, an individual,
organization needs a new state of alertness.
In no case should a business seem less concerned merely because future prospects are on the
positive side.
Control is needed when plans have been set and actual performance have been done then control
measure and corrupt performances to ensure that the organizational goals and objectives are in
line.
According to Weihrich (2001), planning and control are inseparable – Siamese twins of
management, any attempt to control without plan is meaningless, since there is no way for
people to tell whether they are going where they want to go. This plan furnishes the standard of
control.
A close relationship between planning and control is graphically represented below;

NEW PLAN

IMPLEMENTATION
CONTROLLING-
OF PLAN
PLANNING comparing plan
with result

CORRECTIVE
ACTIONS Undesire
d

Adapted from Heinz Weihrich (2001):The management- a global perspective, Tenth Edition.
3.12 ORGANIZATIONAL PERFORMANCE
This refers to how well or badly a job or activity is executed by a business concern.
It can also be said as the degree at which the goals of an organization are attained. Modern
writers have elaborated in the classical definition of performance/ effectiveness to incorporate
the achievement of both economic and non-economic result that is attainable of multiple goals.
Kaplan (1988), defined performance as the organizational capacity to survive, adapt, maintain
itself and grow.
The performance of an organization is based on certain factors, which are divided into two (2);
- INTERNAL FACTORS
- EXTERNAL FACTORS
a. Internal Factors;
i. Absenteeism,
ii. Poor productivity,
iii. Poor decision making,
iv. Inability to meet standard set by management etc.
b. External Factors;
i. Market trend,
ii. Customers,
iii. Political stability etc.

13. MODE OF MEASUREMENT

The indices of organizational performance cannot be easily measured due to the fact that
organizational performance domain is vague.
In this research work, planning and control of cost is effected through budgetary control and
standard costing techniques. It prepares budgets and reviews its budget (forecast) to know how
relevant it will be in the future.
In planning and control of its cost, the company sets standards to be compared with actual
performance and see if there will be any deviation which will be corrected through budgetary
control.
Variance analysis is needed as earlier discussed in this chapter, because it provides practical
pointers to the cause of off standard performance so that management can improve operations,
increase efficiency, utilize resources more effectively and reduce cost to the barest minimum.
Variance, if calculated too long after the event, does not fulfill the control purpose of standard
costing.
In the light of the above, it therefore means that budgeting and standard costing can be used as a
mode of measurement of organizational performance.
Certain indices have been adapted as models of measuring organizational performance and they
include;
i. RETURN ON CAPITAL EMPLOYED (ROCE)
Net profit
Capital employed
ii. PRODUCTIVITY OF ASSET
Gross profit
Total assets
iii. SALES MARGIN
Net profit
Net sales

iv. NET OPERATING MARGIN

Net operating income
Net sales

v. EARNINGS PER SHARE

Earnings attributable to shareholders
Number of ordinary shares (ranking for dividend)
The assumption of most management scholars is that organizational performance is dependent on
the application of appropriate management techniques and availability of competent managers.
However, it is necessary to point out that organizational performance does not depend on the
techniques of management in use; other extra managerial factors have considerable impact on
organizational success.
Management is only one of the factors affecting organizational performance; others could be
owing to time constraint and stress.
 CHAPTER NO. 4 :

DATA ANALYSIS, INTERPRETATION and PRESENTATION

Normal number of workers 100

Number of hours paid for in a week 80

Standard Rate of wages per hour Rs.1.60

Standard Output of the department per hour taking into account normal idle time 40 units

In the first week of January 2003 it was ascertained that 2,000 units were produced despite 20%
idle time due to power failure and actual rate of wages was Rs.1.80 per hour. Calculate Labour
Variances.
Standard Costing Problem 2:

From the following data prepare a unit cost statement showing the prime cost of product A
and B together with analysis of variances:
Standard Costing Problem 3:

A gang of workers normally consists of 30 men, 15 women and 10 boys. They are paid at
standard hourly rates as under:

In a normal working week of 40 hours, the gang is expected to produce 2,000 units of output.
During the week ending 31st December, 2002, the gang consisted of 40 men, 10 women and 5
boys. The actual wages paid were @ Re 0.70, Re 0.65 and Re 0.30 respectively. 4 hours were
lost due to abnormal idle time and 1,600 units were produced.
Calculate:

(i) Wage Variance;

(ii) Wage Rate Variance;

(iii) Labour Efficiency Variance;

(iv) Labour Mix Variance; and

(v) Labour Idle Time Variance.

Standard Costing Problem 4:

Calculate labour variances from the following data:

Gross direct wages Rs.36,000

Standard hours produced 2,000

Standard rate per hour Rs.15

Actual hours paid – 1,800 hours out of which hours not worked (abnormal idle time) are 50
hours.
Standard Costing Problem 5:

From the following particulars calculate variable overhead expenditure variance:

Standard Costing Problem 6:

The standard cost card of a manufacturing concern includes the following particulars:

Variable overhead per unit – 2 hours @ 0-30 p. per hour = 0-60 p.

Actual operating hours 8,000 hours

Actual variable overhead expenses Rs.2,600

Actual units produced 4,850

Calculate necessary cost variances.

Standard Costing Problem 7:

From the following particulars compute:

For land improvement the total cost is Rp.16,646,305,375 with detail items on table 4,2
the average price is Rp. 4,109,994 (16,646,305,375/4,050) but price for the land
available for sale, the price is Rp 11,108,093 (16,646,305,375/1,498.5), the last cost is
from interest expense, the total expense over the years (1998-2004) was 68,164,001,689
thus the average price is Rp. 3,313,404 (68,164,001,689/20,572.20) but interest expense
from land available to sell the price become Rp 8,955,145 meter square
(68,164,001,689/7,611.71) table 4.3,. as we can see the difference the price if the total
land used and not. In the real estate development industry, the developer usually starts to
sell the land before it is constructed completely, which calls pre-selling. This process
could benefit the company to finance the operation. Since the project has not been
finished yet, the developer does not know the actual cost for the land. Since the project
has not been finished, developer will set up the pre-selling price upon the percentage of
standard cost. Standard cost it self acquired from 3 items (raw material, land
improvement and interest expense) land available for sell, which is Rp.
28,379,899(8,316,661+ 11,108,093+8,995,145). On this project the pre-selling price set
up for Rp 32,000,000 (12,7% more than the standard cost) and the actual cost pr square
is Rp 25,687,421 it means the pre-selling actually 24,5% higher.

The impact of this overstated pre-selling price, will be on the financial recording since
set up standard cost used for the whole project such as cost of good sold while the land
in inventory is recorded in the actual cost every year thus the gross margin will increase
It means the net income will also increase which cause increase in tax payment as one
the consequences. The project started 2003 and started sold land on 2004 and 2005, by
2006 all the land available for sell sold out.
The different between the actual gross margin and reported gross margin is quite big considered
it is only some from the projects, the total difference has reached Rp. 1.932,832,887. The
substances in actual cost are the same as when set up the standard cost the main different is on
land improvement. Here, developer realizes the actual cost depends on a series transaction
voucher, invoice, bank statement and journal entries. The main land improvement operation
activity is from 1998 to 2002. Starting from 2003, the developer begins to construct the
buildings, while the land improvement process is still on the process until 2005.
Initially land improvement was Rp 16, 646,305,375 in total after realization it is only Rp.
12,610,799,271 and as result the actual cost per meter square for land available for sale is Rp.
8,415,615 (12,610,799,271/1,498.50). At the end phase of this project, the developer can
statistics the data for standard cost and actual cost and compare the different variance.

At the end of this project, developer has to consider how to revise the overstated cost into the
financials statement. It is impossible for the company to revise the financial statement for the
previous years. Generally, the real estate accountant will put the variance into other incomes in
the financial statement. The variance between standard cost and the actual cost journal as below:
Other Incomes Rp 4,035,506,100 Overstated Land cost Rp 4,035,506,100 Writer also interview
other 20 projects regarding the accuracy of the cost estimation using variance formula below:

% of variance = standard cost/m2 – Actual cost /m2 / Standard cost/m2

The result shown that the positive variation percentage ranges from 4.1% to 15%, this is when
standard cost higher than actual cost and the negative variation percentage range is from -13.5%
to - 5.0%, negative because actual cost higher than standard cost according to the cost estimate
matrix, the standard variation is ranging from lowest -10% to -3.0% and the highest 3 % to 15%
it means all the static data from this 20 projects are in standard estimation scope.
 CHAPTER NO. 5 :

CONCLUSIONS and SUGGESTIONS

Conclusions:

From the analysis of organization about my topic I concluded that almost progress of
various departments of organization is satisfactory. Accounting For Cash & Short-Term
Investment Statement highlights the financial health of levis denim because this analysis
highlights the correct financial picture of this organization. Due to this analysis financial
analyst is able to compare the financial position of Levis Denim with other organization.
In this organization financial manager is effectively using financial ratio to measure the
financial position of Levis Denim. The usefulness of ratios depends on ingenuity and
experience of financial analyst who employs them. Receivable and Turnover ratios are
very much useful and financial manager measure profitability in relation to sales and
investment by profitability ratio.

These analysis help financial analyst in comparing levis with other organization who
have data differ significantly in size because every item on the financial statements gets
placed on a relative, or standardized basis. Although the overall financial progress of
organization is satisfactory but there are some inexperienced financial managers who
choose inappropriate analytical tool, which increase the business risk.
 Advantages / Benefits of Standard Costing System: Standard costing System has
the following main advantages or benefits:

1. The use of standard costs is a key element in a management by exception approach. If

costs remain within the standards, Managers can focus on other issues. When costs fall
significantly outside the standards, managers are alerted that there may be problems
requiring attention. This approach helps managers focus on important issues.

2. Standards that are viewed as reasonable by employees can promote economy and
efficiency. They provide benchmarks that individuals can use to judge their own
performance.

3. Standard costs can greatly simplify bookkeeping. Instead of recording actual costs for
each job, the standard costs for materials, labor, and overhead can be charged to jobs.

4. Standard costs fit naturally in an integrated system of responsibility accounting. The

standards establish what costs should be, who should be responsible for them, and what
actual costs are under control. 


Disadvantages / Problems / Limitations of Standard Costing System:

The use of standard costs can present a number of potential problems or disadvantages.
Most of these problems result from improper use of standard costs and the management by
exception principle or from using standard costs in situations in which they are not
appropriate.

1. Standard cost variance reports are usually prepared on a monthly basis and often are
released days or even weeks after the end of the month. As a consequence, the
information in the reports may be so stale that it is almost useless. Timely, frequent
reports that are approximately correct are better than infrequent reports that are very
 precise but out of date by the time they are released. Some companies are now reporting
variances and other key operating data daily or even more frequently.

2. If managers are insensitive and use variance reports as a club, morale may suffer.
Employees should receive positive reinforcement for work well done. Management by
exception, by its nature, tends to focus on the negative. If variances are used as a club,
subordinates may be tempted to cover up unfavorable variances or take actions that are
not in the best interest of the company to make sure the variances are favorable. For
example, workers may put on a crash effort to increase output at the end of the month to
avoid an unfavorable labor efficiency variance. In the rush to produce output quality may
suffer.

3. Labor quantity standards and efficiency variances make two important assumptions. First,
they assume that the production process is labor-paced; if labor works faster, output will
go up. However, output in many companies is no longer determined by how fast labor
works; rather, it is determined by the processing speed of machines. Second, the
computations assume that labor is a variable cost. However, direct labor may be
essentially fixed, then an undue emphasis on labor efficiency variances creates pressure
to build excess work in process and finished goods inventories.

4. In some cases, a "favorable" variance can be as bad or worse than an "unfavorable"

variance. For example, McDonald's has a standard for the amount of hamburger meat that
should be in a Big Mac. A "favorable" variance would mean that less meat was used than
standard specifies. The result is a substandard Big Mac and possibly a dissatisfied
customer.

5. There may be a tendency with standard cost reporting systems to emphasize meeting the
standards to the exclusion of other important objectives such as maintaining and
improving quality, on-time delivery, and customer satisfaction. This tendency can be
 reduced by using supplemental performance measures that focus on these other
objectives.

6. Just meeting standards may not be sufficient; continual improvement may be necessary to
survive in the current competitive environment. For this reason, some companies focus
on the trends in the standard cost variances - aiming for continual improvement rather
than just meeting the standards. In other companies, engineered standards are being
replaced either by a rolling average of actual costs, which is expected to decline, or by
very challenging target costs.

In sum, managers should exercise considerable care in their use of a standard cost
system. It is particularly important that managers go out of their way to focus on the
positive, rather than just on the negative, and to be aware of possible unintended
consequences.

Nevertheless standard costs are still found in the vast majority of manufacturing
companies and in many service companies, although their use is changing. For
evaluating performance, standard cost variances may be supplanted in the future by a
particularly interesting development known as the balanced scorecard.
 CHAPTER NO. 6 :

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