ASSIGNMENT NO.

Cost Accounting

Application of standard costing in a manufacturing

concern keeping in a view the various variance

Submitted To: Sir Waqar Akbar

Allama Iqbal Open University

Submitted By: Faiz-ullah Khan

Roll no , Ah-522997

April 9, 2011

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 In the name of Allah, the most beneficent and the most merciful.

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 Acknowledgements:

All words of praise and gratitude to the sole Lord of universe, almighty
Allah. I am thank, first and foremost, Allah for having enable me to
complete my effort of writing such an assignment that would not have
been possible for me to complete without his help in all stages of its
preparation.

I revoke peace for Hazrat Muhammad (S.A.W) for whom the earth and
heaven is created.

I am thankful for my parents, teachers, friends and class fellows for

having great courage and help during the report

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 Dedication:

Dedicate to my Parents. I would like to admit that I owe all my

achievements to the most sincere and most loving relation of this
world, whose prayers are a source of determination for me.

Abstract:
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Standard costs are aid in the planning, operations and gaining insights
in to the probable impact of managerial decision on cost levels and
profit. Standard cost is used for Establishing Budgets, Controlling cost
and motivating and measuring efficiencies.

Standard cost are also used for promoting possible cost reduction and
assigning cost to material, work in process and finished goods
inventories.

Levi’s Straus signature has small wholesale business that supplied

miners and workers with work clothes that were strong and did not
tear easily, the company is adopting the standard cost for their
planning and budgeting.

Table of Contents:
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 Contents Page
No

Title page 01

Acknowledgement 03

Abstracts 05

Table of contents 06

Introduction to the issue 07

Practical study of organization 13

Data collection methods 18

SWOT analysis 19

Conclusion 21

Recommendations 22

23

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Topic: - Application of standard costing in a
manufacturing concern keeping in a view the
various variance
Introduction to issue
Standard Costing:

Standard costs are usually associated with a manufacturing

company's costs of direct material, direct labor, and
manufacturing overhead.

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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

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 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

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• 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 `

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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 uality control standards
are
sacrificed
Analyzing variances

•Variances must be analyzed to determine their significance

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• 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

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 Practical study of the organization
levi,s 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

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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

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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:

Date Account Name Debit Credit

Jan. 8, 2010 Direct Materials Inventory 3,000

Accounts Payable 2,900

Direct Materials Price 100

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 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

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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.

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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.

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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

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 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.

Data collection methods

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Data are collected by Financial Management books, online
articles

Conclusions:

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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.

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 Recommendations:

 In order to avoid the misallocation of funds financial

manager should have to make the plan before of financial
decision. This plan include whether the investment
required or not.
 Levis denim should have to use a computer based
spreadsheet program for quickly analyzing financial
statements.
 To plan for the future the financial manger must assess
the firm’s present financial position and evaluate
opportunities in relation to this current position.
 There is need of well-experienced financial manager,
because inexperienced financial manager cannot analyze
the financial statement in an effective way.

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  Company should employ a high experienced Financial
person, to analyze the market to utilize the short-term
investment to get the maximum profit.

References

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Book Business Law By Qazi Awais Amin

Organization data by Finance Manger –KIMS

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Levis Denim Limited

Levis Denim is now a medium size organization manufacturing

a variety of confectionery products e.g.

biscuits, toffees, bubble gums, chocolates, candies etc, under

the brand name KIM. Established in 1995 as a

SME, the organization was conceptualized by a food scientist,

namely Mr. Qadir Mehmood. Chocolate and

candies were introduced in the product line in 1998, while

instant drinks under the brand name of U-Sip were

introduced in 2002. The company operates its factory in

Hattar Industrial Estate, located at a distance of about

50 kms from the main capital, Islamabad. It complies to

quality standards of ISO 14000, ISO 9001/2000 and

HACCP food safety requirements. It is currently exporting its

products to 25 different countries, mainly in the

west e.g. USA, UK, Australia, Canada, Sri Lanka and

Afghanistan.

Major Challenges

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The year 2002 posed major challenges to the operations of
the company. A number of biscuit factories in Hattar

failed in their businesses and closed down. A prime reason

was the end of sales tax exemption period, which

increased the cost of production by 15%. However, the

financial crunch increased substantially when sugar

crises occurred in the country and the price of sugar

increased from PKR 10 to PKR 38 per kg, more than 300%

increase. At Silver Lake, the daily utilization of this basic raw

material was 8-9 tons, which led to a massive

increase in the cost of production. A major challenge for the

company thus became reducing its costs of

operations, enhancing sales volumes and improving the

overall productivity of the organization.

Productivity Improvement Plan

In July 2005, at a time when contemporaries were closing

down their factories due to high cost of production

thus rendering the business unprofitable, Mr. Mehmood

embarked upon a productivity improvement plan to

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reduce the organization.s cost of production. With the
assistance of his Quality Assurance Manager, namely,

Mr. Ishtiaq Hussain Kiani, quality parameters were set with a

two-fold target: wastage reduction and

productivity enhancement. The targets were translated into

department-wise, machine-wise, process-wise, shiftwise

and variety-wise. A productivity implementation plan was put

in place.

In the first couple of months of the plan, results were not very
encouraging. After few months, Mr. Mehmood,

also being the President of the Hattar Industrial Estate

Association was introduced to the National Productivity

Organization, Pakistan and became interested in seeking its

assistance for the improvement of its program.

NPO-Pakistan conducted an initial productivity audit of the

company and analyzed the major problems.

Subsequently, a productivity improvement plan was

developed and fine-tuned with the organization. A

productivity measurement criteria was put in place to

measure improvements. The management of Silver Lake

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agreed on the following weaknesses:

1. High % of wastages in every product line . wastages of raw

material and packing material;

2. Manpower motivation and participation . staff and workers

were not interacting to understand the

problems in process flows. Supervisors were not interacting

with the top management to take

immediate remedial measures in manufacturing. Staff

participation was minimal;

3. Role of Quality Assurance . the role of quality assurance

was focused on controlling quality;

Subsequently, the concept of quality control circles (QCC) in

the factory was introduced. Employees were

motivated to become more involved in identifying techniques

to reduce the wastages (especially of products and

wrappers) and improve efficiencies. Additionally, suggestion

scheme was introduced at all levels. The

employees were asked to give their suggestions and

observations on a machine-wise, process-wise basis, etc.

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Subsequently, information and suggestions received from
each department were discussed in a weekly meeting

of the departmental supervisors with the CEO. The decisions

taken were properly noted, implemented and

followed-up through an action plan.

Process reengineering was implemented: bottlenecks along

the process line from cooking to packing were

identified. In some cases, moulds were replaced, while in

some areas, number of human resource was

rationalized and skills were improved.

Emphasis was laid on introducing Total Quality Management

at the factory. The Quality Assurance Manager

participated in a TQM course and learned the importance of

becomingFacilitator than a controller. Henceforward,
extensive training on .Becoming a Facilitator. was imparted to
an in-house team of 16 members with

the assistance of the NPO-Pakistan. Trainers were trained in

quality control tools and their implementation; the

organization thus transformed its Quality Assurance Team into

Facilitators to assist in collection of data,

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implementation of QCCs, interaction within the employees,
etc. NPO-Pakistan also helped in sending the CEO

on an APO course to Japan; this interaction with members of

other APO member countries further facilitated in

knowledge sharing and improvement of the productivity and

quality program. Currently, the CEO is also

participated in the 6-week course of .Productivity Specialist.

being implemented by NPO-Pakistan.

Initiatives in Marketing and Promotion

The sales team of the organization was revamped and

strategies were made to expand into international

markets. The organization put up its stalls in international

exhibitions in Germany to penetrate other markets.

With the opening of post-Taliban Afghanistan market, Silver

Lake immediately entered into this new market.

Initiatives in Research & Development

Research on new products is carried out on regular basis.

Consequently, two new products were added to the

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product line to meet increasingly competition and growing
market demand.

Initiatives in Technology Up-gradation

The factory has 100% locally manufactured machinery.

However, changing market needs have necessitated

technological adjustments in the plant. The Technology

Manager has been instrumental in indigenous upgradation

of the plant and machinery, and almost 60-70% currently

installed has been fabricated in-house. The

technology up-gradation has been one of its kind in Pakistan,

and the Manager has recently been selected for the

President.s Excellence Award by the Government of Pakistan.

Initiatives in Human Resource Development

Silver Lake does not have a specialized human resource

function. However, through its quality assurance

function, the organization has instituted a system of awards

and incentive for the human resource. On

achievement of targets, cash prizes are given. Best

Performance Certificates are given on annual basis. To

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enhance motivation and interaction amongst the staff,
frequent samosa and cake parties are organized. A

training policy has been defined and regular training

programs are organized for all levels of employees.

Results

With the productivity improvement plan implemented by

Silver Lake, it was able to prevent the business failure

and shut down. In one year, the major achievements have

been as follows:

1. Cost Controls: Not only did it manage the exorbitant price

hike of 300% of the major raw material and

the decreasing trend in the sale price, the company made a

saving of PKR.2-3 million per month;

2. Wastage Control: In its biscuit product line, the wastages

were reduced to 0%, while in candy product

line, wastages were reduced to less than 1%;

3. Increased Production: Total capacity utilization of the

factory improved from an average 20 tons per

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product line per day to 35 tons. The workers. productivity
improved from 60% to 85%.

4. Improved Human Resource Attitude: The human resource

has become participative and involved in

the operations of the company. The regular trainings have

improved their skills and attitude. The

supervisors are more responsible in putting across the

suggestions of their subordinates and

implementing the solutions for improving productivity of the

machines and labor. The human resource

realizes the importance of their role in the organization.

5. Facilitating Quality Assurance Department: the QA

department facilitates implementation of the

Productivity Improvement Plan and assists in coordination of

efficiency-related activities than

controlling them. Revised quality parameters have been put in

place e.g. for biscuit, quality parameters

are biscuit breaking, taste, texture, moisture/shape, weight,

etc.

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6. As a company which has transformed its operations in one
year, the company has become a role model

company for NPO-Pakistan. It is now on the intending to

provide training services in QCC to 100

companies. The General Manager of Silver Lake has also been

nominated to be on the Central Steering

Committee on QCC being set up by NPO-Pakistan;

The organization is now envisaging implementing Just-in-Time

methodology to control inventory levels.

However, it feels that due to poor communication networks in

the country as well as infrastructural problems,

this is going to be difficult. Moreover, government restrictions

on major raw material (i.e. restriction of flour

purchase from one province to be sent to another due to flour

crises in the country) further restrict the inventory

purchases. In the future, Silver Lake intends to introduce new

brands and enter new markets.

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