Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING
STANDARD COSTING
Introduction:
It is a tool of cost control. Under standard costing, performance standards are set for all areas of operation within the organisation. This is done in consultation with various departmental heads. When actual performance takes place, actual data is compared with standards. If there is a difference between actuals and standards, the difference is calculated and analysed to find reasons thereof. Deviation of actuals from standards are called variances. Such variances may be favourable or adverse for the business.
MATERIAL COST VARIANCES:
Material standards are set in relation to material price and material quantity. If more than one material is used, standard is also set as regards the mix ratio between materials. This is done in consultation with production manager and purchase manager. Suppose it is decided that for making one unit of product, 5 kgs of raw materials should be used at Rs.12 per kg. Then, standard material cost = 5 kgs x Rs.12 per kg. = Rs.60 When actual production takes place, actual data is compared with standard. Suppose one unit of product was actually produced using 6.5 kgs of material purchased at Rs.15 per kg. Actual material cost = 6.5 kgs x Rs.15 per kg = Rs.97.5
Total variance = 37.5 (adverse)
This variance can be further analysed to find its reasons as under:
Price
Y
(Rs. Per kg)
AP
SP
15
12
0 
5 
6.5 
X 
SQ 
AQ 
Quantity (Kgs.) 
Various material variances are calculated as under:
1) 
Total material cost variance = SQ x SP – AQ x AP 
2) 
Material price variance = (SP – AP) x AQ 
3) 
Material usage variance = (SQ – AQ) x SP 
In case more than one material is used, Material usage variance is further analysed as:
1. Material yield / subusage variance = (SQ – SQ in actual input) SP
2. Material mix variance = (SQ in actual input – AQ) SP
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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING
Notes:
1. While solving the problem, prepare the following table:
Usage
2. Given quantity ratios are to be entered in ratio column.
3. Material is a variable cost and so, given ratios are to be applied to actual output to get standard quantity for actual output. (Standard always depends on actual output)
4. If any of the above variances are negative, they are said to be adverse and if positive, they are said to be positive.
5. Total material cost variance = Material price variance + Material usage variance
6. Material usage variance = Material yield variance + Material mix variance
Illustration 1 80 Kgs of material A at a standard price of Rs 2 per Kg and 40 Kgs of material B at a standard price of Rs 5 per Kg were to be used to manufacture 100 Kg of a chemical. During a month 70 Kgs of material A priced at Rs 2.10 per Kg. and 50 Kg. of material B priced at Rs 4.50 per Kg. were actually used and the output of the chemical was 102 Kgs. Find out the material variances.
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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING
Total Material Cost Variance = (SQ X SP) – (AQ X AP)
A = (81.6 X 2) – (70 X 2.1) B = (40.8 X 5) – (50 X 4.5) 
= 
16.2 (Favourable) 

= 
21 
(Adverse) 

4.8 
(Adverse) 
Material Price
Variance = (SP – AP)AQ
A = 
(22.1) 70 = 
7 
(Adverse) 
B = 
(54.5) 50 = 
25 
(Favourable) 
18 
(Favourable) 
Material usage variance = (SQ – AQ) SP
A (81.6 – 70) 2 = = 23.2 (Favourable) 

B (40.8 – 50) 5 = = 46 
(Adverse) 
22.8 (Adverse)
Material yield variance/Sub usage variance = (SQ – SQ in total input)SP
A = 
(81.6 – 80) 2 
= 
3.2 (Favourable) 

B = 
(40.8 – 40) 5 
= 
4 
(Favourable) 
7.2 (Favourable)
Material Mix Variable = 
(SQ in total input – AQ) SP 

A = 
(80 – 70)2 = 
20 (Favourable) 

B = 
(40 – 50)5 = 
50 
(Adverse) 
30 
(Adverse) 
Price variance occurs at the time of purchase. It occurs on the entire quantity purchased. However, it may be calculated immediately at the time of purchase on quantity purchased or it may be calculated later, as and when materials are used. If price variance is calculated at the time of purchase, Material price variance = (SP – AP of purchases) AQ purchased
If price variance is calculated at the time of consumption, Material price variance = (SP – AP of consumption) AQ consumed
Material usage variance occurs at the time of usage (i.e. consumption) and so it is always calculated at the time of consumption and is based on quantity consumed.
Illustration 2 Eskay Ltd. produces an article by blending two basic raw materials. The following standards have been set up for raw materials:
Material 
Standard Mix 
Standard price per kg. 
A 
40% 
Rs 4.00 
B 
60% 
Rs 3.00 
The standard loss in processing is 15% During Sept 1990, the company produced 1,700 Kg of finished output.
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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING
The position of stock and purchases for the month of Sept 1990 is as under:
Material 
Stock on 
stock on 
Purchased during 

1.9.90 
30.9.90 
Sept, 90. 

Kg 
Kg 
Kg 
Cost Rs 

A 
35 
5 
800 
3,400 
B 
40 
50 
1,200 
3,000 
Calculate the materials variances. Assume first in first out method for the issue of material. The opening stock is to be valued at standard price.
Solution:
A 
B 

Qty 
CPU 
Amount 
Qty 
CPU 
Amount 

Op. Stock 
35 
4 
140 
40 
3 
120 
(+) Purchases 
800 
4.25 
3400 
1200 
2.5 
3000 
835 
3540 
1240 
3120 

() Clg. Stock 
5 
4.25 
21.25 
50 
2.5 
125 
Consumed 
830 
3518.75 
1190 
2995 
Usage
Total Material cost variance = SQ X SP – AQ x AP
A (800 X 4) – (830 X 3518.75/830) = 318.75 (Adverse)
=
B (1200 X 3) – (1190 X 2995/1190) = 605
=
(Favourable)
Material Price Variance:
286.25 (Favourable)
(A)If 
calculated at the time of purchase=(SP–AP of purchase)AQ purchased. 

A (4 – 4.25) 800 = = 
200 
(Adverse) 

B (3 – 2.5) = 1200 = 
600 
(Favourable) 

400 
(Favourable) 

(B) 
If calculated at the time of consumption=(SP–AP of consumption)AQ 
Consumed
A (4 – 3518.75/830) 830 = = 
198.75 (Adverse) 

B (3 – 2995/1190) 1190 = = 
575 
(Favourable) 
376.25 (favourable)
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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING
Materials usage variable = (SQ – AQ) SP
A (800 – 830) 4 = = 
120 
(Adverse) 
B (1200 – 1190)3 = = 
30 
(Favourable) 
90 
(Adverse) 
Material yield variance = (SQ – SQ in total input) SP
A (800 – 808)4
B (1200 – 1212)3
=
=
= 32 (Adverse) = 36 (Adverse) 68 (Adverse)
Material Mix variance= (SQ in total Input – AQ) SP
A (808 – 830) 4
B (1212  1190) 3 = 66 (Favourable)
=
=
= 88(Adverse)
22 (Adverse)
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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING
LABOUR COST VARIANCES:
Labour standards are set as regard time and wage rate. If there are more than one type of worker, standards are also made for the composition of the various types of workers. This is done in consultation with production manager and personnel manager. Suppose it is decided that to manufacture one unit of a product, a worker should take 6 hours and he should be paid at Rs.2.50 per hour. So, standard labour cost per unit = 6 hours x Rs.2.5 per hour = Rs.15 When actual production takes place, actual data is compared with standard. Suppose one unit of product was actually produced in 8 hours paid at Rs.3 per hour. Actual labour cost per unit = 8 hours x Rs.3 per hour = Rs.24. Total labour cost variance = 1524 = Rs.9 (adverse) This variance can be further analysed as follows:
Various labour variances are calculated as under:
1. Total labour cost variance = SH x SR – AH _{p} x AR
2. Labour Wage rate variance = (SR – AR) AH _{p}
3. Labour usage variance = (SH – AH _{p} ) SR
If idle time has taken place, then labour usage variance is further divided into labour efficiency variance and labour idle time variance. If there are more than one category of workers, usage variance is further divided into efficiency variance, mix variance (and also idle time variance, if there be). This is done as under:
1. Labour efficiency/yield/subusage variance = (SH – SH in total AH _{w} ) SR
2. Labour mix variance = (SH in total AH _{w}  AH _{w} ) SR
3. Labour idle time variance = (AH _{w} – AH _{p} ) SR = idle time x SR
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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING
NOTES:
1.
Prepare the following table:
Usage
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
The ratio of time in which workers should be utilised to manufacture a product is entered in the ratio column.
Labour is a variable cost and so, given ratios are to be applied to actual output to get standard time for actual output. (standard always depends upon actual output)
Labour time is measured in terms of labour hours and not hours. Labour hours = number of workers x number of hours.
If any of the above variances are negative, they are said to be adverse and if positive, they are said to be favourable.
Total labour cost variance = Labour rate variance + labour usage variance
Labour usage variance = Labour efficiency variance + Labour mix variance + Labour idle time variance.
Mix variance is also called gang variance
Efficiency variance is also called yield variance or subusage variance
Idle time is calculated based on standard ratio of workers and not actual ratio of workers.
In absence of idle time, AH _{w} = AH _{p}
Illustration 3. The following was the composition of a gang of workers in a factory during a particular month, in one of the production departments. The standard composition of workers and wage rate per hour were as below:
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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING
Skilled: 
Two workers at a standard rate of Rs.20 per hour each. 
Semiskilled: 
Four workers at a standard rate of Rs.12 per hour each. 
Unskilled: 
Four workers at a standard rate of Rs.8 per hour each. 
The standard output of the gang was four units per hour, of the product. During the month in question, however, the actual composition of the gang and hourly wage rates paid were as under:
Nature of workers
No. of workers
Wage rate paid per worker per hour engaged
Skilled 
2 
Rs.20 
Semiskilled 
3 
Rs.14 
Unskilled 
5 
Rs.10 
The gang was engaged for 200 hours during the month, which included 12 hours when no production was possible due to machine breakdown.810 units of the product were recorded as output of the gang during the month. You are required to compute the total variance in labour cost during the month and analyse the variance into subvariances.
Total Labour Cost variance = SH X SR – AH _{P} X AR
Skilled 
= 405 X 20 – 400 X 20 = 
100 (Favourable) 
Semiskilled 
= 810 X 12 – 600 X 14 = 
1320 (Favourable) 
Unskilled 
= 810 X 8 – 1000 X 10 = 
3520 (Adverse) 
2100 (Adverse)
Labour wage rate variance = (SR – AR) AH _{p}
Skilled 
= (20 – 20) 400 = 
0 

Semi–Skilled 
= (12 14) 600 = 
1200 (Adverse) 

Unskilled 
= (8 – 10) 1000 = 
2000 (Adverse) 

3200 
(Adverse) 
Labour usage variance = (SH – AH _{p} ) SR
Skilled 
= (405 – 400)20 = = (810 – 600)12 = = (810 – 1000)8 = 
100 (Favourable) 2520 (Favourable) 1520 (Adverse) 

Semi–Skilled 

Unskilled 

1100 
(Favourable) 
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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING
Labour Yield / Efficiency variance = (SH – SH in total AH _{w} ) SR
Skilled 
= (405 – 376) 20 = 
580 (Favourable) 696 (Favourable) 464 (Favourable) 

Semi–skilled 
= (810 – 752) 12 = 

Unskilled 
= (810  
752) 
8 = 
1740 (Favourable)
Labour Mix / Gang Variance = (SH in total AH _{w} – AH _{w} )SR
Skilled 
= (376 – 376) 20 = = (752 – 552) 12 = 
0 

SemiSkilled 
2400 (Favourable) 1600 (Adverse) 800 (Favourable) 

Unskilled 
= (752 – 952) 
8 = 
Labour Idle time variance = (AHw – AHp)SR OR Idle time x SR
Skilled 
= 24 x 20 = = 48 x 12 = 
480 (Adverse) 

Semiskilled 
576 (Adverse) 

Unskilled 
= 48 x 8 
= 
384 (Adverse) 
1440 (Adverse)
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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING
FIXED OVERHEADS VARIANCES:
Before the start of the year, budget for fixed overheads and output is prepared and recovery rate is determined as follows:
Fixed overheads recovery rate = Budgeted fixed overheads Budgeted output When actual production takes place, fixed overheads are recovered in the cost books based on fixed overheads recovery rate. Fixed overheads recovered = Fixed overheads recovery rate x Actual output The actual fixed overheads may not match with budgeted fixed overheads as well as recovered fixed overheads. Hence variances arise.
Cost
Volume
Expenditure/Budget
Fixed overheads Recovered (R)
Budgeted fixed overheads (B)
Actual fixed
overheads
(A)
Fixed overheads cost variance = (R) – (A) Fixed overheads volume variance = (R) – (B) Fixed overheads expenditure/budget variance = (B) – (A)
If information about budgeted and actual hours is also given:
In such case, volume variance can be further divided into efficiency and capacity variance. Find standard hours for actual output. Find standard rate per hour.
Efficiency
Capacity
Standard hours for actual output
actual hours
budgeted hours
Fixed overheads efficiency variance
= (standard hours for actual output – actual hours) Std. rate / hour
Fixed overheads capacity variance
= (Actual hours – budgeted hours) Std. rate / hour
If information about budgeted and actual days is given:
In such case also, volume variance can be further divided into efficiency and capacity variance. Find standard days for actual output. Find standard rate per day.
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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING
Efficiency
Capacity
Standard days for actual output
actual days
budgeted days
Fixed overheads efficiency variance
= (standard days for actual output – actual days) Std. rate / day
Fixed overheads capacity variance
= (Actual days – budgeted days) Std. rate / day
If information about budgeted and actual hours as well as days is given:
In such case, volume variance can be further divided into efficiency, capacity and calendar variance. Find standard hours for actual output. Find standard hours in actual days. Find standard rate per hour.
Efficiency
Capacity
Calendar
Standard hours for actual output
Actual hours
Standard hours in actual days
budgeted hours
Fixed overheads efficiency variance
= (standard hours for actual output – actual hours) Std. rate / hour
Fixed overheads capacity variance
= (Actual hours – Standard hours in actual days) Std. rate / hour
Fixed overheads calendar variance
= (standard hours in actual days – Budgeted hours) std. rate / hour
Illustration 4. The following information is available from the records of a factory:
Fixed overhead for June Production in June (units) Standard time per unit(hours) Actual hours worked in June Compute:
Budget
Rs 10,000
2,000
10
Actual
Rs 12,000
2,100
22,000
i) 
Fixed overhead cost variance 
ii) 
Expenditure variance 
iii) 
Volume variance 
iv) 
Capacity Variance 
v) 
Efficiency variance. 
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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING
Solution:
Budget 
Actual 

Fixed overheads (Rs.) 
10,000 
12,000 
Output (units) 
2,000 
2,100 
Hours 
2000 x 10 = 20,000 
22,000 
Step 1 _{}_{}_{}_{} Fixed overheads recovery rate = Budgeted fixed overheads Budgeted output = Rs. 10000 = Rs.5/unit
2000 units Step 2 _{}_{}_{}_{} Fixed overhead recovered = Recovery rate x Actual output
= Rs.5/unit x 2,100 units = Rs.10,500
Cost
Volume
Expenditure
(Budgeted Fixed overheads)
Rs.10,000
(Recovered Fixed overheads)
Rs.10,500
(Actual fixed overheads)
Rs.12,000
Step 3 _{}_{}_{}_{} Std. hrs for actual output Output
std hrs.
Step 4 Std. rate per hour = Budgeted fixed overheads Budgeted hours = Rs.10,000 = Rs.0.5/hr.
20,000hrs.
Efficiency
Capacity
Standard hours for actual output
21,000
actual hours
22,000
budgeted hours
20,000
Fixed overheads cost Variance
= Recovered fixed overheads – Actual fixed Overheads
= 10,500 – 12,000 = 1,500 (Adverse).
Fixed overheads Volume Variance
= Recovered fixed overheads – Budgeted fixed overheads
= 10,500
 10,000 = 500 (Favourable)
Fixed overheads expenditure/Budget variance
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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING
= Budgeted fixed overheads – Actual fixed overhead
= 10,000 – 12,000 = 2,000 (Adverse)
Fixed overheads efficiency Variance
= (Std hrs actual output – Actual hrs) std rate per hr.
= (21,000 – 22,000) 0.5 = 500 (Adverse)
Fixed overheads capacity variance
= (Actual hrs. – Budgeted hrs.) Std. rate per hour
= (22,000  20,000) 0.5 = 1000 (Favourable)
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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING
VARIABLE OVERHEADS VARIANCE:
In case of variable overheads, budgets or standards are set on per unit basis. Thus, if in the question, we are given that variable cost of Rs.10000 is budgeted for an output of 500 units, it is to be understood that the variable overheads budgeted is Rs.20 per unit and not Rs.10000 in total. Thus, if the actual quantity is not 500 units, standard will be revised for actual output.
Hence, first find budgeted variable overheads per unit Budgeted variable overheads per unit = budgeted variable overheads Budgeted output
Find standard variable overheads for actual output Standard variable overheads for actual output = Budgeted variable overheads per unit x actual output
Variable overheads cost variance =Standard variable overheads for actual output – Actual variable overheads
Illustration 5. AB company Ltd is having Standard Costing system in operation for quite some time. The following data relating to the month of April, 1994 is available from the cost records:
Budgeted 
Actual 
Output (in units) 30,000 
32,500 
Variable overheads (Rs) 60,000 
68,000 
You are required to work out the relevant variance (on the basis of output)
Solution:
Budgeted variable overheads per unit = Budgeted variable overheads Budgeted output
= Rs.60000
= Rs.2/unit
30,000 units
Standard variable overheads for actual output = Rs.2/unit x 32,500 units = Rs.65,0000.
Variable overheads cost variance =Standard variable overheads for actual output – Actual variable overheads = 65,000 – 68,000 = 3,000 (Adverse)
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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING
SALES VARIANCES:
Sales budgets are prepared for the period in respect of sales quantity and selling price. The actual sales for the period are directly compared with budgeted sales. However, while comparing, it is to be checked that the length of the period of budget and actual data is same. i.e. if budgeted sales are given for one year but actual sales are only for a quarter, then they cannot be directly compared and hence, budgets are adjusted for actual period and then compared. Notes:
1. Prepare the following table:
SSQ 
SSQ in total ASQ 
ASQ 
SSP 
ASP 

A 
XX 
XX 
XX 
XX 

B 
XX 
XX 
XX 
XX 

C 
XX 
XX 
XX 
XX 

TOTAL 
XX 
TOTAL ASQ 
TOTAL ASQ 
2. Various sales variances are calculated as under:
a) Total sales variance = SSQ x SSP – ASQ x ASP
b) Sales price variance = (SSP – ASP) ASQ
c) Sales volume variance = (SSQ – ASQ) SSP
3. If there are more than one product being sold, sales volume variance is further divided into the following:
a) Sales quantity / subvolume variance = (SSQ – SSQ in total ASQ) SSP
b) Sales mix variance = (SSQ in total ASQ – ASQ) SSP
4. Total sales variance = sales price variance + sales volume variance
5. Sales volume variance = Sales quantity variance + sales mix variance
6. Since sales is an income, negative variance denotes favourable variance and positive variance denotes adverse variance.
Illustration 6. PH Ltd furnishes the following information relating to budgeted sales and actual sales for April 1991 :
Product
Sales Quantity Units
Selling Price Per unit Rs
Budgeted Sales: 
A 
1,200 
15 
B 
800 
20 

C 
2,000 
40 
15
Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING
Actual Sales
A 
880 
18 
B 
880 
20 
C 
2,640 
38 
Calculate the following variances:
i) 
Sales Quantity Variances 
ii) Sales Mix Variances 
iii) 
Sales Price Variance iv) Total Sales Variance. Solution: 
SSQ 
SSQ in Actual sales 
ASQ 
SSP 
ASP 

A 
1200 
1320 
880 
15 
18 

B 
800 
880 
880 
20 
20 

C 
2000 

2200 
2640 
40 
38 

4000 
4400 

4400 
Total Sales Variance = SSQ x SSP – ASQ x ASP
A = (1200 x 15) – (880 x 18)
B = (800 x 20)  (880 x 20)
C = (2000 x 40) – (2640 x 38)
= 2160 (Adverse) = 1600 (Favourable) = 20320 (Favourable) 19760 (Favourable)
Sales price Variance = (SSP – ASP) ASQ.
A = (15 – 18) 880 = 2640 (Favourable)
B = (20 – 20) 880 =
C = (40 – 38) 2640= 5280 (Adverse)
0
2640 (Adverse)
Sales Volume variance = (SSQ – ASQ) SSP.
A = (1200 – 880) 15
B = ( 800 –
C = (2000 – 2640) 40 = 25600 (Favourable)
= 4800 (Adverse)
= 1600 (Favourable)
880) 20
22400 (Favourable)
Sales Qty/Sale Volume variance = (SSQ – SSQ in Actual Sales) SSP.
A = (1200 – 1320) 15 = 1800 (Favourable)
= 1600 (Favourable)
B = (800 – 880) 20
C = (2000 – 2200) 40 = 8000 (Favourable)
11400 (Favourable)
Sales mix Variance = (SSQ in Actual Sales – ASQ) SSP.
A = (1320 – 880) 15 
= 
6600 (Adverse) 

B = ( 880 – 
880) 20 
= 
0 
C = (2200 – 2640) 40 = 17600 (Favourable)
11000 (Favourable)
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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING
PROFIT VARIANCES:
Variance in profit arises due to cost as well as sales. Let us consider the following example:
2000 units were budgeted to be sold @ Rs.30 each. Cost budgeted was Rs.24 per unit. 1900 units were sold @ Rs.32 each. Cost incurred was Rs.25 Budgeted profit = 2000 (30 – 24) = Rs.12000 Actual profit = 1900 (32 – 25) = Rs.13300 Increase in Profit = Rs.1,300 Variance in profit = Rs.1300 (favourable)
This variance in profit of Rs.1,300 is due to cost factor and sales. To analyse the effect of cost on profit, keep selling price constant.
Budget 
Actual 

Selling Price 
30 
30 
 Cost 
24 
25 
Profit 
6 
5 
Therefore, if cost increases by Re. 1, profit decreases by Re.1. Increase in cost
is Re.1 (adverse) and decrease in profit is also Re.1 (adverse). This means that profit variance due to cost is same as cost variance. In the above example, Profit variance due to cost = cost variance=(24–25) X 1900* = 1900 (adverse)
* In all the cost variances, the given ratio was always revised for actual output.
Variance in profit due to sale can be analysed in two parts – Selling price and sales volume.
Let us analyse the effect of change in selling price on profit. For this, keep the cost constant.
Budget 
Actual 

Selling Price 
30 
32 
Cost 
24 
24 
Profit 
6 
8 
Therefore, if selling price increases by Rs.2, profit also increases by Rs.2. Change in selling price is Rs.2 (favourable) and change in profit is also Rs.2 (favourable). Thus, profit variance due to selling price is same as selling price
variance.
Profit variance due to selling price = sales price variance = (SSP – ASP) X ASQ.
= (30 – 32) X 1900 = 3800 (favourable)
Effect of change in sales volume on profit:
Keep cost and selling price constant. Let us analyse the effect of change in sales quantity on profit.
1 unit 
2 units 

Selling price (@ Rs.30 p.u.) Cost (@ Rs.24 p.u.) Profit 
30 
60 

24 
48 

6 
12 
Increase in sales due to change in quantity is Rs.30 but increase in profit is Rs.6 only. Thus sales volume variance is Rs.30 (Favourable) but profit variance due to sales volume is Rs.6 (favourable) and so not the same.
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Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING
Thus, 
Sales volume variance = (SSQ – ASQ) x SSP 
Profit 
variance due to sales volume = (SSQ – ASQ) x Std. Profit 
In the above example, Profit variance due to sales volume = (2000 – 1900) 6 = 600 (adverse)
Total variance in profit = profit variance due to cost + profit variance due to
selling price + profit variance due to sales volume = 1900 (adverse) + 3800
(favourable) + 600 (adverse) = 1300 (Favourable)
Illustration 7 The standard
company are given below together with the budgeted sales and unit selling
cost data of three products X, Y and Z manufactured by a
price for 199596: 
X 
Y 
Z 

Budgeted sales (Units) 
25,000 
20,000 15,000 

Selling price per unit ( Rs) 
40 
60 
80 

Cost per Unit(Rs) 
28 
48 
64 
The cost department of the company gathered the following details for 1995
96:
X
Y
Z
Actual Sales (Units) Average sales realisation per unit (Rs) Actual cost per unit (RS) 20,000 42 30 
22,000 
16,000 

56 
81 

50 
63 

You are required to determine: 

a) the Budgeted profit and the actual profit for 199596; 

b) the variance in profit analysed into 

i) Cost Variance; 

ii) Price Variance Sales 

iii) Volume Variance. Sales 

Solution 

SSP 
Std. cost 
Std. Profit 
SSQ 
Profit 

X 
40 
28 
12 
25000 
300000 

Y 
60 
48 
12 
20000 
240000 

Z 
80 
64 
16 
15000 
240000 

Budgeted profit 
780000 

ASP 
Actual cost 
Actual 
ASQ 
Profit 

profit 

X 42 
30 
12 
20000 
240000 

Y 56 
50 
6 
22000 
132000 

Z 81 
63 
18 
16000 
288000 

Actual profit 
660000 
Profit variance due to cost = (Std. cost – Actual cost) ASQ
X (2830) 20000 = 40000 (Adverse)
Y (4850) 22000 = 44000 (Adverse)
Z (6463) 16000 = 16000 (favourable) 68000 (Adverse)
=
=
=
18
Prof. Zulesh/R.C.C./P.C.C./COSTING/STANDARD COSTING
Profit variance due to sales price=Sales price variance=(SSP–ASP) ASQ
X (4042) 20000 = = 
40000 (favourable) 
Y (6056) 22000 = = 
88000 (Adverse) 
Z (8081) 16000 = = 
16000 (Favourable) 
32000 (Adverse)
Profit variance due to sales volume = (SSQ – ASQ) Std. profit
X (2500020000)12=
Y (2000022000)12= 24000 (Favourable)
Z = (1500016000)16= 16000 (Favourable)
=
=
60000 (Adverse)
20000 (Adverse)
Statement reconciling budgeted and actual profit
Particulars 
Rs. 
Rs. 
Budgeted profit 
7,80,000 

() decrease in profit due to 

Adverse profit variance due to cost 
68000 

Adverse profit variance due to sales price 
32000 

Adverse profit variance due to sales volume 
20000 
120000 
Actual profit 
660000 
19
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