Standard costing

standard cost is the pre-determined cost based on technical estimates for materials labour and overhead for a selected period of time for a prescribed set of working conditions CIMA london standard cost is a predetermined cost which determines what each product or services should cost under given circumstances Brown and Howard

Standard costing
the preparation of standard costs and applying them to measure the variations from actual costs and analysing the courses of variations with a view to maintain maximum efficiency in production CIMA Aims at what the costs should be Important tool for cost control Important only in industry where products & process are standardised

features
Setting of standard cost for different elements of costs ie material, labour and overhead. Ascertainment of actual cost Finding out variances Analysis of variances Corrective action

advantages
Costs are determined before they are incurred Yardsticks are created to measure efficiency No delay in availability of data Useful for filing quotation and decision making : make or buy, sell or not to sell

Type of standard
type Basic std. Current std Ideal std. Expected std Normal std.

Setting standard cost

Direct material Material price standard Material usage standard

Setting standard cost

Direct labour Labour rate std. Labour time std.

Setting standard cost

Direct overhead Std. overhead rare (per hour) Std. overhead rate (per unit)

Variance analysis
Favorable and unfavorable/ adverse variance : taken less time favorable taken more cost unfavorable, material less used favorable Controllable and uncontrollable variance: more time taken, more material used controllable :increase in power rate, taxes etc. uncontrollable Principle of exception holds good Only controllable variance should be looked into

Type of variance
Material cost variance Labour cost variance Overhead cost variance

Material cost variance

Material cost variance Material price variance Material usage variance Material yield variance/revised usage

Material mix variance

Labour cost variance

Labour cost variance Labour rate variance Labour mix variance Labour efficiency variance Idle time variance Labour yield variance

Overhead cost variance

Overhead cost variance

Variable OH. cost variance

Fixed OH. Cost variance

Expenditure variance

Efficiency variance

Expenditure variance

Volume variance

Efficiency variance

Capacity variance

Calendar variance

Material cost variance

Standard cost of actual output actual cost Material price variance : SP of actual qty actual price Material usage variance ( std. qty. actual Qty) standard price for actual output Material mix variance :(revised std qty-actual qty) standard price Material yield variance/material revised variance: (std qty-revised std qty) standard price

Problem
A furniture company uses sun mica tops for tables. It provides the following data. Std. qty for sun mica per table 4 Sq feet Std. price per sq feet of sun mica Rs 5/ Actual prod. Of tables 1000 No. Actual purchase price Rs 5.50 per sq feet Sun mica actually used 4300 sq feet Calculate mat. Cost variance, material price variance and material usage variance

problem
To manufacture a batch of bread the following is the standard and actual standard actual Maida 100 kg@20 2000 105 kg@21 2205 Oil 10 kg@70 700 11 kg@80 880 Total 110 kg 2700 116 3085 Calculate material cost variance price variance and usage variance.

problem
To produce 10M of wire rope the following is the standard direct material Raw material standard 5mm wire 40 kg @ 50 per kg 4 mm wire 60 kg @ 40 per kg total 100 kg Actual production 5mm wire 50 kg @ 50 per kg 4 mm wire 60 kg @ 45 per kg Calculate material cost , usage, mix and material revised usage variance

Labour cost variance

Total labour variance due to labour rate or labour efficiency/inefficiency

Labour rate variance

Increase in wage rate More work in overtime ( overtime rate is higher) Using more/less of skilled/ unskilled workers Employing more of temporary workers ( temporary workers are paid less)

Labour efficiency variance

Poor working conditions Defective tools Inefficient workers/ supervisors Bad raw materials More setup time Break down

Idle time variance

If idle time is more/less than standard ( idle hours * standard rate)

Labour mix variance

This happens if skilled/ unskilled workers are interchanged

Labour yield variance

If production increased because of efficient

Other formula
Labour cost variance : std labour cost of actual output actual labour cost Labour rate variance: (std rate- actual rate) * actual hours Labour efficiency variance: (std hours for actual output actual hours) * standard rate Idle time variance : Idle hours * std. rate Labour mix variance : (revised Std. hrs actual hrs) std rate Labour yield variance: (actual yield Std yield from actual input) * std labour cost per unit of output

problem
Product A is estimated to require 20 hours per unit. The standard rate per hour is Rs 10/-. During the month of January 2000 units were produced. For this 38000 hours were taken at Rs 10.5 per hour. Calculate labour cost variance, labour rate variance and labour efficiency variance.

problem
In the previous problem 100 hours was lost due to breakdown of the transformer. Calculate labour cost variance, labour price variance , labour efficiency variance and Idle time variance.

problem
The standard labour force for producing a truck load of material X is 10 skilled worker @ Rs 10/- per hour 40 Hr 15 semi-skilled @ Rs 6/- per hour 40 hr Actual 8 skilled worker @ Rs 11/- per hour 42 Hr 17 semi skilled @ 5.5/- per hour 42 Hr Calculate labour cost, labour rate and efficiency variance

Overhead variance
Overhead variance is more difficult because should it be per unit or per hour Overhead has to be classified as fixed and variable STD. OH rate (per hour) : budgeted OH/ budgeted hours STD. OH rate ( per unit): budgeted OH/budgeted unit

 Variable OH cost variance: absorbed variable OH- actual variable OH Variable OH expenditure variance: standard variable OH actual variable OH Variable OH efficiency variance: absorbed variable OH- standard variable OH

problem
budgeted actual Production 20000 kg 19000 kg prod. Hrs. 5000 4500 Fixed overhead Rs10000 10500 Variable overhead Rs 5000 4800 Calculate variable OH cost, expenditure and efficiency variance

problem
budgeted actual Production 20000 kg 19000 kg prod. Hrs. 5000 4500 Fixed overhead Rs10000 10500 Variable overhead Rs 5000 4800 Calculate fixed OH cost, expenditure and efficiency variance

Sales variance
Sales variance

Turnover method Price variance Volume variance Price variance

Margin method

Volume variance Mix variance

Mix variance

Qty. variance

Qty variance

problem
The following is the cost data of 4.5 lit pepsi with MRP of RS 45/ Material 5 Labour 5 Overhead 10 Profit 5 Excise 5 VAT @ 12.5% 3.75 Selling price 33.75 Retailer & dist. Margin 11.25

 Ranchi CSD ( canteen supply depot) has shown intrest to buy 100000 Pc of 1.5 litr Pepsi for RS 20.25 inclusive of all taxes. AS per excise notification no excise is levied on CSD supply though VAT is applicable. As the area sales manager would you accept the offer knowing well that coca-cola has in principle agreed to supply the same at Rs 20.5 per pc? Give reason.

Marginal costing/ absorption costing

Absorption costing: all costs are absorbed, costs are not segregated into fixed and variable cost Cost sheet is an example

Marginal costing
the amount at any given volume of output by which aggregate costs are changed if the volume of output is increased by one unit marginal cost Only variable cost are considered Fixed costs are charged directly to costing P&L a/c Contribution is calculated

Principle of marginal costing

Sales Less variable cost contribution Less fixed cost Profit xxxx xxxx xxxx xxxx xxxx

advantages
Helps in managerial decision Simple to understand Simple to calculate Cost remains static Cost control becomes effective: variable costs are more likely to be controllable

disadvantages
Segregation of fixed and variable cost is difficult Not possible in capital intensive industry Sometimes gives wrong prices Time taken for production is ignored : if one product takes 1 hrs to produce and another 10 hours to produce both are treated equally.

Cost-volume-profit (CVP analysis)

Cost and volume affects profit Volume affects cost Break even point: the point (sales or volume ) at which there is no profit/loss Margin of safety Break even analysis : technique to study cost volume profit (CVP)

assumptions
Cost can be segregated into fixed and variable Fixed cost remains fixed Selling price remains constant irrespective of volume Variable cost remains variable at all levels of production ( ie no bulk qty discount etc.)

graph
35000 30000 25000 20000 15000 10000 5000 0 0 100 units 200 units 300 units Sales Fixed cost Total cost

Basic formula
Contribution : sales variable cost or fixed cost + profit P/V ratio = contribution/sales Break even point (in rupee) FC/ P/V ratio Break even point (in units) = FC/ contribution per unit

problem
Fixed cost Rs 6000/Variable cost per unit Rs 75/SP Rs 100/Calculate P/V ratio, breakeven sales

problem
From the data of Mangalam Lubricants (P) Ltd. Calculate the P/V ratio, break even sales in Rs and in units for the month of November. Sales Rs1,20,00,000 ( 1000 drums of Rs 12000/- each) Fixed cost Rs 18,00,000/ Variable cost per drum Rs 9000/-

problem
The following is the data of Satender and sons (P)Ltd. a dealer in steel. Fixed cost per month 150000 Selling price per kg Rs 30/ Variable cost per kg Rs 20/ Calculate BE sales in rupee and in tons

 Due to severe competition the company is forced to give a discount of Rs 6/- per kg. what is the new BE sales

problem
The following is the data of pepsi 1.5 lit cola Selling price per pc Rs 25/ Variable cost per pc Rs 10/ Sales 15000 pc per month Profit during the month Rs 1,00,000/ Due to ULFA problem the company has decided to wind up its NE operation. What would be its margin of safety in unit terms?

Problem on sell or not

A manufacturer is having the following cost/profit data for the previous month Variable cost per unit Rs 25/ Fixed cost per unit Rs 12.50 Sales 40000 units @ Rs 40/answer the following a) due to severe competition you are forced to reduce the price to Rs 35/-. Would you sell ?

b) The company has spare production capacity of 20000 units which can be sold provided a discount of 10 % is given on the selling price. As the head of the sales department would you give the discount? c) The company has spare capacity of 20000 units which can be sold in USA @ Rs 27/- . Should you accept the offer?

Problem on make or buy

This is the cost data of a company for the previous month Variable cost per unit Rs 30/ Fixed cost per unit Rs 20/an external supplier is ready to supply the material for Rs 40/- per unit. Should you accept the offer assuming that the facilities saved cannot be used for any productive use ?

Sales mix decision

product A B C variable cost per unit 15 20 30 fixed cost per unit 10 12 17 total cost 25 32 47 Selling price per unit 30 36 50 Profit per unit 5 4 3 Max. prod. Possible 1000 1500 1500 Total sales possible of A,B and C 2500 units Which products should be produced and sold?

problem
Firm X produces 3 products A,B, and C. The cost data of the products are as follows for the previous month. A B C Direct mat.( Per unit) 1000 1500 2500 Direct lab. ( per unit) 100 200 400 Direct Exp ( per unit) 50 100 200 Selling price ( per unit) 2000 2500 5100 Time taken(days per unit)2 5 8

 Simultaneously only 1 product can be produced at a time Fixed cost of the firm Rs 5000/ Give your suggestion for production