UNIT V – Standard Costing & Variance Analysis

Meaning of Standard Cost

Standard costs are predetermined cost which may be used as a yardstick to measure the efficiency with which
actual costs has been incurred under given circumstance. To illustrate, the amount of raw material required to
produce a unit of product can be determined and the cost of that raw material estimated. This becomes the
standard material input. If actual raw material usage or costs differ from the standards, the difference which is
called ‘variance’ is reported to manager concerned. When size of the variance is significant, a detailed
investigation will be made to determine the causes of variance

According to the chartered Institute of Management Accountants (C.I.M.A) London, “Standard cost is the
predetermined cost based on technical estimates for materials, labour and overhead for a selected period of time
for a prescribed set of working conditions.”

The Institute of Cost and Works Accountants defines standard costs as “Standard costs are prepared and used to
clarify the final results of a business, particularly by measurement of variations of actual costs from standard costs
and the analysis of the causes of variations for the purpose of maintaining efficiency of executive action.”

Thus standard costs is a predetermined which determines what each product or service ‘should be’ under given
circumstances. From the above definitions we may note that standard costs are:

1. Pre-determined cost: Standard cost is always determined in advance and ahead of actual point of time
of incurring of costs.

2. Based on technical estimated: Standard cost is determined only on the basis of a technical estimate
and on a rational basis.

3. For the purpose of Comparison: The very purpose of standard cost is to aid the comparison with
actual costs.

4. Based for price fixing: The prices are fixed in advance and hence the only variation basis is the
standard cost.

Estimated Cost

Estimates are predetermined costs which are based on historical data and is often not very scientifically
determined. They usually compiled from loosely gathered information and therefore, they are unsafe to use them
as a tool for measuring performance. Standard costs are predetermined costs which aims at what the cost should
be rather then what it will be. Both the standard costs and estimated costs are used to determine price in advance
and their purpose is to control cost. But, there are certain differences between these two costs as stated below:
The following are some of the important differences between standard cost and estimated cost:

Standard Cost Estimated Cost

Standard cost emphasizes as what the cost Estimated cost emphasizes on what the cost
‘should be’ in a given set of situations. ‘will be’.
 determined by technical experts after into consideration the historical data as the
considering levels of efficiency and basis and adjusting it to future trends.
production
It is used as a devise for measuring It cannot be used as a devise to determine
efficiency efficiency. It only determines expected
costs.
Standard costs serve the purpose of cost Estimated costs do not serve the purpose of
control cost control.
Standard costing is part of cost accounting Estimated costs are statistical in nature and
process may not become a part of accounting.
It is a technique developed and recognised It is just an estimate and not a technique
by management and academecians
It can be used where standard costing is in It may be used in any concern operating on
operation a historical cost system.
The system of standard costing can be used effectively to those industries which are producing standardised
products and are repetitive in nature. Examples are cement industry, steel industry, sugar industry etc. The
standard costing may not be suitable to jobbing industries because every job has different specifications and it will
be difficult and expensive to set standard costs for every job. Thus, standard costing is not suitable in situations
where a variety of different kinds of tasks are being done.

Advantages of Standard Costing:

1. Proper Planning: It helps to apply the principle of “Management by exception”. That is, the management
need not worry over those activities which proceed in tandem plans. It is only on the issues of exceptions
that they have to concentrate.
2. Efficient Cost Control: Standard Costing is a tool for the management to gain reduction in the cost and
control over it. Under this technique, differences are analyzed and responsibilities are determined.
3. Motivational Factor: Labour efficiency is promoted and they are destined to be cost conscious. Standards
provide incentives and motivation to work with greater effort. This increases efficiency and productivity.
4. Comparison of Forecasting and Outcome: A target of efficiency is set for the employees and the cost
consciousness is stimulated. Since the process of standard costing allow an appraisal to be made of
personnel, machines and method of working, current inefficiencies come to the notice and get eliminated.
5. Inventory Control: Standard costing facilitates inventory control and simplifies inventory valuations.
This ensures uniform pricing of stocks in the form of raw materials, work‐in‐progress and finished goods.
6. Economical System: Standard costing system is economical system from the viewpoint that it does not
require detailed records. It also des not require a big staff. It results in the reduction in paper work in
accounting and needs very few records. Thus, there is saving of time as well as money.
7. Helpful in Budgeting: Budgets are prepared on the basis of standard costing. Standards which are set up
in respect of materials, labour and overheads, are helpful in preparing various budgets. For example,
flexible budget, sales budget, etc.
8. Helps Formulate Policies: This technique is a valuable aid to the management in determining prices and
formulating production policies. Standard costing equips cost estimates while planning the production of
new products.
9. Helps Distinguish Activities: Standard costing helps in distinguishing between skilled and unskilled
activities. So the skilled worker only gives pays attention to improving the activities of the unskilled
workers.
10. Eliminates Wastage: Through fixing standard, certain waste such as material wastage, idle time, lost
machine hours, etc. are reduced.
Limitations of Standard Costing:
1. Costly System: Because the Standard Costing requires highly skillful and competent personnel, it
becomes a costly system too. For the same experts are paid high remuneration.
2. Difficulties in Fixation of Standard: It is always difficult to determine precise standard costs in a given
situation which will coincide with actual cost when operations are over. Standard cost are determined
partly by the past experience and partly by the cost projections based on advanced statistical techniques.
Thus, uncertainties revolve around standards.
3. Constraint for Service Industry: Standard costing is applied for planning and controlling manufacturing
costs. Thus, it cannot be applied in a service industry.
4. Consistency of Standard: because the standards of marginal costing fluctuate and vary time to time, it is
difficult to always sustain and continue the same standards.
5. Unsuitable for Non‐standardised Products: Standard costing is expensive and unsuitable for job
manufacturing industries as they manufacture non standardized products such as catering, tailoring,
printing, etc.
6. Relatively Fixed Standards: A business may not be able to keep standards up‐to‐date. In other words, a
business may not revise standards to keep pace with the frequent changes in manufacturing conditions.
Firms may avoid revising standards as it is a costly affair.
7. Difficulties for Small Industries: Establishment of standards and their implementation involve initial
high costs. Standards have to be revised and new standards be fixed involving larger costs. Thus, small
firms find it
8. expensive to operate standard costing system. This system is not fit for each type of industries.
9. Discouragement for Workers: Sometimes the employees and workers are discouraged when the
standards are fixed at a high level. The unreal high standards may adverse by effect the morale of workers
rather than working as an incentive for better efficiency.
10. Inaccurate Diverse Results: Inaccurate and unreliable standards cause misleading results and thus may
not enjoy the confidence of the users of this system.
Objectives of Standard Costing:
1. To institute a control mechanism on all the elements of costs that affect production and sales
2. To measure different operational efficiencies and check the wastages
3. To improve the delegation of authority and generate a sense of responsibility among the employees
4. To develop a cost consciousness in the employees
5. To presume the production costs, sales and profit
6. To avail the benefits of 'Management by exception.'
7. To bring about a vivid progressive vision and sagacious decision making at each managerial level.
Preliminaries of Establishment of Standard Cost System:
The following four points are usually considered for setting up a standard cost system in a business:
1) Setting up cost center
2) Classification of Accounts
3) Types of Standards
4) Settings the Standards.
1) Setting up Cost Center: Introducing Standard Cost System is requires first of all to establish cost centers
with their well‐designed ambit of work. In the process there should be no ambiguity about the responsibility
of each cost center so that their responsibility may be identified.
A cost center is a location; people or item of equipments for cost may be ascertained and used for the purpose
of cost control.
 2) Classification of Accounts: Accounts are classified in order to assist collection and analysis. To use the
system of standard costing effectively, all accounts have to be classified on the basis of their functions, items
of revenue nature, assets and liabilities, etc. Codes are given for each item and each account along with
elements of cost with this end in view, codes may be used. A code is a symbolic representation of any
particular item of information.
3) Types of Standards: Basically, there are two types of standard:
(A) Current Standard
(B) Basic Standard
(A) Current Standard: It is established for the use over a diminutive period of time and is related to current
circumstances. Such a standard remains in operation for a limited period and belongs to the current conditions.
These standards are revised at regular intervals. Current standard are of three types like (1) Ideal standards, (2)
Expected standards, and (3) Normal standards.
(1) Ideal standards: This is a hypothetical standard which is rather not practicable to attain. This ideal is
clearly unrealistic and unattainable. It pre‐supposes that the performance of men, materials and machines is
perfect and thus makes no allowance for the loss of time, accident, wastage of materials and any other type
of waste of materials and any other type of waste or loss. Such standards have the advantage of establishing
a goal which, however, is not always attainable in practice. As such it is having a little practical value.
The standard which can be attained under the most favourable condition possible.
(2) Expected or practical standards: Such standards are likely to be expected or utilized in the future
period. Such standards are based on expected performance after making a reasonable allowance for
unavoidable losses and other inevitable lapses from perfect efficiency. So it is most generally used standard
and is best suited for cost control.
This standard can be anticipated as well as attained in future in sync with the specified budget.
‐ I.C.M.A.
(3) Normal standards: It is also known as ‘Past Performance Standard’ because it is based on the average
performance in the past. It should be attainable and it provides a challenge to the staff. The aim of such a
standard is to eliminate the variations in the cost which arise out of trade cycle.
The average standard can be anticipated as well as attained in a future period of time. Preferably, it should
be long enough to cover one trade‐cycle.
‐ I.C.M.A.
(B) Basic standards: This is a standard which is established for use unaltered for an indefinite time. It is similar
to an index number against which all results are measured. Variances from basic standards show trends of
deviations of the actual cost. However, basic standards are of no practical utility from the point of view of
cost control and cost ascertainment. This standard is set on a long‐term basis and seldom revised.
It is an underlying standard from which current standard can be developed.
‐ I.C.M.A.
4) Setting the Standard: The process of setting standard is a valuable activity in itself. The success of standard
costing system depends on the reliability,
accuracy and acceptance of the standards. If standards have been properly set and maintained, they are a sound
basis for determining cost for various purposes. While setting the standards, the following points should be taken
into consideration: duration of use of standard, reasonable standard of performance, level of activity. For the given
units standard sets for the following items are (i) direct material cost, (ii) direct wage cost,(iii) direct expense,(iv)
factory variable overhead cost,(v) selling and distribution variable cost,(vi) selling price and sales margin.
• Standards for Material: It includes (1) Determination of standard quantity of material required, and (2)
Determination of standard price per unit of material.
• Material Quantities: After establishing the standard quality of material, it is more important and necessary to
establish the standard regarding quantity of each material. Generally, quantities are expressed in terms of
kilograms, feet, units and so forth.
• Standards for Labour: This standard is determined with regard to the current rate of pay and any anticipated
variations. It should be fixed for each grade of labour and for each operation involved. The standard hours are
fixed for all categories of labour i.e., for skilled and unskilled labour. In these standards, number of hours and
workers are established.
• Material Prices: This is a forecast of the average prices of material during the future period. This standard is
quite difficult to establish because prices are regulated more by the external factors than by the company
management. While setting standard prices, the past experiences, existing prices and anticipations should closely
examine. Price of material in the past, current prices and fluctuating trends are the base for determining standard of
price.
• Setting for Overheads: Setting standard for overheads is more complex than the development of material and
labour standards. It is estimated for variable overheads and fixed overheads.
o Variable Overheads: It may be recalled that variable overhead has been defined as a cost which tends to vary
directly with the volume of output. It is assumed that the overhead rate per unit is invariable, irrespective of the
quantity produced, so it is necessary to calculate only a standard cost per unit or per hour.
o Fixed Overheads: Fixed overhead tends to be unaffected by variations in the volume of output. Therefore it is
required to determine total fixed overhead for the period and budgeted production in units.
Standard Hour: Production is usually articulated in physical units such as tons, pounds, gallons,
numbers, kilograms, liters, etc. When a company is manufacturing different types of products, it is almost
impossible to increase the production, which cannot be expressed in the same unit.
Standard hour means a hypothetical hour, which represents the amount of work that should be performed in
one hour under standard conditions.
‐ I.C.M.A.
Budgeting

Budgeting may be defined as the process of preparing plans for future activities of the business enterprise after
considering and involving the objectives of the said organisation. This also provides process/steps of collection
and preparation of data, by which deviations from the plan can be measured. This analysis helps to measure
performance, cost estimation, minimizing wastage and better utilisation of resources of the organisation. Thus,
budgets are prepared on the basis of future estimated production and sales in order to find out the profit in a
specified period.

The objective of the standard costing and budgeting is to achieve maximum efficiency and cost control. Under
both the systems actual performance is compared with predetermined standards, deviations, if any, are analysed
and reported. Budgeting is essential to determine standard costs while standard costing is necessary for planning
budgets. Both are complimentary in nature and in determining the results. Besides similarities there are certain
differences between standard costing and budgeting which are as follows:

VARIANCE ANALYSIS
Definition: The process of analysis variances by sub-dividing the total variance in such a way that
management can assign responsibility for off-standard performance.
Interpretation of Variances:
Each variance is interpreted accordingly and by “interpretation” we mean making a decision whether the variance
is favourably or unfavorable and attaching responsibility.
- When actual cost is less than the standard cost, the difference is considered “FAVOURABLE” or
CREDIT VARIANCE.
- On the other hand when the actual cost exceeds the standard cost, the difference is termed as
UNFAVOURABLE or a DEBIT VARIANCE.
- Ordinarily, a favourable variance is a sign of efficiency of the organisation whereas an unfavourable
variance is a sign of inefficiency.

Controllable and Uncontrolled Variances

The variance may be classified as Controllable and Uncontrollable. Variance is said to be controllable if it is
identified as the primary responsibility of a particular person or department. The excessive use of materials or
labour hours than the standards can be attributable to a particular person.
When the variations are due to the factors beyond the control of the concerned person or department, it is said to
be uncontrolled. The rise in prices of materials, increase in wage rates, Govt. restrictions etc., are the examples of
uncontrollable variance. These factors are not within the control of the management and the responsibility of the
variance cannot be assigned to any particular person or division.

The division of variance into controllable and uncontrollable is important from the view point of management as it
can place more emphasis on controllable variance and thus facilitates to the principle of management by
exception.

Classification of Variances
Variances may be classified into two categories viz.,

1. Cost variances and

2. Sales variances.

The cost variance may again be sub-divided into variances for each element of cost as shown in the following
chart:

TOTAL ORGANISATION VARIANCE

Cost Sales

Material Labor Overhead

Sales Sales
Value Margin

COST VARIANCES:

In the manufacturing function, cost variances are classified on the basis of the elements of cost viz. material, labor
and expense variances.

In cost analysis the standard cost of each element of cost is reconciled with actual cost and difference is called cost
variance or total variance. The cost variance has two components:

(i) Price Variance; and

(ii) Volume variance.

Classification of Cost Variances:

 (i) Material Variance:

Price
variance Mix variance
Cost Variance

Usage/volume
variance Yield variance

(ii) Labour Variances:

Rate variance
Mix Variances

Efficiency variance
Cost Variance
Idle time variance Yield variance

Calendar variance

(iii) Overhead Variances

A: Variable Expenditure variance

Overhead variance
Efficiency/volume variance

B: Fixed Overhead Variance

Expenditure variance

Cost Variance Efficiency variance

Volume variance Capacity variance

Calendar variances

DIRECT MATERIAL VARIANCES

Illustration:
(i) From the following particular, calculate material variances

Standard Mix Rs. Actual Mix Rs.

A: 55kgs at Rs.2.00 110 60kgs at Rs.2.25 135

B: 45kgs at Rs.4.00 180 40kgs at Rs.3.50 140
100 kgs 290 100 kgs 275
(ii) Using the information as in (i) and further assuming that the standard output and actual output are
90 units and 81 units respectively, calculate the material variances.
SOLUTION:
Calculation of Input Variances:
A. 1. Cost Variance = Actual cost - Standard cost

= Rs.275 – 290 = Rs.15F

2. Price Variance = Actual Qty. (Actual Price – Standard Price)

= A: 60 (2.25 – 2.00) = Rs.15 (A)

= B: 40 (3.50 – 4.00) = Rs.20 (F)

5 (F)

3. Usage Variance = Std. Price (Actual Qty. – Std. Qty.)

= A: 2.00 (60 – 55) = Rs.10 (A)
B: 4.00 (40 – 45) = Rs. 20 (F)

10 (F)

4. Material Mix
Variance = Std. Price (Actual Qty. – Revised Std. Qty)

= A: 2.00 (60 – 55* x 100) = Rs.10 (A)

100

= B: 4.00 (40 – 45 x 100) = Rs.20 (F)

100 10 (F)

*Revised Standard Qty. Std. Qty used x Total in actual mix

for actual output = Total Qty in Std. Mix

Verification:

Cost Variance = Price Variance + Use Variance

= Price variance + Mix variance + Yield Variance

15 = 5 + 10 + 0

= 15

B: SOLUTION
Calculation of Output variances:

1. Cost variance = Actual cost of output – Standard cost of output

= Rs.(275 – 81* x 290) = Rs.14

90

*Actual output x Total Qty in std. mix

2. Price Variance= Actual Qty. (Actual price – standard price)

= A: 60 (2.25 – 2.00) = Rs.15 (A)

B: 40 (3.50 – 4.00) = Rs.20 (F)
5 (F

3. Usage Variance = Std. Price (Actual Qty – Revised standard Qty)

= A; Rs.2 (60 – 49.5) = Rs.21 (A)

B: Rs.4(40 – 40.5) = Rs.2 (F)
19 (A)

Workings: RSQ = Std. Qty for x Actual output achieved.

each Material Std. Output from Std. mix

A: = 55 x 81 = 49.5 units
90

B: = 45 x 81 = 40.5 units
90

4. Mix Variance = Std. Price (Actual Qty – Revised Std. Qty)

= A: Rs.2 (60 – 55) = Rs.10 (A)

B: Rs.4 (40 – 45) = Rs.20 (F)
10 (F)

Workings: RSQ is the actual mix’s total in terms of standard mix proportion x Actual
Quantity in actual Mix.

5. Yield Variance = Std. rate per unit of put x (AY – SY)

= 290 (81-90) = Rs.29 (A)

90
DIRECT LABOUR VARIENCES

Illustration

In the manufacture of a product, 200 employees are engaged at a rate of Rs..50 per hour. A five-day
week of 40 hours is worked and the standard performance is set at 250 units per hour. During the first
week in January, six employees were paid at Rs..45 an hour and four at Rs. .56 an hour, the remaining
were paid at the standard rate. The factory stopped production for one hour due to power failure.
Calculate labour variances.

SOLUTION

1. Cost Variance = Actual Cost – Standard Cost

= Rs. 3 997.60 – 4000 = Rs.2.40 (F)
 SC = Std. Hours x Std. Rate per hour
= 200 x 40 x 50
= Rs.4 000

AC (i) = 190 employees for 40 hours at Rs..50

= Rs.3 800

(ii) = 6 employees for 40 hours at Rs..45

= Rs. 108

(iii) = 4 employees for 40 hours at Rs..56

= Rs.89.60

Total Actual Cost = Rs. 3 997.60

2. Rate Variance
= Actual Hours Paid (Actual Rate – Std. rate)

(i) = 190 employees x 40 Hrs (.50 - .50) = 0

(ii) = 6 employees x 40 Hrs (.45 - .50) = Rs.12 (F)
(iii) = 4 employees x 40 Hrs (.56 - .50) = Rs.9.60 (A)
Total Rs.2.40 (F)

3. Efficiency Variance

= Std. rate (Actual Hours worked – Std. Hours)

= .50 (7 800 – 8 000) = Rs.100 (F)

Workings: AH – worked = 200 x 39 = 7 800 Hours

4. Idle Time variance = Idle hours x Std. rate per hour

= 200 x 1 hours x .50 = Rs.100 (A)

Verification:
CV = R.V + Eff. V + ITV

= 2.4 (F) + 100 (F) + 100 (A)

= 2.40 F

SALES VARIANCE
Although a discussion on standard costing should be limited to cost variances, it is considered incomplete unless

sales variances are appended with it as a part of comprehensive information presented to the Management.
(i) Turnover method or Sales Value; and

(ii) Profit / Sales Margin Method

In the sales value method, variances are calculated on the basis of the figure of the pre-determined sales and
actual sales whereas in sales margin method, calculation of variances is done on the basis of the figures of
predetermined profit and actual profit.

As the first method fails to measure the effect/impact of deviations of actual sales from planned sales, the
management is usually interested in the sales margin approach. This is to say the management is usually
interested in knowing to what extent actual sales margin differed from budgeted sales margin – and not on why
budgeted sales differed from actual sales, therefore sales margin approach is preferable.

SALES MARGIN APPROACH

Sale Value Variance

Sale price variance Sales volume variance

Sales Sales Mix

Revised Qty. Variance
Variance

Illustration:
During the first quarter of 2001, Meccer Ltd’s sales was budgeted to be 9 000 units but the actual sales
turned out to be 10 000 units. You are required to analyze this information and provide the information
as indicated below.
Actual Budget Difference
Rs. Rs. Rs.
Sales 12 000 9 000 3 000
Cost of sales 8 000 6 300 1 700
Gross Profit 4 000 2 700 1 300

Selling Price per unit 1.20 1.00 -

Cost Price per unit 0.80 0.70

Required:
Calculate the following:
(i) Sales price variance
(ii) Sales quantity variance
(iii) Cost price variance
(iv) Cost-quantity variance
(v) Total Gross Profit variance.

SOLUTION
1. Selling Price Variance= (AP – SP) x AQ

AP – Actual Price = (1.2 – 1.00) x 10 000

SP – Standard Price
AQ – Actual Quantity = Rs.2 000 (F)
This is the impact of price difference between the standard price and the actual price on the actual
quantity sold.

2. Sales Quantity Variance = (AQ – SQ) x SP

= (10 000 – 9 000) X 1.00
= Rs.1 000 (F)

This is the impact of the quantity difference on the standard price.

3. Cost Price Variance = (AC – SC) x AQ

AC – Actual Cost = (.80 - .70) x 10 000

SC – Standard Cost = Rs.1 000 (A)

This is the impact of the difference between the standard cost of sales and the actual cost of sales on
the actual quantity sold.

4. Volume variance = (AQ – SQ) x SC

(Cost quantity variance) = (10 000 – 9 000) x .70
= Rs.700 (A)

This is the impact of the difference between the actual volume and the budgeted volume on the
standard cost of sales.

5. Total Gross Profit Variance = Total of the individual variances

= Rs.2 000(F) + 1 000 (F) + 1 000 (A) + 700 (A)
= Rs.1 300 (F)

PROBLEMS IN APPLICATION OF STANDARD COSTS:

It goes without saying that standard costs can be used in almost every sphere of management and in
conjunction with almost all the different costing systems.

Reconciliation of actual costs with standard costs

A variance exists when the actual situation differs from the standard or budgeted projection. Therefore it
is clear that the total of all the variance must be equal to the net difference between the standards
(budgeted profit) that was set and the actual performance achieved (actual profit). The total of all
variances put together must be equal to the difference between actual and budgeted costs.

Illustration:
The following information was taken from the books of Stab. Ltd which manufactures only one type of
product
 Budgeted Actual
Opening stock - -
Closing stock - -
Units manufactured 5 600 5 000
Materials used (kg) 28 000 26 000
Labours hours 56 000 55 000
Materials Purchased (Rs.) 140 000 133 000
Wages (Rs.) 168 000 170 500
Variable Manufacturing overheads (Rs.) 28 000 26 000
Sales (Rs.) 672 000 605 000
Fixed Manufacturing overheads (Rs.) 84 000 94 000

Required:
(i) Calculate the budgeted and the actual net profit.
(ii) Calculate the necessary variances to reconcile the budgeted and actual net profit.
(iii) Reconcile the net profit as calculated in (i) above.

SOLUTION
Because there was no opening and closing stock all the products manufactured were sold. Further the
material usage was equivalent to the material purchases.

(i) Income statement:

Budgeted Actual
Rs. Rs.
Sales 672 000 605 000
Less: Production costs
Material 140 000 133 000
Labour 168 000 170 500
Overheads:
Variable 28 000 26 000
Fixed 84 000 420 000 94 000 423 500
Net Profit 252 000 181 500

(ii) Calculations:
Standard material Quantities and hours per unit of finished product:
Material: 28 000 kg/5600 = 5kg
Hours: 56 000 hrs/5600 = 10 hrs

Standard Material price = 140 000

28 000
= Rs.5

Labour standard rate = 168 000

56 000
= Rs.3
Overheads:
Std.Variable rate = 28 000
56 000
 Std. Fixed rate = 84 000
56 000
= Rs.1.5

Standard Cost Per finished Product

Rs.
Direct Material 5kg x Rs.5 25
Direct Labour 10 hrs x Rs.3 30
Overheads 10 hrs X Rs.2 20
75

Standard Profit margin per finished product:

Rs.
Sales (672 000/56 000) 120
Costs 75
Income 45

VARIANCES
Favorable Adverse
Materials Rs. Rs.
Price AQ (AP – SP)
133 000 – (5 x 26 000) 3 000
Quantity SP (AQ – SQ)
(5 x 26 000 – 5 000 x 5 x 5) 5 000

Labour:
Labor Rate Variance:
AT (AR – SR) (Rs.170 5000 - Rs.3 x 55 000) 5 500
Efficiency
SR (AT –ST)
(55 000 x Rs.3 – 5 000 x 10 x Rs.3) 15 000

Overheads: variable:
Overhead Rate Variance:
AT (AR – SR); 26 000 – (Rs..5 x 55 000) 1 500
Efficiency
SR (AT – ST)
0.5 x (55 000 – (5 000 x 10) 2 500

Fixed:
Expenditure Variance:
(Actual Amount – Budgeted Amount)
94 000 – 84 000 10 000

Volume Variance:
 84 000 – (5 000 x 10 x 1.5) 9 000

Sales Variances:
(i.) Price Variance: AQ (AP – SP)
605 000 – (Rs.120 x 5 000) 5 000

(ii.) Volume Variance:

SP (AQ – BQ)
Rs.45 (5 000 – 5 600) 27 000
6 500 77 000

(iii) Reconciliation: Rs.

Budgeted Profit
252 000
Favorable variances 6 500
Adverse Variances (77 000)
Actual Profit 181 500

Setting of standards:

A standard is an ideal which is anticipated and can be attained over a future period of time, normally in the next
accounting year. The cost accountant, departmental heads, foremen and technical experts should work together in
setting standards. Just like a budget committee, a committee should be formed to set standards.

TYPES OF STANDARDS

Broadly the standards can be divided into three categories:

(i) Current standards;
(ii) Basic standard; and
(iii) Normal standard

Current Standards:

Fixed on the basis of current conditions and remain in operation for a limited period in the sense that they
are revised at regular intervals. Current standards are of two types:
(a) Ideal standards:
This standard reflects the level of attainment on the basis of maximum possible level of efficiency
which may never be achieved.
(b) Expected (or Attainable) standards.
Reflects a level of attainment based on a high level of efficiency which is capable of being
achieved. It is best suited for control point of view because this standard reveals real variances
from the attainable performance levels.

Basic standard:
The standard is established and operated without revision for a number of years to help forward planning.
It is not suitable for cost control purposes.

Normal standard

This standard is meant to smooth out fluctuations caused by seasonal and cyclical changes. It is difficult to
follow such standards in practice because it is not possible to forecast performance with adequate accuracy
for a long period of time. As such, normal standards have little relevance for planning and cost control.
Similarities Between Budgeting And Standard Costing
The following are the points of similarity between standard cost and budget cost:
Standard Costing Budgeting Cost

Predetermined Standard costs are predetermined costs

Budget costs are also estimated costs.
cost fixed according to estimates.

These costs are also estimated in

Standard costs are estimated in advance,
Advance cost advance and these are compared to
these are compared to actual costs.
actual costs.

Budgeting costs also aim at cost

Both aim at Standard cost is designed to control costs
control and assure addition in
cost control and bring efficiency.
employee’s efficiency.

Cost Standard costs are designed well in These advance estimated costs and
comparison advance and compared to actual costs. compared to actual costs.

Standard costs are periodically reported to Budgetary costs are also reported to
Reporting
top management management periodically.

Standard cost lays stress on check of

Corrective Budgetary control lays stress on check
adverse variation and effort is made for
action of adverse variances.
correction.
Differences Between Standard Costing And Budgetary Costing:
Basis of
Standard Costing Budgetary Costing
difference

Standard costs are predetermined or Budgetary costs are based on past

Base
planned costs. experiences

Standard costs are based on technical The budgetary costs are based on historical
Technique
estimates. data and adjusted to the future.

The standards are set for elements of The budgets are prepared for
Scope
costs. every business activity.

Standard costs can be used for Budgets are used for men, material and
Limited use
estimation or forecasting. money.

Standard costs are used in ideal Budgets are made and used, in own situation
Conditions
conditions or situations. or situations.

Standard costs can be calculated per Budgetary cost cannot be calculated per
Per unit
unit. units.
 Budgets are compiled for both income and
Nature Standards are set only for expenditure.
expenditure.

Standard cost is not comprehensive, it Budgetary cost coverage is much more than
Coverage
is only limited to cost operations. standard costs.

Parts Standard costs cannot be in parts. Budget can be in parts: only Cash budget