STANDARD COSTING (CA INTER/CS INTER/ICWA)

 Calculation of Variances

COST VARIANCE

Material Labour Overheads

1. MATERIAL COST VARIANCE

Material Price Variance Material Usage Variance

Material Yield Variance Material Mix Variance

2 LABOR COST VARIANCE

Labor Rate Variance Labor Efficiency Variance Labor Idle Time

Labor Yield Variance Labor Mix Variance [Gang]

3. OVERHEAD VARIANCE

Fixed Variable

Fixed Cost Variance Variable Cost Variance

Expenditure Effiiciency

Expenditure Volume

Capacity Efficiency

Standard Costing: - Standard costing is a technique to control the cost by comparing actual cost with
budgeted cost/standard cost.

If Actual Cost > Standard Cost, then variance is adverse/unfavorable.

And
If Actual Cost < Standard Cost, then variance is favorable.

The term standard/budget are same while applying in problems but technically they are different. The
term budget means on the basis of past data and standard is based on industry average.

The term standard cost means estimated cost based on past data for future course of action along with
available resources.

For example: Suppose a crickter Virat Kohli Scores in his last 7 matches:
Match I – 78
Match II- 99
Match III- 88
Match IV- 110
Match V- 90
Match VI -105
Match VII- 100

What should he score in VIII match?

On the basis of past performance if we say he should score above 90, then it is wrong to say as before
making estimate about his performance in VIII match we must considered the following factors:

1. Against which team VIII match will be played?

2. On which position kohli likely to play?
 3. Weather conditions?
4. Whether it will be played in India or outside india?

Taking into above factors if we say Kohli will score above 55 then it is right estimate/standard.

Material Price variance

Material Cost Variance

Material Usuage variance

Cost = Rate * Quantity

For example:

Budgeted Cost/Standard Cost

To produce 1 unit of finished goods standard estimated cost is Rs 50 as per below:

Material consumed 10 kg @ Rs 5 per kg = 50 Rs

Acutual Cost
To produce 1 unit of finished goods actual cost is Rs 78 as per below:

Material consumed 13 kg @ Rs 6 per kg = 78 Rs

Variance = 28 Rs

From the above it is clear that actual cost > standard cost and variance is adverse. This is due to two
elements of cost i.e. rate and quantity. If there is difference in rate then rate variance and purchase
manager is responsible for that difference. If there is change in quantity then Usage Variance and
production manager is responsible for that difference.

Material Price Variance = Change in Price i.e (Budgeted Price - Actual Price)*Actual Qty

For variance in price management called purchase manager to pay penalty for diff in price multiplied by
actual qty. But purchase manager is of the view that change in price should be multiplied by standard
price as management should not penalized me for extra quantity used by production manager.

Management called their cost accountant and he is of the view that difference in price should be
multiplied by the actual quantity as it is the duty of the purchase manager to purchased effectively and
efficiently all the material (standard as well as excess). So in formula change in price is multiplied by
actual qty.

If we penalized purchase manager at budgeted quantity then purchase manager may manipulate with
vendors for the excess qty.
Therefore material price variance = (Rs 5 – Rs 6) * 13 = Rs 13 adverse

Material Quantity variance = Change in qty *Std Price

In the above formula we multiply difference of actual quantity and standard quantity by standard price
because difference of excess quantity has already been recovered from purchase manager as shown
below:
MCV

MPV (Diff of price *actual qty) MUV (Diff of Qty * Standard rate)

(Rs 5 – Rs 6)*(10kg+3kg) (10kg – 13kg) * (Rs 5 + Rs 1)

(Rs 1)*(10kg + 3kg) (3 kg) * (Rs 5 + Rs1)

As shown above the excess qty diff of Rs 3 has already been recovered from purchase manager in price
variance.

Therefore Material Usuage Variance is ( Std qty for actual output– Actual Qty ) * Std Price
(10Kg – 13 kg) *5 = 15 adverse.

Mix Variance and yield difference  Sometimes management declares bonus on favorable part of
material usage variance (Qty. saved) in order to motivate the production manager. Production manager
in order to increase bonus they manipulate the resources by increasing the qty of material having low
rate by decreasing the quantity of material having high rate. Then it is called mix variance .This will not
reflected true performance.

But if production manager follows standard ratio as fixed by management and saved quantity of material
then he is entitled to bonus. Then it is called yield variance or revised quantity difference

Material Mix variance = (Standard ratio for actual output – actual ratio for
actual output) * standard rate

Material Yield Variance = ( Standard ratio for total standard qty – standard ratio for total actual qty) *
standard rate

Q1 For example:
The standard cost of chemical mixture is as follows:
40% of Material A at Rs 20 per kg
60% of Material B at Rs 30 per kg
A standard loss of 10% of input is expected in production. The cost records for a period showed the
following usuage:
90 kg material A at a cost of Rs 18 per Kg
110 kg material B at a cost of Rs 34 per kg
The quantity produced was 182 kg of the good product.
Calculate (a) Material cost variance and material price variance and material usuage variance

Sol:
Data for material variance

Original Budget Revised Budget Actual Budget

Q R Amt Q R Amt Q R Amt

A 40*20 800 80.88*20 1617.60 90 * 18 1620

B 60*30 1800 121.33*30 3639.9 110* 34 3740

100 2600 202.21 5257.5 200 5360
Std loss 10 18
Std output 90 182

Revised Budgeted means Standard input/budgeted resource for actual output. Revised budgted is
calculated in cases where standard output is different from actual output.

Working Notes:

Standard Qty for actual output for A = original standard qty for standard output * actual output
Standard output
= 40 *182 = 80.88
90

Standard Qty for actual output for B = 60 *182 = 121.33

90

Material cost variance = Standard cost for actual output – actual cost for actual output
= 5257.50 – 5360 = 102.5 (adverse)

Material Price Variance = Actual Qty(Std price – Actual Price)

A = 90 * (20 -18) = 180 (Favourable)

B = 110 * (30 – 34) = 440 ( Adverse)

Net price variance = 260 (Adverse)

Material Usuage Variance = Std price ( Std Qty for actual output – actual Qty for actual output)
A = 20 (80.88 – 90) = 182.4 (Adverse)
B = 30 ( 121.33 – 110) = 339.9 (favorable)

Net Material Usuage Variance = 157.5 (favorable)