by Steps in Standard Costing
Set the standard cost
- A standard quantity is predetermined and standard price per unit is estimated.
- Budgeted cost is calculated by using standard cost.
Record the actual cost
- Calculate actual quantity and cost incurred giving full details.
Variance Analysis
- Comparison of the actual cost with the budgeted cost.
- The cost variance is used in controlling cost.
- Take suitable corrective action.
- Fix responsibilities to ensure compliance
- Create effective control system.
- Resetting the budget, if required.
Types of standards
Ideal Standards:
These represents the level of performance attainable when prices for material and labour are most favorable, when the highest output is achieved with the best equipment and layout and when maximum efficiency in utilization of resources results in maximum output with minimum cost.
Normal Standards:
These are the standards that may be achieved under normal operating conditions. The normal activity has been defined as number of standard hours which will produce normal efficiency sufficient goods to meet the average sales demand over a term of years.
Basic or Bogey standards:
These standards are use only when they are likely to remain constant or unaltered over long period.
According to this standard, a base year is chosen for comparison purposes in the same way as statistician use price indices. When basic standards are in use, variances are not calculated as the difference between standard and actual cost. Instead, the actual cost is expressed as a percentage of basic cost.
Current Standard:
These standards reflect the management’s anticipation of what actual cost will be for the current period. These are the costs which the business will incur if the anticipated prices are paid for goods and services and the usage corresponds to that believed to be necessary to produce the planned output.
Variance
- The difference between standard cost and actual cost of the actual output is defined as Variance. A variance may be favourable or unfavourable.
- If the actual cost is less than the standard cost, the variance is favourable and if the actual cost is more than the standard cost, the variance will be unfavourable.
- It is not enough to know the figures of these variances in fact it is required to trace their origin and causes of occurrence for taking necessary remedial steps to reduce / eliminate them.
Variance Types
The purpose of standard costing reports is to investigate the reasons for significant variances so as to identify the problems and take corrective action. Variances are broadly of two types, namely, controllable and uncontrollable.
Controllable Variance
Controllable variances are those which can be controlled by the departmental heads whereas uncontrollable variances are those which are beyond their control. If uncontrollable variances are of significant nature and are persistent, the standards may need revision.
Variance Analysis
Variance analysis is the dividing of the cost variance into its components to know their causes, so that one can approach for corrective measures.
Variances of Efficiency:
Variance arising due to the effectiveness in use of material quantities, labour hours. Here actual quantities are compared with predetermined standards.
Variances of Price Rates:
Variances arising due to change in unit material prices, standard labour hour rates and standard allowances for indirect costs. Here actual prices are compared with predetermined ones.
Variances of Due to Volume:
Variance due to effect of difference between actual activity and the level of activity estimated when the standard was set.
Reasons of Material Variance
- Change in Basic price.
- Fail to purchase anticipated standard quantities at appropriate price.
- Use of sub-standard material.
- Ineffective use of materials.
- Pilferage
Material Variance
Material Cost Variance = (Standard Quantity X Standard Price) – (Actual Qty X Act Price).
Material Price Variance = Actual Quantity (Standard Price – Actual Price).
Material Usage Variance = Standard Price (Standard Quantity – Actual Quantity).
