Management accounting S.Y.B.COM.

:STANDARD COSTING:

1. MEANING OF STANDARD COSTING:

Standard costing involves the preparation of costs and
applying them to measure the variances from actual costs and
Analysing the causes of variances with a view to maintain
maximum efficiency in production.

2. MEANING OF STANDARD COST:

Standard costs are carefully and scientifically predetermined
costs. The determination of standard cost is based on
technical estimates for materials, labour and overhead for a
selected period of time and for a prescribed set of working
conditions. They are also target costs which can be achieved
under normal efficient operational conditions. Standard costs
provide a framework for measuring performance, preparing
budgets, determining prices, ascertaining the cost of a
product and for effecting economy in operations.

3. Definition of Standard Costing

Standard Costing is a cost accounting technique, which helps
to measure the performance of material, labor & overhead and
report the variances, to take corrective actions. The
variances are being analyzed in detail and reported by
comparing the actual costs with the standard cost for actual
output along with determining the reasons for the same. There
are two types of variances i.e. favorable (F) (actual cost is
less than the standard cost) and adverse (A)/ Unfavorable (U)
(actual costs exceed standard costs).
The following steps are taken, in the process of Standard
Costing:
• Fixing Standards
• Determining Actual Costs
• Comparison between actual and standard figures
• Variance analysis and reporting
• Taking corrective action for the disposition of
variances
Standard Costing is a tool for ascertaining and controlling
the costs. With this technique, the organization can make
best possible use of the resources. In addition to this, the
management can keep a check on the organizational activities
by assessing the deviations, i.e., analyzing the difference
between actual performance and the standard performance.

4. Difference between Standard Costing and Budgetary Control:

BASIS FOR
STANDARD COSTING BUDGETARY CONTROL
COMPARISON

Meaning The costing method in Budgetary Control is

which evaluation of the system in which
performance and budgets are prepared
activity is done by and continuous
making a comparison comparisons are made
between actual and between the actual and
standard costs, is budgeted figures to
Standard Costing. achieve the desired
result.

Basis Determined on the basis Budgets are prepared on

of data related to the basis of
production. management's plans.

Range It is limited to cost It includes cost and

details. financial data.
 BASIS FOR
STANDARD COSTING BUDGETARY CONTROL
COMPARISON

Concept Unit Concept Total Concept

Scope Narrow Wide

Reporting of Yes No
Variances

Effect of The short term changes The short term changes

temporary will not influence the will be shown in the
changes in standard costs. budgeted costs.
conditions

Comparison Actual costs and Actual figures and

standard cost of actual budgeted figures
output

Applicability Manufacturing concerns All business concerns

5. ANALYSIS OF COST VARIANCES:

COST VARIANCES

Direct Material Cost Direct Labour Cost Overhead Cost

Variance (DMCV) Variance (DLVC) Variance(OVC)

Let’s see in details:

1. DIRECT MATERIAL COST VARIANCE(TOTAL):

Material Cost Variance

Material Price Variance Material Usage (Qty.) Variance

Material Mix Variance Material Yield Variance

Material cost variance represents the difference between the

standard cost of direct material and the actual cost of
direct material for actual output. In formula it may be shown
as under:

Standard cost – Actual cost Or SC – AC

If actual cost exceeds the standard cost, variance will be

designated as adverse (A) and when actual cost is less than
the standard cost, variance will be designated as favorable
(F)
Here, Standard Cost = Actual Output X Standard material
cost per unit of output.

(a) Material Price Variance:- Material price variance

represents the difference between standard price and
actual price of the actual quantity of material. It can be
computed by multiplying the difference between standard
price and actual price by actual quantity.
In the formula from:

Actual Quantity x (Std. Price – Actual Price)

2
 If actual price exceeds the standard price, variance will be
designated as adverse (A) and when actual price is less than the
standard price variance will be known as favorable (F)

(b)Material Quantity (Usage) Variance :- Material Usage

variance represents the difference between standard quantity
and actual quantity of material. It can be calculated by
multiplying the difference between standard quantity and
actual quantity by standard price. In formula form:

Std. Price X Std.Quantity for Actual

Actual output - quantity

Here, Standard quantity refers to the quantity of material

which should have been consumed in the production of actual
output.
If actual quantity exceeds the standard quantity, variance
will be designated as adverse (A) and when actual quantity is
less than the standard quantity, variance will be called
favorable (F).

Material Usage Variance : can be divided into two parts

- Material Mix Variance
- Material Sub usage variance
(b) Material Mix Variance :- It is that portion of the
material usage variance which arises due to difference
between the standard mix and the actual mix of different
materials used in the production. The change in the
proportion of various materials in the total actual mix
affects the average standard price per unit of actual mix.

Std. Price X Actual qty. _ Actual Qty. in

in Actual Mix std. Mix

If the standard price of actual mix is less then the

standard price of standard mix, the variance is favorable
and if the standard price of actual mix exceeds the standard
price of standard mix, the variance will be adverse.

(c) Material Sub-usage Variance or Material yield variance:

It arises due to the difference between the standard yield
(output) specified and actual yield obtained. The material
yield variance is just another way to look at the material
sub usage variance.

Std. Price X Actual Qty. in _ Std. Qty. in

std. Mix Std. Mix.

If actual yield exceeds the standard yield, the variance will

be favorable and vice-versa.

Any Variance –whether adverse or favorable:-

Any variance is whether favorable or adverse, can be judged
by considering its effect on profit. It is effect on profit
positive, it is favorable variance and vice-versa.

3
 :Example:

Ex:01. For the production of product X the following data are

available:
Standard Actual
Quantity of material 100 kgs 120 kgs
Price per kg. Rs. 20 Rs.17.50
You are required to compute:
(a) Material Cost Variance
(b) Material Price/Rate Variance
(c) Material usage variance

Ex:02. It is estimated that in the making of a table, 4sq.ft. of

sunmica is required at the rate of Rs.25 per sq.ft. during a
month, 1000 tables are made by using 4,300 sq.ft. of sunmica @
Rs.30.
You are required to calculate the material cost variances.

Ex:03. A manufacturing concern which has adopted standard costing

furnishes the following information:
Standard:
Materials for 70 kgs. Finished products 100 kgs.
Price of materials Re 1 per kg.
Actual:
Output 2,10,000 kg.
Material used 2,80,000 kg.
Cost of materials Rs. 2,52,000
Calculate:
(a) Material Usage Variance
(b) Material price Variance
(c) Material Cost Variance

Ex:03. The following data are given for the production of 90 units
of output:
Standard cost Actual Cost
Material Quantity Price Amount Quantity Price Amount
Kgs. Rs. Rs. Kgs. Rs. Rs.
A 50 10 500 45 12 540
B 50 15 750 60 20 1200
Total 100 1250 105 1740
Findout:
1. Material cost Variance
2. Material Price Variance
3. Material Usage Variance
4. Material Mix Variance
5. Material Yield Variance

Ex:04. Standard cost for producing 100 kgs. Of product R is given:

Direct Material Quantity Price Standard
Kgs. Rs. cost Rs.
A 40 10 400
B 40 20 800
C 45 30 1,350
Total material input 125 2,550
Less: Normal Loss 25 --
Output 100 2,550
Actual results for the period:
130 Kgs. Of direct material was used as follows:
45 Kgs. Of A at Rs.12 Rs. 540
50 kgs. Of B at Rs.18 Rs. 900
35 Kgs. Of C at Rs.30 Rs. 1,050
130 Rs. 2,490
Actual output 105 kgs.
You are required to calculate:
i) Material cost variance

4
ii) Material Price Variance
iii) Material usage Variance
iv) Material Mix variance
v) Material yield variance
Ex:05. From the following data calculate:
(i) Material cost variance
(ii) Material price Variance
(iii) Material Mix Variance
(iv) Material yield Variance
Standard Actual
Quantity Rate Value Quantity Rate Rs. Value Rs.
Kgs. Rs. Rs. Kgs.
Material A 40 2 80 35 2.1 73.5
Material B 20 5 100 25 4.5 112.5
Total Mix 60 180 60 186
Loss 6 -- 9 --
Output 54 180 51 186

EX:06. Product X is an alloy consisting of 70% metal A and 30

metal B. in melting and processing it is expected that a 4% loss
of metal will occur. Standard prices are Rs.40 per kg. for metal A
and Rs.15 per kg. for metal B from the following figures show
clearly how you would record:
(a) Material price variance
(b) Material usage variance
(c) Material Mix Variance
(d) Material Yield Variance

Standard Actual
Material Quantity Rate Per Kg. Quantity Rate Per Kg.
A 700 kgs. Rs.40 600 kgs. Rs.50
B 300 Rs.15 500 kgs. Rs.12
Output 960 kgs. 1,032 kgs.

Ex:07. Vinayak Ltd. produces an article by blending two basic raw

materials. It operates standard costing system and following
standards have been set for raw materials:
Material Standard Mix Standard Price
A 40% Rs.4 per kg.
B 60% Rs.3 per kg.
Standard loss in processing is 15%.
During April 1997, the company produced 1700 kg. of finished
output. The position of stock and purchases for the month of
April,1997 is as under:
Material Stock on Stock on Purchased during April 1997
1-4-97 Kg 30-4-97 Kg
A 35 5 800 3400
B 40 50 1200 3000

Calculate Material cost variances such as material cost variance,

Price, Usage and Yield variance.

Ex:08. From the following data compute the Materials Cost

Variance, Material Price Variance, Material Usage Variance and
Material Mix Variance:
Standard Actual
Material Qty. Kg. Rate Total Rs. Qty. Kg. Rate Total Rs.
A 4 1 4 2 3.50 7
B 2 2 4 1 2 2
C 2 4 8 3 3 9
Total 8 2 16 6 3 18
Ex:09. Standard material for 100 kg. Chemical no.456 is given
below:-
Kg. Total Rs.
45 of material A @ 2 per kg. 90

5
 40 of material B @ Rs.4 per kg. 160
25 of material C @ Rs. 6 per kg. 150
110
Standard Loss: 10 400
Actual production 2,000 kg. of Chemical No.456 and actual material
usage is as follows:-
Kg. Rs.
Material A 1,000 @ 1.90 Per Kg 1,900
Material B 850 @ 4.20 per kg. 3,570
Material C 450 @ 6.50 per kg. 2,925
2,300 8,395

Calculate (i) Material Cost Variance (ii) Material Price

Variance (iii) Material Mixture Variance (iv)Material Yield
Variance (v) Material Usage Variance.

6
 :Labour Cost Variances:

(a) Labour Cost Variance:

It is the difference between the standard labour cost and the
actual wages paid for actual output, if the standard labour
cost of actual output exceeds the actual labour cost, the
variances is favorable and vice-versa.
Labour Cost Variance

Labour Rate Variance Labour Efficiency Variance

Labour Sub-Efficiency Variance Labour Mix Variance Labour Idle

Time variance
(a) Labour Rate Variance:

Actual hours paid for (Actual Rate- Std. Rate)

Difference of Actual rate and std. Rate has been multiplied

by actual hours paid for because still we have to segregate
efficiency variances, which includes idle time variance.

• Once rate variance has been identified, all subsequent

analysis will be based on std. Rate only.

(b) Labour Efficiency Variance:

It arises due to the difference between the standard labour
hours specified for actual output and actual hours worked. It
is computed by multiplying the difference between standard
and actual hours by the standard rate per hour. In formula
form, it may be shown as below:

Standard hours _ Actual hours

Standard rate per hour for actual output paid

If the standard hours exceed the actual hours paid, the

variance is favorable and vice-versa.

(c) Labour Gang Variance (Labour Mix Variance)=

Where the labour used in process is of different types or
grades, a labour mix (gang) variance is worked out.
Labour mix variance arises due to the difference in the
computation of standard and actual labour force. It is
calculated in the same way as material mix variance.

Std. Rate Revised standard Actual hours worked

Hours worked _

(d) Sub-efficiency Variance (Labour Yield Variance)

Just as material yield variance is calculated, similarly
labour yield variance can also be known. It is the variation
in labour cost on account of increase or decrease in yield or
output as compared to the relative standard. The formula for
its computation is as follows:

Std. Hours _ Revised std.

Std. Rate X actual output worked

If the actual production is more than standard production,

it would results in a favorable variance and vice versa.

(e) Labour Idle time Variance:

This variance arises due to the difference between actual
labour hours worked and the actual labour hours paid (idle
time hours). This computed by multiplying the difference

7
 between hours worked and paid by the standard labour rate. In
formula form, it may be written as follows:

Actual hours Actual hours

Std. Rate x Paid for in - worked for in
Std. Mix std. mix

Labour idle time is caused when the workers have remain

idle (without work) due to abnormal circumstances. Since it
always affects profits adversely the variance is designated
as adverse. Calculation of Labour idle time variance brings
out the effect of idle time cost separately.

:Labour cost variance – Example:

Ex:01.Ispat Ltd. manufactures a component. The budgeted production

standard labour cost for a month were:
Budgeted production 8,000 Units
Standard labour cost per unit:
1-1/2 hours @ Rs.4 per hour Rs.6
Actual results for the month were:
Production 7,800 units
Wages Rs. 56,000
Throughout the month, 56 workers were employed who were on duty
for 8 hours per day for 25 days. However, during the last week of
the month each worker remained idle for 4 hours as a result of
machine break down because of poor maintenance.
You are required to calculate:
1. Labour cost variance.
2. Labour rate variance.
3. Labour efficiency variance
4. Labour idle time variance.

Ex:1a The following information is fathered from the labour

records of Ramkrishna & CO.
Payroll allocation for direct labour Rs.20,000.
Time card analysis shows that 9,000 hours were worked on
production lines
Production reports for the period showed that 4,000 units
have been completed, each having standard labour time 1-1/2 hours
and a standard labour rate of Rs.2 per hour.
Calculate the labour variance.

Ex:01b. From the data given below, calculate labour variances for
the two departments:
Deptt. A Deptt. B
Actual Gross Wages (direct) Rs.2,000 Rs.1,800
Standard Hours Produced 8,000 6,000
Actual hours Worked 8,200 5,800

Ex:02. Ajay Ltd., manufactures one standard product. A team of

workers engaged in the production of the single product is made up
as follows:
Standard Gang:
Grade No. of Workers Hourly wage rate Standard rate
depending on merit per hour
rating
A 8 Rs.6-Rs.8 Rs.7
B 7 Rs.4-Rs.6 Rs.5
C 5 Rs.2-Rs.4 Rs.3
In a working week of 40 hours, the team is expected to produce 100
units of the product. During a period of four(4) weeks, it was
necessary to change the gang composition due to sickness and the
team during that period of 4 weeks consisted of:
Actual Gang:
8
 Grade No. of workers Hourly Wage rate Rs.
A 9 8
B 7 6
C 4 4

During the above 4-week period, 10 hours were lost due to

power failure. The output of the team for the 4 week period was
500 units.
You are required to calculate:
1.Labour cost variance.
2.Labour rate variance.
3.Labour efficiency variance
4.Labour idle time variance
5.Labour gang variance.

Ex:03. Calculate the labour variances from the following

information:
Standard wages:
Grade A 60 labourers at RS.9.00 per hour
Grade B 90 labourers at Rs.6.00 per hour
Actual wages:
Grade A 80 labourers at RS.10.00 per hour
Grade B 70 labourers at Rs.7.50 per hour
Budgeted hours 1,00; actual hours 900
Budgeted gross production 5,000 units;
Standard loss 20%; actual loss 900 units.

Ex:04. The details regarding the weekly wage rate of workers

engaged on a job scheduled to be completed in 30 weeks are as
follows:

Category of Workers Standard Actual

No. of Weekly wage No. of Weekly wage
workers rate per workers rate per
worker worker
Skilled 75 60 70 70
Semi-skilled 45 40 30 50
Un-skilled 60 30 80 20
The work is actually completed in 32 weeks.
Calculate:
1. Labour Cost variance
2. Labour rate variance
3. Labour efficiency variance.

Ex:05. Trishul Industries turns out only one article, the prime
cost standards which have been established as follows:
Per Completed Piece
Materials 5 lbs. @ Rs.4.20 Rs.21
Labour 3 hours @ Rs.3 Rs. 9
The production schedule for the month of July, 1983 required
completion of 5,000 pieces. However, 5,120 pieces were actually
completed.
Purchases for the month July 1983 amounted to 30,000lbs. Of
material at the total invoice price of Rs.1,35,000.

Production records for the month of July,1983 showed the following

actual results:
Material requisitioned and used 25,700 lbs.
Direct Labour – 15,150 hours Rs.48,480

Calculate appropriate material and labour variances.

Ex:06. A gang workers normally consists of 30 men, 15 women and 10
boys. They are paid at standard hourly rates as under:
Men Re 0.80
Women Re 0.60

9
 Boys Re 0.40
In a normal working of 40 hours the gang is expected to produce
2,000 units of output.
During the week ended 31st December 1987, the gang consisted
of 40 Men, 10 Women and 5 Boys. The actual wages paid were @ re
0.70, re 0.65 and Re 0.30, respectively. 4 hours were lost due to
abnormal idle time and 1600 units were produced.

Calculate (i) Wage variance (ii) Wage rate variance (iii) Labour
efficiency variance (iv) Gang composition (v) labour idle tome
variance.

Ex:07.Calculate all the Labour Cost Variances for the following

information provided by T Ltd.

Standard Actual
Hours Rate P.H.(Rs) Hours Rate P.H.(Rs)
Skilled 90 20 44 25
Semi-skilled 60 10 66 5

Ex:08 100 skilled workmen, 40 semi-skilled workmen and 60

unskilled workmen were to work to get a contract job completely
within 30 weeks. The standard weekly wages were Rs.60, Rs.36 and
Rs.24 respectively. the job was actually completed in 32 weeks by
80 skilled, 50 semi-skilled and 70 unskilled workmen were paid
Rs.65, Rs.40 and 20 respectively as weekly wages. Calculate the
variances labour variances.

10