INTRODUCTION AND DEFINATION Cost Accounting primarily refers to
the process of recording classifying and allocating the costs to
the ultimate desired level of the production activity. Such lowest
of activity is known as The cost unit. Thus cost accounting process
strives to ascertain and to control the cost per unit. The costing
are two type : o Post operative exercise Historical costing o Pre
operative exercise Standard costing Standard costing is a technique
of ascertaining the unit cost based on standards for the purpose of
cost control.
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Another definition for the The Certified Institute of
Management Accounts, England for the Standard cost is "The
preparation and use of standard costs their comparison with the
actual cost and the analysis of variances to their causes and
points of incidence Another definition Wheldon say that "Standard
costing is the method of ascertaining the cost whereby statics are
prepared to show (a) the standard cost (b) the actual cost ; and(c)
the difference between these costs which are termed as variance.
Another definition Srikant Datar says that "Standard costing is the
costing method that traces direct cost to cost object by
multiplying the standard price or rate times the standard input
allowed for actual output achieved and allocates indirect costs on
the basis of the standard indirect rate times the standard inputs
allowed for the actual output achieved . Another definition
S.K.bhattachary and Johan Dearden says that " A standard cost
system is one where product costs are developed before the fact"
i.e. an estiment is made before the product is produced of what the
costs should be.
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HISTORICAL COSTING 1. It emphasies on Unit Cost Ascertainment.
2. It is Accounting oriented. 3. It considers the post operation
data. 4. It considers What Costs have been incurred. 5. It uses the
Cost Sheet for unit cost determination. STANDARD COSTING 1. It
emphasises on Cost Control. 2. It is Management Planning &
Controlling oriented. 3. It sets the per-operative standards &
compares the post-operation data with them. 4. It consdiers What
costs shoud have been incureed. 5. It develops the Variancebased on
the comparision of the standard and actual data.
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Requirements for a good standard costing system Standard
costing is an effective method of costing compared to the
historical costing. Along with with the unit costing ascertainment,
it also controls the costs and is agreeable for quoting the price
ahead of the production. However, a good standard costing system
must possess the following characteristics :
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(1) Accuracy of standards: Standards are the norms used for
measuring the performance of the people. So, the standards should
be accurate. They should be developed on the basis of engineering
study and sound judgment should be attainable under normal
performance and should be amenable for objective prescription.
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(2) Control on production variables: Standard performance is a
function of appropriate production variables. Production variables
affecting the standard performance of an operator are machines,
materials and other inputs. Proper machines and equipment must be
made available, continued availability of defined quality raw
materials must be provided and other production inputs like power,
water, materials handling etc. should be provided
appropriately.
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(3) Measurement of performance: The output of the operators
should be measured accurately and in objective terms. The traceable
costs should be accounted properly and the common costs (i.e.
overheads) should be allocated on a judicious basis.
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(4)Identification of the responsibility for variances:
Variances indicate the difference between the standards and the
actuals.Variances may be favorable or unfavorable. Proper analysis
of the variances should be made. Appropriate identification of
responsibilities for variances should be made for the reward or the
penalty.
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(5)Performance variances should be separated from the forecast
variables Variance may occur from two sources (a) efficiency level
of the people and (b) the error in the forecasts. Persons should
not be made responsible for the erroneous forecasts. Thus,
performance variances should be separated from the variances caused
by the forecast errors.
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Advantages : Standard costing techniques results into following
advantages : 1. Quick unit cost ascertainment 2. Tendering and
quotation 3. Cost Control 4. Performance evaluation 5. Cost
consciousness among people 6. Ease in accounting 7. Application of
management by exception principle
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(1) Quick unit cost ascertainment : Unit cost of the production
can be ascertained through standard materials cost, labour cost and
standard overhead recovery rate. So, as compared to historical
costing, unit can be ascertained easily and quickly. (2)Tendering
and quotation : Under the historical costing cost ascertainment is
done at the and of the production. Under the business situation, It
is necessary to quote the price before the production. Standard
costing facilitates this type of tendering and quotation.
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(3)Cost Control : Standard costing consider What should have
been spent instead of What is spend. Thus standard or different
elements of the cost reduces the wastages and inefficient
operation.Thus,cost per unit is reduced. (4) Performance evaluation
: Standard costing generates variances, Which are the indicators of
good or bad performance. Thus, operating performances of the
operators and employees can be measured through variances and the
reasons for such variances.
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(5) Cost consciousness among people : Because of the existence
of standards or norms, the people in the organization become
conscious about the cost and they strieve to the standared. They
become cost conscious. (6)Ease in accounting : Where the standard
costing is in use, the cost accounting data are compiled on the
basis of standard cost, Which more or less remain the same during
the foreseeable future. Thus, Complex accounting is exercise is
simplified.
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(7) Application of management by exception principle : Under
the standard costing variances are identified by comparing the
Actuals with the standard. Instead of detailed costing record, Only
variances are analysed rigorously. Thus, variances derive the
residual values which are analysed in grater detail sliving the
other costing records untoucheds.
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(1) Difficulty in setting standards: Standard is a measuring
rod which is used in measuring the performance of employees.
However, it is very difficult to set ideal or even reasonable
standard. Whether standards be set on the basis of average employee
performance, past records, probable futuristic events
etc.Thus,standards are always subject to the challenge.
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(2) Lack of flexibility : Standards are set for the longer
period in advance and are required to be followed during the
reasonable period. However, the variables are volatile and are
changing very fast. Under such conditions standard costing becomes
an unreliable activity.
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(3) Employee grievances : Where standard costing is followed,
the employers tend to keep high standards of performance. Thus the
employees are generally not in favor of the adoption of the
standard costing.
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(4) Controllable and uncontrollable variances : The standard
costing derives various cost variances. There are certain
uncontrollable variances which are not within the control of
management. Thus, the standard costing does not help controlling
the uncontrollable variances.
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Under the standard costing, Standard costs are ascertained for
the actual production and then they are compared with the actual
costs. The difference between the standard costs and actual costs
are treated as variances.
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~>Classification of various variances 1) Material Usage
Variance Into Material Mix Variance When the production uses more
than one raw-material items, with a specific standardized mix of
various raw material items, like material A- 50%, B-30% and C-20%.
The actual usage proportion may be different than the standard mix.
Under such situation materials mix variances are calculated.
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~>Classification of various variances 2)Labor Efficiency
Variance and Labor Mix Variance Where the labor categories like
skilled, Semi-skilled and Unskilled all are used in the production,
then standard proportion, then standard proportion of labor usage
is prescribed. As the skill differs, the wage rates will also
differ like more wages to skilled labor and lower wages to
unskilled labor. The actual production may use the labor proportion
different than the standard proportion prescribed. Under such a
situation labor mix variance is ascertained.
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~>Classification of various variances 3) Sales Volume
Variance and Sales Mix Variance Where a company is producing and
selling multiple products, then the actual sales volume sometimes
differ than the standard or budgeted sales volume. As ex: Three
products A,B and C have budgeted sales volume of 40%, 35% and 25%.
The actual sales volume may be different. Here sales mix variance
is ascertained on the basis of budgeted sales and the actual sales.
On the price front, generally the standard contribution margin
(i.e. sales variable cost) per product category is considered
instead of the standard selling price.
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1.Material Cost Variance (MCV) The material cost generally
consists of two parts- the price of the materials multiplied by the
usage of the materials. Material Cost Variance (MCV) = (Standard
Materials Costs ) (Actual Materials Costs) Or = (SQ x SR) (AQ x AR)
Where,SQ = Standard Quantity,AQ = Actual Quantity SR = Standard
Rate,AR = Actual Rate.
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2.Labor Cost Variance (LCV) The labor cost is the result of the
wage rate and the efficiency of the labor measured in terms of
labor hours. Labor Cost Variance (LCV) = (Standard Labor Costs )
(Actual Labor Costs) Or = (SH x SP) (AH x AP) Where,SH = Standard
Hours,AH = Actual Hour SP = Standard Price,AP = Actual Price.
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3.Factory Overhead Variances Factory Overheads are the common
costs which are included in the unit cost. Generally costing is
confined up to the factory level and thus factory overheads are
considered in the standard costing. Factory overheads are broadly
classified into following two categories : A.Fixed Factory Overhead
B.Variable Factory Overhead
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A.Fixed Factory Overhead Variances Fixed factory overhead as
per their description remain fixed irrespective of the volume of
production. They are like the period cost and thus are incurred as
per the passage of time, e.g. Depreciation on machinery, salary of
the permanent factory supervisor etc.
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A.Fixed Factory Overhead Variances However, for the purpose of
standard costing, some advance budgeting is made in the beginning
of the year about various items of the fixed factory overheads and
such total fixed factory overheads are related to some budgeted
production which is set in the beginning of the year. On the basis
of such budgeted fixed factory overheads (in rupee) and the
budgeted production ( in units), the per unit recovery rate is
ascertained as under :
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A.Fixed Factory Overhead Variances Per Unit Fixed O/H Recovery
Rate = Total Budgeted Fixed Factory Overhead( In Rupee) Total
Budget Production ( In Units) E.g. In the beginning of the year,
Rs. 50000 have been budgeted for various heads of the fixed factory
overheads and during the year, it has been budgeted that 10000
units will be manufactured. In such case per unit Recovery Rate of
the Fixed Factory Overhead would be as under : Per Unit Fixed O/H
Recovery Rate = Rs. 50000 10000 Units = Rs. 5 per unit.
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B.Variable Factory Overhead Variances Variable factory
overheads vary as per the volume of production. E.g. consumption of
the trivial material in the production which are treated as
overheads due to its insignificant value. E.g. butter paper used in
packing the cakes of the butter in the Amul butter factory.
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B.Variable Factory Overhead Variances Like direct materials and
direct labor which vary with the volume of production, variable
factory overheads also vary in direct proportion to production. The
variable factory overhead variances are ascertained as under :
Variable Factory O/H Cost Variance = Budgeted variable factory O/H
cost LessActual variable factory O/H cost. = (Budgeted Units x
Budgeted cost) Less (Actual Units x Actual Cost)
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B.Variable Factory Overhead Variances This cost variances is
further spitted into following two sub variances based on volume
and rate : i.Variable Factory O/H Volume Variance = (Budgeted Units
Actual Units ) x Budgeted Rate ii.Variable Factory O/H Rate
Variance = ( Budgeted Rate Actual Rate ) x Actual Units
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4.Sales Variances Sales variances are also developed like cost
variances, i.e. materials cost, labor cost and overhead cost
variances. As sales variance is related to the revenue generation,
unlike cost variance the positive difference between budgeted sales
and actual sales is considered as unfavorable variance and vice
versa. Sales variances are used for measuring the efficiency of the
sales staff. Like direct materials, direct labor and variable
factory overhead variances, these variances are directly related to
the Sales Volume.
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4.Sales Variances Sales variance are classified as under :
Sales Variance = Budgeted Sales (In Rs.) Less Actual Sales (In Rs.)
= (Budgeted Sales Volume x Budgeted Price) Less(Actual Sales Volume
x Actual Price) Like Direct material cost variances, the above
variances is further spitted into following two subcategories on
volume and price. a)Sales Volume Variance = (Budgeted Sales Volume
Less Actual Sales Volume) x Budgeted Price b)Sales Price Variance =
(Budgeted Price Less Actual Price) x Actual Price
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~> Mixed Variances Mix Variances arise in case where the
unit of production uses different mix of the material. E.g. In case
of the detergent powder generally three types of raw materials are
used- soda ash, slurry and color. Standard proportion of these
materials is prescribed. But where the actual proportion deviates
from the standard mix, then the mix variance is generated.
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Various variances are analyzed by reasons for control purposes.
1.Reasons for the material price variances : o Change in price. o
Cash discount not taped. o Purchase of materials other than
standard material. 2. Reasons for material usage variance : o Poor
workmanship resulting to wastages. o Purchase of defective
material. o Rejection during inspection. REASON FOR THE VARIANCES
:
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3. Reasons for labor rate variances : o Change in wage rates. o
Employing highly paid operator than standard operator. o Standard
is ignored. 4. Reasons for labor efficiency variances : o
Employment of sub-standard operator. o Inefficient operations. o
Idle labor time.
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5. Reasons for labor rate variances : o Change in wage rates. o
Employing highly paid operator than standard operator. o Standard
is ignored. 6. Reasons for the variable factory overhead variances
: Variable factory overhead arise because of the variation in
indirect material, indirect labor and indirect expenses which are
treated as variable factory overhead due to their insignificant
value.
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7. Reasons for sales price variances : o Lower price to meet
competition, idle capacity. o Quantity discount offered. o Cash
discount offered. 8. Reasons for sales volume variances : o
Inability to maintain delivery schedule. o Unexpected entry of new
competitor. o Strategic aggressive market presentation by the
existing competitor who will grap the market share of the
company.