Upload
alankarmathur
View
62
Download
1
Embed Size (px)
Citation preview
Standard Cost & Variance Analysis
Management Control System
Kapil Agarwal
Management Control
Control is the process of ensuring that action conform to plans
To ensure operations are in conformity there are two waysStandard CostVariance Analysis
Standard
It is an approach to implement and achieve the goals of the firm
Standards can be set only for repetitive tasks
Standard Vs Budget
Budget Standard
Budget relates to entire activity
Standard applies to every task
It relates holistically It relates to same information on per unit basis
Prepared by management, consultants & finance people
By cost accountants
Used for planning and coordination
Used as a control device
Standard Costing
Types of costingActual Cost
Historical costStandard Cost
Predetermined cost
Standard Cost
Scientifically pre-determined cost of manufacturing
Either per unit or for certain nos of unitsCalculated for a certain period in immediate
futureUnder current operating conditions
Easy identification of inefficient operations
Measuring performanceControlling and reducing costMaintaining Inventory level
Advantage of Standard Costing
Levels of Standard Cost
Ideal– max. efficiency under favourable conditions
Normal/ Attainable– realistic, motivational
Expected
Ideal Standard Costs
Ideal cost refers to estimates of costs under perfect conditions
There would be no waste, scrap, idle items, no machine breakdown etc
Normal Standard Costs
Assume normal conditions of operationStandard cost means Normal Standard
Cost during the discussion
Establishing Cost Standards
Ways of establishing cost standardsEngineering estimatesObserved behaviorPredicted behaviorDesired behavior
Components of Standard Cost
Direct Material CostDirect Labour CostOverheads
Variance Analysis
Difference between actual and standardActual Cost > Std Cost ---- unfavorableAC < SC--- favorable, sign of efficiency
Unfavorable variance suggests a condition that may require correction
Favorable variance suggest an opportunity that management can exploit
Variance Analysis: Benefits
BenefitsForms basis of cost controlQuantify corrective actionPinpoint responsibilities of managersBrings in Management Control
Classification of Variance
Controllable It arises when responsibility for the variance
can be attributed to any individual/process Material wastage, labour hour wastage Suggest management to take corrective action
Uncontrollable It arises when responsibility for the variance
cannot be attributed to any individual/process Price variation in material/ labor, breakdown
Types of Variance
Price variance Cost Variance Quantity/Volume variance Efficiency variance– quantity produced in
available working hours Capacity variance
Calendar variance– working days available in month
Idle time variance– hours lost due to breakdowns
Types of Variance Sales variance Operating profit due to sales volume
Sales quantity is analyzed Operating margins are assumed same
Operating profit due to selling price Operating margins are calculated
Territory mix variance Different proportion of product mix
Cost Variance
Cost Variance
Material Labor Overhead
Material Variance-- MCV
Material cost variance is difference of std cost of material and actual cost incurred
It has two components Material price variance
MPV = (SP – AP) X AQ Material quantity variance
Material Price Variance-- MPV
Factors responsible for MPV Inflation Change in tax structure, excise Rise in fuel prices leading to rise in freight Material hoarding Cash crunch, unable to avail cash discounts Change in technology, resulting in change in raw material
specification Failure to purchase even lot size (30T, 10T)
Material Quantity Variance-- MUV
Factors responsible for MUV (Mat. Usage Variance) Careless handling of material, process Improper machine adjustment Use of sub standard material Change in design Material theft, pilferage, wastage Defective tools, old technology
Material Mix Sub variance Substituting one raw material for another, even though total
input quantity of all materials does not exceed standard proportion amount
Labour Variance
Labor Cost Variance is difference of std labor cost and actual labor cost
Labor Rate Variance (LRV) Also called as Wage Rate Variance Difference between actual wage rate and Std wage rate
and actual labor hours worked LRV = (SR – AR) * AH* AO
Should be determined separately for skilled, semi skilled and unskilled laborers
Labour Rate Variance
Factors responsible for LRV Changes in basic wage structure or piece work rate Employing a worker mix (Skilled workers for semi skilled
jobs) Fulfilling urgent orders Seasonal demands During recession Casual and temporary workers proportion to employee
strength
Labour Efficiency Variance
It is a function of hours workers should have consumed in actual production, actual hours worked and standard wage rate
Reasons of LEV Working conditions– Ergonomic Study Machines, equipments, tools in proper condition Sub standard raw material Organizational efficiency Supervision Training to workers Labour turnover, Gang composition (labour mix)
Labour Efficiency Variance
LEV is further divided into Idle time variance– machined breakdown, raw
material unavailability, power failure Labour mix variance Labour yield variance
Overhead Variance
OV is difference between actual overhead cost incurred and std overhead cost
TypesVariable overhead varianceFixed overhead variance
Calendar Variance
Actual no of working days is different from standard no of working days
[No of Std working days(SD) – no of actual working days (AD)] * std fixed overheads per day
[SD- AD] * SFOD
Capacity Variance
Budgeted hours per day * actual days worked and actual hours worked
[ Budgeted hours on basis of actual days worked – Actual hours worked] * SOFR per hour
SOFR– std fixed overhead rate per hour
Thank You