15.standard Costing22

FinancialandManagementAccounting
Unit15
Unit15
StandardCosting
Structure:
15.1
Introduction
Objectives
15.2
Definition
SelfAssessmentQuestions1
15.3
Meaning
15.4
StandardcostandBC
15.5
Establishorstandard
15.6
Varianceanalysis
15.7
Materialvariance
15.8
Materialpricevariance
SelfAssessmentQuestions 7
15.9
Materialusage
15.10 MaterialMix
15.11 MaterialYield
15.12 Directlaborvariance
15.13 LaborEfficiencyVariance
15.14 Laborratevariance
15.15 Labormixvariance
15.16 Laboryieldvariance
SikkimManipalUniversity
300
Unit15
TerminalQuestions
AnswertoSAQsandTQs
15.1Introduction
Standardcostingisaveryimportantsystemofcostcontrol.Itisasystemwhichseekstocontrol
thecostofeachunitorbatchthroughdeterminationbeforehandofwhatshouldbethecostand
then its comparison with actual cost. Through planned accounting procedures, the difference
betweentheactualandpredetermined costsareanalyzedandthenpromptlyreporteduponto
managers.Basedonthis,itispossibletotakecorrectiveandpreventiveactionaswellasemploy
thedataforplanning,coordinationandcontrol.
LearningObjectives:
Afterstudyingthisunit,youshouldbeabletounderstandthefollowing
1.Definethestandardcosting.
2.understandthemeaning.
3.Differentiatebetweenstandardcostandbudgetarycontrol.
4.Acquaintwithestablishmentofstandards.
5.Practicethevarianceanalysis.
15.2DefinitionOfStandardCosting
Standardcostingmaybedefinedasatechniqueofcostaccountingwhichcomparesthestandard
costofeachproductorservicewiththeactualcosttodeterminetheefficiencyoftheoperationso
thatanyremedialactionmaybetakenimmediately:Brownand Howard.AccordingtoJ.Batty
standardcostingisasystemofcostaccountingwhichisdesignedtoshowindetailhowmuch
eachproduct should cost to produce and sell when a businessis operating ata statedlevelof
efficiencyandforagivenvolumeofoutput.
1. Standardcostisdefinedas___________.
15.3Meaning
Themeaningofstandardcostingisfocusedonthemethodoffinancialcontrol.Itcomparesthe
predeterminedandactualcosts.Itisnormallyassociatedcloselywithbudgetarycontrol.Many
organizations use both the systems although one can be used without the other. Standard
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costing is mainly applied to products and processes. Therefore, it is atechnique that is more
commonlyusedinmanufacturingorganization,thoughitmayalsobeusefulinserviceindustries.
As in budgetary control, itallows the comparison of predetermined costs and income with the
actualcostsandincomeachieved.Anydifferencecanthenbeinvestigated.
1. Standardcostisbasically_________.
15.4StandardCostAndBudgetaryControl
Both are closely interrelated. They both aim at the improvement of the system of managerial
control. They both achieve the same objective of maximum efficiency and cost control by
establishing predetermined standards. They compare actual performance with the
predetermined standard. They take necessary steps to improve the situation wherever
necessary. Both techniques are forward looking. However, the following are some of the
differencesidentified.
1. Thescopeofbudgetarycontroliswider.Itisintegratedplanofaction,acoordinatedplanin
respectofallfunctionsofanenterpriseThescopeofstandardcosting,ontheotherhand,is
limited to the operating level. Here too, it is further linked to costs. Budgetary control is
extensivewhereasstandardcostingisintensiveinitsapplication
2. Budgetary control deals with costs and revenues. But standard costing restricts only with
costs.
3. Budgetary control takes into account all activities such as production, sales, purchase3s,
finance, capital expenditure, personnel whereas standard costing is restricted to deal with
onlycosts.
4. Budgetary control targets are based on past actual adjusted to future trends. In Standard
costing,standardsarebasedontechnicalassessment.
5. Attheapproachlevel,budgetedtargetsworkasthemaximumlimitofexpensesabovewhich
theactual expenditure shouldnotnormally exceed. Under standard costing, standardsare
attainablelevelofperformance.
6. Budgetareprojectionoffinalaccounts.Standardcostsareprojectionofonlycostaccounts.
7. Budgetarycontrolemphasizestheforecastingaspectofthefutureoperations.Standard
8. Costingscopeandutilityislimitedtoonlyoperatingleveloftheconcern.
9. Inbudgetarycontrol,thedegreeofvarianceanalysistendstobemuchlessandvariancesare
notrevealedthroughtheaccountsbutarerevealedintotal.Butinstandardcosting,variances
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are analyzed in details according to their originating causes and ar3e revealed through
differentaccounts.
10. Budgetary control is possible even in parts of expenses according to the attitude of
management. A standard costing system can not be operated in parts. All items of
expenditureincludedincostunitsaretobeaccountedfor.
1. Standardcostandbudgetcontrol_________.
15.5EstablishmentOfStandards
Understandardcostingsystem,thereisaneedtodeterminethestandardcostsforeachelement
of cost. The standards arefixedforthree mainelementsofcost namely direct material,direct
laborandoverhead.
Standardsshouldbefixedforeachofthemseparately.
Direct Material : Standardmaterial costforeachproductshouldbepredetermined.This will
requirethedeterminationofmaterialquantitystandardandmaterialpricestandard.Thestandard
quantity of each type of materialsis determinedby theengineeringdepartment onthe basisof
pastrecords,experienceandchemicalandengineeringtests.Whilesettingsuchstandards,an
allowanceshouldbemadeforthenormalwastageofmaterials.Thestandardpriceforeachitem
ofmaterialisestablishedaftercarefullystudyingthemarketconditionsandforecastingthetrend
ofpricesforafutureperiod.Thisisdonebycostaccountantwiththehelpofpurchaseofficer..
Directlabor:Thestandardlabortimeandstandardlaborrateshouldbeestablished.Standard
timefor each grade oflabor isfixed by the production engineering departmenton the basis of
time and motion study. Infixing the standard time due allowance shouldbemadeforfatigue,
tool setting, receiving instructions and normal idle time. The standard rates of pay for each
categoryoflaborarefixedbythecostaccountantwiththehelpofpersonneldepartment.
Overheads : These are aggregate of indirect materials, indirect labor and indirect expenses/
Separatestandardsmustbeestablishedforvariableandfixedoverheads.Asvariableoverheads
perunitorperhourremainconstantateachlevelofoutput/salesbuttotalamountofvariable
overheads tend to vary directly with volume of output / sales . Therefore, it is sufficient to
calculateonlyastandardvariableoverheadrateperunitorperhour.Thisisdonebydividingthe
total variable overheads for the budget period by the budgeted output. In respect of fixed
overheads standards are set for total fixed overheads for the budget periodand the budgeted
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outputandstandardfixedoverheadrateiscomputedbydividingthebudgetedfixedoverheads
withbudgetedoutput.
1. Standardsareestablishedfor_____.
15.6CostVarianceAnalysis
The distinctive feature of standard costing system is variance analysis. By definition, the term
variancemeansthevariationordeviationoftheactualfromthestandard.Instandardcosting,it
impliesthedifferencebetweentheactualcostandstandardcost.Variancesindicatetheextent
towhichstandardssethavebeenachieved.Ifproperlyrecordedandanalyzed,thesevariances
becomeveryimportantandusefultoolformanagerialcontrol.
Variancesbythemselvesarenottheend.Theyarecomputedtoknowthereasonsandfixthe
responsibility for any deviations of actual performancesfrom pre determinedtargets. Basedon
thiscorrectivemeasuresareproposedforadoptioninfuture.Therefore,varianceanalysisisthe
processofanalyzingvariancesbysubdividingthetotalvarianceinsuchawaythatmanagement
can assign responsibility for off standard performance It is hence a very useful means for
interpretingoperatingresultsandspottingsituationscallingforcorrection.
Variancesareinterpretedasfavorableandunfavorablevariances.Eachvarianceisinterpreted.
Interpretationhelpsindecidingwhetheravarianceisfavorableorunfavorable.Whentheactual
costislessthanthestandardcost,thedifferenceistermedasfavorableorcreditvariance.On
the other hand, when actual cost exceeds the standard cost, the difference is termed as
unfavorable, adverse or debit variance. Ordinarily, a favorable variance is a sign of
efficiency of the organization whereas an unfavorable variance a sign of inefficiency. But in
varianceanalysis,thisgenerallogicmayprovetobeuntrue.Therefore,allvariancesshouldbe
interpretedin relationto eachotherand only the net resultbe reported tothe managementfor
correctiveaction.
Controllable and Uncontrollable variances : The controllable variance can be identified as the
primaryresponsibilityofaspecifiedpersonoradepartment.Favarianceisduetothefactors
beyond the controloftheconcernedperson ordepartment,itis said tobe uncontrollable. No
personordepartmentcanbeheldresponsibleforuncontrollablevariances.Actuallyrevisionof
standardsisrequiredtoremovesuchvariancesinfuture.
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1. Variationrefers________.
2. Variancesanalysisis_________________.
3. Variancesareinterpretedas_____and____.
15.7MaterialVariance
It refers to material cost variance. It is the difference between the standard cost of materials
allowedfortheactualoutputandtheactualcostofmaterialsused.Itmaybeexpressedas:
MaterialCostVariance=StandardCostActualCost
Wherestandardcost=actualoutputxstandardrateperunitofoutput
Orstandardquantityofmaterialforactualoutputxstandardpriceperunitofmaterial
Actualcost=actualquantityconsumedxactualpriceperunitofmaterial.
Afavorablevariancewouldresultifactualcostislessthanthestandardcostandviceversa.
The material cost variance is the sum total of material price variance and material usage
variance.
1.
Materialvarianceis______________.
Example: DRLtdhasdecidedtoextenditsrangetoincludeDenimJackets.Onejacketrequires
astandardusageof3metersofdirectmaterialwhichhasbeensetatastandardpriceofRs.2.20
permeter.Intheperiod,80jacketsweremadeand260metersofmaterialconsumedatacost
ofRs.1.95permeter.Calculatethedirectmaterialstotalvariance.
Solution: Calculatethestandardquantityofmaterialsfortheactuallevelofproduction
For1jacket=standardusageis3meters
Thereforefor80jackets,itis80x3meters/1or240meters
Considertheformula,(SQxSP)(AQxAP)
=(240xRs.20)=(260xRs.1.90)orRs.528Rs.507
=Rs.21(Favorable)variance.
The difference indicates that them company has spent less on materials than planned for the
levelofproduction.
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15.8MaterialPriceVariance
Under Materialpricevariance , theprice paidfor materialsis differentfrom the predetermined
price. It is calculated by multiplying the actual quantity of materials used with the difference
betweenstandardandactualprices.Theformulais:
MaterialPriceVariance=(StandardPriceActualPrice)xActualquantityused
Shorten=(SPAP)AQ
Afavorablevariancewouldresultiftheactualpriceislessthanthestandardpriceandviceversa.
1. Materialpricevarianceis__________.
Example:CalculatethedirectmaterialpricevariancefromthedataofDRLtdabove.
Solution: Formula:(SPAP)AQor(Rs.2.20Rs.1.90)x260metersorRs.78FAV
Itisfavorablebecausethecompanyhaspaidlessforthematerialsthanplannedforthatlevelof
production
15.9MaterialUsageVariance
Itisalsoknownasmaterialquantityvarianceorefficiencyvariance.Itisthatportionofmaterial
cost variance which measures the difference in material cost arising from higher or lessa
consumption of materials than the standard material consumption for the actual output. It is
calculatedbymultiplyingthestandardpricewiththedifferencebetweenthestandardandactual
quantititiesofmaterials:
MaterialUsageVariance=(StandardQuantity ActualQuantity)StandardPrice
Shorten=(SQAQ)SP
Afavorablevariancewouldresultiftheactualquantityislessthanthestandardquantityandvice
versa.
1. Materialusageis_______.
Example1: CitingDRsexample:thedirectmaterialusagevarianceis:
(SQAQ)SPor(240260meters)xRs.2.20perunitorRs.44(ADV)
It is adverse because the company has used more materials than planned for that level of
production.
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Example2:ItisobservedthatoneunitofproductXrequires3kgsofmaterialMatRs.2perkg
DuringJanuary2008,200unitsofproductXwereproducedconsuming620kgsofmaterialM,
allofwhichwaspurchasedatRs.1.80perkg.Computematerialcostvariances.
Solution: MaterialPriceVariance:(SPAP)AQor(2.001.80)x620oRs.124F
MaterialUsagevariance:(SQAQ)SPwhereSQforactualconsumptionis
200x3kg/1kg0r600kgs
(600620_Rs.2orRs.40A
MaterialCostVariance:MaterialPriceVariance+MaterialUsagevariance
124(F)+40)A)orRs.84(FAV)
Example3:Forproducingacommodity,thestandardquantityofmaterialwasfixed10kgsand
standard price was fixed at Rs.2 per kg. The actual quantity was consumed 12 kgs and the
actualpricewasRs.1.90perkg.Calculatethematerialvariances.
Solution:MUV=(SQAQ)SPor(1012)2or2x2or4ADV
MPV=(SPAP)SQor(21.90)12or1.20FAV
MCV=(SQxSR)(AQxAP)=(10x2)(12x1.90)=2.80ADV
Example4: Calculatethematerialvariance.
Standard
Actual
Materialfor80kgsOutput1,65,000kgs
Finishedproducts100kgsMaterialused2,00,000kgs
PriceperkgRs.0.80paidActualcostRs.1,70,000
Solution: Calculationofstandardquantity
For80kgs,finishedproductsneeds100kgsmaterial
Therefore,for1,65,000kgs,itis1,65,000x100/80
Or2,06,250kgs.
MUV=(SQAQ)SPor(2,06,2502,00,000)Rs.0.80
=Rs.5,000FAV
MPV=(SPAP)AQor(0.800.85)2,00,000orRs.10,000,ADV
Costof2,00,000kgsisRs.1,70,000
Therefore,costofonekgis0.85
MCV=(SQxSR) (AQxAP)
(2,06,250x0.80)(2,00,000x0.85)
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=Rs.5,000ADV.
Example 5: It is estimated that in the manufacture of a product, for each ton of materials
consumed 100 units should be produced. The standard price per ton of materials is Rs.10.
DuringthefirstweekofJanuary,100tonsofmaterialswereissuedtotheProductionDepartment.
ThepurchasepriceofwhichwasRs.10.50perton.Theactualoutputfortheperiodwas10,250
units.Calculatethecostvariances.
Solution: Standardrateofmaterial:Standardcostperton/standardoutputpertonor10,250
units/100tonsor102.5perton
Materialusage(SQAQ)SpwhereSQ=Actualoutput/standardquantityor10,250/100tons
=102.5ton(onetonfor100unitsRs.10,250,thestandardquantityis102.5tons.(102.5100
tons)xRs.10orRs.25FAV
MPV=(SPAP)AQ(1010.50)x100=Rs.50ADV
MCV=(SQxSP)(AQxAP)or102.5x10100x10.50orRs.25ADV
Example6: Afactory worksonstandardcostingsystem.Thestandardesti8matesofmaterial

forthemanufactureof1000unitsofacommodityis400kgatRs.2.50perkg.When2000units
ofacommodityaremanufactured,itisfoundthat820kgsofmaterialisconsumedatRs.2.60per
kg.Calculatethematerialvariance
Solution: Firstcalculatethestandardquantityandstandardcost.
Standard quantity : For manufacture of 1000 units, the standard estimates = 400 kgs.
Therefore,foractualmanufacturedquantity,thestandardis2000x400/1000or800kgs.
Standardcost=StandardquantityxStandardrateor800xRs.25orRs.2,000
ActualCost=820xRs.2.60orRs.2,132
Materialcostvariance=StandardcostActualcostor200021312or132ADV.
Materialpricevariance=(SRAR)AQor2.502.60x820orRs.82ADV
Materialusagevariance=800820x2.50orRs.50ADV
15.10MaterialMixVariance
Thisvariancearisesonly whenmorethanone typeofmaterialsareusedinmanufacturingthe
productandthequantitiesofmaterialsissuedtoproductionarenotinproportionofstandardmix.
It is defined as that portion of the direct materials usage variance which is due to difference
betweenthestandardandactual,compositionofamixture.Forcalculatingthemixvariance,first
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calculate the quantities of revised standard mix. This is calculated by dividing the total
quantities of actual mix in standard mix proportion. In the terminology of standard costing,
quantitiesofrevisedstandardmixarereferredtoasrevisedstandardquantity.Mixvarianceis
obtained by multiplying the standard price of materials with the difference between revised
standardquantityandactualquantityforeachmaterial.Itmaybeexpressedasfollows:
MaterialMixVariance=Revisedstandardquantityforeachmaterialactual
MMVQuantityforeachmaterial)xstandardprice.
Where RSQ = standard quantity for each material / total of standard quantity of all types of
materialsxactualmixtotal
RSQ=Totalweightofactualmix/totalweightofstandardmix
Xstandardquantity.
Afavorablevariancewouldresultifactualquantityislessthanrevisedstandardquantityandvice
versa.
1. Materialmixvarianceto__________.
Example: ThefollowingextractsareextractedfromthebooksofDRLtd.
StandardMix
ActualMix
MaterialQtyRateTotalQtyRateTotal
X30051,50028051,400
Y200
102,000220102,200
Total500500
Calculatethematerialmixvariance
Solution:
Revisedstandardquantity=Totalweightofactualmix/totalweightofstandardmixxstandard
quantity
ForMaterialX=500/550x300=300
ForMaterialY=500/500x200=200
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MMV=ForX=(300280)_5=100FAV
Y=(200220)10=200ADV
TotalMixvariance100ADV
15.11MaterialYieldVariance
Thisvariancearisesonlywhentherateofoutputisknown.Itisthatportionofthedirectmaterial
usagevariancewhichisduetothedifferencebetweenstandardyieldspecifiedandactualyield
obtained.Itmeasuresthelossorsavingduetowastageofmaterials.Thisvarianceiscalculated
asfollows:
MYV=(StandardyieldActualYield)xstandardrateperunitofoutputor
(StandardLossActualLoss)xstandardrateperunitofoutput
where standard rate = standard cost of standard mix / standard output from standard mix
standardyield=standardoutputfromstandardmix/standardmixtotalxactualmixtotalMYVis
an output variance and hence a favorable variance would result if actual yield is more than
standardyieldandviceversa.
1. Materialyieldvarianceis__________.
Example1: ThefollowingextractsrefertoDRLtd.
StandardMix
ActualMix
MaterialQtyPriceTotalQtyPriceTotal
X60530056
5280
Y40104004410440
100700100
720
Loss30%30Loss25%25
a.
75
Calculatethematerialyieldvariance.
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Solution:
MaterialYieldVariance:(StandardyieldActualyield)Standardrate
Wherestandardrate=Totalcostofstandardmix/netstandardoutputor700/70=Rs.70
MYV=(7075)10orRs.50ADV.
Example 2: DR manufactures a product X. It is estimated that for each ton of material
consumed, 100 articles should be produced. The standard price per ton of material is Rs.10.
DuringthefirstweekofJanuary2008,100tonswereissuedtoproduction,thepriceofwhichwas
Rs.10.50perton.Productionduringtheweekwas10,200articles.Computethevariances
Solution:
Costvariance:StandardcostActualCostorRs.1,020Rs.1,050=Rs.30ADV
Working:Actualoutputxstandardrateperunitofoutputor10200x0.10orRs.1,020
SR=Actualoutput/standardoutputpertonor10,200/1`00or102tons
Pricevariance:Actualquantityofinput(StandardpriceActualPrice)or(1010.50)x100=
Rs.50ADV
Usage Variance : (Standard quantity Actual quantity)standard price or (102 100) x10or
Rs.20FAV
Yieldvariance=(StandardyieldActualyield)standardrateperunitofoutputor(10,000
10,200)0.10orRs.20FAV
Working : Standard yield = Actual quantity of material x standard rate per ton of output or
100x100=10,000articles.
Example3:ThestandardmixofproductMSisasfollows
Materials
QtyinkgPriceperkg
A505
B204
C3010
Thestandardlossinproductionis10%ofinput.Thereisnoscrapvalue.Actualproductionfor
amonth was7,240kgsofMSfrom80mixes.Actualpurchasesand consumptionofmaterials
are:
A4,1605.50
B1,6803.75
C2,5609.50
Solution
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Statementshowingstandardinputrequirementsof80mixesofproductMS
MaterialStandard
Actual
SQSRSCAQARAC
A40005
20,00041605.5022,880
B160046,40016803.756,300
C24001024,000
25609.5024,320
Total800050,400840053,500
LessStd.Loss800
Finaloutput7200
50,400
SCperkgoffinishedproduct=50,400/7200kg=Rs.7perkg
Costvariance:SC ACor7x724053500orRs.2,820ADV
PrinceVariance:(SRAR)xA Q
A=Rs.2,080ADV
B=Rs.420FAV
C=Rs.1,280FAV
MixVariance=(RSQAQ)SR
A=(8400x50/100)Rs.5=200FAV
B=8400x20/100xRs.4Nil
C=8400x30/100xRs.10=400ADV
Total:200ADV
Yieldvariance=(SYAY)SRperkg
Standardyield=8400kgx9/10or7560klg
(7,5607,240)Rs.7orRs.2,240ADV
15.12DirectLabourVariances
ThesameprinciplesapplytothecalculationofDirectLaborvariancesasforthedirectmaterial
variances.Standardsareestablishedfortherateofpaytobepaidfortheproductionofparticular
products and labor time taken for their production. The standard time taken is expressed in
standardhoursorminutesandbecomethemeasureofoutput.Bycomparingthestandardhours
allowedandtheactualtimetaken,laborefficiencycanbeassessed.Inpractice,standardtimes
areestablishedbywork,timeandmethodstudytechniques.
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DirectLaborvariance: Itisthedifferencebetweenactuallaborcostandthestandardlabor
costofproductionachieved.Itiscalculatedas:
TotalLaborCost=HoursworkedxRateperhour
LaborCostVariance=StandardCostActualCost
Shorten=SC ACOr(Standardlaborhoursxstandardrateperhour)(Actuallaborhours
xActualrateperhour)
1. Directlaborvarianceis___________.
Example: ThemanagementofDRLtddecidesthatittakes6standardhourstomakeoneDenim
jacket and the standardratepaidtolaboris Rs.8 perhour. Theactualproductionis900 units
andthistook5,100hoursatarateofRs.8.30perhour.Calculatethedirectlabortotalvariance.
Solution: Calculatethestandardlaborhourfor900jackets
ForoneJacketproduction,thestandardhouris6
Therefore,forproducing900units,thestandardhouris900x6/1=5,400hours
DLV=(5,400x8))5,100x8.30)=Rs.870favorable.
Afavorablevariancewouldresultwhenactualcostislessthanstandardcostandviceversa.
Labor cost variance is the sum total of labor rate variance, labor efficiency variance, rate
variance,idletimeandlaborcalendarvariance
15.13LabourEfficiencyVariance
Itisthatportionoflaborcostvariancewhichisduetothedifferencebetweenthestandardlabor
hours specified for the activity i.e output achieved and the actual labor hours worked. It is
calculatedbymultiplyingstandardrateofwageswiththedifferencebetweenstandardhoursand
actualhoursworked.
LEV=Standardhoursactualhoursworked)xstandardrate
Shorten=(SHAH)SR
Afavorablevariance would result whenactual hours worked are less than standard hours and
viceversa.
1. Laborefficiencyvarianceto_________________.
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Example:Fromthedataabove,calculatethelaborefficiencyvariance
Solution: (5400standardhours5100actualhours)xRs,8standardrate
Rs.2,400FAV
15.14LaborRateVariance
Itisthatportionoflaborcostvariance whichisduetothedifferencebetweenthestandardrate
specified and actual rate paid. It is calculated by multiplying the actual hours paid with the
differencebetweenstandardratespecifiedandactualratepaid
LaborRatevariance=(StandardRateActualRate)xactualhourspaid
Shorten=(SRAR)AH
1. Laborratevarianceis__________.
Example1: CitingDRexample,calculatethedirectlaborratevariance
Solution:(Rs.88.30)x5,100hoursorRs.1,530ADV
Example 2: The productionof a certain unitisassumedto require18hourslabor at a rateof
Rs.1.25perhour. On completionof aunit,it wasfound that thetimetaken was 16 hours, the
wageratebeingRs.1.50perhour.Calculatelaborvariances.
Solution: Costvariance=Standardcostactualcost
Rs.22.50Rs.24orRs.1.50ADV
Working:SC=Standardhoursxstandardrateperhour=18xRs.1.25=Rs.22.50
OR
LCV=LEV+LRV
2.5FAV+4ADV=1.5ADV
Efficiencyvariance=(Standardhoursactualhoursworked)standardrate
(1816)x1.25orRs.2..50FAV
Ratevariance=(Standardrateactualrate)actualhourspaid
(1.251.50)16orRs.4ADV
LaborIdleTimevariance: Itisthatportionoflaborcostvariancewhichisduetoabnormalidle
timeof workers. Thisvariance is calculated to show separately the effect of abnormal causes
affectingproductionsuchasfailureofpowersupplies,machinebreakdown,waitingformaterials,
waitingforinstructions,strike,lockouts.Itiscalculatedas:
Laboridletimevariance=Idlehoursxstandardhourlyrate
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Thisvarianceisalwaysanadverseone.
Example 3: In the ma manufacture of a product, 200 employees are engaged at a rate of 50
paiseperhour.Afivedayweekof40hoursisworkedand thestandardperformanceissetat
250unitsperhour.DuringthefirstweekinJanuary,sixemployeewerepaidat45paiseanhour
andfourat56paiseanhour,theremainingemployeeswerepaidatstandardrates.Thefactory
stoppedproductionforonehourduetopowerfailure.Calculatevariances.
Solution: Efficiencyvariance=(Stdhoursactualhoursworked)xstdrate
(80007800)0.50orRs.100FAV
Ratevariance=(SRAR)AH
(0.50190employeesx40hours=Nil
(0.500.40)x6x4012FAV
(0.50.56)4x409.60ADV
Total2.40FAV
Idletimevariance=Idlehoursxstdrateperhour
200hrsand0.50orRs.100ADV
Laborcostvariance=LEV+_LRV+Idletimevariance
100FAV+2.40FAV+100ADV=Rs.2.40
15.15LabourMixVariance
This variance arises only when different types of workers (women and men workers, trained,
semitrained and untrained workers, are employed in manufacturing. Ifactual workingforce of
different gradesof workers isnotinthepredetermined ratio, then the mixvariance will occur.
Thevarianceshowstothemanagementastohowmuchofthelaborcostvarianceisduetothe
changesinthecompositionoflaborforce.Itiscalculatedasfollows:
LMV= (Revisedstandardhoursactualhoursworked)xstandardhourlyrate
Shorten(RSLHALH)xSR
Where revised standard hour = total time of actual worker / total time of standard workers x
standardlaborrate.
1. Labormixvarianceis_________________.
Example1: Thelaborbudgetforaweekisasfollows:
40skilledmenatRs.1.50perhourfor80hours
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80unskilledmenatRe.1perhourfor80hours
Actuallaborforcewasusedaregivenbelow
60unskilledmenatRe.1perhourfor80hours
Calculatelabormixvariance.
Solution : Revised standard labor hours = total time of actual workers / total time of standard
workersxstandardlaborhours
Skilledworker=80/80x80=80hours
Unskilled=80/80x80=80hours
LMV=Skilled=(3,2004,800)1.50=Rs.2,400ADV
Unskilled=(6,4004,800)Re.1=Rs.1,600FAV
TotallabormixvarianceRs.800ADV.
15.16LaborYiedVariance.
Thisisduetothedifferenceinthestandardoutputspecifiedandtheactualoutputobtained.The
formulaisasfollows:
LYV:(ActualoutputStandardoutput)xstandardcostperunit
1. Laboryieldvariance________________.
Example1: Actualoutput460units.Standardoutput500units.StandardrateofwagesRs.9per
hour.AStandardtime2hourperunit.
Solution: Standardcostperunit=Rs.9x2hours=Rs.18
LYV=(AOSO)SCor(460500units)xRs.18orRs.720ADV
Example2: Calculate(a)Laborratevariance(b)laborefficiencyvariance(c)laborcostvariance
Standard: Laborrate0.24paiseperhour.Laborhours3perunit.
Actual:Unitsproduced250.Laborrate0.25periseperhour.Hoursworked800.
Solution: LRV:(SR=AR)AHorRs.8ADV
LEV=(SHAH)SRorRs.12ADV
LCV=(SLCALC)or(SHxSR)(AHxAR)=Rs.20ADV
Example3:ThestandardlaborforceofDRLtdisasfollows:
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20skilledmenatRe.0.50perhourfor40hrs
40semiskilledmenat0.35perhourfor40hrs.
Duringacertainweek,theactual,laborforcewas:
30semiskilledmenat0.40perhour
Analyzelaborvariancefor40hours.
Solution: Calculationofstandardhours
Actualhours:30x40=1,200hours
30x40=1.200hours
20x40=800hours
40x40=1,600hours
Total2,400hours
Sincestandardhoursandactualhoursarethesame intotalthere wouldbenolaborefficiency
variance.
Laborcostvariance:SLCALCorRs.120ADV
Laborratevariance:Skilled:(SRAR)AHorNil
Semiskilled(0.350.40)1,200or60ADV
Labormixvariance=(SHAH)SR
Skilled(8001200)x0.50or200ADV
Semiskilled(1,6001,200)Rs.0.35or140FAV
Example4: Acontractjobisscheduledtobecompletedin20weeks withalaborforceof10
skilledworkers,4semiskilledworkersand6unskilledworkers.Thestandardweeklywagesof
eachtypeofworkersare:SkilledRs.50,semiskilledRs.40andunskilledRs.30.Theworkis
actually completed in 25 weeks with a labor force of 8 skilled, 5 semiskilled and 7 unskilled
workersandtheactualweekly wageratesaverageRs.55forskilled,Rs.45forsemiskilledand
Rs.25forunskilledworkers.Analyzethevariance.
317
Unit15
Solution
GradeStandard
Actual
No.WeeksWeeklyrateAmountNo.WeeksRateAmountSkilled
1020Rs.5010,000825Rs.5511,000Semiskilled
420Rs.403,200525Rs.455,625Unskilled
620Rs.303,600725Rs.254,375
l2016,8002021,000
SkilledSemiskilledUnskilled
LRV=(SRAR)AT1,000ADV625ADV875FAV
LEV=(STAT)SRNil
1,800ADV1.650ADV
LMV(RSLHALH)SR2500FAV1,000ADV750ADV
Total750FAV
Laborcostvariance:LRV+LEV=750+3450=4200ADV
Laboryieldvariance=(Actualweeksstandardweeks)Standardrateperhour
(500400)Rs.42=Rs.4,200ADV(16800/(20nosx20weeks)
RSLH:Totaltimeofactualworkers/totaltimeofstandardworkersxStandardlaborhours
500/400x200=250=(250200)50=Rs.2,500FAV
500/400x80=100=(100125)40=Rs.1,000ADV
500/400x120=150=(150175)x30=Rs.750ADV
TerminalQuestions
1. Howisstandardcostingrelatedtobudgetarycontrol?
2. Howdoyoufixstandardfordirectmaterial,directlaboranddirectoverheads?
3. Writeshortnoteon:
a. MaterialPriceVariance
b. MaterialMixVariance
c. MaterialYieldVariance.
4. Brieflydescribelabormixvarianceandyieldvariance.
5.Computeprice,usage,costandmixvariance
318
Unit15
MaterialStandard
Actual
QuantityPriceTotalQtyPriceTotal
A61.50952.4012
B2
3.57166
6.DatagivenbelowpertaintoDRLtd
DEPARTMENT
AB
Actualgrosswages2,0001,800
Standardhoursproduced8,0006,000
Standardrateperhour0.300.35
Actualhoursworked8,0005,800
Calculatelaborvariances.
AnswerSelfAssessmentQuestions
1. Costofeachproduct
1. Finicalcontrol
1. Closelyinterrelated
1. Directmartial,directlabor,overheads
1. Deviation
2. Processofanalysis
3. Favorableandadverse.
1. SCAC
319
Unit15
1. (SPAP)xAQ
1. SQAQxSP
1. RSQAQxSP
1. SYAYxSR
1. SCAC
1. SHAHxSR
1. SRARxAH
1. RSLHALHxSR
1. AOSOxSC
AnswerforTerminalQuestions
1. Refertounit15.4
2. Refertounit15.5
3. Refertounit15.8,15.10and15.11
4. Refertounit15.15and15.16
5. Pricevariance=(SRAR)AQforA=Rs.4.50ADV
ForB=Rs.2.50ADVtotalRs.7ADV
Usagevariance:(SQAQ)SPforA=1.50FAV
ForB=3.50FAVTotalRs.5FAV
CostVariance=MUV+MPV=57or2ADV
Mixvariance=(RSQAQ)SPwhereRSQ=A6/8x6or4.5kgs
320
Unit15
B6/8x2or1.5kgs
ForA(4.55)x1.5or0.75ADV
ForB(1.51)x3.5or1.75FAVThereforetotal1FAV
6. StandardlaborcostDeptA8000x0.30=2,400
B6,000x0.35=2,100
ActualrateA2000./8000=0..25
B1800/5800or900/29paise
LRV=(SRAR)AHDeptA=(0.300.25)8000=400FAV
B=(.35900/25)x5800=230ADV
LEV=(SHAH)SRForA=(80008000)x0.30Nil
B=(60005800)0.3570ADV
LCV:(SLCALCForA(24002000)400FAV
B(21001800)300ADV
321

15.standard Costing22

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Example6: Afactory worksonstandardcostingsystem.Thestandardesti8matesofmaterial

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