Académique Documents
Professionnel Documents
Culture Documents
Standard
The word standard means a benchmark or yardstick. The standard cost is a predetermined cost which determines in advance what each product or service should cost under given circumstances. Real life examples are the following: ISO International Standards for Business, Government and Society. CMMI Process improvement approach from Carnegie Mellon University, USA. NBA An AICTE program for institution evaluation.
Standard cost
In the words of Backer and Jacobsen, Standard cost is the amount the firm thinks a product or the operation of the process for a period of time should cost, based up on certain assumed conditions of efficiency, economic conditions and other factors.
Standard Costing
The technique of using standard costs for the purposes of cost control is known as standard costing. Standard Costing is the preparation of standard costs and applying them to measure the variations from actual costs and analyzing the causes of variances with a view to maintain maximum efficiency in production. It is a technique which uses standards for costs and revenues for the purposes of control through variance analysis.
Cont.
Cost control-- Every costing system aims at cost control and cost reduction. The standards are being constantly analyzed and an effort is made to improve efficiency. Whenever a variance occurs, the reasons are studied and immediate corrective measures are undertaken. The action taken in spotting weak points enables cost control system. Right decisions-- It enables and provides useful information to the management in taking important decisions. For example, the problem created by inflating, rising prices. It can also be used to provide incentive plans for employees etc. Eliminating inefficiencies-- The setting of standards for different elements of cost requires a detailed study of different aspects. The standards are set differently for manufacturing, administrative and selling expenses. Improved methods are used for setting these standards. The determination of manufacturing expenses will require time and motion study for labor and effective material control devices for materials. Similar studies will be needed for finding other expenses. All these studies will make it possible to eliminate inefficiencies at different steps.
Types of standards
There are three types of standards: Current standards : - A current standard is a standard which is established for use over a short period of time and is related to current condition. It reflects the performance that should be attained during the current period. The period for current standard is normally one year. It is presumed that conditions of production will remain unchanged. In case there is any change in price or manufacturing condition, the standards are also revised. Current standard may be ideal standard and expected standard.
Cont..
Ideal standard: - This is the standard which represents a high level of efficiency. Ideal standard is fixed on the assumption that favorable conditions will prevail and management will be at its best. The price paid for materials will be lowest and wastes etc. will be minimum possible. The labor time for making the production will be minimum and rates of wages will also be low. The overheads expenses are also set with maximum efficiency in mind. All the conditions, both internal and external, should be favorable and only then ideal standard will be achieved. Expected standard: - this is the standard which is anticipated during a future specified budget period. In setting up this standard, a reasonable allowance is also made for unavoidable (normal) wastages. This standard is therefore, considered to be more realistic than the ideal standard because is based on realities rather than on the most ideal conditions.
Cont
Basic standard: - A basic standard may be defined as a standard which is established for use for an indefinite period which may a long period. Basic standard is established for a long period and is not adjusted to the preset conations. The same standard remains in force for a long period. These standards are revised only on the changes in specification of material and technology productions. It is indeed just like a number against which subsequent process changes can be measured. Basic standard enables the measurement of changes in costs. For example, if the basic cost for material is Rs. 20 per unit and the current price is Rs. 25 per unit, it will show an increase of 25% in the cost of materials. The changes in manufacturing costs can be measured by taking basic standard, as a base standard cannot serve as a tool for cost control purpose because the standard is not revised for a long time. The deviation between standard cost and actual cost cannot be used as a yardstick for measuring efficiency.
Cont.
Normal Standard: - As per terminology, normal standard has been defined as a standard which, it is anticipated, can be attained over a future period of time, preferably long enough to cover one trade cycle. This standard is based on the conditions which will cover a future period of five years, concerning one trade cycle. If a normal cycle of ups and downs in sales and production is 10 years, then standard will be set on average sales and production which will cover all the years. The standard attempts to cover variance in the production from one time to another time. An average is taken from the periods of recession and depression. The normal standard concept is theoretical and cannot be used for cost control purpose. Normal standard can be properly applied for absorption of overhead cost over a long period of time.
Setting Standards
Normally, setting up standards is based on the past experience. The total standard cost includes direct materials, direct labor and overheads. Normally, all these are fixed to some extent. The standards should be set up in a systematic way so that they are used as a tool for cost control. Various Elements which Influence the Setting of Standards: Setting Standard for Direct Material Setting Standard for Direct Labor Cost Setting Standard of Overhead
Variance Analysis
If actual costs are greater than standard costs the variance is unfavourable. If actual costs are less than standard costs the variance is favourable.
The difference between the actual costs and the standard costs are known as variances. Standard costing and the related variances is a valuable management tool. If a variance arises, management becomes aware that manufacturing costs have differed from the standard (planned, expected) costs.
Usage Variance
Price Variance
Formula MCV=(AQ*AP)-(SQ*SP) AQ=actual quantity AP=actual price SQ=standard quantity for actual output SP=standard price
Mix Variance
Yield Variance
Formula: Material yield variance = [(Standard loss in terms of actual input) (Actual loss on actual input)] (Average standard price) Material yield variance = Material usage variance Material mix variance
Efficiency Variance
Labour cost variance is the difference between the actual direct wages paid & standard direct wages specified for output achieved.
Formula : LCV=(AH*AR)-(SH*SR) AH=actual hours AR=actual rate SH=standard hours SR=standard rate
Mix Variance
Yield Variance
Situation A Labour mix variance = (Standard time mix Actual time mix) Standard rate per hour Situation B Labour mix variance = (Revised standard time Actual time) Standard rate per hour Here, RST= Total actual time
Expenditure variable
Expenditure variable
Efficiency variable
Volume variable
Efficiency variable
Capacity variable
Calendar variable
Variable overhead variance = AO (SR AR) = (AO SR) (AO AR) = SVO AVO Here, AO = Actual output, SR = Standard rate, AR = Actual rate, SVO = Standard variable overhead, and AVO = Actual variable overhead
Variable overhead efficiency variance (VOEV) : The difference between the actual hours used to complete a job and the standard hours allowed to do it indicates the efficiency or inefficiency. It measures the extent of cost saved or excess cost incurred due to efficient or inefficient performance.
VOEV = (Standard hours allowed for actual volume or output Actual hours taken for actual volume) Standard variable overhead rate per hour = (Actual output hours Standard per unit) (Actual hours Standard variable overhead recovery
rate)
The variable overhead can be attributed to the causes which are responsible for the labour efficiency variance. Factors such as workers personal problems, incentive plans, work process, frequency and quantity of machine repairs, materials quantity, etc. will cause variable overhead efficiency variance.
Here, TSC = Total standard cost for actual output, TAC = Total actual cost, AO = Actual output SFO = Standard fixed overhead AFO = Actual fixed overhead TSO = Total standard overhead TAO = Total actual overhead
Expenditure Variance
The difference between the amount actually spent during a certain period as fixed overhead and the amount of fixed overhead budgeted for the period is expressed by this variance. This part of fixed overhead cost variance shows whether the actual amount of fixed overhead is less or more than the amount budgeted for it.
Expenditure variance = Budgeted fixed overhead Actual fixed overhead
Volume variance
Volume variance is caused mainly due to the difference between budgeted output and actual output. To calculate this variance, the difference of budgeted output and actual output is multiplied by the budgeted standard absorption rate.
Volume variance = SC (AQ BQ) Where, SC = Standard cost per unit of fixed overheads AQ = Actual output in actual hours worked BQ = Budgeted standard output in budgeted standard hours
Efficiency variance
This variance gives information about the efficiency of workers because it arises due to their being less or more efficient. It also arises due to the change in production process or quality of material and efficiency of the machinery, plant, and workers. Efficiency variance = SC (AQ SQ) Here, SQ means the quantity produced during actual working hours at the standard rate.
Capacity variance
Capacity is expressed in terms of average direct labor hours per day. If capacity is utilized to a level less or more than the planned standard, variance arises. Use of plant and instruments less or more than their capacity affects the efficiency due to which this variance arises.
Capacity variance = SC (SQ BQ)
Calendar variance
If the number of actual working days during a certain period is different from the standard number of working days during the same period, then it is called calendar variance.
Calendar variance = SC (RBQ BQ) Here, RBQ = Budgeted quantity of output for actual working days.
Note: If the calendar variance is being calculated, capacity variance should be ascertained using the formula given below: Capacity variance = SC (SQ RBQ)