Cost Structure Analysis

Choudhary & Sons.

--A dress Manufacturing Company
 Cost Analysts
 Niyaz Choudhary 10
 Bushra Khan 21
 Saima Khan 25
 Nazia Memon 33
 Shabila Momin 41
 Munal Rakhangi 47
 Master Budget
(Plz refer to Excel sheet attached alongwith)
Variance Analysis
Causes Of Variances
Components of Cost Variance
Standard for Production of 20000 units

Particulars Qty Rate Amount

Cloth 80000 50 4000000

Thread 20000 3 60000

Hooks 10000 1 10000

Zips 10000 2.50 12500

TOTAL 4082500
Standard 18000 Units Actual 18000 Units
Production Production

Particulars Qty Rate Amount Particulars Qty Rate Amount

Cloth 72000 50 3600000 Cloth 76000 50 3800000

Thread 18000 3 54000 Thread 19000 2 38000

Hooks 9000 1 9000 Hooks 9000 1.50 13500

Zip 9000 2.50 22500 Zip 9000 2 18000

TOTAL 3685500 TOTAL 3869500

 Material Cost Variance (cloth)
=Standard cost for Actual materials consumed – Actual cost
=3600000 -3800000
= 200000 (adverse)

Material Price Variance(cloth)

=Actual qty(Standard price – Actual price)
=76000(50-50)
=0

Material Usage Variance (cloth)

Standard rate(Standard qty – Actual qty)
= 50(72000 – 76000)
= 200000 (adverse)
 Material Cost Variance (Thread)
=Standard cost for Actual materials consumed – Actual cost
=54000 – 38000
= 16000 (favourable)

Material Price Variance(Thread)

=Actual qty(Standard price – Actual price)
=19000(3 – 2)
=19000

Material Usage Variance (thread)

=Standard rate(Standard qty – Actual qty)
= 19000 (favourable)
=3 (18000 – 19000)
= 3000 (averse)
 Material Cost Variance (hook)
=Standard cost for Actual materials consumed – Actual cost
=9000 – 13500
=4500 (adverse)

Material Price Variance(hook)

=Actual qty(Standard price – Actual
price)
= 9000 ( 1 – 1.50)
= 45000 (adverse)

Material Usage Variance (hook)

=Standard rate(Standard qty – Actual qty)
=1 (9000 – 9000)
=0
 Wage Variance

 Wage Variance=(Standard wage for actual

hrs ­actual wages)
 Wage variance

Labour Efficiency Wage rate

variance variance
 Calculation
 Wage Rate variance = Actual hrs × (the standard wage rate ­the
actual age rates)

 Labour efficiency variance =Standard wage rate ×(Standard hrs for

actual output – Actual hrs worked)
Standard(18000 units) Actual(18000 units)

Time Rate Amount Tim Rate Amount

1hr × 50 9,00,000 e 52 1029600
18000 1.10hr
units ×
18000
units
 Labour/wage Cost variance =std cost for actual output – actual cost
= 900000-1029600
=-29600

 Labour efficiency variance =std rate per hr ×(actual std hrs for actual
output – actual hrs)
= 50 (18000 - 19800)
= -90,000

 Labour rate variance =Actual hrs ×(std rate per hr­Actual rate per hr)
=19800(50-52)
=19800(-2)
=-39600
 Marginal Costing
vis-a vis
Absorption costing
 Marginal costing
 Marginal costing tends to vary directly in proportion to
changes in production level.
 Cost incurred to produced an extra unit is called marginal
variable cost.
 Fixed cost remains constant.
 Only variable manufacturing cost are considered.
 Direct labour,direct material and variable factory
overheads are considered.
 Fixed factory manufacturing overheads are not
considered.
 Absorption costing
 Absorption costing is also known as full costing.
 Costing technique in which both fixed and variable
cost are considered.
 It is used in determining the cost of goods
manufactured and inventories.
 Difference between…..
Marginal costing Absorption costing

 Fixed manufacturing cost are charged to

 Fixed manufacturing cost are not inventory
charged to inventory
 Inventory is at higher figure as it is
determined in terms of fixed and variable
 Inventory is at lower figure as it is cost
determined in terms of only
variable production cost  There is a difference of net income as
compared to absorption costing
 There is a difference of net income  Variable & Fixed selling & administrative
as compared to absorption costing expenses are considered as period cost and
not as product cost
 Variable & Fixed selling &
administrative expenses are
considered as period cost and not
as product cost
 Income Statement Absorption Costing
Particulars Amount
(Rs.)
Sales 20000000
Less: Manufacturing costs
1) Variable costs
Direct material cost 4400000

Direct labour cost 580000

Variable manufacturing overhead 3040000
2) Fixed factory manufacturing overhead 1560000
Cost of goods manufactured 10420000
Add: Beginning inventory 401500
Cost of goods available for sale 10821500
Less: Closing inventory 401500
Cost of goods sold 10420000
Less: Fixed selling and administrative expenses 1150000
Variable selling and administrative expenses 880000
Operating income 8390000
 CVP Analysis
 The study of effects of changes in FC, VC, SP,
Q & mix on future profits
 Based on the assumption that the Volume of
production derives cost & Revenue
 Only for short term decision making
 Bar Graph
TR
TC
Profit

BE
Rs.

Profit Line
LOSS
FC

No. of units sold

 Utility of CVP analysis
 Modernization/automation programme
 Effects of a general expansion
 New product decision
 Optimum SP of products
 Profit/Loss at different level of outputs
 Cash requirements at a given volume of output
 Exercise cost control
 Plant shutdown decision
Impact of VC, FC, SP
on
PV Ratio, BE Point &
Margin of Safety
 I in VCD in CD in PV Ratio
 D in VCI in CI in PV Ratio
 I in FCI in BED in Margin of safety
(no effect on PV Ratio)
 D in FCD in BEI in Margin of safety
(no effect on PV Ratio)
 I in SPI in CI in PV RatioD in BEI in MOS
 D in SPD in CD in PV RatioI in BED in
MOS
Thank You