STANDARD COSTING AND
VARIANCES ANALYSIS
Layout of the presentation
Lecture objectives
Definition of standard cost and standard
costing
Types of variance
Calculating basic variances
By the end of this lecture you should be able
to:
Define term standard cost and standard
costing
State three main types of standards
Calculate basic variances
Definition of standard cost
Standard cost is the planned unit cost of the
products, services or components produced
in a period.
The main uses of standard costs are in
performance measurement, control, inventory
valuation and in the establishment of selling
prices.
Standard costing is a control technique which
compares standard costs and revenues with
actual results to obtain variances, which are
used to stimulate improved performance.
Types of standards
Standards may be classified primarily as
1. basic (or static) standards
2. ideal standards
3. current attainable standards.
Basic standards
Basic standards are designed to be used over
a long period of time.
These are not intended for revision in the
short run and therefore, they may not reflect
current conditions.
Ideal standards
These standards are set considering the ideal
prevailing conditions and demand a high
degree of efficiency and performance.
Current attainable standards
These are subject to alterations in prevailing
conditions during the period the standards
are to be used.
They may require periodical review and
frequent revisions in order to adjust them
with the changes in the production method or
price level.
Therefore, these standards normally remain
valid only for the accounting period under
consideration.
Calculating basic variances
Direct material price
Direct material usage variance
Direct labour rate variance
Direct labour efficiency variance
Fixed overhead expenditure variance
Fixed overhead volume variance
Sales price variance
Sales volume variance
Example 1
R Ltd has the following standard cost card
Direct Material (0.7m @$30 per metre)
Direct Labour (2 hrs @$16/Labour hour)
Variable Overheads (2 hrs @$2 Labour hour)
Fixed overheads (2hrs@$6 per hour
The budgeted production and sales volume
was 640 units.
The actual results for April for 700 units are
set out as follows
Sales(700 units) 63000
Direct Material(525 metres used)16800
Direct Labour (1350 hours worked) 22275
Variable Overheads(1350 hours) 2600
Fixed overheads 8000
Profit 13325
Required
Calculate the standard cost of producing one
unit
Determine the selling price if the company
requires a mark up of 1/3 on cost
Prepare relevant variances for R Ltd
SOLUTION
DMPV=(SP-AP)AQ
DMUV=(SQ-AQ)SP
DLRV=(SR-AR)AH
DLEV=(SH-AH)SR
VOEXV=(SR-AR)AH
VOEFFV=(SH-AH)SR
FOEV=BOEX-ACEX
FOVV=(AV-BV)OAR
Sales price=(SP-AP)AQ
Sales volume (BQ-AQ)SP
solution
DMPV=(SP-AP)AQ=(30-32)525=1050 (A)
DMUV=(SQ-AQ)SP=(490-525)30=1050 (A)
DLRV=(SR-AR)AH=(16-16.5)1350=675 (A)
DLEV=(SH-AH)SR=(1400-1350)16=800 (F)
FOEV=BO-ACEX=(7680-8000)=320 (A)
FOVV=(AV-BV)OAR=(640-700)12=720F
Sales price=(SP-AP)AQ=(95-90)700=3500(A)
Sales volume (BQ-AQ)SP=(640-700)26=1560
(F)
summary
State any three types of standards
State the variances that are calculated in
business
