AFM 31130
Standard Costing &
Variance Analysis
By
Isuru Nadeesha Manawadu
B.Sc in Accounting Sp. (USJP), ACA,
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Standard cost
Standard cost is a predetermined estimated
unit cost used for stock valuation & control.
Standard cost card
Standard cost card shows full details of the
standard cost of each product.
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Standard Costing
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.
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Standard costing involves:
• The setting of standards.
• Ascertaining actual results.
• Comparing standards and actual costs to
determine the variances.
• Investigating the variances and taking
appropriate action where necessary.
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Types of Standards
• Ideal Standards
• Attainable standards
• Current Standards
• Basic Standards
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Selling Price
Variance
Sales
Variance
Sales
Volume
Variance
DM Price Variance
DM Usage Variance
DM Total
Variance
Total
Profit
Variance
Production
Cost
Variance
DL Total
Variance
DL Efficiency Variance
VPOH Expenditure Variance
VPOH
Variance
FPOH
Variance
Non
Production
Cost Variance
DL Rate Variance
VPOH Efficiency Variance
FPOH Expenditure Variance
FPOH Volume Variance
Marketing Cost
Variance
Administration
Cost Variance
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1. Direct Material Variances
1.1 Direct Material Price Variance:
Actual Quantity x Actual Price
Actual Cost
-
Actual Quantity x Standard Price
Standard Cost of Actual Quantity
1.2 Direct Material Usage Variance:
Actual Quantity x Standard Price
Standard Cost of Actual Quantity
-
Standard Quantity x Standard Price
Standard Cost of Standard Quantity
or
(Actual Quantity - Standard Quantity) x Standard Price
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Question 01
Araliya PLC manufactured 10,000 bags of cement during the month of January.
Following details on raw materials purchased and consumed during the period given
bellow:
Material Quantity Used
Limestone 100 tons
Sand
250 tons
SU per bag
11 KG
26 KG
Actual Price
Rs. 75/ton
Rs. 10/ton
Standard Price
Rs.70/ton
Rs.14/ton
Calculate;
i. Material price variance
ii. Material Usage Variance
iii. Material Total Variance
SU: Standard Usage
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2. Direct Labour Variances
2.1 Direct Labor Rate Variance:
Actual Quantity x Actual Rate
Actual Cost
-
Actual Quantity x Standard Rate
Standard Cost of Actual Hours
2.2 Direct Labor Efficiency Variance:
Actual Hours x Standard Rate
Standard Cost of Actual Hours
-
Standard Hours x Standard Rate
Standard Cost
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Question 02
Araliya PLC is a company which produces denims and it has
manufactured and sold 10,000 denims during a period. Information
relating to the direct labor cost and production time per unit is as
follows:
Direct Labor
AH Per Unit
0.50
SH Per Unit
0.55
AR Per Hour
Rs. 12
SR Per Hour
Rs. 10
Calculate;
i. Direct Labour rate variance
ii. Direct Labour Efficiency Variance
iii. Total Direct Labour Variance
AH – Actual Hours, SH – Standard Hours, AR – Actual Hours,
SR – Standard Rate
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3. Variable Cost Variances
3.1 Variable Overhead Expenditure Variance:
Actual Manufacturing Variable Overheads Expenditure
Less
Actual hours x Standard Variable Overhead Rate per hour
3.2 Variable Overhead Efficiency Variance:
Standard hours
Actual hours
x Standard Variable Overhead Rate per hour
Less
x Standard Variable Overhead Rate per hour
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Question 03
Araliya Sports LTD is a small manufacturing company specializing in the production of
cricket bats. Araliya Sports LTD currently manufactures 2 types of bats:
Araliya Plus - a hand-crafted bat designed for professional use.
Araliya Gold - a machine-manufactured cheaper bat designed for casual cricket.
Following is a break-up of the standard variable manufacturing overhead costs:
Araliya Plus
Araliya Gold
Number of Hours
2 direct labor hours 1 machine hour
Overheads: Indirect Labor
Rs.10
Polish
Rs.5
Rs.1
Sand paper
Rs. 1
Glue
Rs. 1
Rs. 0.5
Machine lubricants
Rs. 0.5
Electricity
Rs. 3
Rs. 10
Total
Rs.20
Rs. 12
(Rs.10 per direct labor hour)
(Rs.12 per machine hour)
Following information relates to the actual data from last month:
Variable Manufacturing Overheads Rs.175,000
Direct Labor Hours10,000
Machine Hours 5,000
Production (units) – Araliya Plus 4,500
Production (units) - Araliya Gold 5,200
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Calculate; Variable overhead expenditure variance and efficiency variance.
4. Fixed Overhead Variances
4.1 Fixed Overhead Total Variance (FOTV):
FOTV= Actual Fixed Overheads - Absorbed Fixed Overheads
4.2 Fixed Overhead Expenditure Variance:
Actual Fixed Overheads - Budgeted Fixed Overheads
4.3 Fixed Overhead Volume Variance:
Absorbed Fixed overheads - Budgeted Fixed Overheads
Actual Output x FOAR* - Budgeted Output x FOAR*
* Fixed Overhead Absorption Rate per unit of output
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Question 04
Araliya PLC is a manufacturing company specializing in
the production of automobiles. Information from its last
budget period is as follows:
Actual Production 275,000 units
Budgeted Production 250,000 units
Standard Fixed Overhead Absorption Rate Rs. 2,000 per
unit.
Actual fixed overhead Rs. 600 Mn
Calculate
i. Fixed overhead total variance
ii. Fixed overhead expenditure variance
iii. fixed overhead volume variance
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1. Sales Variances
1.1 Sales Price Variance:
Actual Price x Actual Units Sold
Actual Sales Revenue
(Actual Price - Standard Price)
- Standard Price x Actual Units Sold
Standard Revenue of Actual Units Sold
or
x Actual Units Sold
1.2 Sales Volume Variance:
Sales Volume Variance (where absorption costing is used):
(Actual Unit Sold - Budgeted Unit Sales) x Standard Profit Per Unit
Sales Volume Variance (where marginal costing is used):
(Actual Unit Sold - Budgeted Unit Sales) x Standard Contribution Per Unit
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Question 05
Araliya PLC is a fertilizer producer which specializes in the
manufacture of NHK-II (a chemical fertilizer).
Following information relates to the sale of fertilizer by Araliya
PLC during the period:
Material
NHK-II
Quantity
200 tons
Actual Price
Rs. 380/ton
Standard Price
Rs. 400/ton
Budgeted quantity of sales is 210 tons and standard variable cost
per unit is Rs. 250.
Calculate;
Sales price variance
Sales volume variance
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Limitations of Standard Costing
& Variance Analysis
Non Standardized Production
Service Organizations
Assigning Responsibilities
Reporting Delay
Behavioral Issues
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