Budgeting and Budgetary control – Standard costing and variance analysis: Cost control and cost reduction: Introduction to cost control – cost reduction- fields covered by cost reduction- tools and techniques for cost reduction

1. Budgeting and Budgetary control –
Standard costing and variance analysis:
Cost control and cost reduction:
Introduction to cost control – cost
reduction- fields covered by cost
reduction- tools and techniques for cost
reduction

2. Standard costing and variance analysis
• A standard refers to an indicator which is used to
evaluate performance, quality etc.
• Standard cost is a predetermined cost. It is a
determination in advance of production, of what
should be the cost. When standard costs are used
for the purpose of cost control, the technique is
known as standard costing.
• Standard costing is a cost accounting technique
which compares the results of actual production
with the basic standard, as anticipated, in terms of
costs so as to determine the reasons for
discrepancies between the anticipated and actual
costs.

3. Setting up standard costs
• Standards in respect of various elements
of costs.

4. Standard
material
cost

5. Standard Material Cost
• The cost of materials for any product depends
upon the quantity of materials and prices of
materials. the setting of standard costs for direct
materials involves;
• standard material quantity
• Standard material price
• Standard cost of material= Standard
Quantity x Standard Price
SCM= SQ x SP

6. Standard Labour Cost
• The standard labour cost is equal to the
standard time for each operation multiplied
by standard labour rate. Setting of
standard cost of direct labour involves;
– Fixation of standard time
– Fixation of standard rate
• Standard Labour Cost = Standard Labour Hours
x Standard Labour Rate
–SLC = SLH x SLR

7. Standard Overheads
• Setting of standard cost of overheads involves;
– Overheads are divided into fixed and variable. Standard
overheads rate is determined for these on the basis of past
records ad future trend of prices. It is calculated for a unit
of for an hour
– Standard Variable Overhead Rate=
Standard Variable Overhead for the budgeted period
Budgeted production. Units or budgeted hours for the
budgeted period
– Standard fixed Overhead Rate=
Standard fixed Overhead for the budgeted period
Budgeted pdn. Units or budgeted hours for the
budgeted period

8. Standard hour
• Is the quantity of output, or an amount of
work, performed in one hour

9. Standard cost card
• When standards are set for each element
of cost, a standard cost card is prepared.
In this card, the standards set for various
elements of cost in respect of a product or
job are shown.

10. Analysis of variances
• The deviation of actual from standard is called
variance. In other words, variance is the difference
between the actual performance and standard set.
• When the actual cost is less than standard cost , it
is known as favorable variance.
• When the actual cost is exceeds standard cost, it
is known as unfavorable variance or adverse
variance.
• In accounting language, unfavorable variance and
favorable variances are known as debit and credit
variances respectively.

11. Classification and computation of
variances
Material variances
Labour variances
Overhead variances
Sales variances

12. Material variances
• In case of materials, the following may be
the variances;
– Material cost variances
– Material price variances
– Material quantity variance
– Material mix variance
– Material yield variances

13. Material cost variances
• It is the difference between the standard cost
of material specified and the actual cost of
materials used.
• Material cost variances = standard cost of
materials- actual cost of materials used.
• Material cost variances = material price
variance+ material usage or quantity variance
• Material cost variances= (SQ x SP)-(AQ x AP)
• If the actual cost is more than the standard
cost, it would result in an adverse variance and
vice versa

14. Material price variances (MPV)
• The material price variance is the difference
between the standard price specified and the
actual price paid multiplied by actual quantity
of material purchased.
• MPV= AQ x (SP-AP).
• If the actual price is more than the standard
price, the variance would be adverse and in
case the standard price is more than the
actual price, it shall result in a favorable
variance

15. Material quantity variances
• It indicates the deviation caused from the
standard due to differences in quantities
used. It is that portion of the material cost
variance which is due to the difference
between the standard quantity of the material
specified for the actual output and the actual
quantity of materials used.
• MUV= SP x (SQ for actual output-AQ)
• If the actual quantity is more than the
standard quantity, it would cause an
unfavorable variance and vice versa

16. • When more than one type of material is
used , the total usage variance will be
classified into material mix variance and
material yield variance

17. Material Mix Variance (MMV)
• It is the difference between the standard mix of
materials fixed and actual mix of materials used. If
the standard mix of material fixed and the actual
mix or proportion of materials used are the same ,
the MMV will be zero.
• MMV = SP ( Revised standard quantity- actual
quantity)
• Revised standard quantity=
• SQ for each material x total AQ
Total SQ
OR total AQ x standard mix ratio
When the actual quantity is less than the revised
one, there is a favorable variance and vice
versa.

18. Material Yield Variance (MYV)
• It represents that portion of total usage
variance which is due to the difference
between the standard output and the
actual output. If the actual output is more
than the standard, then the variance
would be favorable and vice versa.
• MYV= SC per unit x (standard yield- actual
yield)

19. Labour variances
In case of labour, the following may be
the variances;

20. Labour Cost variance (LCV)
• It is the difference between the
standard direct wages specified for
the activity achieved and the actual
wages paid
• LCV= SC-AC
•
(ST x SR – AT x AR)
• If the actual cost is less than standard
cost, the variance is favorable and
vice versa.

21. Labour Rate Variance
• This is the difference between the
standard and actual direct labour
rate per hour for the total hours
worked.
• LRV= AT(SR-AR)
• If the actual rate paid is less, the
variance is favorable and the vice
versa.

22. Labour Efficiency Variance
• It is the difference between the actual hours taken
to produce the actual output and the standard
hours that this output should have taken,
multiplied by the standard rate per hour.
• LEV = Standard Rate( Standard Time- Actual
Time)
•
LEV= SR (ST-AT)
• If the actual time is less than the standard time or
actual
production is more than standard
production, the variance is favorable and vice
versa.

23. Labour Mix Variance
• When the actual composition of labour is not
accordance with the standard mix, this variance
arises.
• LMV=Standard Rate(Revised Standard Time-Actual
time)
• LMV=SR(RST-AT)
• RST= Total Actual Time x Standard Time
•
Total standard time.
• RST= actual hours (total) x standard ratio
• If the actual hours taken are lesser than the revised
standard hours, the variance is favorable and vice
versa

24. Labour Idle Time Variance
• The idle time variance represents the
difference between hours paid and hours
worked, i.e., idle hours multiplied by the
standard wage rate per hour.
• LITV= abnormal Idle time x standard rate
per hour
• Idle time variance will be always
unfavourable or adverse.

25. Labour Yield Variance
• It is the difference between the standard
labour output and the actual output
• LYV= Standard cost per unit( standard
output for actual time – Actual output)
• LYV= SC ( SO for AT- AO)
• If the actual production is more than the
standard production, it would result in
favorable variance and vice versa

26. Overhead Variances
• Overhead expenses may relate to production
overhead expenses, administrative overhead
expenses and selling and distribution
expenses. These expenses include both
variable and fixed elements
• For the purpose of computing overhead
variances, overhead expenses are classified
into variable and fixed overhead expenses on
the basis of their behavior to the levels of
activity.

27. • Overhead variance may be classified into
two broad categories,
• Variable overhead variance
• Fixed overhead variance

28. Variable Overhead cost
variance
• It is the difference between the standard cost of
overhead allowed for the actual output and the actual
cost of overhead incurred for the actual output achieved.
• OCV= SVC- AVC
• Standard variable overhead rate= budgeted variable
overhead
budgeted hours
• OCV= (actual output x standard overhead rate per hour)
– actual overhead cost.
• OCV= (Standard hours for actual output x standard
overhead rate per hour)- (actual overhead cost)

29. • The variable overhead variances may be
classified into;
– Variable overhead expenditure variance
– Variable overhead efficiency variance

30. Variable overhead expenditure variance
• It is the difference between the standard
variable overhead rate and the actual
variable overhead rate duly multiplied by
actual hours.
• Variable overhead expenditure variance represents
efficiency in the use of services or excess costs. An
unfavorable variance indicates excessive use of
services or increase in the cost of services.
• Variable overhead expenditure variance=
(standard variable overhead rate per hour x
actual hours worked) – actual variable
overheads.
• VOEV= AVOH-SVOH for actual hours worked

31. Variable overhead efficiency variance
• The variable overhead efficiency variance is
calculated by taking the difference in standard
output and actual output multiplied by the standard
variable overhead rate.
• Variable
overhead
efficiency
variance
= (standard variable overhead rate x standard
quantity) – actual quantity
• Variable overhead efficiency variance=standard
time for actual production x standard variable
overhead rate per hour – actual hours worked x
standard variable overhead rate per hour
• Variable overhead efficiency variance = standard
rate x ( standard quantity – actual quantity)

32. Fixed overhead cost variance
• Is that portion of total overhead cost variance
which is due to the difference between the
standard cost of fixed overhead allowed for
the actual output achieved and the actual
fixed overhead cost incurred.
• FOV= (standard fixed overhead rate x actual
output)-actual fixed overheads
• FOV= actual output x ( fixed overhead rateactual fixed overheads)

33. • Fixed overhead variance may be classified
into the following types ;
• Fixed overhead expenditure variance
• Fixed overhead volume variance
• Fixed overhead efficiency variance
• Fixed overhead capacity variance
• Fixed overhead calendar variance

34. Fixed overhead expenditure
variance
• Also called budget variance
• Obtained by comparing the total fixed
overhead actually incurred against the
budgeted fixed overhead cost
• FOEV= budgeted fixed overheads- actual
fixed overheads.

35. Fixed overhead volume
variance
• It is the difference between overhead
absorbed on actual output and those on
budgeted output
• FOVV= (actual output x SR) – budgeted
fixed overheads
• FOVV= SR x (actual output- standard
output)
• FOVV= standard rate per hour ( standard
hours produced- budgeted hours)

36. Fixed overhead efficiency
variance
• This arises due to the difference between
budgeted efficiency to production and
actual efficiency achieved.
• FOEV= standard rate per hour x actual
hours worked) standard hours for actual
output
• FOEV= standard rate x (actual output in
units- standard output in units)

37. Fixed overhead capacity
variance
• The capacity variance represents the part
of volume variance which arises due to
working at higher or lower capacity than
standard capacity.
• FOCV= SR x( budgeted quantity –
standard quantity)

38. Fixed overhead calendar
variance
• It arises due to the volume variance which
is due to the difference between the no. of
working days anticipated in the budgeted
period and the actual working days
• FOCV= std. no of working days- actual no of working
days) x
overheads in the budgeted period
• Std. no. of days in the budgeted period
total fixed

39. Sales Variances
• Arises due to the difference between
target sales and actual sales. The sales
variances can be calculated under two
methods;
– Value method
– Profit or sales margin method

40. Value method
• Value method is used to denote variances
arising out of changes in sales price,
quantity mix etc.

41. a) Sales value variance
• This is based on the sales value , also
called value variance or sales variance
• It represents the difference between the
actual sales and budgeted sales
• SVV= budgeted sales – actual sales

42. Standard price variance
• Difference between actual price and the
standard price of sales
• SPV= actual quantity sold x (actual pricestandard price)

43. Sales volume variance
• Due to the difference between the
standard quantity and actual sales quantity
• SVV= SP (AQ-SQ)

44. Sales mix variance
• It arises due to the changes made in
standard mix of difference articles sold.
• SMV= standard value of actual mixstandard value of revised standard mix.
• standard value of revised standard mix.=
total qty. of actual sales mix x standard
qty.
• Total qty. of std. sales mix

45. Profit or sales margin variance
• The profit or sales margin variance arises
because of the difference between the
total budgeted profit and actual profit
• SMV= standard or budgeted marginactual margin

46. • Profit or sales margin variance may be
classified into;
• Sales margin price variance
• Sales margin volume variance
• Sales margin quantity variance

47. Sales margin price variance
• That portion of total margin variance
which is due to the difference between the
standard price of the quantity of sales
affected and the actual price of those
sales
• SMPV= actual profit- standard profit
• SMPV= actual quantity of sales x (actual
profit per unit – standard profit per unit)

48. Sales margin volume variance
• It is that portion of total variance which is
due to the difference between the
budgeted quantity and the actual quantity
of sales.
• SMVV= standard profit x (actual quantity
of sales – standard quantity of sales)
• SMVV= Standard profit on actual quantity
of sales- standard profit on standard
quantity of sales

49. Sales margin quantity variance
• The standard quantity is the difference
between budgeted profit on budgeted
sales and expected profit on actual sales
• SMQV=
standard profit per unit x
(standard proportion for actual salesbudgeted quantity of sales)

50. Sales margin mix variances
• The sales mix variances arise when the
company manufactures and sells more
than one type of product
• SMMV= standard profit per unit x ( actual
quantity of sales – standard proportion of
actual sales)