AFM 31130 Standard Costing & Variance Analysis Isuru Nadeesha Manawadu By Isuru Nadeesha Manawadu B.Sc in Accounting Sp. (USJP), ACA,

Standard cost Standard cost card 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.

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.

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.

Types of Standards • Ideal Standards • Attainable standards • Current Standards • Basic Standards

Selling Price Variance Sales Variance Sales Volume Variance DM Price Variance DM Usage Variance DM Total Variance DL Rate Variance Total Profit Variance DL Total Variance DL Efficiency Variance Production Cost Variance VPOH Expenditure Variance VPOH Variance VPOH Efficiency Variance FPOH Variance FPOH Expenditure Variance FPOH Volume Variance Non Production Cost Variance Marketing Cost Variance Administration Cost Variance

1. Direct Material Variances 1.1 Direct Material Price Variance: Actual Quantity x Actual Price   -   Actual Quantity x Standard Price      Actual Cost      -   Standard Cost of Actual Quantity 1.2 Direct Material Usage Variance: Actual Quantity x Standard Price   -   Standard Quantity x Standard Price Standard Cost of Actual Quantity   -   Standard Cost of Standard Quantity or (Actual Quantity - Standard Quantity) x Standard Price

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 SU per bag Actual Price Standard Price Limestone 100 tons 11 KG Rs. 75/ton Rs.70/ton Sand 250 tons 26 KG Rs. 10/ton Rs.14/ton Calculate; Material price variance Material Usage Variance Material Total Variance SU: Standard Usage

2. Direct Labour Variances 2.1 Direct Labor Rate Variance:   Actual Quantity x Actual Rate   -   Actual Quantity x Standard Rate       Actual Cost      -   Standard Cost of Actual Hours 2.2 Direct Labor Efficiency Variance: Actual Hours x Standard Rate   -   Standard Hours x Standard Rate Standard Cost of Actual Hours    -     Standard Cost

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: AH Per Unit SH Per Unit AR Per Hour SR Per Hour Direct Labor 0.50 0.55 Rs. 12 Rs. 10 Calculate; Direct Labour rate variance Direct Labour Efficiency Variance Total Direct Labour Variance AH – Actual Hours, SH – Standard Hours, AR – Actual Hours, SR – Standard Rate

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   x   Standard Variable Overhead Rate per hour

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 Calculate; Variable overhead expenditure variance and efficiency variance.

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

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 Fixed overhead total variance Fixed overhead expenditure variance fixed overhead volume variance

1. Sales Variances 1.1 Sales Price Variance:   Actual Price x Actual Units Sold   -   Standard Price x Actual Units Sold Actual Sales Revenue    -    Standard Revenue of Actual Units Sold or (Actual Price - Standard Price)   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

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 Quantity Actual Price Standard Price NHK-II 200 tons Rs. 380/ton 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

Limitations of Standard Costing & Variance Analysis Non Standardized Production Service Organizations Assigning Responsibilities Reporting Delay Behavioral Issues