1. Amity School of Business Variance Analysis Module VI

2. Amity School of Business Standard Costing Standard costing is the establishment of cost standards for activities and their periodic analysis to determine the reasons for any variances. Standard costing is a tool that helps management in controlling costs. Standard costing involves the creation of estimated (i.e., standard) costs for some or all activities within a company.

3. Amity School of Business For eg;- at the beginning of a year a company estimates that material costs should be Rs.2 per unit. Such standards are established either by historical trend analysis of the cost or by an estimation by any engineer or management scientist. After a period, say one month, the company compares the actual cost incurred per unit, say Rs.2.05 to the standard cost and determines whether it has succeeded in controlling cost or not.

4. Amity School of Business Variance Analysis The comparison of actual costs with standard costs is called variance analysis and it is vital for controlling costs and identifying ways for improving efficiency and profitability. If actual cost exceeds the standard costs, it is an unfavorable variance. On the other hand, if actual cost is less than the standard cost, it is a favorable variance.

5. Amity School of Business Variance analysis is usually conducted for Direct material costs (price and quantity variances); Direct labor costs (wage rate and efficiency variances); and Overhead costs.

6. Amity School of Business Need for Standard Costing Budgeting Effective cost control Helps in planning and formulating plicies Price formulation Eliminates wastes Valuation of stocks Economical and simple

7. Amity School of Business Standard costing vs. Budgetary control Although budgetary control and standard costing both are based on some common principles; both are pre-determined, comparison will be made with the actual costs and both system need a revision of the standards or the budget, these two systems have certain differences which are as follows:

8. Amity School of Business Budgetary control deals with the operation of a department or the business as a whole in terms of revenue and expenditure. Standard costing is a system of costing which makes a comparison between standard costs of each product or service with its actual cost.

9. Amity School of Business Budgetary control covers as a whole in terms of revenue and expenditures such as purchases, sales, production, finance etc. Standard costing is related to a product and its cost only. Budgetary control is applicable to utmost all business organizations. Standard costing is applicable to manufacturing concerns producing standard products and services.

10. Amity School of Business Budgetary control is concerned with a specific period and is based on the totals of amounts. Standard costing is concerned with the standard costs, which are worked out generally per unit of production. Budgetary control is not based on standard costing system. Standard costing cannot exist in the absence of a budgetary control system.

11. Amity School of Business Material Variance Material Cost Variance = ( SQ X SP)- (AQ X AP) Material Price Variance = (SP –AP) X AQ Material Usage Variance = (SQ – AQ) X SP Material Mix Variance = (RSQ – AQ) X SP

12. Amity School of Business Labour Variance Labour Cost Variance = ( SR X SH)- (AR X AR) Labour Rate Variance = ( SR – AR) X AH Labour Efficiency Variance = ( SH-AH) X SR Where SR = Standard Rate AR = Actual Rate SH = Standard Hour AH = Actual Hour