Monday, January 25, 2010

Standard Cost

Standard Cost


Learning Objectives
• To understand the meaning of standard costing, its meaning and definition
• To learn its advantages and limitations
• To learn how to set of standards and determinations
• To learn how to revise standards
Introduction
You know that management accounting is managing a business through accounting information. In this process, management accounting is facilitating managerial control. It can also be applied to your own daily/monthly expenses, if necessary. These measures should be applied correctly so that performance takes place according to plans. Planning is the first tool for making the control effective. The vital aspect of managerial control is cost control. Hence, it is very important to plan and control costs. Standard costing is a technique which helps you to control costs and business operations. It aims at eliminating wastes and increasing efficiency in performance through setting up standards or formulating cost plans.
Meaning of Standard
When you want to measure some thing, you must take some parameter or yardstick for measuring. We can call this as standard. What are your daily expenses? An average of $50! If you have been spending this much for so many days, then this is your daily standard expense.
The word standard means a benchmark or yardstick. The standard cost is a predetermined cost which determines in advance what each product or service should cost under given circumstances.
In the words of Backer and Jacobsen, “Standard cost is the amount the firm thinks a product or the operation of the process for a period of time should cost, based upon certain assumed conditions of efficiency, economic conditions and other factors.”
Definition
The CIMA, London has defined standard cost as “a predetermined cost which is calculated from managements standards of efficient operations and the relevant necessary expenditure.” They are the predetermined costs on technical estimate of material labor and overhead for a selected period of time and for a prescribed set of working conditions. In other words, a standard cost is a planned cost for a unit of product or service rendered.
The technique of using standard costs for the purposes of cost control is known as standard costing. It is a system of cost accounting which is designed to find out how much should be the cost of a product under the existing conditions. The actual cost can be ascertained only when production is undertaken. The predetermined cost is compared to the actual cost and a variance between the two enables the management to take necessary corrective measures.
Advantages
Standard costing is a management control technique for every activity. It is not only useful for cost control purposes but is also helpful in production planning and policy formulation. It allows management by exception. In the light of various objectives of this system, some of the advantages of this tool are given below:
1. Efficiency measurement-- The comparison of actual costs with standard costs enables the management to evaluate performance of various cost centers. In the absence of standard costing system, actual costs of different period may be compared to measure efficiency. It is not proper to compare costs of different period because circumstance of both the periods may be different. Still, a decision about base period can be made with which actual performance can be compared.
2. Finding of variance-- The performance variances are determined by comparing actual costs with standard costs. Management is able to spot out the place of inefficiencies. It can fix responsibility for deviation in performance. It is possible to take corrective measures at the earliest. A regular check on various expenditures is also ensured by standard cost system.
3. Management by exception-- The targets of different individuals are fixed if the performance is according to predetermined standards. In this case, there is nothing to worry. The attention of the management is drawn only when actual performance is less than the budgeted performance. Management by exception means that everybody is given a target to be achieved and management need not supervise each and everything. The responsibilities are fixed and every body tries to achieve his/her targets.
4. Cost control-- Every costing system aims at cost control and cost reduction. The standards are being constantly analyzed and an effort is made to improve efficiency. Whenever a variance occurs, the reasons are studied and immediate corrective measures are undertaken. The action taken in spotting weak points enables cost control system.
5. Right decisions-- It enables and provides useful information to the management in taking important decisions. For example, the problem created by inflating, rising prices. It can also be used to provide incentive plans for employees etc.
6. Eliminating inefficiencies-- The setting of standards for different elements of cost requires a detailed study of different aspects. The standards are set differently for manufacturing, administrative and selling expenses. Improved methods are used for setting these standards. The determination of manufacturing expenses will require time and motion study for labor and effective material control devices for materials. Similar studies will be needed for finding other expenses. All these studies will make it possible to eliminate inefficiencies at different steps.
Limitations of Standard Costing
1. It cannot be used in those organizations where non-standard products are produced. If the production is undertaken according to the customer specifications, then each job will involve different amount of expenditures.
2. The process of setting standard is a difficult task, as it requires technical skills. The time and motion study is required to be undertaken for this purpose. These studies require a lot of time and money.
3. There are no inset circumstances to be considered for fixing standards. The conditions under which standards are fixed do not remain static. With the change in circumstances, if the standards are not revised the same become impracticable.
4. The fixing of responsibility is not an easy task. The variances are to be classified into controllable and uncontrollable variances. Standard costing is applicable only for controllable variances.
For instance, if the industry changed the technology then the system will not be suitable. In that case, we will have to change or revise the standards. A frequent revision of standards will become costly.
Setting Standards
Normally, setting up standards is based on the past experience. The total standard cost includes direct materials, direct labor and overheads. Normally, all these are fixed to some extent. The standards should be set up in a systematic way so that they are used as a tool for cost control.
Various Elements which Influence the Setting of Standards
Setting Standards for Direct Materials
There are several basic principles which ought to be appreciated in setting standards for direct materials. Generally, when you want to purchase some material what are the factors you consider. If material is used for a product, it is known as direct material. On the other hand, if the material cost cannot be assigned to the manufacturing of the product, it will be called indirect material. Therefore, it involves two things:
• Quality of material
• Price of the material
When you want to purchase material, the quality and size should be determined. The standard quality to be maintained should be decided. The quantity is determined by the production department. This department makes use of historical records, and an allowance for changing conditions will also be given for setting standards. A number of test runs may be undertaken on different days and under different situations, and an average of these results should be used for setting material quantity standards.
The second step in determining direct material cost will be a decision about the standard price. Material’s cost will be decided in consultation with the purchase department. The cost of purchasing and store keeping of materials should also be taken into consideration. The procedure for purchase of materials, minimum and maximum levels for various materials, discount policy and means of transport are the other factors which have bearing on the materials cost price. It includes the following:
• Cost of materials
• Ordering cost
• Carrying cost
The purpose should be to increase efficiency in procuring and store keeping of materials. The type of standard used-- ideal standard or expected standard-- also affects the choice of standard price.
Setting Direct Labor Cost
If you want to engage a labor force for manufacturing a product or a service for which you need to pay some amount, this is called wages. If the labor is engaged directly to produce the product, this is known as direct labor. The second largest amount of cost is of labor. The benefit derived from the workers can be assigned to a particular product or a process. If the wages paid to workers cannot be directly assigned to a particular product, these will be known as indirect wages. The time required for producing a product would be ascertained and labor should be properly graded. Different grades of workers will be paid different rates of wages. The times spent by different grades of workers for manufacturing a product should also be studied for deciding upon direct labor cost. The setting of standard for direct labor will be done basically on the following:
• Standard labor time for producing
• Labor rate per hour
Standard labor time indicates the time taken by different categories of labor force which are as under:
• Skilled labor
• Semi-skilled labor
• Unskilled labor
For setting a standard time for labor force, we normally take in to account previous experience, past performance records, test run result, work-study etc. The labor rate standard refers to the expected wage rates to be paid for different categories of workers. Past wage rates and demand and supply principle may not be a safe guide for determining standard labor rates. The anticipation of expected changes in labor rates will be an essential factor. In case there is an agreement with workers for payment of wages in the coming period, these rates should be used. If a premium or bonus scheme is in operation, then anticipated extra payments should also be included. Where a piece rate system is used, standard cost will be fixed per piece. The object of fixed standard labor time and labor rate is to device maximum efficiency in the use of labor.
Setting Standards of Overheads
The next important element comes under overheads. The very purpose of setting standard for overheads is to minimize the total cost. Standard overhead rates are computed by dividing overhead expenses by direct labor hours or units produced. The standard overhead cost is obtained by multiplying standard overhead rate by the labor hours spent or number of units produced. The determination of overhead rate involves three things:
• Determination of overheads
• Determination of labor hours or units manufactured
• Calculating overheads rate by dividing A by B
The overheads are classified into fixed overheads, variable overheads and semi-variable overheads. The fixed overheads remain the same irrespective of level of production, while variable overheads change in the proportion of production. The expenses increase or decrease with the increase or decrease in output. Semi-variable overheads are neither fixed nor variable. These overheads increase with the increase in production but the rate of increase will be less than the rate of increase in production. The division of overheads into fixed, variable and semi-variable categories will help in determining overheads.
Determination of Standard Costs
How should the ideal standards for better controlling be determined?
1. Determination of Cost Center
According to J. Betty, “A cost center is a department or part of a department or an item of equipment or machinery or a person or a group of persons in respect of which costs are accumulated, and one where control can be exercised.” Cost centers are necessary for determining the costs. If the whole factory is engaged in manufacturing a product, the factory will be a cost center. In fact, a cost center describes the product while cost is accumulated. Cost centers enable the determination of costs and fixation of responsibility. A cost center relating to a person is called personnel cost center, and a cost center relating to products and equipments is called impersonal cost center.
2. Current Standards
A current standard is a standard which is established for use over a short period of time and is related to current condition. It reflects the performance that should be attained during the current period. The period for current standard is normally one year. It is presumed that conditions of production will remain unchanged. In case there is any change in price or manufacturing condition, the standards are also revised. Current standard may be ideal standard and expected standard.
3. Ideal Standard
This is the standard which represents a high level of efficiency. Ideal standard is fixed on the assumption that favorable conditions will prevail and management will be at its best. The price paid for materials will be lowest and wastes etc. will be minimum possible. The labor time for making the production will be minimum and rates of wages will also be low. The overheads expenses are also set with maximum efficiency in mind. All the conditions, both internal and external, should be favorable and only then ideal standard will be achieved.
Ideal standard is fixed on the assumption of those conditions which may rarely exist. This standard is not practicable and may not be achieved. Though this standard may not be achieved, even then an effort is made. The deviation between targets and actual performance is ignorable. In practice, ideal standard has an adverse effect on the employees. They do not try to reach the standard because the standards are not considered realistic.
4. Basic Standards
A basic standard may be defined as a standard which is established for use for an indefinite period which may a long period. Basic standard is established for a long period and is not adjusted to the preset conations. The same standard remains in force for a long period. These standards are revised only on the changes in specification of material and technology productions. It is indeed just like a number against which subsequent process changes can be measured. Basic standard enables the measurement of changes in costs. For example, if the basic cost for material is Rs. 20 per unit and the current price is Rs. 25 per unit, it will show an increase of 25% in the cost of materials. The changes in manufacturing costs can be measured by taking basic standard, as a base standard cannot serve as a tool for cost control purpose because the standard is not revised for a long time. The deviation between standard cost and actual cost cannot be used as a yardstick for measuring efficiency.
5. Normal Standards
As per terminology, normal standard has been defined as a standard which, it is anticipated, can be attained over a future period of time, preferably long enough to cover one trade cycle. This standard is based on the conditions which will cover a future period of five years, concerning one trade cycle. If a normal cycle of ups and downs in sales and production is 10 years, then standard will be set on average sales and production which will cover all the years. The standard attempts to cover variance in the production from one time to another time. An average is taken from the periods of recession and depression. The normal standard concept is theoretical and cannot be used for cost control purpose. Normal standard can be properly applied for absorption of overhead cost over a long period of time.
6. Organization for Standard Costing
The success of standard costing system will depend upon the setting up of proper standards. For the purpose of setting standards, a person or a committee should be given this job. In a big concern, a standard costing committee is formed for this purpose. The committee includes production manager, purchase manager, sales manager, personnel manager, chief engineer and cost accountant. The cost accountant acts as a co-coordinator of this committee.
7. Accounting System
Classification of accounts is necessary to meet the required purpose, i.e. function, asset or revenue item. Codes can be used to have a speedy collection of accounts. A standard is a pre-determined measure of material, labor and overheads. It may be expressed in quality and its monetary measurements in standard costs.
Revision of Standards
For effective use of this technique, sometimes we need to revise the standards which follow for better control. Even standards are also subjected to change like the production method, environment, raw material, and technology.
Standards may need to be changed to accommodate changes in the organization or its environment. When there is a sudden change in economic circumstances, technology or production methods, the standard cost will no longer be accurate. Standards that are out of date will not act as effective feed forward or feedback control tools. They will not help us to predict the inputs required nor help us to evaluate the efficiency of a particular department. If standards are continually not being achieved and large deviations or variances from the standard are reported, they should be carefully reviewed. Also, changes in the physical productive capacity of the organization or in material prices and wage rates may indicate that standards need to be revised. In practice, changing standards frequently is an expensive operation and can cause confusion. For this reason, standard cost revisions are usually made only once a year. At times of rapid price inflation, many managers have felt that the high level of inflation forced them to change price and wage rate standards continually. This, however, leads to reduction in value of the standard as a yardstick. At the other extreme is the adoption of basic standard which will remain unchanged for many years. They provide a constant base for comparison, but this is hardly satisfactory when there is technological change in working procedures and conditions.
Summary
Basically, standard costing is a management tool for control. In the process, we have taken standards as parameters for measuring the performance. Cost analysis and cost control is essential for any activity. Cost includes material labor and overheads. Sometimes, we need to revise the standards due to change in uses, raw material, technology, method of production etc. For a proper organization, it is required to implement this under a committee for the activity. It is a continued activity for the optimum utilization of resources.



STANDARD COSTING
Standard : Predetermined measurable quantity set in defined conditions.
Standard cost: A scientifically predetermined cost which is arrived at assuming a particular level of efficiency in utilization of material ,labor,and indirect services.
It is like a model which provides basis for comparison with actual cost. This comparison provides a useful information for cost control.
It is also the cost plan for a single unit.
Uses:
Standard cost information is used for the following:
(1) Establishing budgets
(2) controlling cost and motivating and measuring efficiencies
(3) promoting possible cost reduction
(4) simplifying cost procedures
(5) forming basis for quotations.
Standard Costing : “is a control technique which compares standard costs and revenues with actual results to obtain variances which are used to stimulate improved performances”
Standard cost sheet: A cost sheet showing the total standard cost analysed in to standard material cost, standard labour cost and standard overheads.
Variances : Variances represent deviations of actual performance from standard performance. A variance can be favourable or unfavourable depending on its impact on the profit.
Variances Analysis: “ is an exercise to classify the variances according causes for highlighting the situations requiring managerial attention.

Advantages (Merits):
(1) Optimum utilization of resources such as material ,labor and services
(2) Helps comparison with actual costs
(3) Only major deviations are reported to management drawing its attention
(4) It helps planning,control,decision making and price fixation
(5) It creates an atmosphere of cost consciousness
(6) It motivates employees to achieve targets

Limitations (Demerits):
(1) Establishment of standard is difficult . For ex. Fixing standard for labor efficiency
(2) Standards are subject to frequent changes difficult to comply with
(3) Difficult to fix responsibility when it is a result of collective effort.
(4) It may create adverse psychological effects
(5) It is difficult to distinguish the controllable and uncontrollable elements of variances

Classification of variances:
Variances are classified as follows:
(1) Cost Variance : the difference between the actual cost and the standard cost
(2) Profit (sales margin) variance : the difference between the actual profit and the standard profit
(3) Sales value variance: the difference between the actual sales and the standard sales.
Cost Variances: A cost variance is adverse if the actual cost is more than the standard cost (denoted by A, bad performance ) . It is favourable if the actual cost is less than the standard cost (denoted by F, good performance)
Cost variance is divided in to:
(a) Direct Material cost variance
(b) Direct wages (Labor) variance
(c) Variable Overhead Variance
(d) Fixed overhead variance

Material cost variance is divided in to :
(a) Material Price Variance (b) Material Volume or Quantity or Usage Variance
Material Usage variance is further divided in to (i) Material Mix Variance and (ii) Material Yield Variance .
Material Cost variance : the difference between the actual cost of material used and the standard cost of material specified for the output achieved
Material Price variance: is that part of material cost variance which is due to difference between the actual price and the standard price
Material Quantity or Usage Variance: is that part of material cost variance which is due to actual quantity and standard quantity of material used.
Material Mix Variance : is that part of material quantity (usage) variance which is due to actual composition of mix and standard composition of mix.
Material Yield Variance: is that part of material usage variance which is due to difference between actual output (Yield) obtained and the standard yield specified.

Exercise:
(1) A product is manufactured by using a raw material. The details are as follows:
Standard quantity specified , 100 units at Rs 15/ unit. Actual quantity used , 90 units at Rs 20 /unit.
Determine : (a) Material Price Variance (b) Material Usage Variance (c) Material Cost Variance.

(2) Following data relate to a Product:
Standard Mix: 40 tons of Material A @Rs 10 /ton and 80 tons of Material B @ Rs 20/ton
Actual Mix: 50 tons of Material A @ 12 /ton and 70 tons of Material B @ Rs 16 /ton.
Determine the Material Cost variances.
(3) From the data given below , determine the cost variances:
Standard Mix for Production of A ---- X – 60 tons@ Rs5/ton; Y—40tons @ Rs10/ton
Actual Mix for production of A ----- X – 80 tons @ 4/ton ; Y --- 70tons @ Rs8/ton
(4) The standard cost of a Chemical mixture is as follows: 40% of Material A at Rs 20 per Unit ; 60% of Material B at Rs 30 per Unit.
Actual cost is as follows: 180 units of A @ Rs 18 /unit; 220 units of B @Rs 34 /unit.
A standard loss of 10% of input is expected in production. But the actual output was 364 units.
Required: Calculate, (1) Material Price variance (2) Material mix Variance (3) Material Yield Variance (4) Material Usage Variance (5) Material Cost Variance
5ANC ltd produces a product by blending two basic raw materials ,m and n. The following details are available:

Material Standard mix Standard price / kg
M 40% 4
N 60% 3
The standard loss in process is 15%.
During Nov.2004 the company produced 1,700 kgs of finished output.
The quantity details are as below:
Material Stock on Nov.1.(kgs) Stock on Nov.30 (kgs) Purchases during Nov.
kgs Cost
M 35@4/kg 5 800 3,400
N 40@3/kg 50 1,200 3,000
Calculate cost variances based on the materials used (assuming FIFO).
6.Determine the material cost variances under the following two situations:
(A) Purchased during the period 3,000 Kg ,cost 6,200
Standard 2 kg/unit @ 2 /kg
Original budget 2,000units
Production 1,400 units
(B) Purchased during the period 6,000 kgs , cost 2,400
Standard 3 kgs/ unit @ 0.50 /kg
Production 2,000 units
Ending stock 400 kgs.
Note: In case of(B) ,calculate price variance at (i) the time of purchase (ii) at the
time of use.
7.Details of a chemical product is as follows:

X Y
Qnty Value Qnty Value
Raw material purchased 2,000 4,000 5,000 6,250
Issued to production 2,150 ? 3,950 ?
Stocks : Beginning
Ending 300
200 ?
? 1,000
1,250 ?
?
Standard price : Material X – 1.90/kg,Material Y – 1.30/kg
Standard usage : Material X Material Y
Product A 1 kg 1 kg
Product B ½ kg 1 kg
Output during the period – Product A , 1,130 units, Product B, 2550 units.
Required : Determine the Material cost variances.
8. XYZ ltd is producing floor covers in roll of standard size measuring 3 meters wide and 30 meters long by feeding raw materials to a continuous process machine. Standard mix fixed for a batch of 900 sq.meters of floor cover is as follows:
2,000 kgs of A @ 1.00/kg, 800kgs of B @ 1.50/kg,20 gallons of C @ 30/gallon.
During the period , 1,505 standard size rolls were produced from the materials used for 150 batches. The actual usage and the cost of materials are as follows:
300,500 kgs of A @ 1.10/kg, 119,600 kgs of B @1.65/kg ,3,100 gallons of C @ 29.50 /kg
Required: Calculate Material cost variances.


Labour Cost Variance
Direct Wage Variance: Difference between Actual and Standard wages paid.
This is divided in to parts as below:

Wage Variance

Rate
Efficiency
Composition
Idle
Yield









L1 = Actual Hours x Actual Rate
L2 = Actual Hours x Standard Rate
L3 = Standard Composition x Standard Rate
L4 = Labour Hours Utilised x Standard Rate
L5 = Standard Labour Cost per unit x Actual Production

Direct Wage Variance : Difference between the actual wages paid & Standard wages specified for production.( L1- L5)
Direct Wage Rate Variance: Difference between wages for actual hours @actual rate and Standard Rate. (L1 – L2)
Direct Wage Efficiency Variance: Difference between wages paid for actual hours at standard rate & Standard Labour cost for actual production (L2- L5)
Direct Wage Composition Variance : Difference between wages paid at standard rate for actual composition & standard composition . (L2 – L3)
Direct Wage Idle Time Variance: Difference between Wages paid at standard rate for Labour hours applied & Labour hours utilized. (L3 – L4)
Labour Yield Variance : Difference between wages paid at standard rate for Actual & Standard Production. (L4 –L5 )
Note : If there is no idle time , then Yield variance = L3 – L5

Problem : 1
Following information relates to a factory :
Standard Composition Standard Hourly rate(Rs)
10 Men 62.5
5 Women 40.0
5 Boys 35.0
A week consists of 40 hours and the standard output for a week is 1,000 units.
But, in a particular week , the composition consisted of 13 Men , 4 Women, 3 Boys and actual wages were : Rs 60, 42.5 , 32.5 respectively.
Two hours were lost during the week and 960 units were produced.
Find: a.Labour Rate variance b. Labour Efficiency Variance c. Composiiton(Mix) Variance d.Idle Time Variance e. Yield variance f. Labour Cost Vairance

Answer :
L1 = 13 M x 40 x 60 = 31,200 + 4 W x 40 x 42.5 = 6800 + 3 B x 40 x 32.5 = 3900 = 41,900
L2= 13M x 40 x 62.5 = 32,500 + 4 W x 40 x 40 = 6400 + 3 B x 40 x 35 = 4200 =43,100
L3 = 10 M x 40 x 62.5 =25000+5Wx40x40=8000+5Bx40x35=7000 = 40,000
L4=10Mx38x62.5=23750+5 Wx38x40=7600+5Bx38x35=6650=38,000
L5= Std cost per unit i.e. 40000 /1000 x 960 units = 38,400
a.Labour Rate variance = L1 – L2 = 41,900-43,100 = 1,200 (F)
b. Labour Efficiency Variance: L2-L5 = 43,100- 38,400 = 4,700 (A)
c. Composiiton(Mix) Variance: L2 – L3 = 43,100-40,000 = 3,100 (A)
d.Idle Time Variance: L3 – L4 =40,000-38,000 = 2,000 (A)
e. Yield variance: L4 – L5=38,000-38,400 = 400 (F)
f.Labour Cost variance : L1-L5 = 41900-38400=3,500(A)

Problem 2
A mix of workers normally consists of 30 skilled ,15 Semi skilled & 10 Unskilled with Standard rate of Rs 80,60 & 40 respectively.Normal working week is 40 hours with a production of 2,000 units. During a specific week , the mix consisted of 40 Skilled, 10 Semiskilled and 5 Unskilled workers, with actual wages of Rs 70,65,30 respectively. 4 hours were lost in the week & 1,600 Units were produced.
Determine Labour Cost Variances.
Problem 3
Following data are available for Producing a product A: (Standard)
Hrs Rate per hr
Skilled 10 30
Semi Skilled 8 15
Unskilled 16 10
Actual production was 1,000 units of A for which actual data are as below:
Hrs Rate per hr
Skilled 9,000 40
Semi Skilled 8,400 15
Unskilled 20,000 9
Determine Labor Cost variances
Problem 4
Determining the standard cost of direct labor for the good output produced in January 2007:
Large Aprons Small Aprons Total
Actual aprons manufactured 100 60
Standard hours of direct labor per apron manufactured 0.3 hr. 0.2 hr.
Total standard hours of direct labor for actual aprons manufactured 30 hr. 12 hr. 42 hr.
Standard cost per direct labor hour incl. payroll taxes Rs10 Rs10 Rs10
Standard cost of direct labor in the good output Rs300 Rs120 Rs420


Assuming that the actual direct labor in January adds up to 50 hours and the actual hourly rate of pay (including payroll taxes) is Rs9 per hour, our analysis will look like this:

Direct Labor Variance Analysis for January 2007:



4. Credit Wages Payable for the actual direct labor cost.



5. Direct Labor Rate Variance
Act Hr x (Std Rate - Act Rate)
2. Actual hours of direct labor used x the standard hourly pay rate
3. Direct Labor Efficiency Variance (Std Hr - Act Hr) x Std Cost 1. Debit Inventory-FG for the standard hours of direct labor that should have been used to make the good output x the standard hourly pay rate
Act Hr x Act Rate Difference Act Hr x Std Rate Difference Std Hr x Std Rate
50 act hr x Rs9 50 hr x Rs1 50 act hr x Rs10 (8 hr) x Rs10 42 std hr x Rs10
Rs450 Rs500 Rs420
Rs50 Favorable Rs80 Unfavorable


In January, the direct labor efficiency variance (#3 above) is unfavorable because the company actually used 50 hours of direct labor—this is 8 hours more than the standard quantity of 42 hours allowed for the good output. The additional 8 hours is multiplied by the standard rate of Rs10 to give us an unfavorable direct labor efficiency variance of Rs80. (The direct labor efficiency variance could be called the direct labor quantity variance or usage variance.)

Note that DenimWorks paid Rs9 per hour for labor when the standard rate is Rs10 per hour. This Rs1 difference—multiplied by the 50 actual hours—results in a Rs50 favorable direct labor rate variance. (The direct labor rate variance could be called the direct labor price variance.)


Overhead Variances
Divided in to two: Variable & Fixed
Variable OH Variance: VOH remains constant per unit ,but varies in total
It is the difference between the Actual VOH incurred & the VOH at Standard Rate for Production.
It is divided in to two parts:
Variable OH Expenditure Variance: It is the difference between Actual VOH incurred & VOH of Actual hrs worked at Standard rate.
Variable OH Efficiency variance: It is the difference between VOH of Actual Hrs worked at standard rate & the VOH at standard rate for production (Std rate per unit x actual production )
Fixed OH variance: This remains constant in total ,but varies per unit as the production changes. It arises when absorption standard costing system is used. Under this, a standard fixed OH rate for a base is determined. Variances arise due to variation in the production, capacity utilization, in the base .
It is divided in to :
Expenditure / Budget variance: Difference between Actual FOH incurred & Budgeted FOH.
Volume variance: Difference between Budgeted FOH & Standard FOH for Actual Production.
Volume variance is further divided in to :
Calendar variance : This is due to difference in the number of working days.
Capacity variance : This is due to difference in the capacity utilized.
Efficiency Variance: This is due to efficiency in the production .








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