cost ch- 06 standard costing

5/27/2018 COST CH- 06 Standard Costing

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COST & MANAGEMENT

ACCOUNTING

Presented by

uhammad Shahidullah TasfiqLecturer in Finance

Department of Management Studies

Jagannath University


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Standard Costing


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Standard cost

A standard cost is a planned or pre-determined

cost which is calculated from managements

standard of efficient operation & the relevant

necessary expenditure.


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Standard costing

Standard costing is the preparation of

standard costs and applying them to measure

the variationsfrom actual costs and analyzing

the causes of variations with a view to maintainmaximum efficiency in production.

It can be used as a process of measuring and

correcting actual performance to ensure that

the plans are properly set and implemented.


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Purpose of Standard Costing

Establishing budgets.

Controlling costs,

Promoting possible cost reduction.

Simplifying costing procedures and expediting

cost reports.

Directing and motivating employees and

measuring efficiencies.


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Setting Standard

Standard must be established for a definite

period of time so that they can be effective in

performance evaluation, control & analysis of

costs. Standards are developed for-

Materials Labor

Overhead


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Factors in Setting Price Standard

Purchase Price

Freight

Receiving & handling

Purchase discount


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Factors in Setting Quantity Standard

Basic materials input i.e. materials requirement

as specified in the bill of material.

Allowance for waste & spoilage

Allowances for rejecting defective materials

Evaporation

Leakage


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Factors in Setting Rate Standard

Basic wage rate per hour

Employment taxes

Fringe benefit

Union negotiation

Experience of the worker


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Factor in Setting Time(Hour) Standard

Basic labor time

Allowance for breaks & personal needs

Allowance for cleanup & machine downtime

Allowance for reject

Allowance for set-up time

Allowance for fatigue

Waiting time of operator


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Variance analysis

A variance is the difference between the

standards and the actual performance

When the actual results are better than the

expected results, there will be a favorablevariance (F).

If the actual results are worse than theexpected results, there will be an adverse

variance (A).


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Three types of cost variance

Material cost variance

Labor cost variance

Overheads variance

Variable overheads variance

Fixed overheads variance


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Material Variance

Materials cost variance(AQ*AP SQ*SP)

Material Price varianceAQ*AP AQ*SP

Material Usage VarianceAQ*SP SQ*SP

Mix Variance Yield Variance

Actual UnitsProduced*SQ P/U


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Labor Variance

Labor Cost Variance

AH*AR SH*SR

Rate VarianceAH*AR AH*SR

Mix Variance Yield Variance

Idle Time VarianceSR*Hours Lost

Efficiency VarianceAH*SR SH*SR

Actual UnitsProduced*SH P/U


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Overhead variance

Variable Overhead variance

(AH*AR

SH*SR)

VO Expenditure/Spending/

Budget Variance

AH*ARAH*SR

VO Efficiency

Variance

AH*SR SH*SR

Actual Units

Produced*SVMO P/U


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Variable Overhead variance

Fixed Overhead varianceAOCSH*SFOR

Fixed O/H Expenditure Variance

AFOH - SFOH

Fixed O/H Volume variance

(APSP)*SFOHR PU

Efficiency

varianceCalendar

variance

Capacity

Variance


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Assignment Problem

ZB Company produce a single product. Variable

manufacturing overhead is applied to products on thebasis of direct-labor-hours. The standard costs for

one unit of product are as under:

StandardQuantity or Hour

StandardPrice or Rte

StandardCost

Direct Materials 3 Pound Tk. 4 Tk. 12

Direct Labor 2.5 Hours Tk. 14 Tk. 35

VariableManufacturing O/H

2.5 Hours Tk. 3 Tk. 7.5

Total Standard Cost Tk.

54.50


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Problem

During June, 2011, 2000 units were produced.

The costs associated with Junes operations

were as under

Actual QuantityOr Hour

Actual Priceor Rate

Actual Cost

Direct Materials 6500 Pound Tk. 3.80 Tk. 24700

Direct Labor 5400 Hours Tk. 13.75 Tk. 74250

VariableManufacturing O/H

5400 Hours Tk. 2.85 Tk. 15390


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Assignment Problem

Compute & Comment on the material variance if

All of the material purchased was used

during June.

5000 units of materials is used during the

period of to produce 1600 units of products

Compute & Comment on the Labor variance. Compute & Comment on Manufacturing

Overhead Variance.


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Assignment Problem # 03

What will be the BEP?

Show your result in PV graph.


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Margin of Safety (MOS)

Margin of safety (MOS) is the excess of

budgeted or actual sales over the break even

volume of sales.

It stats the amount by which sales can dropbefore losses begin to be incurred.

The higher the margin of safety, the lower therisk of not breaking even.


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Margin of Safety (MOS)

Margin of safety can be improved by lowering

fixed and variable costs, increasing volume of

sales or selling price and changing product mix

so as to improve contribution and overall P/VRatio.


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MOS in

Revenue

Total Budgeted

or Actual Sales

Break-even

Sales

Margin Safety (MOS)

OR

MOS as % =MOS in Amount

TB/A S(%)

TB/A S = Total Budgeted or Actual Sales

MOS inUnits

Actual orestimated units

of activity

Units atbreakeven

point

OR

=

=

f f


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Margin of Safety

TR/TC

Q

TR

TC

TVC

FC

BEP

Profit Area

Loss

Area

B/AS

Margin ofSafety


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Assignment problem # 04

ZB Co. Sold in two successive years 7,000 and

9,000 units and incurred a loss of Tk.10,000 and

earned Tk.10,000 as profit respectively. The

selling price per unit is Tk.100.

What is the amount of fixed costs,

What is the number of units to breakeven, and

What is the number of units to earn a profit of

Tk.50,000.


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Cost Structure

Cost structure refers to the relative

proportion of fixed and variable costs in an

organization.


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Target Net Income & Income Taxes

When managers want to know the effect of

their decisions on income after taxes, CVP

calculations must be stated in terms of target

net income instead of target operating income.

TNI = TOP (1- Tax rate)


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Target Net Income & Income Taxes

Will Income taxes Change Break Even Point ?NO

Because by definition Operating Income at BEP

is ZERO.

And thus no income taxes will be paid.


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Contribution margin Vs Gross margin

Contribution income statement emphasizes

contribution margin.

Revenues Variable cost of goods sold

Variable operating costs = Contribution margin

Contribution margin Fixed operating costs =

Operating income


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Contribution margin Vs Gross margin

Financial accounting income statement

emphasizes gross margin.

Revenues Cost of goods sold = Gross margin

Gross margin Operating costs = Operating

income

S i i i A l i d U i


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Sensitivity Analysis and Uncertainty

Sensitivity analysis is a what if technique

that examines how a result will change if the

original predicted data are not achieved or if

an underlying assumption changes.

S l Mi


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Sales Mix

Sales mix is the combination of products that a

business sells.

cost ch- 06 standard costing

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