STANDARD COSTING -NATURE AND SCOPE Standard costing is the preparation and use of standard costs, their comparison

with actual costs and the analysis of variance to their causes and points of incidence (ICWA. Terminology of Cost Accountancy). Standard cost is a predetermined cost which is calculated from management's standards of efficient operation and the relevant necessary expenditure. A standard cost is used as a basis for price fixation and cost control through variance analysis. BUDGETARY CONTROL AND STANDARD COSTING ESTIMATED COST AND STANDARD COST ADVANTAGES OF STANDARD COSTING: (i) (ii) Effective utilisation of men, materials and machines economies of increased productivity in the business activities. Yardstick for measuring actual performances and comparing it with the standard - application of principle of management by exception'. Valuable aid to management in formulating price selling price, pricing of inter department transfers, valuation of stocks -RM, WIP & FG. Provides reliable, accurate, firm data with simplicity and ease. No further adjustments and variations are necessary as would require in historical costing. Creates an atmospl1cre of cost consciousness among Executives Promotes cooperation and co-ordination amongst various functions and departments. Provides complete integration of cost and financial accounts without the need of any kind of reconciliation between separate sets of accounts. Costing procedure is simplified -reduction in paper Considerable saving in clerical time and expenses. work

(iii)

(iv)

(v)

(vi)

(vii)

(viii) Standardisation of products, methods and operations results into elimination of waste of time & material. (ix) Constant review of stds. provides means for achieving cost reduction through improved methods, quality of products, better materials, men, effective selection and use of capital resources etc.

(x) Facilities delegation of authority & fixation of responsibility of each dept. or individual. LIMITATIONS (i) (ii) Establishment of std. costs is difficult in practice. In course of time, stds. become rigid. It is not always possible to change stds. Revision of stds. is costly.

(iii) Inaccurate, unreliable and out of date stds. do more harm than benefits. (iv) (v) (vi) (vii) Creates adverse psychological effects. Too high stds. creates frustration & resistance. May not be suitable for small concerns. In small concers, personal contacts may be more effective then std. costing system. Std. costing may be found unsuitable and costly in case of industries dealing in non std. products & for repair jobs. Lack of interest in std. costing on the part management makes the system practically in effective.

Standard costing involves (1) Establishment of standard costs.

(2) Accounting for Actual costs including the analysis of the causes of variances. (3) Reporting to management for taking appropriate where necessary.

CONDITIONS WHICH DETERMINE THE STANDARD COST (1) Length of the period of use. (b) Current Standard (3) Combined

(a) Basic Stal1dard Standard. (2) Std. (3)

The standard of attainment to be fixed. (a) Ideal Std. (b) Normal Std. (c) Expected Std. (d) Historical

The level of output attainable.

ESTABLISHMENT OF STANDARD COSTS Establishment of standard costs for direct material, direct labour, variable and fixed overheads is essential and is possible only with the close cooperation of production manager, personnel manager, works-study engineer, purchase officer, sales manager and cost accountant. Standard cost determination involves the determination of (1) quantity standards and (2) price standards of each item. (1) DIRECT MATERIALS COST STANDARD : The establishment of standard cost of direct materials involves the determination of (a) standard quantity of standard raw materials; and (b) standard price of raw materials consumed. (2) DIRECT WAGES STANDARD: Standard costs for direct labour are derived from determination of (a) (3) standard time; and (b) Standard rate.

DIRECT EXPENSE STANDARD : If there be any direct expenses relating to the cost unit, the setting of standard direct expenses involves the determination of standard quantity of the service and the standard rate therefore. Thus for transport service, the quantity, i.e. mileage as well as price, i.e. rate per mile must determined.

(4)

VAIABLE OVERHEAD STANDARD: It is observed that variable overhead per unit remains constant irrespective of volume of production and as such it is necessary to calculate only a standard variable overhead per unit or per hour.

(5)

FIXED OVERHEAD STANDARD: Establishment of standard fixed overhead cost involves the determination of budgeted fixed overhead for a period and the corresponding budgeted output in units or standard hours.

ANALYSIS OF VARIANCES A variance is the difference between the budgeted or standard amount and the actual amount during a given period. These variances may be favourable or adverse according to circumstances.

COST VAIRIANCE (Direct materials, wages or variable overhead)

PRICE VIRIANCE USAGE VARIANCE (a) Direct materials price variance. (a) Direct materials usage variance. (b) Direct wages rate variance (b) Direct labour efficiency variance. (c) Direct overhead expenditure variance (c) Variable overhead efficiency variance. DIRECT MATERIAL COST VARIANCE is the difference between the standard cost of direct materials specified for the output achieved and the actual cost of direct materials used. DIRECT MATERIAL PRICE VARIANCE: It is that portion of the direct materials cost variance which is due to the difference between the standard price specified and the actual price paid. Material price variance = AQ (AR-SR) Material price variance arises due to the following causes:(a) Change in basic purchase price of material. (b) Change in quantity of purchase or uneconomical size of purchase order. (c) Rush order to meet shortage of supply, or purchase in less or more favourable market (d) Failure to take advantage of of-season price, or failure to purchase when price is cheaper. (e) Failure to obtain (or availability of) cash and trade discounts or change in the discount rates. (f) Weak purchase organisation. (g) Payment of excess or less freight. (h) Transit losses and discrepancies, if purchase price is inflated to include the loss. (i) Change in quality or specification of material purchased. (j) Use of substitute material having a higher or lower unit price. (k) Change in the pattern or amount of taxes and duties. DIRECT MATERIALS USAGE VARIANCE: It is that portion of the direct materials cost variance which is due to the difference between the standard quantity specified and the actual quantity used. Materials usage variance = SR (AQ-SQ).

Tile causes for materials usage variance are: (a) Variation in usage of materials due to inefficient or careless use, or economic use of materials. (b) Change in specification or design of Product. (c) Inefficient and inadequate inspection of raw materials. (d) Purchase of inferior materials or change in quality of materials. (e) Rigid technical specifications and strict inspection leading to more rejections which require more materials for rectification. (f) Inefficiency in production resulting in wastages. (g) Use of substitute materials. (h) Theft or pilferage of materials(i) Inefficient labour force leading to excessive utilisation of materials. (j) Detective machines, tools, and equipments, and bad or improper maintenance leading to breakdowns and more usage of materials. (k) Yield from materials in excess of or less than that provided as the standard yield. (l) Faulty materials processing. Timber, for example, if not properly seasoned may be wasted while being used in subsequent processes. (m) Accounting errors, e.g. when materials returned from shop or transferred from one job to another are not properly accounted for. (n) Inaccurate standards. (o) Change in composition of a mixture of materials for a specified output. DIRECT MATERIALS MIXTURE VARIANCE: It is that portion of the direct materials usage variance which is due to the difference between the standard and actual composition of a mixture. Material mixture variance = AQ (SCAM -SCSM) DIRECT MATERIALS YIELD VARIANCE: It is that portion of the direct materials usage variance which is due to the difference between the standard yield specified and tile actual yield obtained. Yield variance = SC (SO -AO) DIRECT WAGES VARIANCES : Direct wages variance is the difference between the standard direct wage specified for the activity achieved and the actual direct wages paid. DIRECT WAGES RATE VARIANCE : It is that portion of the direct wages variance which is due to the difference between the standard rate of pay specified and the actual rate paid. Wages rate variance = AH (AR -SR)

Direct labour rate variances occur due to the following :(a) (b) (c) (d) (e) (f) (g) Change in basic wage structure or change in piece-work rate. These will give rise to a variance till such time the standards are not revised. Employment of workers of grades and rates of pay different from those specified, due to shortage of labour of the proper category, or through mistake, or due to retention of surplus labour. Payment of guaranteed wages to workers who are unable to earn their normal wages if such guaranteed wages form part of direct labour cost. Use of a different method of payment, e.g. payment at day-rates while standards are based on piece-work method of remuneration. Higher or lower rates paid to casual and temporary workers employed to meet seasonal demands, or urgent or special work. New workers not being allowed full normal wage rates. Overtime and night shift work in excess of or less than the standard, or where no provision has been made in the standard. This will be applicable only if overtime and shift differential payments from part of the direct labour cost. The composition of a gang as regards the skill and rates of wages being different from that laid down in the standard.

(h)

DIRECT LABOUR EFFICIENCY VARIANCE : It is that portion of the direct wages variance which is due to the difference between the standard labour-hours specified for the activity achieved and the actual labour- hours expended. Labour efficiency variance = SR (AH -SH) The Causes giving rise to direct labour efficiency variance are as follows: (a) (b) (c) (d) (e) (f) (g) (h) (i) (k) Lack of proper supervision or stricter supervision than specified. Poor working conditions. Delays due to waiting for materials, tools, instructions, etc. if not treated as idle time.. Defective machines, tools, and other equipments. Machine break-down, if not booked to idle time. Work on new machines requiring less time than provided for, so long as the standard is not revised. Basic inefficiency of workers due to low morale, insufficient training, faulty instructions, incorrect scheduling of jobs, etc. Use of non-standard material requiring more or less operation time. Carrying out operations not provided for and booking them as direct wages. (j) Incorrect standards. Wrong selection of workers, e.g. not employing the right type of man for doing a job.

(l) (m)

Increase in labour turnover. Incorrect recording of performances, i.e. time or output.