COST CONTROL: STANDARD COSTING & VARIANCE ANALYSIS

Dr. Alok Dixit IIM Lucknow

COST CONTROL
Managers, quite often, are confronted with the situation where Actual Profits are different from Budgeted Profits. And, it gives rise to the need of a control system which minimizes such deviations.

Important for ensuring that the standard fixed in the beginning of the period could be achieved with least possible deviations. Need to be carried out on frequent intervals (say, weekly or daily) to spot the deviations, if any, in time. Diagnosis of such variations is needed to ascertain the possible reasons and nature of such variances in terms of controllable & uncontrollable. And, a suitable action can be initiated to bridge the gap between standard and actual so that standards can be met at the end of the budgeted period.

TOOL FOR COST CONTROL

Variance Analysis is used as one of the most important tool for cost controls. It attempts to compare actual vs. a suitable benchmark, fixed in the beginning of the budgeted period (standard). Deviations, if any, are spotted, analyzed in terms of Favourable/ Unfavourable, controllable/ uncontrollable. And finally, for controllable variances, concerned employee/ centre is held accountable for.

STANDARD COSTING

Variance analysis requires some suitable benchmark for comparing the actual performance; Standard costing provides those suitable benchmarks for assessing the actual performance; For effective control, the standards should be set cautiously. These should neither be too tight nor too loose as they have got their own implications. If the standard itself is incorrect, measurement of variance will become a futile exercise;

VARIANCE ANALYSIS
MATERIAL VARIANCES

COST VARIANCES

LABOUR VARIANCES

ACTUAL PROFITS { BUDGETED PROFITS

SALES VARIANCES

OVERHEADS VARIANCES

MATERIAL COST VARIANCES

Material Price Variance (MPV) Total Material Cost Variance (TMCV) Material Quantity Variance (MQV)

Material Mix Sub Variance(MMSV)

Material Yield Sub Variance(MYSV)

MATERIAL VARIANCE: AN EXAMPLE

MATERIAL VARIANCE: EXAMPLE 2

Detailed Solution is given in the material on Variance Analysis (scanned copy).

SOLUTION: MATERIAL COST VARIANCES

MPV
={AP-SP}*TAQ
Material A = 6000 (F) Material B = Zero Material C= 10000 (U) Total= 4000 (U)

MMSV
={Actual Mix of Actual Quantity - Standard Mix of Actual Quantity}*SP Material A = 5000 (U) Material B = 14000 (U) Material C =60000 (F) Total= 41000 (F)

TMCV
={TAQ*AP-TSQ*SP}
Material A = 4000 (U) Material B= 20000 (U) Material C= 40000 (F) Total= 16000 (F)

MQV
={TAQ-TSQ}*SP
Material A =10000 (U) Material B= 20000 (U) Material C= 50000 (F) Total= 20000 (F)

MYSV
={Actual Yield for standard mix - Standard Yield of Standard Mix}*SP of finished output Material A = 5000 (U) Material B = 6000 (U) Material C =10000 (U) Total= 21000 (U)

TSQ= SQ (PER UNIT)*ACTUAL OUTPUT

LABOUR COST VARIANCES

LABOUR COST VARIANCES

Labour Rate Variance (LRV) Labour Mix Sub Variance(LMSV) Labour Yield Sub Variance(LYSV)

Total Labour Cost Variance (TLCV)

Labour Efficiency Variance (LEV) Revised**

Labour Idle Time Variance (LITV)

** Labour efficiency variance need to be revised for idle hours, if any. The labour efficiency variance net of the idle hours cost will give a true measure of Labour efficiency as Labour cant be held responsible for idle time.

PROBLEM: LABOUR COST VARIANCE

SOLUTION

SOLUTION

SOLUTION

SOLUTION

SOLUTION

Idle hours should be apportioned based on Standard Mix to ensure that the deviations, if any, on account of changes in Standard Mix should get reflected in LMSV; Such deviation should not get reflected in Cost of Idle Time.

Important:

SOLUTION
Labour Rate Variance (LRV)
={AR-SR}*TAH
Unskilled= 1000 (U) Semiskilled= 200 Skilled = 520 (U) Total= 1320 (U)

Labour Mix Sub Variance(LMSV)

={Actual Mix of Actual Quantity - Standard Mix of Actual Quantity}*SR Unskilled= 200 (U) Semi-skilled= 640 (F) Skilled = 400 (U) Total= 40 (F)

Total Labour Cost Variance (TLCV)

Unskilled= 1600 (U) Semi-skilled= 520 (F) Skilled = 1320 (U) Total= 2400 (U)

Labour Efficiency Variance (LEV) Revised

={TAH-TSH}*SR
Unskilled= 600-480 = 120 (U) Semi-skilled= 320+384=704 (F) Skilled = 800-480 = 320 (U) Total= 1080-1344=264 (F)

Labour Yield Sub Variance(LYSV)

={Actual Yield for standard mix - Standard Yield of Standard Mix}*SR of finished output Unskilled= 80 (F) Semi-skilled= 64 (F) Skilled = 80 (F) Total= 224 (F)

Labour Idle Time Variance (LITV)

={Idle Hours}*SR TSH*= Standard Hours required to support the Actual Output
Unskilled= 480 (U) Semi-skilled= 384 (U) Skilled = 480 (U) Total= 1344 (U)

OVERHEADS COST VARIANCES

OVERHEADS COST VARIANCES

Variable Overheads Spending Variance (VOSV)

Variable Overheads Cost Variance (VOCV)

={(TAH*AVOR) (TSH*SVOR)}

={AVOR-SVOR}*TAH

Total Overheads Cost Variance (TOCV)

Variable Overheads Efficiency Variance (VOEV)

={TAH-TSR}*SVOR

Fixed Overheads Cost Variance (FOCV)

={(TAH*AFOR) (TSH*SFOR)}

Fixed Overheads Spending Variance (FOSV)

={TAFOC- Budgeted Fixed Overheads Cost}

Volume Variance
={Actual VolumeBudgeted Volume}* SH*SFOR

Fixed Overheads Efficiency Variance (FOEV)

={TAH-TSR}*SFOR

Capacity Variance
={TAH- Normal Hours}*SFOR

PROBLEM: VARIABLE OVERHEADS COST VARIANCES

SOLUTION: VARIABLE OVERHEADS COST VARIANCES

Variable Overheads Spending Variance (VOSV) ={AVOR-SVOR}*TAH ={11-10}*2300= 2300 (U)

Variable Overheads Cost Variance (VOCV) ={2300*11-2000*10}= 5300 (U)

Variable Overheads Efficiency Variance (VOEV) ={TAH-TSR}*SVOR ={2300-2000}*10 = 3000 (U)

PROBLEM: FIXED OVERHEADS COST VARIANCES

SOLUTION: FIXED OVERHEADS COST VARIANCES

Fixed Overheads Spending Variance (FOSV)
={TAFOC- Budgeted Fixed Overheads Cost

Fixed Overheads Cost Variance (FOCV)

={(TAH*AFOR) (TSH*SFOR)} ={50600(2000*20)}=10600 (U)

={50600-50000}= 600 (U)

Volume Variance
={Actual VolumeBudgeted Volume}* SH*SFOR ={1000-1250}*2*20 = 10000 (U)

Fixed Overheads Efficiency Variance (FOEV)

={TAH-TSR}*SFOR

={2300-2000}*20= 6000 (U)

Capacity Variance
={TAH- Normal Hours}*SFOR

={2300-2500}*20= 4000 (U)

SALES VARIANCES

SALES VARIANCES

SALES VARIANCES

ACTUAL PROFITS { BUDGETED PROFITS

COST VARIANCES

MATERIAL VARIANCES LABOUR VARIANCES OVERHEADS VARIANCES

SALES VARIANCES

Sales Price Variance

Profit Variance
SALES VARIANCES =SPV+SVV

Sales Mix Variance Sales Volume Variance =SMV+SQV

Sales Quantity Variance

PROBLEM: SALES VARIANCES

SOLUTION: SALES VARIANCES

SOLUTION: SALES VARIANCES

SOLUTION: SALES VARIANCES

This solution is based on sales value to determine the mix and quantity variance. The impact is visible in Sales Mix and Sales Quantity variances. However, Sales volume variance turns out to be the same. SALES VARIANCES =SPV+SVV
Product A= 4000(F) Product B= 20000 (F) Total = 24000 (F)

Sales Price Variance

={ASP-SSP}*AQS
Product A= 8000 (U) Product B= 16000 (F) Total = 8000 (F)

Sales Mix Variance Sales Volume Variance =SMV+SQV

Product A= 12000(F) Product B= 4000 (F) Total = 16000 (F) Product A= 7529(F) Product B= 9412 (U) Total = 1883 (U)

Sales Quantity Variance

Product A= 4471 (F) Product B= 13412 (F) Total = 17883 (F)

Actual Sales at Budgeted Prices Product A = 8000*10=80000 Product B = 16000*8 = 128000 Total Actual Sales at Budgeted Prices = 208000 Standard Mix Ratio = 5:12

COMPREHENSIVE ANALYSIS: PUTTING IT ALTOGETHER

COMPREHENSIVE PROBLEM: VARIANCE ANALYSIS

STEPS INVOLVED IN VARIANCE ANALYSIS

Determine the Profit Variance.

y

Profit Variance = Actual Profit Budgeted Profit

Try to trace the variance by analyzing cost variances and sales variances. Prepare a reconciliation statement.

For detailed analysis go through the material provided (scanned copy) on variance analysis.

SOLUTION: COMPREHENSIVE PROBLEM