STANDARD COSTING AND VARIANCE ANALYSIS Ns eee Introduction; Meaning and definition of standard cost and standard costing; Applicability; Standard cost and estimated cost; Standard costing and budgetary control; Advantages; Limitations; Prelimineries; Variance analysis; Material variances; Labour variances; Overhead variances; Sales variances; Disposition of variances; Control ratios; Summary of formulae; Problems and solutions; Key terms; Examination questions. Introduction standard costing is a specialised technique of cost accounting to control the cost. From cost contzol point of view, ‘what a product should have costed’ is more important than ‘What it id actually cost. The actual cost is the past cost or historical cost and historical costing sa system in which actual costs incurred in the past are ascertained. limitations of Historical Costing Ascertainment of actual costs does not serve any useful purpose and has certain limitations. Firstly, such costs are obtained too late and cannot be used for price quotations. Secondly, historical costs do not serve the purpose of cost control because the cost has ateady been incurred before cost figures are available for managerial control. Thirdly, historical costs do not provide any yardstick against which efficiency can be measured. These limitations encouraged the development of a more satisfactory standard costing approach tased on predetermined costs. Standard costing is not a method of costing like job order on Mocess costing. It is a special technique to control costs and can be used in conjunction with ayy other system like job costing, process costing or marginal costing, etc. Standard costing is one of the most important tools to control costs. In this technique, all ‘osts are pre-determined, i.e., costs are determined in advance of production. Such pre-determined fosts are then compared with the actual costs. The difference between the actual costs and Me-determined costs, known as variances, are then analysed and investigated to know their isons. Variances are reported to management for taking remedial steps so that actual costs te to pre-determined or standard costs. 34a Management Ace = unt Meaning and Definition of Standard Cost rion. Standard cost is thus a criterion cost yy, ‘dency with which actual cost has been incy..." or target costs that should be inc, The word standard means ‘a norm’ or a crite! may be used as a yardstick to measure the effi In other words, standard costs are pre-determined costs under efficient operating conditions. Q According to Chartered Institute of Management Accountants ei Stand cost is the pre-determined cost based on technical estimates for ae ees and overh,. {for a selected period of time for a prescribed set of working conditions « In the words of Brown and Howard, “the standard cost is a predetermined cost which determin, what each product or service should cost under given circumstances « Thus standard costs. ° planned costs that should be attained under a given set of operating conditions. The main obj. of standard cost is to look forward and assess what the cost ‘should be’ as distinct from what the cost has been in the past. Meaning and Definition of Standard Costing Standard costing is simply the name given to a technique whereby standard costs are comp, ted and subsequently compared with the actual costs to find out the differences between the t, These differences (known as variances) are then analysed to know the causes thereof so a5 ,, provide a basis of control. The C.LM.A. London has defined standard costing as “the prepara of standard costs and applying them to measure the variations from actual costs and anaiysi, the courses of variations with a view to maintain maximum efficiency in production”. Brown ang Howard have defined it, “as a technique of cost accounting which compares the standard cost « each product or service with the actual costs, to determine the efficiency of the operations so thy any remedial action may be taken immediately’. Steps. Standard costing system involves the following steps : 1. The setting of standard costs for different elements of cost, ie., material, labour ang overheads. 2. Ascertaining actual costs. 3. Comparing standard with actual costs to determine the differences between the two, know as ‘variances. 4. Analysing variances for ascertaining reasons thereof. 5. Reporting of these variances and analysis thereof to management for appropriate corective action, where necessary. Applicability of Standard Costing The application of standard costing requires certain conditions to be fulfilled. These are (a) A sufficient volume of standard products or components should be produced. (b) Methods, operations and processes should be capable of being standardised. (0) A sufficient number of costs should be capable of being controlled. Industries producing standardised products which are repetitive in nature, i.e., industries usind process costing method, fulfil all the above conditions and thus the system can be used to the best advantage in such industries. Examples are fertilisers, cement, steel, sugar, etc. In jobbing industries, it is not worthwhile to develop and employ a full system of standat! costing. This is because in such industries each job undertaken may be different from anothé! and setting standards for each job may prove difficult and expensive. In such industries, therefo%ind Variance Analysis ——— 3.3 rt 89 seat oo stem may be adopted in appropriate circumstance formed may be of a repetitive Ss d by setting standard for each ma 's. For example, certain processes and ure and thus the principles of standard costing such process or operation jal 2 Pons per * ye apie sent costs and Estimated Costs - Comparison dard costs and estimated costs are predetermined costs computed in advance of production. oF nei objectives are normally different. The differences between the two are summarised as wt nt Mia oe | _ tet ot SLE Re neal |Standard cost aims at what the cost | Estimated cost is an assessment of what the 1, ae | SHOULD be. cost WILL be. [Standard costs are planned costs which are determined on a scientific basis after taking into account certain level of efficiency. Estimated costs are based on average of the Past figures, taking into consideration anticipated changes in future. pauation to[In standard costing system, standard costs | Estimated costs are used as statistical data Beats. |ate usually incorporated into the accounts, | for comparing with actual figures. Such costs from which variances of actual from | are not entered in the books of accounts. standard are ascertained. Standard costs are meant to be used for a] Estimated costs may be used in any concem Use. i g concern operating on a standard costing | operating on a historical cost system. system. is Purpose. | Standard costs serve the purpose of cost | Estimated costs do not serve the purpose of control. cost control. Such costs serve other purposes, like quoting selling price of new products, decision to buy or manufacture, etc. gandard Costing and Budgetary Control — Comparison ‘Standard costing and budgetary control have the common objective of cost control by establishing predetermined targets. The actual performances are measured and compared with the predetermined targets for control purposes. Both the techniques are of importance in their respective fields and aie complementary to each other. Toints of Similarity ‘here are certain basic principles which are common to both standard costing and budgetary control. These are : 1. The establishment of predetermined targets of performance. . The measurement of actual performance. 3. The comparison of actual performance with the predetermined targets. 4. The analysis of variances between the actual and the standard performance. 5. To take cormrective measures, where necessary. Points of Difference Eo spite of so much similarity between standard costing and budgetary control, there are some differences between the two, which are as follows :3.4 7 7 Budgetary contro Basis Standard costing ee acontrol Budgets are compiled for differe, of the business such as sales, p. duction, cash, capital expen and development, 1. Scope. Standard costs are developed mainly for the manufacturing function and sometimes also for marketing and administration func- tions kc 2% Intensity. | standard costing is intensive in applica:| Budgetary contro is extensive in na. tion as i calls for detailed analysis of| the intensity of analysis tends ot x variances, less than that in standard costing. 3. Relation to] accounts, | re-vealed through accounts, rd costing, varias are usualy In budgetary contol, variances aie not revealed through accounts any ,°°"™ exercised by statistically putting bys” actuals side by side Usefulness, standard costs represent realistic yardsticks| Budgets usually represent an uppoy = and, are therefore, more useful for con-| spending without considering tie Sfface trolling and reducing costs. ness of the expenditure in terms of ¢<*™ 5. Basis, Standard costs are usually established| Budgets may be based on Previous year, after considering such vital matters as| without any attention being paid an production capacity, methods employed and ceny other factors which require attention when determining an acceptable level of efficiency. fi ©. Projection. | Standard cost is a projection of cost| Budget is a projection of financial accoun, accounts, ADVANTAGES OF STANDARD COSTING The advantages to be derived from a system of standard costing will vary from one busines to another. Much depends upon the degree of sophistication achieved and the acceptance by the management of utility of the system. Possible advantages are as follows : 1. Effective cost control. The most important advantage of standard costing is that it facilitate the control of costs. Control is exercised by comparing actual performance with standiad, and taking action on the basis of variances so revealed. 2. Helps in planning. Establishing standards is a very useful exercise in business planning which instils in management a habit of thinking in advance. 3. Provides incentives. Standards provide incentives and motivation to work with greater effort. Schemes may be formulated to reward those who achieve or Surpass the standard. This increases efficiency and productivity. dorizing Prices and formulating policies. Standard costs are a valuable aid to managenen in geterining prices and formulating production policies. For example, prices may be fixe! by adding a standard margin of profit to standard cost. Similarly, standard costing furnishes cot estimates while planning production of new products. ity for off-standard performance with the persons concerned, an organisation chart is prepared which ach executive.Pr in i casting and Variance Analysis gaciitates Se isle “slablishing standards, the performance of different gents sucht 38 ion, sales, purchases etc, i roe cae Meandard cost system, coordination af eis taken into ac a Hi through the ol ae us functions is achieve B fimisates wastes. Dy fixing standard, certain waste such as material wastage, idle time, “machine hours, etc. are reduced, a age, es eas cating simplifies the valuation of stock because the stock - gatued at m ne Tence between standard and actual cost is transferred to @ a nce eC ‘orm Pricing of stocks in the form of raw materials, work-in- id finished goods. gunanagement by exception. Reporting of variances is based on the principle of management yFoption. only variances beyond a predetermined limit may be considered by the management Wi eaetive action. This also reduces the cost of preparing reports , Economical and simple. Standard costing is an economical and simple means of cost / —eounting and generally results in savings in the cost of costing system. It results in reduction er work in accounting and needs fewer number of forms and records. This leads to ia Morale saving in clerical labour, 3 UMITATIONS OF STANDARD COSTING Spec ostinn system may stuffer from certain disadvantages® This may be) because of (=e sjeaucation and communication and resultant misunderstanding on the part of managerial staff. fos dsedvantages ae : 4, The system may not be appropriate to the business. | ress 2 | 2, The staff may not be capable of operating the system. 3, A business may not be able to keep standards up-to-date. In other words, a business may not | tevise standards to keep pace with the frequent changes in manufacturing conditions. Firms ‘may avoid revising standards as it is a costly affair. 4 Inaccurate and unreliable standards cause misleading results and thus may not enjoy the confidence of the users of the system. “5, Operation of the standard costing system is a costly affair and small firms cannot afford it. 6; Standard costing is expensive and unsuitable in job order industries which are manufacturing non-standardised products. VARIANCE ANALYSIS Cost Variance-Difference between standard and actual is known as variance. Cost variance is the “difference between a standard cost and the comparable actual cost incurred during a period.” CLM.A., London. Variance analysis is the process of analysing variances by sub-dividing the total variance in such away that management can assign responsibility for any off standard performance. According toCLM.A., London, Terminology, variance analysis is “the process of computing the amount of variance and isolating the causes of variance between actual and standard.” An important aspect of variance analysis is the need to separate controllable from uncontrollable variances. A detailed IN iDe, SOMONE Ac. 7 3.6 BGM ant it to identify the persons analysis of controllable variances will help the panei Persons resp for its occurrence so that corrective action can FAVOURABLE AND UNFAVORABLE VARIANCES : Be. Where the actual cost is less than standard cost, it is Hema votre OF rei va n the other hand, where the actual cost is more than sta : rece ie to as ‘unfavourable’, ‘adverse’ or ‘debit’ variance. has a favourable effect on profit is favourable vari, ance that f ET an 1 unfavourable effect on profit is unfavourable any variance which has an adverse 0 i ining whether a variance is favourabl ts experience difficulty in ascertaining whether Ss Bacula book, positive (+) variance will indicate favourable yari,,"™ In the formulae given in this (4 c negative (-) variance will indicate adverse variance. Favourable variances will be designat, (F) and Adverse by (A). CONTROLLABLE AND UNCONTROLLABLE VARIANCES If a variance can be regarded as the responsibility of a particular person, with the result y, his degree of efficiency can be reflected in its size, then it is said to be a controllable Vatiane, For example, excess usage of material is usually the responsibility of the foreman concerneg However, if the excessive usage is due to material being defective, the responsibility may... with the Inspection Department for non-detection of the defects. es Vatiang If a variance arises due to certain factors beyond the control of management, it is known uncontrollable variance. For example, change in the market prices of materials, general inoe,, in the labour rates, increase in the rates of power or insurance premium, etc. are not within, contzol of the management of the company. Responsibility for uncontrollable variances cannot assigned to any person or department. The division of variances into controllable and uncontrollable is extremely important, th management should place more emphasis on controllable variance as it is these variances why, require investigation and possibly corrective action. The uncontrollable variances, on the sth hand, may be ignored. This follows the well known “principle of exception” whereby those matic, which are going right are ignored and any deviations from efficient performance are investigated, MATERIAL VARIANCES Material Cost Variance This is the difference between the standard cost of direct materials specified for the output achieved and the actual cost of direct materials used. It is calculated as : Material Cost Variance = Standard cost of actual output - Actual cost MCV = SC - AC Material Cost Variance -|St@ndard quantity Standard] _ [Actual Actual for actual output “price quantity “price MCV = (SQ = SP) - (AQ x AP) |(Overhead Variance Material Usage Variance Material terial Labour i CA Yield ii ste Labour Varian ime Yield variance ef | Valence Variance | variance Variable Overhead Cost Variance Expenditure or Budget Variance Efficiency Variance Expenditure or Budget Variance Volume Variance Fig. 3.1 Cost Variance Analysis Bample ‘A fumiture company uses sunmica tops for tables. It provides the following data : Standard quantity of sunmica per table 4 sq. ft. Standard price per sq. ft. of sunmica z5 Actual production of tables 1,000 Sunmica actually used 4,300 sq. ft. Actual purchase price of sunmica per sq. ft. @ 5.50 Material cost variance will be calculated as under : ‘MCV = (SQ « SP) - (AQ x AP) MCV = (1,000 x 4 x % 5) - (4,300 x & 5.50)38 ee = 20,000 - 23,650 = 3,650 (A) i 4 ; he material cost variance may be further divided into price variance and usage ,,. The material cos Material Price Variance oan rial cost variance whic “that portion of the mate Libs 1 Hi , thc tindard price specified and the actual price paid’.* It is calculated by the formula : ‘Actual price) « Actual quantity Material Price Variance = (Standard price - ‘MPV = (SP - AP) * AQ price and actual price multiplied by actua|g Thus, this is the difference between standard Example With the figures in Example given above, the material price MPV = (SP - AP) « AQ MPV = (5 - 5.50) * 4,300 = % 2,150 (A) asons for Material price Variance. This variance usually arises due to the fol, variance will be calculated as Rei reasons : 1, Change in the market prices of materials. 2, Failure to purchase the specified quality, thereby resulting in a different price being pais 3, Change in the quantity of materials purchased, thereby leading to lower/hisher qua» discount. Not availing cash discounts, when standards set took into account such discounts. Inefficient purchasing. . Change in the delivery costs. /. Rush purchases. Purchase of a substitute material on account of non-availability of the material specified . Change in the rates of excise duty, purchase tax, etc. 10, Off-season purchasing for certain seasonal products like jute, cotton, ete. ern eaes Material Usage (or Quantity) Variance This is “that portion of the material cost variance which is due to the difference between te standard quantity specified and the actual quantity used”. Its formula is : * C.LM.A., London Terminologya 9 - | Material Usage Variance ~ = Muy this i the difference between standatd q van es, ce. pat some caging example given above, mate contin tial usage variance will be MOV» (S0.= 40) » 5p iat ‘ll be caleulated as under : ity and actual quantity multiplied by the = (4,000 - 4,300) « 5 = © 1,500 (A) we the following reasons tial usage variance may be caused by some {. the of defective or sub-standard materials >. Caelessness in the use of materials 3, Piferage. «Poor workmanship. §, Defect in plant and machinery. 6. Change in the design or specification of the product. 7, Change in the quality of materials. §, Use of substitute materials. ¢, Use of non-standard material mixture. 40. Yield from materials in excess of or less than standard yield. eck yl the algebraic sum of material price variance and material usage variance should be equal to ‘saterial cost variance. Thus : MCV = MPV + MUV 3,650 (A) = & 2,150 (A) + © 1,500 (A) i figure 3.2 shows the graphic analysis of material variances which has been prepared with the 4 guns of the above example. In this chart, the solid lines rectangle indicates the standard cost ' tatoo » & 5) and the dotted rectangle shows the actual cost (4,300 x & 5.50). MPV = (5 -7% 5.50) x 4,300 = 7 2,150 (A) MUV = (6,000 ~ 4,300) «5 = © 1,500 (A) The difference between the areas of standard cost rectangle and the actual cost rectangle Le. shaded area represents material cost variance, which has been analysed into material price raiance and material usage variance. The variances are adverse because the actual cost rectangle ‘s lager in size than the standard cost rectangle. aa3.10 0 ‘Quantity in sq. ft. 4,000 4,300 Fig. 3.2 Analysis of Material Cost Variance. TMustration 3.1 The standard cost card shows the following details relating to material needed to p44, kg. of groundnut oil -— Quantity of groundnut required 3 kg, Price of groundnut % 2.50 per kg. ‘Actual production data Production during the month 1,000 kg. Quantity of material used 3,500 kg. Price of groundnut 3 per kg. Calculate : (2) Material Cost Variance (b) Material Price Variance (c) Material Usage y,,i, BCom, coi Solution Basic Data Standard Quantity (SQ) = 1,000 kg. of production x 3 kg. = 3,000 kg. Standard Price (SP) = © 2.50 per kg. Actual quantity (AQ) = 3,500 kg. ‘Actual price (AP) = ©3 per kg. Calculation of Variances (a) Material Cost Variance = SC - AC = (SQ « SP) - (AQ = AP) = (3,000 x 2.50) - (3,500 x 3) = & 3,000 (A) (b) Material Price Variance = (SP - AP) x AQ = (2.50 ~ 3) x 3,500 = @ 1,750 (A) (c) Material Usage Variance = (SQ - AQ) x SP (3,000 - 3,500) x 2.50 = %1,250(4) Check Material Cost Variance = Price Variance + Usage Variance 3,000 (A) = 1,750 (A) + 1,250(A)i ii P ting and Variance Analysis dard C0 ion of Material Usages Variance _ sot ee ssificatl terial usage variance is further sub a divided into | atrial mix variance ip) Material yield variance, (Or Material sub-usage yarian ‘ ariance) sotesat Mix Veriance a 1 f material js sub-variance o} lal usage variance, It arises In Sted fr produig the fine melt Mt only where more than on type ot matefials which does not comply with the pany may be using a mixture o i Predetermined st rial mix variance. terial mix variance is defined as that qhe materia b Portion of the material usage variance which is ne ee nes ee, and actual composition of materials. It may arise in sties is Peer at, big 2 number of raw materials are mixed to produce a | product Migietuix or due ‘ard ‘mix may be due to non-availability of one or more ments of © ron-Purchase of materials at proper time. Increase in the rable mix variance and vice versa, the use of more Fepensive a s in adverse variance. |“ tis variance is calculated with the help of the following formula ; Spaces. ase with the help of the following formula : ‘andard mixture. This gives rise to patel (Revised standard Actual) srangang | {quantity quantity )* ~ price MMV = (RSQ - AQ) x 5} The revised standard quantity is nothing but the standard proportion of total of actual quantities of all the materials, This is calculated as under Material mix variance = | pso = Satara quantity ofone material Total of actual quantities Total of standard quantities of all materials ofall materials Mlustration 3.2 From the following data, calculate material mix variance. Also calculate price and usage variances. Raw material Standard Actual ve 40 units @ @ 50 per unit 50 units @ & 50 per unit ae 60 units @ % 40 per unit 60 units @ & 45 per unit Total 100 units 110 units Solution Gleulation of Revised Standard Quantity (RSQ). 40 RSQ of X =755 * 110 = 46 units 0 a RSQ of Y =755 * 110 = 66 unitsMaterial Mix Variance = (RSQ - AQ) « SP Material X = (44 - 50) x 50 Material Y = (66 - 60) x 40 uMY Material Price Variance = (SP - AP) « AQ Material Y = (50 - 50) x 50 Material ¥ = (40 - 45) * 60 ‘My Material Usage Variance = (SQ - AQ) « SP Material X = (40 - 50) x 50 Material Y = (60.- 60) x 40 ‘MuV = %500 (A) Material Sub-usage (or Material Revised Usage) Variance This is a sub-variance of the material usage variance and represents that Portion material usage variance which is attributed to reasons other than those which Give material mix variance. Thus the algebraic sum of this revised usage variance and Mate variance is equal to material usage variance. Its formula is : Mal ay of Material revised _ (Standard _ Revised standard). | age varane = auantly quant, 4)» Standard pie | Se ee MRUV. = (SQ.- RSQ) * SP In Illustration 3.2 material revised usage variance is calculated as follows ‘MRUV = (SQ - RSQ) « SP X = (40 - 44) x50 = 200 (A) ¥ = (60-66) x 40 = % 240 (A) MRO = © 440 (A) Check MOV = MMV + MRUV 500(A) = 60 (A) + 440 (A) Material Yield Variance This is also a sub-variance of material usage variance. It arises in process industries, tis chemicals, where loss of materials in production is inevitable. While setting standards, the none or standard loss is taken into account. But actual loss may differ from normal or standard lox This results in actual yield or output being different from standard yield. Thus material yield variance is that portion of the material usage variance which is due to th difference between standard yield specified and actual yield obtained. The standard yield ist» cutput expected to be obtained from the actual usage of raw materials. It should be noted tht yield variance as used in standard costing is the same thing as abnormal loss ot abnormal 32° in the other costing systems.ne is oa csting and Variance Analysis dort 3.13 ure of yield vy. 3 ortant feature of ariance which different one iPr and mix variances) is that yield vay Vferentiates it from other material variances pes sriances. In other words, yield variance represents once Put Variance while others are Moat Yaaryetion, while other variances represent a gain oon, ots on output i tetas of | ste as follows 4 gain or loss on the cost of material input. w Material Yield (Actual Standard) Stang d Variance | yield yielg output price | MYV = (AY - SY) x Sop tput price (SOP) is the standa sandard output P Standard material cost per unit of output. station 33 poring che month of May, the following data applies 2 er a Price "Amount | “Units Price Amount 9. e z Kg. z z x 60 25 1,500 56 25 1,400 Y 40 50 2,000 4 502,200 Total 100 3,500 100 3,600 ess: Loss. 30 26 Yield 70 14 qhe standard loss is 30%. Calculate: (2) Material yield variance (b) Material mix variance. solution (o) Material Yield Variance = (AY - SY) x SOP MYV = (74 ~ 70) x 50° = & 200 (F) ‘standard material cost per unit of output is calculated as follows : Standard material cost _% 3,500 S0P = “Standard output 797 © 5° (t) Material Mix Variance = (RSQ - AQ) = SP Material X = (60 - 56) x 25 = 100 (F) Material Y = (40 - 44) x 50 = % 200 (A) ‘MMV = %100 (A) Note, In this case, standard quantity and revised standard quantity (RSQ) is the same because total ‘tual quantity of all the materials and total standard quantity is the same, i.e., 100 units.3.14 Material A 60 units @ € 15 per unit 900 uneeinh DS > 00 ants, @ @)80ipar acts 1,600 Material C100 units @ © 25 per unit 2 300 240 units 5,000 During the month of Duly, 10 units were actually Produced and consumption Meret A 640 units @ 17.80 per unit. 15 200 WMS 28 oy Naterial B 950 units @ & 19.00 Material C _870 units @ & 27.50 2460 units 52,225 Catculate all material variances, (BCom. Hons. Dethi Ada a ted Solution $ Material Standard cost ~ Actual cost = € 50,000 = & 52,225 (a) MCV = & 2,225(a) Material A = (15 ~ 17.50) « 640 = 1,600 (a) Material B= (20 - 18) x 950 Material C\— = (2515527450) 5/870. «= €o.a75,44 MPV = %1,875 (A) 3. Material Usage Variance ~ (st.dty. - Actual ty.) « St. Price piterial A. = (600 - 640) x 15 = &.600 (a) Material B= (800 - 950) x 20 = €3,000 (A) Material C= (1,000 - 870) x 25 _= 83.250 (F} MOV = % 350 (A) 4 Material Mix Variance = (Revised St. Qty. — Actual Qty.) = 50 Price Material A. == (615%,- 640). «15. = ¥.375,(a) Material B - (820" - 950) x 20 = 2,600 (a) Material C= (1,025° - 870) « 25 = €3,875 (F)_ MMV = © 900 (F)5 Wy cmos ond variance Anaiyns 3A ord COSTS a Quantity (RSQ) is calculated standard as follow: ages 2460 Material A = 3459 * 600 = 615 unit 2460 Material B= 3;55 * 800 = 620 units 2460 Material C= 5455 * 1,000 1,025 units Gaterot wield Variance med via, certain basic calculations have to be made as follows yi Re Actual usage of materials 2460 Fandand usage per unit of output “g4g 7 10-25 units gandard vied” material cost per unit of output) = & 50,000 + 10 units = © 5,000 ce = (AY - SY) x SOP MYV = (10 - 10,25) * 5,000 = © 1,250(A) (st ‘ stent Wied Varian nevised Usage (or Sub-usage) Variance (MRUV) yaterial Beppe coity Revived Standard Quantity) x Standard Price Material A = (600 - 615) = 15 = % 225(A) Material B = (800 - 820) » 20 = % 400(A) Material C = (1,000 - 1,025) x 25 = % 625(A) ‘MRUV = €1,250(A) ote, sither MV or MRUV is calculated. These two are always equal. check 0 ‘MUV = MMV + MYV (Or MRUV) = 350 (A) = © 900 (F) + & 1,250 (A) or (i ‘MCV = MPV + MMV + MYV (Ox MRUV) 2,225 (A) = © 1,875 (A) + & 900 (F) + & 1,250 (A) LABOUR VARIANCES the analysis and computation of labour variances is quite similar to material variances. labour Cost Variance This is the difference between the standard direct labour cost specified for the acti achieved and the actual direct labour cost incurred. It is calculated as under : Labour Cost Variance = ¢Jfasmel ouput ~ an Lev = SC = AC or, ‘St.hours ‘Strate ] ie ‘Actual cal Labour Cost Variance = x ange ( for actual output ™ per hour) ~\ hours. * per hour LCV = (SH SR) - (AH x AR)LL Managem uy ois a EEN a Example The following information is given : 6 Stabe © per hour Actual data 1000 units Actual production atk 15,300 hours Actual hours Actual rate Calculate labour cost variance. , % 3.90 per hour Solution Labour Cost Variance = (Sif for actual output « SR) ~ (AH « AR) = (1,000 x 15 * 4) = (15,300 « 3.90) Ley = © 330 (F) Labour cost variance is further divided into rate variance Sind efficiency variance Labour Rate Variance This is that portion of the labour cost variance which is due to the difference hety, standard rate specified and the actual rate paid. Its formula is : een ty, [Labour Rate Variance = (Standard rate - Actual rate) = Actual hours | IRV = (SR - AR) x AH : Thus this is the difference between standard and actual rates of wages, multiplied ty ours. hy Example Using the data given in above example : IRV = (SR - AR) x AH = (4 - 3.90) x 15,300 = & 1,530 (F) Reasons for labour rate variance. Usual reasons are : 1, Change in the basic wage rates. 2. Use of a different method of wage payment. 3. Employing workers of grades different from the standard grades specified. 4. Unscheduled overtime. 5. New workers not being paid at full rates. Often, labour rate variance will be an uncontrollable variance as labour rates are us, determined by demand and supply conditions in the labour market, backed by negotiable steno of the trade union. Where this variance is due to the use of a grade of labour other than tnt specified, there may well be such acceptable explanations as non-availability of the labour gris specified. But when a foreman carelessly employs a wrong grade of labour on a job, he may held responsible. Labour Time (or Efficiency) Variance This is that portion of the labour cost variance which is due to the difference between labo: hours specified for actual output and the actual labour hours expended. This variance is calculated as follows : :— 3.17 7 eee Efficiency Variance actual output | i hours} * Standard rate V = (SH - au ance is the difference ber, = SR ust vari ference between Standard and _ actual time valued at standard rate. | Mang the data given in above example LEV = (SH for actual output - AH) « sp = (15,000 ~ 46 ie 5,300) x 4 = spe total of labour rate variance and labour Head 5 Sano AY hos: ¥ variance is equal to labour cost van LCV = LRV + Ley © 330 (Ff) = & 1,5 towing reasons : working conditions, e, i E Fire i Baris: ae ae Ughting and ventilation, excessive heating, etc. 3, Inefficient workers. 4, Incompetent supervision. 5, Use of defective or non-standard materials, 6, Time wasted by factors like waiting for mate 7, Insufficient training of workers, 8, Change in the method of operation, 9, Non-standard grade of workers. ane fol tials, tools or machine break-down, etc. ussification of Labour Efficiency Variance labour efficiency variance is further divided into the following sub-variances. (@) Idle time variance (b) Labour mix variance | (©) Labour Yield Variance (or Labour revised-efficiency variance) 4 Idle Time Variance } ‘This variance represents that portion of the labour efficiency variance which is due to abnormal ile time, such as time lost due to machine break-down, power failure, strike, etc. It is calculated ‘by valuing idle hours at standard rate. Thus: Idle Time Variance = Idle hours x Standard rate | ITV = IH SR As idle hours represent a loss, idle time variance is always unfavourable. Some accountants do not treat Idle Time Variance as a part of labour efficiency variance but leat it as a part of labour cost variance. Lea8 Menedengy, Example Using the data give in the above example and further assuming that idle time j, then the idle time variance would be: 2 ITV = 200 4 = % 800 (A) When idle time variance is treated as a sub-variance of labour cost variance ang ,. efficiency variance, then for labour efficiency variance, the actual time would 4, "°* of = 15,100 hours, Labour efficiency variance will be calculated on the basis of 15,1. Labour Efficiency Variance = (SH - AH) x SR = (15,000 - 15,100) x 4 = % 400 (A) In this case, the total of Labour Rate Variance, Labour Efficiency Varian, Variance would be equal to Labour Cost Variance. Thus LV = LRV + LEV + ITV 330 (F) = 1,530 (F) + 400 (A) + 800 (A) Labour Mix Variance (Gang Composition Variance) 0 hour, 2 ee and tay, This variance is similar to material mix variance. It arises only when mor workers are employed and the composition of actual grade of workers differ f It is calculated with the help of following formula : Hee Revised standard Actual Labour Mix Variance = ( rH ereeee at fee) % Standard rate LMV = (RSH ~ AH) x SR SS | Mlustration 3.5 fe than one ' rom those 50, Coates India Ltd. manufactures a particular product, the standard direct labour cost g is & 120 per unit whose manufacture involves the following : mig Grade of Hours Rate Amount workers z z A 30 2 60 B 20 3 _60_ 50, 120 See a a A ee During a period, 100 units of the product were produced, the actual labour cost of viich re as follows : "| Grade of Hours Rate Amount workers fe z A 3,200 1.50 4,800 5 1,900 4.00 7,600 5,100, 12,400 Calculate (a) Labour Cost Variance (6) Labour Rate Variance (c) Labour Efficiency Variance (d) ‘Labour Mix Variance.Variance Analysis 3.19 Standard for 100 units Fetual for 100 Hours Rate Amt. |. Nowe Rate Amt. ¢ ? ¢ 3,000 2 6,000 3,200 1.50 4,800 2,000 3 6,000 | 1900 4.00 7,600 5,00 | mB; — 000 12,000 | $100 tabour Cost Variance » SC = AC (o) LCV = 12,000 = 12,400 =@ 400 (A) py about Rate Variance = (SR = AR) « AH Oo A = (2 = 1.50) * 3,200 = 2 1,600 (F) B = (3 = 4,00) « 1,900 =% 1,900 (A) Lav = ®% _ 300 (A) ig our Eificlecy Variance (SH AH) » SE A = (3,000 - 3,200) « 2 =% 400 (A) B = (2,000 - 1,900) x 3 =% _ 300 (F LEV =® _ 100 (A) ae LCV = LRV + LEV 400 (A) = 300(A) + 100(A) (g) Labour Mix Variance = (RSH* - AH) « SR A. = (3,060 - 3,200) « 2 =% 280 (A) B = (2,040 ~ 1,900) = 3 =% _ 420 (F) IMv = &% _ 140 (F) stalculation of Revised Standard Hours (RSH) ‘St. hours of the grade , 041 actual hours aSH = Total st. hours 2 p= 22% 5,100 3,060 hrs. Grade B= 2° 5 100 2,040 hrs. 5,000 5,000 Labour Revised Efficiency Variance. (01 Labour Sub-efficiency Variance) This is similar to Material Revised Usage Variance and is a sub-variance of labour efficiency variance. It arises due to factors other than those which give rise to idle time variance and labour mix variance. Thus, this is a residue of labour efficiency variance left after idle time and mix variance have been ‘separated. Its formula is : Sthours for _ Revised). actual output ~ st. hours )* S*T#€ LREV = (SH - RSH) = SR Labour Revised Efficiency Variance = (Using the data given in Illustration 3.5. Labour Revised Efficiency Variance = (SH - RSH) x SR Grade A = (3,000 - 3,060) x 2 = 120 (A) Grade B = (2,000 - 2,040) x 3 = %120 (A) LREV = %240 (A) Check LEV = LMV + LREV © 100(A) = & 140 (F) + % 240 (A) Labour Yield Varlance. This is quite similar to Material Yield Variance. This Vatian the effect on labour cost of actual output or yield being more or less than tthe stands." Its formula + lard Vie Labour Yield Variance = ( ~ _St-labour cog; Ber unit of out ‘Actual _ . yield ) yield ~ from actual input, Mlustration 3.6 Standard output 500 units, Actual output 450 units, Standard time 1000 hrs. Standard rate % 20 per hour. Calculate Labour Yield Variance Solution St. time per unit = 1000 hrs + 500 units = 2 hrs. St. cost per unit = 2 hrs @ 20 = & 40. ‘Actual St. cost per unit yield. of output = (450 ~ 500) = % 40 = © 2,000 (a) Labour Yield Variance = ( a se yea) * Mlustration 3.7 The standard labour employment and the actual labour engaged in a week for a Job are a5 unde, Skilled Semi-skilled Unskiled workers workers worker Standard no. of workers in the gang 32 1 6 ‘Actual no. of workers employed 28 18 ‘ Standard wage rate per hour 3 G 1 ‘Actual wage rate per hour 4 3 2 During the 40 hours working week, the gang produced 1,800 standard labour hours of weit Calculate : (a) Labour Cost Variance (b) Labour Rate Variance (0) Labour Efficiency Variance (@) Labour Mix Variance (e) Labour Yield Variance (B.Com Hons Deli)Ba EE Standard I] catego! ree Rate amoung sod op otters pene CP | Se 1,280 3 seo | 1120 geoisrted 480 2 as i nstiled BE hOB ai uo ta ae Bere 2 5,040 2,000 Tne. of workers x 40 hours. eee at = Renee ey ste cost jofpactual:outp! 2,000 hrs * 1,800 hrs. = % 4,536 our cost variance’ = St cot of actual output ~ Actual cost a LCV = % 4,536 - 6,960 = %2,424 (A) apour Rate variance = (SR- AR) « AH Skilled = (3 - 4) «1,120 = @ 1,120 (A) semi-skilled = (2 - 3) x 720 =% 720(A) unskilled = (1 - 2) x 160 =% 160 (A) Lav = %2,000 (A) "SH for actual output - AH) x SR avout Efficiency Variance- Skilled = (1,152 - 1,120) x 3 96 (F) Semi-skilled = (432 - 720) x 2 576 (A) Unskilled = (216 - 260) x 1 56 (F) LEV = © 424 (A) sce. ins. for actual output are calculated as follows : 1,800 Skilled => p99 * 1280 = 1,152 hrs. = 1,800 Semi-skilled -7 999 * 480 = 432 hrs. 1,800 = 216 hrs. ‘Unskilled = 2,000 = 240 Labour Mix Variance. = (Revised st. hrs. - AH) = SR. Skilled = (1,280 - 1,120) «3 = % 480 (F) Semi-skilled = (480-720) * 2 =% 480 (A) Unskilled = (240 - 160) x 1 =% 80 (F) Imv =% 80 (F)(Actual _ St. output for) Labour Yield Variance = (output ~ actual hours) * Strate per hour of work 5,040 00 © 504 (A) LYV = (1,800 - 2,000) « 35 cheek 0) Lev = LRV + LEV © 2,424 (A) = & 2,000 (A) + & 424 (A) w) LEV = LMV + LYV © 424 (A) = © 80 (F) + & 504 (A) OVERHEAD VARIANCES Overhead is the aggregate of indirect materials, indirect labour and indirect of overhead variances is different from that of direct material and direct La Xs considered to be a difficult part of variance analysis. There are mainly tre Teasons difficulty. Firstly, standard overhead rate for fixed overhead is difficult t. establish pot th changes in the volume of output will distort this rate even though there ig 10 change *“ amount of fixed overhead cost, Generally fixed overhead absorption rate is determines te basis of normal volume of output. Secondly, there is conflicting terminology sr differen of computing overhead variances. Overhead variances may be Separately computed fo, overheads and variable overheads. Then there are two Variance, three variance and fou, ariet methods of analysing overhead variances. Moreover, overhead rate may be per hour or yer of output. All these lead to confusion in overhead variance analysis. me expenses 4. bour variances In this book, overhead variances have been classified into fixed and variable over thead vatianes, and then further analysed according to causes. It is important to understand at the outset that ovethead variance is nothin over-absorption of overhead. Certain basic terms used in connection with overhe explained first of all. 9 but unde , ad variances 40 jtandard Overhead Rate: This overhead absorption rate may be computed Per hour follows : Standard overhead _ Budgeted overhead tate (per hour) Budgeted hours Where overhead variances are separately computed for fixed and variable ovetheads, separate overhead rates are to be computed for fixed overhead and variable overhead, Computation of Variances The following basic calculations should be made before computing variances. (a) Standard hours for actual output (SHAQ). It is required to be calculated when overhead ae absorbed on the basis of overhead rate per hour. It is calculated as under : Budgeted hours SHAO ~ Budgeted output * Actual outputee ting ane eo fed (or Recovered) overhead 0 sor 4 overhead rand @ @ ee puiseted overhead ce ead cost.” Thus, this variance it ean ree oat ( St, hours for panple Budgeted output Budgeted hours Budgeted overhead ‘Actual overhead Actual output aalate Overhead Cost Variance (OCV), solution he total overhead variance and can hs verhead absorbed and total actual overhe: ooh erence between the standard cost of overhead absorbed in the output achieved and tHe arises due to the actual overhead incurred differing jard overhead absorbed and is simply under or over absorption of overheads. Its Overhead Cost Variance = Absorbed overhead 423 St. hrs actatta for St. overhead Rena aut * tale pet hour tual st x St. ovethead hours. * rai peed _ Budgeted — s¢. 9. 7 hours * rate per hour Actual Actual overhead hours * “rate per hour be ie Tibed as the difference between total ‘ad incurred. C.1.M.A., London has defined it Actual overhead St. overhead actual output absorption rate) ~ Actual overhead 10,000 units. 10,000 20,000 22,000 12,000 units. Budgeted overhead i =Budgeted everticnd 52212,20,000) . overhead absorption rate Budgeted ours “yaopeee ~ © 2 pet hour 10,000 hrs, hours for actual output —— = 75 909 ynigg * 12,000 units = 12,000 hours. Ocv = (12,000 « 2) - % 22,000 = © 2,000 (F) ‘ovethead Cost Variance is divided into variable overhead and fixed overhead variances. \WRIABLE OVERHEAD (VO) VARIANCES Yariable Overhead Cost Variance : It may be defined as the difference between absorbed ‘saiable overhead and actual variable overhead. Its formula is : Variable Overhead _{ St.hours for St. variable | _ Actual overhead Cost Variance actual output overhead rate cost VOCV = (Absorbed V.0. - Actual V.0.)na! _ oes. This variance is sub-divided into the following two variances : dditure Variance. This is also known as Spengi,, he difference between standard yay) Yr, (a) Variable Overhead Expen Budget Variance. This variance arises due to t f allowed and actual variable overhead incurred. Its formula is: . St.variable , Actual) _ Actual overheag V0. Expenditure Variance = | jverhead rate * hours ot = (Standard ¥.0, - Actual ¥.0.) (b) Variable Overhead Efficiency Variance. This variance arises due to the differen, standard hours allowed for actual output and actual hours. The reasons for this Variant *tng, same which give rise to labour efficiency variance. Its formula is as follows: nce are | “0. Efficiency Variance = | jewal output hours ) ” overhead rate | = Absorbed V.0. - Standard ¥.0. Check pee V.O, Expenditure , V.O. Efficiency V0. Cost’ Variance =." “'yateme +” Variance. Mlustration 3.8 Calculate variable overhead variances from the following : Budgeted Actual Output (units) 20,000 19,000 Hours 5,000 4,500 Overhead - Fixed = 10,000 10,500 Variable % 5,000 4,800 Solution Basic calculations : (a) Ses rauaablede Budock over Bend Santas OURS ester aa overhead rate “Budgeted hours 5,000hours St. hours for actual Budgeted hours 5,000 = ——————-x Actual it = «19, ) output Budgeted output * A‘*¥2! MPM = 29 ogg * 19,000 = 4,750 hours. Caleulation of Variance St. hrs. ic (a) Variable Overhead Cost Variance = (oes, Tote ees = (4,750 x 1) - 4,800 = & 50 (A). (b) Expenditure Variance = (Actual hours x St. rate) - Actual variable overhead = (4,500 x 1) - 4,800 = & 300 (A). (c) Efficiency Variance = ( ee jae Strate = (4,750 - 4,500) x1 = & 250 (F)sa voice Anas 3.25 and vor lure Variance + Ey - EY ct riety (a) + 250 (F) oe a)” ” (f0) VARIANCES cost Variance. It is the difference between standard fixed overhead cost for g anette sorbed overhead) and actual fixed overhead. tts formula is east OE Shows for. SFO, ey rl = Absorbed overhead = Actual overhead. saad cost variance is sub-divided into the following two variances goto yead Expenditure Variance, This is also known as Spending Valance of Budget ae gue to the difference between budgeted fixed overhead and actual fixed es formule is mditure Budgeted _ Actual | ere = fixed overhead ~ fixed overhead ‘ head Volume Variance. This variance arises due to the difference between ae ne snd actual output. It is defined as that portion of overhead variance which arises ae uMerence between standard cost of overhead absorbed by actual production and the i alarance for that output. ey ume _{St-hours for Budgeted =(actual output hours) * St- rate FO. Volume Variance = Absorbed Overhead ~ Budgeted Overhead. fred _ Budgeted fixed overhead _ 10,000 5 ate ead rate” Budgeted hours 5.000 hs, © * hows for _ _ Budgeted hrs. E x Actual output output” Budgeted output * ““¥a" outP™ x 19,000 = 4,750 hrs. ~ 20,000 of Variances Overhead Cost Variance St. hours for ‘Actual fixed in es output * S* rte) - ‘overhead = (4,750 x 2) = 10,500 = © 1,000 (A)3.26 > ace (®) Fixed Overhead Expenditure Variance dgeted Actual = Srothoed ~ overhead = 10,000 - 10,500 = © 500 (A) (©) Fixed Overhead Volume Variance St. hrs. for _ Budgeted). 5+ raty = [actual output ~ hours = (4,750 = 5,000) x & 2 = © 500 (A) Check FO. Cost Variance = Expenditure Variance + Volume Variance 1,000 (A) = 500 (A) + © 500 (A) Mustration 3.10 The following data is given: Budget Actual Production in units 12,500 11,000 Man hours 6,250 5,750 Overhead costs. : Fixed 12,500 13,000 Variable 50,000 ASi000 Calculate overhead variances. Solution Basic calculations zz, Standard fixed overhead rate (per hour) = ee =t2 % 50,000 Standard variable overhead rate (per hour) = @>-5 = 6,250 hrs. 12,500 Standard hours for actual output = 11,000 units = 5,500 hrs. Calculation of Variances (a) Variable Overhead Variances (i) Variable Overhead Cost Variance St. hours for St. overhead) Actual overhead VoCV = | actual output™ rate }~ cost = (5,500 x & 8) - 45,000 = & 1,000 (A) (ii) Overhead Expenditure or Budget Variance (OBV) = Standard overhead - Actual overhead = (Actual hrs. « St. rate) ~ Actual overhead cost = (5,750 « % 8) ~ 45,000 = 46,000 - 45,000 = & 1,000 (F)is rr y eensese comance Analysis 1" Sa 3.27 Pains Efficiency Variance (of) " ove! (Se tous for seta actual output ~ hours | * St. over head rate FATE 5.78055 Cia. 8 apg (a) ae VOCV = OBV + ory £1,000 (A) = € 1,000 (F) + & 2,099 ¢4) “ved overhead Variances em overhead Cost Variance ci St. hours for — St. overh i overhead POCY =: (actuel output sate’) = Actua ove ais 5, (6800 = € 2) 13,0005 © 2,000 (a) qverhead Expenditure or Budget Variance (BV) ~ Budgeted overhead ~ Actual overhead ~ 12,500 ~ 13,000 = & 500 (a) )overnead Volume Variance (0¥V) (i St.hrs. for Budgeted actual production hrs, | x St. rate = (5,500 - 6,250) x & 2 = © 1,500 (a) one FOCV = OBV + ow € 2,000 (A) = % 500 (A) + & 1,500 (A) pdivision of Overhead Volume Variance yolume variance is further sub-divided into the following variances : 1, Efficiency Variance. 2, Capacity Variance. 3, Calender Variance. Fixed Overhead Efficiency Variance. This is defined as “that portion of volume variance which vies the increased or reduced output arising from efficiency above or below the standard which ‘sexpected”. This variance thus shows that the actual quantity produced is different from standard ‘ qantity because of higher or lower efficiency of workers engaged in production. Its formula is : \ | Bffciency Variance = Absorbed fixed overhead ~ Standard fixed overhead | = (St. hrs. for actual output - Actual hours) x St rate | | Fixed Overhead Capacity Variance This is “that portion of the volume variance which is due to working at higher or lower capacity usage than the standard’. Thus this variance arises when plant capacity actually utilised is more or less than the capacity planned to be utilised due to factors like idle time, under or over customer demand, strikes, power failure, ete, Its formula is : Capacity Variance = (Standard fixed overhead - Budgeted overhead) or = (Actual hrs. worked - Budgeted hours) x St. rateManage, 3.28 ii Example: Calculate fixed overhead efficiency variance and capacity variance from info,,,. Mustration 3.10. Solution Efficiency Variance'= (cna! ouput ~ hours = (5,500 = 5,750) x & 2. = © 500 (A) Shs or, — Aaa) Sirol denal_ Budgeted) sae Capacity Variance = (‘hours ~ “hows = (5,750 - 6,250) x % 2 = & 1,000 (A) Check Volume Variance = Efficiency Variance + Capacity Variance & 1,500 (a) = © 500 (A) + ¥ 1,000 (A). Calendar Variance. It may be defined as “that portion of the volume variance yy, to the difference between the number of working days in the budget period and 1/0" actual working days in the period to which the budget is applied”. Calendar varianc. volume variance arising due to a particular cause. i.e, actual number of working 4, different from those budgeted due to extra holiday being declared on the death oy" leader or any other reason. Calendar variance arises only in exceptional cirmustanea, "2 normal holidays are taken into account while laying down the standard, ‘ When calendar variance is calculated, the calculation of capacity variance has to be ny, so as to induct this additional variance into the analysis. Calendar variance is calculated by following formula : y ‘St. rate per day (Actual No.of _ St. No. of Calendar Variance = (working days ~ working days| [Revised budgeted _ Budgeted! or = alas Mages I x. St. rate per hour Generally, this variance is adverse because of extra holidays, but if there are extra wnt, days (because of less holidays), then this variance will be favourable. Mlustration 3.11 The following information is given : St. fixed overhead rate (per hour) ws Budgeted hours 12,500 St. No. of working days 25 ‘Actual hours 11,500 ‘Actual No. of working days 2 Calculate Calendar Variance. Solution St. No. of hrs. per day = 12,500 + 25 days = 500 Revised budgeted hours = St. hours per day x Actual No. of days = 500 x 22 = 11,000Segre nee ANAS sal ost 3.29 dar Variance ~ (12,000 ~ 12,509) , cate ~ © 7,500 (a) Method ve day= St. hrs. per d | ad rate Per Per day » St. rate per | wet SS00lhrs ini €'s =e 2,599 0 deal No.of s, 1, sce = (worting dase ~ SiN 2F |) «Sh rue oe king days) * pera (22 - 25) « 2,500 & 7,509 (a) capacity Variance sete endar variance is to be calculated, the method ren sii ed. The new formula in that case ‘od of cali culating capacity variance has ified. TH is a follows wee Actual No.of St No.of \ a5 (a capacity Variance = rere days ~ working days) * Strate per day J flotation given above, capacity variance willbe capacity Variance = (11,500 ~ 11,000) x ¢ 5 jon 3-12 calculated as follows ¢ 2,500 (F) grit. has furnished you the following information for the month of August : Budget Actual output (units) 30,000 32,500 Hours 30,000 33,000 Fixed overhead % 45,000 50,000 Variable oe % 60,000 68,000 Working days 25 26 lalate overhead variances, sotion susie calculations : ‘ Budgeted hours _ 30,000. andard hours per unit ~ Budgeted units ~ 30,000 4 hrs. for actual output = 32,500 units « 1 hr = 32,500 Budgeted overhead Sandaid overhead rate per hour = “Budgeted hours for fixed overheads = © 1.50 per hour Jor variable overhead = € 2.00 per hour 8 £0, rate per day = © 45,000 + 25 days = 1,800 Tecovered overhead = St. hrs. for actual output x St. rate Fa fixed overhead = 32,500 hrs. x % 1.50 = & 48,750 for variable overhead = 32,500 his. x 2 = € 65,000 Sundard overhead = Actual hours St. rate fr fixed overhead = 33,000 = 1.50 = © 49,5003.30 ta For variable overhead Revised budgeted hours = 33,000 « 2 = % 66,000 Budgeted hours actual days Budgeted days 30,000 , 96 31,200 hours. Revised budgeted overhead (For fixe = 31,200 « 1.50 Calculation of variances Fixed Overhead Variances (i) FO. Cost Variance (ii) 0. Expenditure Variance (iii) F.0. Volume Variance (iv) FO. Efficiency Variance (v) 0, Capacity Variance (vi) Calendar Variance Variable Overhead Variances (V0. Cost Variance (i) V.0. Expenditure Variance (iii) V.0. Efficiency Variance Check (i) F.0. Cost Variance 1,250 (A) (ii) B.0. Volume Variance 3,750 (F) (iii) V.0. Cost Variance 3,000 (A) 25 id overhead) = © 46,800 ‘= Recovered Overhead ~ Actual Overhead = 48,750 - $0,000 = €1,250 (A) = Budgeted Overhead - Actual Overhead = 45,000 ~ 50,000 = © 5,000 (A) = Recovered Overhead - Budgeted Overhead = 48,750 - 45,000 = © 3,750 (F) Recovered Overhead - Standard Overhead 48,750 - 49,500 = © 750 (A) Standard Overhead - Revised Budgeted Overhead 49,500 - 46,800 = © 2,700 (F) (ea _ Budget days ~ days (26 - 25) x 1,800 = © 1,800 (F) » St rate per day. Recovered Overhead - Actual Overhead = 65,000 - 68,000 =% 3,000 (A) = St. Overhead - Actual Overhead = 66,000 - 68,000 =® 2,000 (a) = Recovered Overhead - St. overhead = 65,000 - 66,000 =@ 1,000 (a) Expenditure , Efficiency , Capacity , Calendar = Variance * Variance * Variance * Variance = 5,000 (A) + 750 (A) + 2,700 (F) + 1,800 (F) Efficiency , Capacity , Calendar = Variance * Variance * Variance = 750 (A) + 2,700 (F) + 1,800 (F) | Expenditure , Efficiency x = Variance ‘Variance = 2,000 (A) + 1,000 (A).; £& la SALES VARIANCES anies calculate only cost variances Telating to mat gone CO of course, invaluable, but to obtain 9 t© material, labour and overheads. These ain full a¢ ee panies also calculate sales vatiances, White ca cvantage of standard costing ae c budgeted profit due to favourable ov sant variances are concemed with coet and adverse variances, the sales variances affec ct on = wre ered profit due to changes in sales mi, it @ ive 6 pudde ices or sales quantities, nue ie., changes caused by either a variation Il . ia, are two distinct methods of calculating sates variances ae qurmover (or value) method nia @ by Masgin (oF profit) method lowing chart shows the various main and sub-variances of sales, =e Margin Method ) (Volume Vai ance ) Price Variance) fens) Gay Variance’ Mix Variance) Fig. 3.3 Sales Variances ne fol Sales Variances Volume Variance Quantity Variance) maNOVER METHOD OR SALES VALUE METHOD tinder this method, the following variances are calculated: 1, Sales Value Variance. This is the difference between the budgeted value and the actual sue of sales effected during a period. This variance is calculated as follows « [sales Value Variance = (Actual sales) ~ (Budgeted sales) | Sales value variance results due to one or more of the following reasons : (@) Actual sales volume being more or less than the standard sales volume. This is expressed in sales volume variance. (0) Actual sales price received being higher or lower than the standard sales price, This is expressed in sales price variance. (9 A mix of products has been sold which is different from the standard mix. This is expressed in sales mix variance. 2, Sales Volume Variance. Volume refers to the number of physical units. Sales volume Taiance, therefore, represents that portion of the sales value variance which is due to the ‘ference between the actual volume and standard volume of sales. The formula is : Sales Volume Variance = (Actual quantity - Budgeted quantity) x Standard price = Standard sales ~ Budgeted sales3.32 Managemeny Reasons. The usual reasons for this variance are : 1. Ineffective advertising and sale. 2. Unexpected competition. 3. Lack of proper supervision and control of salesmen, 3. Sales Price Variance, Sales price variance is that portion of the sales value ya,i,, is due to the difference between standard price specified and the actual price <},\°* formula for its calculation is: _ 3 ae Sales Price Variance = (Actual price - Standard price) x Actual quantity = Actual Sales - Standard Sales If actual price is less than the standard price, possible reason may be unforeseen ¢. The price may also have to be reduced if a larger number of units have to be soiq Mustration 3.13 A company marketing a product supplies the following information : Standard sales ‘Actual sales ayy. Price Amt. ty. Price ne Units z x Units z e 10,000 3 30,000 5,000 3 00 8,000 2.50 20,000 Calculate sales value variances. Solution. Sales Value Variance = Actual sales - Standard sales = {(5,000 x 3) + (8,000 2.50)] - (10,000 = 3) = 35,000 - 30,000 = €5,000 (F) Sales Volume Variance = (AQ - BQ) = SP = (13,000 - 10,000) x 3 = © 9,000 (F) Sales Price Variance = (AP - SP) « AQ = (3 - 3) « 5,000 = Nil (2.50 - 3) x 8,000 = %4,000 (A) Total = © 4,000 (A) Check Sales Value Variance = Volume Variance + Price Variance 5,000 (F) = 9,000 (F) + 4,000 (A) 4. Sales Mix Variance. When a company is selling more than one type of product, a bud. will be prepared to show the budgeted sales of each product. If actual sales of different product: is not in the same proportion as budgeted, a sales mix variance will arise. Sales mix variance is “that portion of the sales volume variance which is due to the difference between the standard ani the actual inter-relationship of the quantities of each product or product group of which sales ar composed”. It is calculated by the following formula : Sales Mix Variance = (Actual quantity - Revised standard quantity) x Standard pre or = Standard sales - Revised standard sales.i Variance Analysts 433 costing Zant quantity is calculated as under oe! Total of actual quanties of \ products, Standard quantity ~ Total of standard quantities of all products " of one product quantity pare ‘he variance is the difference between the budgeted sales and les, Its formula is andard 82 Sales Quantity _ (Revised standard _ Budgeted) _ Standard Variance quantity quantity) * price = Revised standard sales - Budgeted sales, dard quantity means actual sales quantity in budgeted ratio of products. Where pent quantity is more than the revised standard quantity, this variance is adverse and ee revised standard quantity is more than budgeted quantity, it is favourable. BAO ye Variance = Price Variance + Volume Variance, 3 lume Variance ~ Mix Variance + Quantity Variance. ies vlue Variance = Price Variance + Mix Variance + Quantity Variance ention 3-14 ig data relates to two products X and Y. following Budget Actual pet ay Price Value ary. Price Value ie: z z e : 1,000 5 5,000 1,200 6 1,200 1 1,500 10 15,000 1,400 9 12,600 eal 2,500 20,000 2,600 19,800 Gualited sales variances by Turnover Method. ‘siation (dsaming that the products X and Y are homogeneous, quantity technique has been used) Glalation of Standard Sales oduct ‘Actual quantity Budgeted price ‘Standard sales (A) (8) (A = B) 1,200 5 6,000 1,400 10 14,000 2,600 20,000 Gleilation of Revised Standard Quantity Total AQ lerised $0. Total SQ. * 50 of each ‘product2,600 x = Feq9 * 1,000 = 1,040 units: 500 00 Calculation of Variances 1, Sales Value Variance = Actual sales - Budgeted sales = 1,500 = 1,560 units = 19,800 ~ 20,000 = © 200 (a) 2 Salen Price Variance = (AP - SP) « AQ X= (6-5) « 1,200 = © 1,200 (F) Y= (9 = 10) « 1,400 = © 4,400 (A) Total = @ 200 (A) 3, Sales Volume Variance = (AQ ~ 80) SP X = (1,200 = 1,000) « 5 =F 1,000 (F) Y = (1,400 ~ 1,500) x 10 = © 1,000 (A) Total Nil 4. Sales Mix Variance = (AQ - RSQ) « SP X = (1,200 - 1,040) = 5 =% 800 (F) Y = (1,400 - 1,560) x 10 = © 1,600 (A) =@ 800 (A) 5. Sales Quantity Variance = (RS0 - Bd) = SP X = (1,060 - 1,000) « 5 =% 200 (F) ¥ = (1,560 - 1,500) « 10 =% 600 (F) Total = & 800 (F) Check (i) Sales Value Variance = Price Variance + Volume Variance 200 (A) = 200 (A) + Nil ) Volume Variance = Mix Variance + Quantity Variance Nil = 800 (A) + 800 (F) SALES MARGIN METHOD The sales margin method measures the effect on profit of deviations of actual from plans: sales. Management is primarily interested in knowing these sales margin variances. Sales ma variance analysis assumes all costs are at standard. Under this method, the following varia: are calculated : Total Sales Margin (Profit) Variance. This variance is the difference between actual pi and budgeted profit. Its formula is: Total sales ie Actual profit) — {Budgeted . Standard profi) Margin Variance ~ \quantity per unit quantity per unit = Actual profit - Budgeted profit. Budgeted profit is calculated by multiplying budgeted quantity of sales with budgeted (« standard) profit per unit.e. SP inleuliance is divided in 7 to price variance isles Wiblateetesin thovg ce and volume variance KG wargin Price ee. It is the difference between actual profit and standard profit 8° [price Variance = Actual profit - Standard profit | ofit is calculated by multiplying the ard pr 5 actual quantity of sales with the budgeted (or ae profit per unit. This variance is equal to the price variance calculated under sales walt oo emus it can also lculated by the following formula # [Price (Actual profit St. profit) Actual quant | Variance Per unit ~ per unit) © sd” ages rai Volume Variance. This is the difference between standard profit and budgeted ee Fs [Yolume Variance = Standard profit - Budgeted Profit | ay also be calculated by the following method R eae zane es | Volume _ ( Actual _ ier) x Standard | Variance ~ \quantity ~ quantity profit per unit «Volume Variance is further sub-divided into mix variance and quantity variance. in Mix Variance ~ This variance arises only wh ling more than oe of product. Its formula is as follows : Se Sales Margin (feta is Revised sandrd) ‘Standard profit ‘Mix Variance ~ \ quantity quantity per unit. - Standard profit - Revised standard profit sales Margin Quantity Variance. It is the difference between revised standard profit and soizeted profit. Its formula is Sales Margin ( Revised standard _ Budgeted) Standard profit Quantity Variance ~ quantity quantity) “per unit = Revised standard profit - Budgeted profit Check (i) Total Sales Margin Variance = Price Variance + Volume Variance (i) Sales Margin Volume Variance = Mix Variance + Quantity Variance Therefore (ii) Total Sales Margin Variance= Price Variance + Mix Variance + Quantity Variance3.36 Mustration 3.15 The following data is supplied to y fou for the month of January 2017 =u] Pudgated ats Uta sts oy, Pagal ay i ta 1.200 5 6,000 B10005 9 5.49 7 patie 32 ray 2,000 2 4.000 sa Se a e 10,000 ay ¥ Total Budgeted costs are: Ess - ® 4.00 Calculate sales margin variances. Solution per unit, Kay - € 1.50 per unit. (Assuming that the products Ess and Kay are homogeneous, quantity technique is used heze) Calculation of actual, standard and budgeted profits Product | Actual profit | Actual | Actual | St. profit | Standard | Standard | 5,;, per unit | quantity profit er unit profit quantity aa 1 2 3 4 5 6 ie (23) (x5) z z z Ess 1.00 1,000 1,000 1.00 1,000 1,200 0.75 300 225 1.00 300 Kay 0.50 1,500 750 0.50 750 2,000 0.40 350 140 0.50 175 Total 3,150 2,115 2,205 3,200 Calculation of revised standard profit Product Revised St. Qty. St. profit per unit Revised St. profit (units) & ¢ 1,200 Ess 3,200 » 3,150 = 1,181 1.00 1,181.00 2,000 Kay 3,200. x 3,150 = 1,969 0.50 984.50 Total 2,165.50 Calculation of Variances 1, Total Sales Margin Variance 2. Sales Margin Price Variance = Actual profit - Budgeted Profit = 2115 = 2,200 = ® 85 (A) = Actual Profit - Standard Profit = 2,115 - 2,225 = ® 110 (A)337 S 221212 400 aoe ead ppp Mix Variance = St. Profit - Revised st. ron 2 = 2,225 ia 2,165.50 jn Quantity Variance= Revised st, p, ened = Yofit ~ Budgeted Profit 7 2165.50 - 2,200» © 34,80 (ay OH caies Margin Variance = Price Variance + Volume Variance ot as (4) = © 110 (A) + & 25 (F) e = Mix Variance + quantity y lantity Variance (ete e257) = 59.50 (F) + 34.50 (4) yy Technique and Value Technique of Computing Sales Mix Variance is aan pray, be ee by using either quantity technique or value technique. ntity Technique. Tus technique is used when various I. i products being sold are pogeneons: FOr example, Maruti Car Company is selling different types of cars. In this technique, tion of sales mix variance is similar to material mix variance. This technique of calculating on variance and sales quantity variance was used in Illustration 3.14. > Valne Technique. This technique is used when products being sold are not homogeneous. jeanple, 2 company is selling TVs, computers, arconditioners etc. In this technique, revised sales value (instead of sales quantity) is calculated. inder value technique, sales value variance, sales price variance and sales volume variance will etle same a5 calculated under Quantity Technique. However, sales mix variance and sales feaiy variance may be different, istration 3.16 eer sales variances by tumover method using value technique from the date given in astration 3.14 solution Jsstated above, sales value, price and volume variance will not be affected. Only mix and quantity ‘aiaces well be different. These are computed as follows: usc calculations (@) Standard sales = Actual quantities sold valued at standard prices. (®) Revised standard sales = Standard sales value re-arranged in the budgeted ratio. Products ‘Standard Sales (SS) Revised standard sales (RSS) a Actual Standard Price Value Ratio z ty. z z 1 1,200 5 6,000 25% 5.000 * ea. 1,400 10 14,000 75% 15,000 * aeee2*| 20,000 20,000 “Revised standard sales = a Total budgeted sales ‘Budgeted sles of individual products a54a) standard sales Bear se338 il 5,000 5,009", 20,000 = © 5,000 X= 20,0 y = 15:00 , 20,000 = € 15,000 20,000 cateulation of Varlancet BY sie et = 6,000 - 5,000 ~ 1,000 (F) ; ‘= 14,000 - 15,000 = 1,000 (A) | " Total = NIL = RSS - BS tity Variance we ee = 5,000 - 5,000 = NIL x Y = 15,000~ 15,000 = NIL | Total = NIL Check 5 2 Mix Variance + Quantity variance Sales Volume Variance = Nil = Nil + Nil 1d be noted that under Tumover Method, while using value technique, sales mis y, fed on a re-arrangement of standard sales in terms of budgerey represent the same figure. at Note : It shoul will always be zero because it is bas fe. total standard sales and total revised standard sale: DISPOSITION OF VARIANCES When standard costs are not entered in the books of account and are used only as a stati information, no adjustments are required at the end of the period for the variances, Hoi, then standard costs are incorporated into the accounting system through journals and ledgers, is. arises a question of adjustment and disposition of variances at the end of the accounting eto, There is no uniformity of opinion as to the proper disposition of variances. Therefore, no and fast rules can be laid down in this regard. The following methods of disposition of variance; are based on practice followed in certain firms. 1, Transfer to Profit and Loss Account Under this method, all variances are transferred to Profit and Loss Account at the end of the accounting period. Thus, the stocks of work-in-progress and finished stock and cost of sales ae maintained at standard costs. This method is based on the assumption that standard css represent correct or real costs and all forms of variances represent conditions of inefficien waste and below standard performance. ‘The method has the advantage of prompt and uniform valuation of inventories. Moreove: presentation of variances as a separate group of items in the Profit and Loss Statement reflects on profit or loss and attracts the attention of the management. 2, Allocation of Variances to Inventories and Costs of Sales Under this method, variances are distributed over stocks of work-in-progress, finished and cost of sales. This will result in showing inventories and costs of sales at actual costs. hs ‘method is based on the premise that standard costs are only tools of control and do not represt the true or real costs. According to this method, thus actual costs should be reflected in t financial statements. stock, riance Analysis and Variance * 3.39 oh (Parr yois explained above ae quite easy to app ene WaerTeeeSE Gig (Frartiee thd howe ely but variances are not disposed of Pep ottee underlying reasons for their existence caeees ai spony ec 4, mriances which result from controllable factors 510 pol be transferred to Profit and Loss Account, On en incorrect standards or uncontrollable causes should be allocated to inventories uld be allocated to inventorie Se sold on some equitable basis. For example, variance due to idle time (controllable) of red to Profit and Loss Account and variance d vot ieee Resanienniidite costa e due to change in material prices ‘a {uncontrol 0 inventory and cost of goods sold. ve , and represent responsibilities of n the other hand, those variances po CONTROL RATIOS iances, certain control ratios are jon to variances, cer commonly used by management for use in goto “ations. These ratios are generally expressed in terms of percentages 1, te rato a hye it indicates a favourable position and versa, if the ratio is less than 100%, it ST Tarourable position. Three important control ratios are given below : poe Ratio It is defined as “the standard hours equivalent to the work produced giao percentage of actual hours spent in production’. Thus, this ratio shows whether as H # fraken in production is more or less than the time allowed by the standard. Its method tion is Standard hours for actual output iciency ratio = | Bene. ‘Actual hours worked 1 Ratio It is defined as “the standard hours equivalent to the work produced, ts percentage of budgeted standard hours”. This ratio shows the extent to which the ‘allies have been utilised as compared with that contemplated in budgets. Its = Standard hours for actual output Activity ratio = “Budgetary hours fame 100 Ratio It shows the relationship between actual hours worked and the budgeted formula is : EB Actual hours worked __| Sapacity ratio = “Budgeted hours 100 Ratio. Sometimes calender ratio is also calculated. This ratio indicates the extent of days availed during the budget period. It is calculated by using the following Calender Ratio = Actual working days in the budget period 99 Budgeted working days in the budget period6 Recerca eee en eee 3.40 2 eee Managem, Mlustration 3.16 ; Two articles A and B are manufactured in a department of XYZ Co. Ltd. th... show that 2 units of A and 8 units of B can be produced in one hour, The bude’ Pec for a month is 400 units of A and 1,600 units of B. Actual production during \j°t®4 units of A and 2,000 units of B. Actual hours spent in production were 4g) working days specified in the budget. However, actually worked days were 26 q,,7?*t0 Your are required to calculate the following ratios : Othe (a) Activity Ratio (b) Capacity Ratio (c) Efficiency Ratio (d) Calender Ratio Solution 7 Basic calculations : Budgeted hours for the month : A= 400 +2 = 200 hours B= 1,600 +8 = 200 hours Total 400 hours Standard hours for actual productio ‘A 600+2 = 300 hours B2,000+8 = 250 hours Total 550 hours a St. hours for actual production x 100 Oa ae Budgeted hours 550 = = «100= 00 137.50% Actual hours worked Budgeted hours 480 = 499 ~100= 120% Sthours for actual production * 100 Actual hours = 100 (©) Capacity Ratio (©) Efficiency Ratio = = 2 x 100- 114.59% _—— Actual worked days x 100 COE Sine Reto racial noe - 3% «100-106% Check ‘Activity Ratio = Capacity Ratio Efficiency Ratio 137.50 % — = 120 % » 114.58 % ee SUMMARY OF FORMULAE Material Variances (i) Material Cost Variance = St. cost of actual output - Actual cost = (St. aty. for actual output x St. price) - (Actual qty. x Actual price)and Variance Analysis ste variance = (St. price - Actual Care variance P Actual price) » Actual qty. yoo variance = (SQ for actual output Ti eed ss es a st yield Variance = (Actual yield - St. yield) x st. output price ‘ wel evised Usage Variance = (SO. for actual output ~ Revised Sd.) x St. price (7 yaiances pn + cost Variance = St. cost of actual output - Actual cost ab" actual output » St. rate) - (Actual hours « Actual rate) 1 Mice variance = (St rate ~ Actual rte) « Actua hour sp ee pene) Voronce = St. Iv fr actual output Aetual he) «St. rate eine Vora = Idle hours « Standard rate yim ie yronce = (Revie st. Rous~ Atl hous) » t,t 0 ur Yield Variance wa jactal yield - St. yield for actual hours) « St. cost per unit of output or Revised Efficiency Variance ae (st. hours for actual output - Revised standard hours) « Standard rate 4 Variances head (VO) Variances: vant ve Marable overhead Cost Variance = Absorbed overhead - Actual overhead Standard overhead - Actual overhead Absorbed overhead ~ Standard overhead Wr yo Expenditure Variance sffciency Variance (7 overhead (F0) Variances: +0 ost Variance (i) #0 Expenditure Variance Absorbed overhead - Actual overhead judgeted overhead - Actual overhead ' fa) Fo Wolume Variance = Absorbed overhead - Budgeted overhead jv) #0 Bfceney Variance = Absorbed overhead - Standard overhead iy 79 Capcity Variance ‘= Standard overhead - Budgeted overhead fi) F0 Revised Capacity Variance . overhead - Revised budgeted overhead (Actual No. of _ St. No. of St. rate ¥ (vi) Calendra Variance s (oan days ~ working days) * per day Ay or = (Revised budegeted hours - Budegeted hours) x St. rate per o : hour. aes Variances sales Value Method (i) Sales Value Variance = Actual sales - Budgeted sales (i) Sales Volume Variance = Standard sales - Budgeted sales = (AQ - BQ) « SP (ii) Sates Price Variance = Actual sales - Standard sales = (AP - SP) x Ad3.42 eee = st. sales ~ Revised st. sales (iv) Sales Mix Variance = (AQ - Revised 50) * SP = Revised St. Sales - Budgeted sales (v) Sales Quantity Variance = (Revised 5d - Budgeted aty.) = SP Sales Margin Method (i) Total Sales Margin Variance (ii) Sales Nargin Price Variance = Actual profit - Budgeted profit «= Actual profit ~ Standard profit = (Actual profit per unit-St. profit per unit) « 4g = Standard profit ~ Budgeted profit = (AQ - BQ) » St. profit per unit «= Revised St. profit - Budgeted profit = (Revised $Q - BQ) x St. profit per unit = St. profit ~ Revised St. profit = (AQ - Revised SQ) « St. profit per unit. (iii) Sates Margin Volume Variance (iv) Sales Margin Quantity Variance (v) Sales Nargin Mix Variance Control Ratios St. hours for actual output y nao ue Serene OO i eae ‘tual hours worked ce Standard hrs. for actual output (f) Acinty Reto a ome agen Actual hours worked (iil) Capacity Ratio = “Budgeted hours * 1° Actual working days = Sauaea waking caylee (iv) Calender Ratio [ PROBLEMS ‘AND SOLUTIONS | ppwoblosmi§s 25 (Micoer GUNN ERIOICES) From the following particulars, compute: (a) Material cost variance, (b) Material price variance, and (c) Material usage variance Quantity of materials purchased 3,000 units Value of materials purchased % 9,000 Standard quantity of materials required per ton of output 30 units Standard price of material % 2.50 per unit Opening stock of materials NL a Closing stock of materials 500 unit: Output during the period rues (B.Com., Hons. Delh)ince Analysis: and varia 7, os 8 ion a piel g material purchased gs) frterals purchased = Inet price per unit standard price standard quantity ‘Actual quantity 3.43 = 3,000 units % 9,000 % 9,000 3,000 units ~ © 3 Per unit 2.50 per unit 80 tons = 30 units= 2,400 units Opening stock + Purchase ~ Closing stock = Nil + 3,000 = 500 = 2,500 units variances : 00 eal Gost Variance = SC ~ AC jo) = ($0 x SP) - (AQ « AP) = (2,400 x 2.50) + (2,500 « 3.00) MCV = © 1,500 (A) eriat Price Variance = (SP - AP) « AQ = (2.50 ~ 3.00) x 2,500 MPV = © 1,250 (A) ial Usage Variance ~ (SQ - Ad) « SP eer = (2,400 ~ 2,500) x 2.50 MUV = © 250 (A) wy Nat ect MCV = MPV + MUV % 1,500 (A) = @ 1,250 (A) + % 250 (A) % 1,500 (A) = % 1,500 (A) 3.2 (Material Variances) 4 manufacturing concern which has adopted standard costing furnishes the following jornation = Yaterial for 70 kg finished products ‘dation Actual Quantity (AQ) Sundard Price (SP) 100 kg Price of material Z 1 per kg staal = output 2,10,000 kg Material used 2,80,000 kg Cost of materials. % 2,52,000 alate + (@) Material usage variance, (b) Material price variance, (c) Material cost variance. (BCom. Kerala) 100 kg Sandard Quantity (SQ) for actual output= 2,10,000 kg = 794g = 3.00.00 kg = 2,80,000 kg = @ 1 per kg Se4one 3.44 ba “ SeaTe = (€ 2,52,000 + 280,000 Ka) = Re 0.90 pe, ,, " Actual Price (AP) tanta = (80 AD) © SP (a) Material Usage Variance - 3 tA ATE Agios € 7-0 i jance - (SP - AP) « A (0) Material Price Variance = i‘ eS saa Bee's, = ($0 = SP) - (AQ* AP) : 6 109,000 x 1) ~ (2,80,000 x 0.90) = © 48,000 (ry Mov © 48,000 (F) Check J (c) Material Cost Variance 2 MPV & 28,000 (F) MUV ® 20,000 (r) Problem 3.3 (Material Variances) ; : ing 10 kg. , the standard material requirement is :~ For making 10 kg. of geme Material Quantity (kg.) Rate Per kg. (¢ ) : 8 6.00 5 4 4.00 t 5 | consumption of mat During April, 1,000 kg. of Gemco were produced. The actual Serials j Materiel ‘uantty (ke) Rate per kg. (¢ 4 750 7.00 > 500 i 5.00 Calculate (a) Material Cost Variance; (b) Material Price Variance; (c) Material usage y, (CA Solution Basic calculations Standard for 1000 kg. Actual for 1000 kg. | Oty. Rate Amount Qty | Rate Amount | Kg | 3s z cea < z A 800 6 4,800 750 7 5,250 3 400 4 1,600 500 | 5 | 2500 Total {at coal [6400 | 1250 | 7,750 Calculation of Variances (a) Material Cost Variance = SC for actual output ~ AC MCV = 6,400 - 7,750 = % 1,350 (A) (0) Material Price Variance = (SP - AP) x AQ A = (6 - 7) « 750 =% 750 (A) B = (4-5) x 500 %_ 500 (A) MPV 1,250 (A) (0) Material Usage Variance = (SQ - AQ) x SP A = (800 - 750) x 6 =% 300 (F) B = (400 - 500) x 4 400 (A) Mov — = €100 (a) a téi—cost? LU? MCV @ 1,350 (A) ing and Variance Analysis pv & 1,250 (A) n (waterial Variances) ¢ following mc, (0) Price information compute and (c) Usage variances: e MUV @ 100 (A) Standard Actual Quantity Unit Total | Quantity : a antl nit Total | tea.) price (kg.) ef price | ° ° z e ¢ ‘ 1.00 Pex... 4.00 2 3.50 7.00 ny 2 2.00 00 | 4 2.00 2.00 preril 2 4.00 sco | 3 3.00 9.00 price Variance = (SP - AP) x AQ ial A = (1 - 3.50) «2 5 (A) as (2-2) =1 = Nil aac = (6-3) «3 3(F) er. 2 (a) uuial Usage Variance = (SQ - AQ) = SP wae A = (4-2) x1 == 20) weeral B =(2-1)x2 2 (F) Material € = (2-3) x4 4 (A) MUV Ni aerial Mix Variance = (Revised SQ - AQ) x SP ‘Material A =(3°- 2) «1 =? 1 (F) Material B = (15 *- 1) x2 =f 1 (F) Material € = (15° -3)*4 == 6) MMV =< 4) standard quantity is calculated as follows: __ Standard quantity of material item Total standard quantity 4 Matehal A == x 6 = 3 kg. ee Mae =F x 6 = 1.5 kg. 2 Material B= x 6 = 1.5 kg. x Total actual quantity 2.00 16.00 6 3.00 18.00 (B.Com. Hons., Delhi)_ 9eMen, 3.46 Problem 3.5 (Material Variances) The standard cost of a chemical mixture 4s as foll 40% material A at © 20 per kg % material B at % 30 per kg steer t is expected in production. The cost records +, lows: A standard loss of 10% of input aoe neasomee eg materia A ata cost of € 28 per kg 110 kg material B at a cost of © 34 per kg The quantity produced was 182 kg of good product. Calculate all material variances. (B.Com. on Solution Basic calculations: — ail Tandard for 1801 ky. output ‘Actual for 182 ty > aty. Rate Amt. ary. Rate [Sapa z zi | oka. A | 2 20 1,600 90 z 120 30 3,600 110 Total 200 5,200 200 Less: Loss 20 = = 18 182, St. cost of actual output = © 5,200 «755 = @ 5,257.78 Calculation of Variances 1. Material Cost Variance = (SC of actual output - AC) = (5,257.78 - 5,360) = 102.22 (A) 2. Material Price Variance = (SP - AP) x AQ Material A = (20 - 18) x 90 =& 180 (F) Material 8 = (30 - 34) x 110 =%_440 (A) MPV =®% 260 (A) 3. Material Usage Variance = (SQ for actual output - AQ) x SP - 182 Material A = (220 Bay 20] x20 = % 182.22 (A) 182 Material B (120 ae 10) «30 = % 340.00 (F) MUV ~ 2157.78 (F) 4. Material Mix Variance = (Revised $0 - AQ) x SP Material 4 = (80 - 90) x 20 =% 200 (A) Material B = (120 - 110) « 30 =%_ 300 (F) MMV = % 100 (F)(OI —— ; ng and Variance Analysis ; coin uy . ‘ Per unit of output i = (182 - 180) « $200 180 * €57.78 (ry ont MCV & 102.22 (A) ev 200(8) MoV @ 157.78 (F) os pub 100, (F) MY? 7 78 (F) 3,6 (Material Variances) standard material cost to produce one tonne of chemical X is : poo ka. of material A@ 10 per keg, yoo ka. of material B@Z 5 per kg, 500 ko. of material C@Z 6 per kg. paing a period, 100 tonnes of chemical X were produced from the usage of : 45 tonnes of material A at a cost of € 9,000 per tonne 42 tonnes of material B at a cost of € 6,000 per tonne 3 tonnes of material C at a cost of € 7,000 per tonne aelate material variances. (B.Com. Hons., Delhi) fuse calculations : Conversion Rate is 1 tonne= 1,000 kg. it erat Standard for 100 tonnes ‘Actual for 100 tonnes i aty. Rate Ant. ty. Rate ‘Ant. , gs re @ Kg. @ @ ay 30,000 10 3,00,000 35,000 9 3,15,000 se 40,000 5 2,00,000 42,000 6 2,52,000 f 50,000 6 3,00,000 53,000 7 3,71,000 Ne 1,20,000 8,00,000 130,000, 9,38,000 x ; 20,000 - - 30,000 - a mh Yoo,o00 | 8,00,000 | _1,00,000 = 9,38,000 of Variances Cost Variance = SC of actual output - AC MCV = 8,00,000 - 9,38,000 = %1,38,000 (A) meidoxd tial Frice Variance = (SP - AP) » AQ “ia A = (@ 10 - % 9) x 35,000 =@ 35,000 (F) B = (85 - 76) x 42,000 = 42,000 (A) ¢ = (% 6 ~ &7) « 53,000 piensa cout) ‘MPV = © 60,000 (A) 8ae Mani § agement 4c, 2. Material Usage (or Quantity) Variance = (50 ~ Ad) * SP ‘A = (30,000 ~ 35,000) « © 10 = ® 50,000 (A) B = (40,000 - 42,000) « © § = © 10,000 (A) © = (50,000 - 53,000) « © 6 = € 18,000 (A) Sai78/000;(A) 4, Material Mix Variance = (Revised 50° = AQ) « SP ‘A. = (32,500 = 35,000) * 10 = © 25,000 (a) 1,30,000 4 = 42,000) . R i 3 2, ) a5 © 6,667 (F) 1 c= (22 =$3,000) 5 6 = 7,000 (F) MMV =~® 11,333 (A) * Revised Standard Quantity is calculated as follows : on) 1,30,000 30,000 = 32,500 ke > Torat sa“? 4 =7/20,000 **” gai 1,30,000 1,30,000 162,500 Pa 50,000 = 262500 j, B= 20,000 «4% = 4,20,000 ames” 5. Material Yield Variance (M17) = (Actual yield - St. yield) x *St. cost per unit of output (100 i= Lae) x 8,000 = & 66,667 (A). *Working Notes: __ Total standard cost Total standard output = 8,000 per tonne 1. Std. cost per unit of output Actual output 100 Tonnes 1,300 2. Std. yield = toearsq * Total AQ =—755. 999° * 120,000 = “tonnes. 12 ‘Check MCV 1,38,000 (A) ‘MPV Z 60,000 (A) MUV & 78,000 (A) [kh ee RR y MMV % 11,333 (A) MYV & 66,667 (A) Problem 3.7 (Material Variances) 80 kgs, of material A at a standard price of € 2 per kg and 40 kgs of material B at a standu! price of % 5 per kg. were to be used to manufacture 100 kgs. of a chemical. During a month, 70 kgs. of material A priced at % 2.10 per kg. and 50 kgs. of material B pre! at 4,50 per kg. were actually used and the output of the chemical was 102 kgs. Find out the material variances. (LOWA. Inte)i riance Analysis = 3d Prt oe St, cost of 100 kg. of output sux eck Actual cost of 102 ky. of output ty. urs n ay, Rate ‘Amount kg. p a MRA | ra 210 | a7 50 4.50 225 120 kg. 372 cen ral output = soo), * 102 a = € 367.20 says = % 360+ 100kg =% 3.60 of Variances fast Variance ~ St. cost of actual output - Actual cost = 367.20 - 372 = © 4.80 (A) price Variance ~ (St. price ~ Actual price) x Actual quantity A = (2 - 2.10) « 70 =t 7 (4) 2 = (5 - 4.50) * 50 = 35) mer = 18 (®) = (Revised St. Qty. - Actual Qty.) x 5.P. = (80 - 70) «2 == 20 (F) B = (40 - 50) x5 =% 50 (A) > MMV = %_ 30 (A) \ Yield Variance = (Actual yield - St. yield) « St. output price alts nv = (102 - 100) x & 3.60 = & 7.20 (F) hs given is Revised St. Qty because the total of actual quantities of materials consumed and is d quantities is equal. he ) MCV @ 4.80 (A) SH he -— 1 x16 1818 (F) ‘MUV @ 22.80 (A) Te ane + MMV & 30 (A) MYV % 7.20 (A) material cost for production of 100 kg. of Chemical D is made up of: 30 kg. @ © 4.00 per kg. 40 kg. @ & 5.00 per kg. 80 kg. @ & 6.00 per kg.3.50 bee Ina batch, 500 kg. of chemical D.was PS Chemical A Chemical B Chemical C How do the yiel 100 per kg, of Chemical D 0 4, mix and the price fact is wer the standard cost? Solution paste cateolations : Variances are calculated for 100 kg. Managemen, , oduced from a mix of : 140 kg at a cost of z 220 kg at a cost of 2 14. 440 kg at a cost of Z 2 g,. ors contribute to the variance in the act, (B.com., of Chemical D as required Naterial ‘Standard for 100 ko. Hetil for 100 bg, aty. Rate Amt. 4 aty. Rate | an, Xo. zg zg Kg. z aa: R SS 4 120 28 4.20 . 2 40 5 200 44 4,80 ae 4 a 6 480 8B 6.50 ee y Total 150 eon ad Bison 28¢ i Actaal price per ka) Al =e 20 Fimo geet C= og Beis ‘Actual quantity per 100 kg Chemical D 1 220 440 Aa = 28 kas: Bae = 4h ig.3 CaS = 88 ky Calculation of Variances Material Cost Variance = SC - AC = 800 - 900.80 = © 100.80 (A) Material Price Variance = (SP - AP) « AQ A = (4 - 4.20) = 28 =% 5.60 (A) B = (5 - 4.80) » 44 =2 8.80 (F) C = (6 - 6.50) x 88 = 44.00 (A) Material Usage Variance - (SQ - AQ) = SP A = (30 - 28) x 4 B= (40 - 44) «5 C = (80 - 88) «6 Material Mix Variance = (RSQ - AQ) x SP A = (32 - 28) 4 2 B= (42 (a) =F 6.55.(A) 5-4) x5 1 Kasco eias = © 16.02 (A) nar © 6.1 8)4 Variance Analysis a 3.51 st. duantity) is computed as below 160 150 * 80 ~ 854 kg * 30 = 32 kg au variance = (AY — SY) St output price MV = (100 - 1062) x 9. 160 , st. yield =359 * 100 = 1062 © 53.33 (a) og tpat rice = % 800 + 100 kg. = % g go iaterial Variances) janufactures PXE by i rose itd. Mi tr Y mixing three raw materials, For each batch of 100 kg. materials are used. In of raw eras d and oct atch 60 batches are prepared to produce an output of PXE. The wal particulars for June are as follows eStandards marae : Brea o fi rice perky, "Price per kg. | raw materials purchased kg. 0. a) 60 | a 5000 a Be a0 20 8 2000 ee 2 20 6 1200 pall variances (B.Com., Hons. Delhi) © Standard for 6,000 kg output | Actual for 5,600 kg output 1 T L Kg. Rate Ant. Kg. ‘Rate Amt. Bieas¢ . e z 3,750 20 75,000 4,500 a 94,500 2,250 10 22,500 1,500 8 12,000 1,500 by 7,500 1,500 6 9,000, 7,500 1,05,000 7,500 1,15,500 F %1,05,000 of actual output =~" x 5,600 Kg. = % 98,000 E 6,000 Ka. a Variance = SC of actual output - AC ___ MCV = 98,000 - 1,15,500 “= %17,500 (A) it, Variance = (SP - AP) « AQ a A = (20 - 21) x 4,500 = &% 4,500 (A) a B = (10 - 8) x 1,500 ae 3008 @ C = (5 - 6) x 1,500 = © 1,500 (A) E “MPV = & 3,000 (A) may382 Adj ae utput = Variance = (50 for actual out Material Usage Varian 3,750 , 5,600 - 4,800) + 20 4 = (io00 = (3800 ~ 4800) « 20 = © 20,000 (a p= (2222 «5,400 1,800) « 10 = \6,000 = (2100 = 1500) « 10 Ba 00 (r) (200 5,600 - 1,500] » 5 © = \6,000 = (1400 = 1500) « 5 —=<_500 (A) MV = 844,500 (A) = (Revised SQ - AQ) = SP Materia Mix Variance + iiase 4,500) » 20 = © 15,000 (a) B = (2,250 - 1,500) x 10 = © 7,500 (F) C = (1,500 - 1,500) « 5 e Nil MMV = & 7,500 (A) Material Yield Variance = (Actual yield - St. yield) x St. output cost per unit 1 MYV = (5,600 - 6,000) « 7,000 (A) Note: In the question, quantity of material purchased is given. It does not consumed, Its thus assumed that quantity actually used is 7,500 units. In ease of materia 2° ‘ Sesumed that 300 units @ 6 were opening stock because purchased quantity is only 1 sc S consumed quantity is 1,500 kg. a, Problem 3.10 (Material Variances) sive quantity o The standard material input required for 1,000 kgs of a finished product are Material Given belo, Quantity St. rate per ky kg z P 450 20 a 400 40 R 250 60 1,100 Standard loss 100 Standard output 1,000 Actual production in a period was 20,000 ka. of finished product for which the actual quant of material used and the prices paid there, fe Bisnis. of were as under: Material Quantities Purchase price per ks. i (Kg.) Ss 10,000 19 a 8,500 42 R 4,500 65Variance Analysis Material Cost Variance (ii) Material Pic itis Variance (v) Material Yield Variance, WY gO reconciliation among the variances 3.53 ariance (iif) Material Usage Variance (iv) (L.C.W.A. Inter) for 20,000 ka output ai eas 000 ke outpu ‘Actual for 20,000 kg. output Rat em re Amt. ty, Rate Amt. Re € ty) ? z jo 180000 10,000 19 1,90,000 40° 3,20,000 8,500 42 60 __3,00,000 4,500 65 8,00,000 23,000 os __ 3,000 a 20,000 gation of Variances aterial Cost Variance = SC - 4c 0 MCV = 8,00,000 ~ 8,39,500 yaterial Price Variance = (SP - 4?) « 4g P = (20 - 19) x 10,000 @ = (40 ~ 42) x 8,500 R = (60 - 65) « 4,500 x pv = Material Usage Variance = (SQ - AQ) x sP P= (9,000 - 10,000) = 20 Q = (8,000 - 8,500) x 40 R = (5,000 - 4,500) « 60 terial Mix Variance = (RSQ* - AQ) SP 9,000 ae (23,000 amd 22, = 4,500) x 40 5,000 A ee 4,500) x Be (23,000 rs 60 ‘MMV = Yield Variance = (AY - SY) x St. output price mane eal) “ A (20,000 - 23, e000 = (23,000 « - 10,000) x = Pp (23 rua 20 = % 11,818 (A) = €39,500 (A) = € 10,000 (F) = %17,000 (A) 22,500 (A) 29,500 (A) = % 20,000 (A) = © 20,000 (A) = © 30,000 (F) ‘MUV = %10,000 (A) = % 5,455 (A) =z 43.636 ) 26,363 (F) 8,00,000, 20,000 ‘ x n3.54 "4 4,60,000) , 40 = © 36,363 (A) rv = (20,000 - S208 40 = @ 3 (A) Reconciliation (i) Nev = NPV 6 MOV 39,500 (A) = 29,500 (A) + 10,000 (A) (ii) Nev = NPV + MAY + MV 39,500 (A) = 29,500 (A) + 26,363 (F) + 36,363 (A) Problem 3.11 (Material Variances) Philips Ltd. produces an article by blending two basic raw materials. The following have been set up for raw material. a Material Standard Mix St. Price per kg A 40% w% B 60% 3 The standard loss in processing is 15%. During September 2017 the company produces ko. of finished output, The position of stock and purchases for the month of Septeyt’ is as under : Material Stock on Stock on Purchases during 1-9-2017 30-9-2017 Sep. 2017 Kg. Kg. Kg. Cost & A 35 5 800 3,400 B 40 50 1,200 3,000 Calculate all material variances assuming FIFO method of issue of materials. The opening , is to be valued at standard price. (B.Com. Hons. pan Solution Basic calculations : 3 100 (Calculation of standard quantity = 1,700 =~ 2,000 kg. Material A = 2,000 « 40% = 800 kg. Material B = 2,000 x 60% = 1,200 kg. (ii) Actual consumption of materials Material Op. stock + Purchases - Closing stock = Consumption A 35 kg. + 800 kg. = 5 kg = 5 830 kg. B 4okg. + 1,200kg. - 50 kg. = ‘1,190 kg. (iii) Caleulation’ of actual price per kg. ‘ Material A = og = 4.25ind Variance Analysis 355 of standard and actual cost of actual output Standard OS 1 Ameunt | Gy fate Amount ba e ig. ces es Nas =e 15 0 kas 5578.75 1200 eae RAR of 300, 120 250 2,875 = variances ost Variance = Standard cost ~ Actual cost MCV = 6,800 ~ 6,513.75 price Variance = (SP - AP) x AQ A = (4 - 4) x 35] + [4 - 4.25) « 795] = & 198.75 (A) B = [(3 - 3) x 40] + [(3 - 2.50) « 1,150] - & 575.00 (F) = 2286.25 (F) MPV = 376.25 (F) ia) Usage Variance = (SQ - AQ) = SP A = (800 - 830) x 4 =% 120 (A) B = (1,200 - 1,190) x 3 =% 30) Mov =® 90 (A) Mix Variance = (RSQ - AQ) = SP ‘A = (808 - 830) x 4 = 88 (A) B = (1,212 - 1,190) «3 =% 66) MMV =R 22) 2,020 E A =3990 * 800 | = 808 kg. 2,020 3,000 * 1200 = 1,212 kg. 9 Yield Variance = (Actual yield --St. yield) « St. output price 6,800 1,700 MYV = (1,700 - 1,717) « = © 68 (A) : 85kg : St. yield = Top xg * 2.020 = 1.727 Kg. we SN, tuodnd, baw. Sat ‘MCV = MPV + MMV + MYV 286.25 (F) = 376.25(F) + 22 (A) + 68 (A) t8ri 10 ‘as ; » $°o] eb, r9q. soxelgmsEE al 3.56 Managemen i = es ks — he Problem 3.12 (Material Variances) ' XYZ Ltd has established the following standard mix for producing 9 gallons of produc z 5 gallons ~ Material x at © 7 per gallon % 3 gallons - Material X at © 5 per gallon 15 2 gallons ~ Material Z at © 2 per gallon 54 A standard loss of 10% of input is expected to\occur, Actual input was : Material X - 53,000 gallons at & 7 per gallon Material X - 28,000 gallons at © 5.30 per gallon Material Z - 19,000 gallons at & 2.20 per gallon Actual output for the period was 92,700 gallons. Calculate: (i) Material Mix Variance, and (ji) Material Yield Variance, (B.Com, Hon, Solution Basic calculations Standard Cost Actual Cost ary. Rate Amt. ty. Rate Gallons e @ Gallons e x 50,000 7 3,50,000 53,000 7.00 Yr 30,000 5 1,50,000 28,000 5.30 z 20,000 2 40,000 19,000 2.20 100,000, 5,40,000 41,00,000 Less: Loss 410,000 7,300 Output 90,000 92,700 Material Mix Variance = (Revised SQ - AQ) x SP X = (50,000 - 53,000) «7 = & 21,000 (A) ¥ = (30,000 - 28,000) x5 = % 10,000 (F) Z = (20,000 - 19,000) x2 = % _2,000(F) MMV = % 9,000 (A) Material Yield Variance = (AY - SY) « St. output price &5,40,000 = (92,700 - 90,000) « —**40,000_ if ) * $0,000 gallons MYV = 2,700 x 6 = 16,200 (F). Problem 3.13 (Material and Labour Variances) From the particulars given below, compute: Material Price Variance, Material Usage Varian. Labour Rate Variance, Idle Time Variance and Labour Efficiency Variance with full working deta One tonne of materials input yields a standard output of 1,00,000 units. The standard prit of material is € 20 per kg. Number of employees engaged is 200. The standard wage rate P* employee per day is % 6. The standard daily output per employee is 100 units. The a‘¥!