1

Introduction
The word "Standard" means a "Yardstick" or "Bench Mark." The term "Standard Costs"
refers to Pre-determined costs.
Brown and Howard define Standard Cost as a Pre-determined Cost which determines
what each product or service should cost under given circumstances. This definition
states that standard costs represent planned cost of a product.
Standard Cost as defined by the Institute of Cost and Management Accountant, London
"is the Predetermined Cost based on technical estimate for materials, labour and overhead
for a selected period of time and for , a prescribed set of working conditions."
Standard costing
Standard Costing is a concept of accounting for determination of standard for each
element of costs .These predetermined costs are compared with actual costs to find out
the deviations known as "Variances." Identification and analysis of causes for such
variances and remedial measures should be taken in order to overcome the reasons for
Variances.
Chartered Institute of Management Accountants England defines Standard Costing as
"the Preparation and use of standard costs, their comparison with actual costs and the
analysis of variances to their causes and points of incidence."
From the above definition, the technique of Standard Costing may be summarized as
follows :
(1) Determination of appropriate standards for each element of cost.
(2)' Ascertainment of information about actuals and use of Standard Costs.
(3) Comparison of actual costs with Standard Costs, the differences known as Variances.
2

(4) Analysis of Variances to find out the causes of Variances.
(5) Reporting to the responsible authority for taking remedial measures.
Advantages of Standard Costing
The following are the important advantages of standard costing :
It guides the management to evaluate the production performance.
It helps the management in fixing standards.
Standard costing is useful in formulating production planning and price policies.
It guides as a measuring rod for determination of variances.
It facilitates eliminating inefficiencies by taking corrective measures.
It acts as an effective tool of cost control.
It helps the management in taking important decisions.
) It facilitates the principle of "Management by Exception."
Effective cost reporting system is possible.
Limitations of Standard Costing
Besides all the benefits derived from this system, it has a number of limitations which
are given below:
Standard costing is expensive and a small concern may not meet the cost.
Due to lack of technical aspects, it is difficult to establish standards.
Standard costing cannot be applied in the case of a- concern where non-
standardised products are produced.
Fixing of responsibility is'difficult. Responsibility cannot be fixed in the case of
uncontrollable variances.
3

Frequent revision is required while insufficient staff is incapable of operating this
system.
Adverse psychological effects and frequent technological changes will not be
suitable for standard costing system.



















4

Determination of Standard Costs
The following preliminary steps must be taken before determinatio.n of standard cost :
(1) Establishment of Cost Centres. :It is the first step required before setting of Star.dards.
According to CIMA. London Cost Centre is "a location. person or item of equipment for
which costs may be ascertained and used for the purpose of cost control." Cost centre is
necessary for the determination of standard costs for each product and comparison of
actual cost with the predetermined standards to ascertain the deviations to take corrective
measures.
(2) Classification and Codification of Accounts:
Classification of Accounts and Codification of different items of expenses and incomes
help quick ascertainment and analysis of cost information.
(3) Types of Standards to be Applied: Determination of the type of standard to be used is
one of the important steps before setting up of standard cost. The different types of
standards are given below :
(a) Ideal Standard
(b) Basic Standard
(c) Current Standard
(d) Expected Standard
(e) Normal Standard

(a) Ideal Standard: The term "Ideal Standard" refers to the standard which can I)e
attained under the most favourable conditions possible. In other words, ideal standard is
based on high degree of efficiency. It assumes that there is no wastage. no machine
5

breakdown. No power failure. ,no labour ideal time in the production process. In practice
it is difficult to attain this ideal standard.
(b) Basic Standard: This standard is otherwise known as Bogey Standard. Basic Standard
which is established for use is unaltered over a long period of time. In other words this
standard is fixed in relation to a base year and is not changed in response to changes in
material costs. labour costs and other expenses as the case may be. The application of this
standard has no practical importance from cost control and cost ascertainment point of
view.
(c) Current Standard: The term "Current Standard" refers to "a standard established for
use over a short period of time related to current conditions which reflects the
performance that should be attained during the period." These standards are more suitable
and realistic for control purposes.
(d) Expected Standard: Expected Standard may be defined as "the standard which may
be anticipated to be attained during a future specified budget period." These standards set
targets which can be achieved in a normal situation. As such it is more realistic than the
Ideal Standard.
(e) Normal Standard: This standard resents an average standard in past which, it is
anticipated,can be attained over a future period of time, preferably long enough to cover
one trade cycle. The usefulness of such standards is very limited for the purpose of cost
control.
(4) Organization for Standard Costing: The success of the standard costing system
depends upon the reliability of standards. Hence the responsibility for setting standard is
vested with the Standard Committee. It consists of
6

(a) Purchase Manager
(b) Production Manager
(c) Personnel Manager
(d) Time and Motion Study Engineers
(e) Marketing Manager and Cost Accountant
(5) Setting of Standard: The Standard Committee is responsible for setting standards for
each element of costs as given below :
I. Direct Material
II. Direct Labour
III. Overheads
(a) Fixed Overheads
(b) Variable Overhead











7

I. Standard for Direct Material Cost
The following are the standard involved in direct materials cost:
1) Material Quantity or Usage Standard.
2)Material Price Standard.
Material Usage Standard: Material Usage Standard is prepared on the basis of
material specifications and quality of materials required to manufacture a product.
While setting of standards proper allowance should be provided for normal losses
due to unavoidable occurrence of evaporation, breakage etc.
Material Price Standard: Material Price Standard is calculated by the Cost
Accountant and the Purchase Manager for each type of materials. When this type
of standard is used, it is essential to consider the important factors such as market
conditions, forecasting relating to the trends of prices, discounb etc.
II. Standard for Direct Labour Cost
The following standards are established:
(i) Fixation of Standard Labour Time
(ii) Fixation of Standard Rate
a)Fixation of Standard Labour Time: Labour Standard time is fixed and it depends upon
the nature of cost unit, nature of operations performed, Time and Motion Study etc.
While determining the standard time normal ideal time is allowed for fatigue and other
contingencies.

8

b) Fixation of Standard Rates: The standard rate fixed for each job will be determined on
the basis of methods of wage payment such as Time Wage System, Piece Wage System,
Differential Piece Rate System and Premium Plan etc.
III. Setting Standards for Overheads
The following problems are involved while setting standards for overheads:
Determination of standard overhead cost
Estimating the production level of activity to be measured in terms of common
base like machine hours, units of production and labour hours.
Setting of overhead standards is divided into fixed overhead. variable overhead and semi-
variable overhead. The determination of overhead rate may be calculated as follows :

Standard Overhead Rate :standard overhead for the budge t priod
Standard Production for the budget period


Standard Variable Overhead Rate : Standard overhead for the budget
Standard Production for the budget

Standard Hour: Usually production is expressed in terms of units, dozen. kgs, pound,
litres etc. When productions are of different types, all products cannot be expressed in
one unit. Under such circumstances, it is essential to have a common unit for all the
products. Time factor is common to all the operation. ICMA, London, defines a Standard
9

Time as a "hypothetical unit pre-established to represent the amount of work which
should be performed in one hour at standard performance."
Standard Cost Card: After fixing the Standards for direct material, direct labour and
overhead cost, they are recorded in a Standard Cost Card. This Standard cost is presented
for each unit cost of a product. The
total Standard Cost of manufacturing a product can be obtained by aggregating the
different Standard Cost Cards of different proceses. These Cost Cards are useful to the
firm in production planning and pricing policies.















10

VARIANCE ANALYSIS
Standard Costing guides as a measuring rod to the management for determination of
"Variances" in order to evaluate the production performance. The term "Variances" may
be defined as the difference between Standard Cost and actual cost for each element of
cost incurred during a particular period. The term "Variance Analysis" may be defined as
the process of analyzing variance by subdividing the total variance in such a way that
management can assign responsibility for off-Standard Performance. The variance may
be favourable variance or unfavourable variance. When the actual performance is better
than the Standard, it resents "Favourable Variance." Similarly, where actual performance
is below the standard it is called as "Unfavourable Variance."
Variance analysis helps to fix the responsibility so that management can ascertain -
(a) The amount of the variance
(b) The reasons for the difference between the actual performance and budgeted
performance
(c) The person responsible for poor performance
(d) Remedial actions to be taken
Types of Variances: Variances may be broadly classified into two categories
Cost Variance and
Sales Variance.


11

1) Cost variance ' :Total Cost Variance is the difference between Standards Cost for
the Actual Output and the Actual Total Cost incurred for manufacturing actual
output. The Total Cost Variance Comprises the following :
Direct Material Cost Variance (DMCV)
Direct Labour Cost Variance (DLCV)
Overhead Cost Variance (OCV)

















12

I. Direct Material Variances
Direct Material Variances are also termed as Material Cost Variances. The Material Cost
Variance is the difference between the Standard cost of materials for the Actual Output
and the Actual Cost of materials used for producing actual output. The Material Cost
Variance is calculated as:
Material Cost Variance = Standard Cost - Actual Cost
MCV = SC-AC

(or)
MCV = { Standard *Standard} - { Actual * Actual }
Quantity Price Quantity Price
= (SQ x SP) - (AQ x AP)

Note: If the actual costs is more than standard cost the variance will be unfavourable or
adverse variance and on tile other hand. if the actual cost is less than standard cost the
variance will be favourabie variance. The material cost variance is further classified into:
(I) Material Price Variance
(2) Material Usage Variance
(3) Material Mix Variance
(4) Material Yield Variance

(1) Material Price Variance (MPV) : Material Price Variance is that portion of the
Material Cost Variance which is due to the difference between the Standard Price
13

specified and the Actual Price paid for purchase of materials. Material Price Variance
may be calculated by
Material Price Variance =
MPV =Actual Quantity * (Standard Price Actual Price)
= Aq (Sp - Ap)

Note : If actual cost of materials used is more than the standard cost the variance is
adverse. it represents negative (-) symbol. And on the other hand. if the variance is
favourable it is to be represented by positive (+) symbol.

(2) Material Usage Variance (MUV): Material Usage Variance is that part of Material
Cost Variance which refers to the difference between the standard cost of standard
quantity of material for actual output and the Standard cost of the actual material used.
Material Usage Variance is calculated as follows:
Material Usage Variance =
Standard { Standard - Actual )
Price Quantity Quantity

SP (SQ - AQ)
Note: This Variance will be favourable when standard cost of actual material is more than
the Standard material cost for actual output, and Vice Versa.

14

(3) Material Mix Variance (MMV) : It is the portion of the material usage variance
which is due to the difference between the Standard and the actual composition of mix.
Material Mix Variance is calculated under two situations as follows :
(a) When actual weight of mix is equal to standard weight to mix
(b) When actual weight of mix is different from the standard mix .

(a) When Actual Weight and Standard Weight of Mix are equal :
(i) The formula is used to calculate the Variance:
Material Mix Variance
Standard (Standard Standard )
Price Quantity Quantity
Sp (Sq - Aq)
(ii) In case standard quantity is revised due to shortage of a particular category of
materials, the formula will be changed as follows :
Material Mix Variance
Standard (Revised Standard Actual)
Price Quantity Quantity
SP (RSQ - AQ)


(b) When Actual Weight and Standard Weight of Mix are different:
The formula used to calculate the Variance is :
Material Mix Variance=
15

{Total Weight Of Actual Mix * Standard Cost} - (Standard Cost Of )
{Total Weight Of Standard M Ix Of Revised Standard Mix } Actual Mix
(ii) In case the standard is revised due to the shortage of a particular category of
materials, the alternative formula will be as follows:
Material Mix Variance=
{Total Weight Of Actual Mix * Standard Cost Standard Mix} {Standard Cost Of
Actual Mix Total Weight Of Standard Mix

ii) In case the standard is revised due to the shortage of a particular category of materials,
the
alternative formula will be as follows:
material mix variance=
{Total Weight Of Actual Mix *Cost Of Revised Standard Mix}- {Standard Cost Of
Actual
Total Weight Of Standard Mix Mix}

(4) Materials Yield Variance (MYV): It is the portion of Material Usage Variance. This
variance arises due to spoilage, low quality of materials and defective production
planning etc. Materials Yield Variance may be defined as "the difference between the
Standard Yield Specified and the Actual Yield Obtained." This variance may be
calculated as under:
Material Yield Variance =
standard * {actual standard}
16

rate yeild yeild

Where:
Standard Rate is calculated as follows :
standard rate = standard cost of standard mix
net standard output
Verification :
The following equations may be used for verification of Material Cost Variances :
(1) Material Cost Variance
(2) Material Usage Variance
(3) Material Cost Variance
= Material Price Variance + Material Usage Variance
= Material Mix Variance - Material Yield Varianc
= Material Mix Variance + Material Yield Variance









17

Labour Variances
Labour Variances can be classified into:
(a) Labour Cost Variance (LCV)
(b) Labour Rate Variance or Wage Rate Variance
(c) Labour Efficiency Variance
(d) Labour Idle Time Variance
(e) Labour Mix Variance
(0 Labour Revised Efficiency Variance
(g) Labour Yield Variance

(a) Labour Cost Variance (LCV): Labour Cost Variance is the difference between the
Standard Cost of labour allowed for the actual output achieved and the actual wages
paid. It is also termed as Direct Wage Variance or Wage Variance. Labour Cost
Variance is calculated as follows:

Labour Cost Variance = Standard Cost Of Labour - Actual Cost Of Labour
( Or)
= {Standard X Standard Time } {ACTUAL RATE * ACTUAL TIME}
Rate For Actual Output

Note: If actual labour cost is more than the standard labour cost, the variance represents
negative and vice versa

18

(b) Labour Rate Variance: It is that part of labour cost variance which is due to the
difference between the standard rate specified and the actual rate paid. This variances
arise from the following reasons:
(a) Change in wage rate.
(b) Faulty recruitment.
(c) Payment of overtime.
(d) Employment of casual workers etc.
It is expressed as follows :

Labour Rate Variance = Actual Time( Standard Rate Actual Rate)
Note: If the Standard rate is higher than the actual rate, the variance will be favourable
and vice versa.

(c) Labour Efficiency Variance: Labour Efficiency Variance otherwise known as Labour
Time Variance. It is that portion of the Labour Cost Variance which arises due to the
difference between standard labour hours specified and the actual labour hours spent. The
usual reasons for this variance are (a) poor supervision (b) poor working condition (c)
increase in labour turnover (d) defective materials. It may be
calculated as following:

Note: If actual time taken is more than the specified standard time, the variance
represents unfavourable and vice versa.

19

(d) Labour Idle Time Variance: Labour Idle Time Variance arises due to abnormal
situations like strikes, lockout, breakdown of machinery etc. In other words, idle time
occurs due to the difference between the time for which workers are paid and that which
they actually expend upon production. It is calculated as follows :
Idle Time Variance = Idle Hours X Standard Rate

(e) Labour Mix Variance: It is otherwise known as Gang Composition Variance. This
variance arises due to the differences between the actual gang composition than the
standard gang composition. Labour Mix Variance is calculated in the same way of
Materials Mix Variance. This variance is calculated in two ways:
(i) When Standard Labour Mix is equal to Actual Labour Mix.
(ii) When Standard Labour mix is different from Actual Labour Mix.


(i) When Standard and actual times of the labour mix are same The formula for its
computation may be as follows :
Labour Mix Variance
= { Standard Cost Of - Standard Cost Of}
Standard Labour Mix Actual Labour Mix

(ii) When Standard and actual times of the labour mix are different : Changes in the
composition of a gang may arise due to shortage of a particular grade of labour. It may
becalculated as follows :
20

Labour Mix Variance
{Revised Standard Time Actual Time )*{ Standard Rate}
Where,
Revised Standard Time: Total Actual Time * Actual Time
Total Standard Time
f)Labour Yield Variance: 'This variance is calculated in the same way as Material Yield
Variance. Labour Yield Variance arises due to the variation in labour cost on account of
increase or decrease in yield or output as compared to relative standard. The formula for
this purpose is as follows:

Labour Yield Variance = Standard Labour *( Standard Output- Actual Output)
Cost Per Unit Of Output For Actual Time
Note: If actual output is more than Standard output for actual time, the variance is
favourable and vice versa.
Verification: Labour Cost Variance = Labour Rate Variance + Labour Efficiency
Variance







21

III. Overhead Variances
Overhead may be defined as the aggregate of indirect material cost, indirect labour cost
and indirect expenses. Overhead Variances may arise due to the difference between
standard cost of overhead for actual production and the actual overhead cost incurred.
The Overhead Cost Variance may be calculated as follows:
Overhead Cost Variance
{Standard Overhead Actual Overhead} * Actual Output
Rate Per Unit Cost
Or
{Standard Hours For * Standard Overhead}- Actual Overhead Cost
Actual Output Rate Per Hr

Essentials of Certain Terms : For the purpose of measuring various Overhead Variances
it is essential to know certain technical terms related to overheads are given below


a
c) Standard Output for Actual Time= Budgeted Output* actual hrs

Budgeted Hours
d) Standard Hours for Actual Output = Budgeted Hours * actual output
Budgeted Output
When Output is measured in Standard Hours :
22

e)Recorded Overheads = Standard Rate Per Hr * Standard Hrs For Actual Output
When Output Is Measured In Units :
Absorbed Overheads =Standard Rate Per Unit *Budgeted Output In Units
f)Budgeted Overheads= Standard Rate Per Unit* Budgeted Output In Units
g)Actual Overheads= Actual Rate Per Unit*Actual Output In Unit
Note: The tenn Budgeted Overheads and Standard Overheads are not used in the same
sense. It is assumed that the Tenn Budgeted and Standard are used interchangeably. In
other words, Budgeted Overheads are used for budgeted time or budgeted output and
standard overheads are used for actual time or budgeted output in actual time.














23

Classification of Overhead Variance
Overhead Variances can be classified as :
I. Variable Overhead Variances:
(1) Variable Overhead Cost Variance
(2) Variable Overhead Expenditure Variance
(3) Variable Overhead Efficiency Variance
II. Fixed Overhead Variance:
(a) Fixed Overhead Cost Variance
(b) Fixed Overhead Expenditure Variance
(c) Fixed Overhead Volume Variance
(d) Fixed Overhead Capacity Variance
(e) Fixed Overhead Efficiency Variance
f)Fixed Overhead Calendar Variance

Variable Overhead Variance
(1) Variable Overhead Cost Variance: This is the difference between standard variable
overhead for actual production and the actual variable overhead incurred. The formula is
as follows:
Variable Overhead Cost Variance =(Standard Variable } {Actual Variable Overheads}
For Actual Output

2)Variable Overhead Expenditure Variance: It is the difference between standard variable
24

overheads allowed for actual hours worked and the actual variable overhead incurred.
This variable may be calculated as follows :
Variable Overhead Expenditur Varience:
{Standard Variable Overheads- Actual Variable Overheads}
(3) Variable Overhead Efficiency Variance: This variance arises due to the difference
between variable overhead recovered from actual output produced and the standard
variable overhead for actual hours worked. The formula is a follows:
Standard Rate Per Hr*{Standard Hrs For Actual Production- Actual Hrs)

Variable Overhead Cost Variance =Variable Overhead Expenditure Variance + Variable
Efficiency Variance

II. Fixed Overhead Variance
(a) Fixed Overhead Cost Variance: It is that portion of overhead cost variance which is
due to over absorption or under absorption of overhead for the actual production. In other
words, the variance is the difference between the standard fixed overheads allowed for
the actual production and the actual fixed overheads incurred. The variance can be
calculated as follows:
(Actual Fixed Overhead) - (Standard Fixed Overhead For Actual Production)

b)Fixed Overhead Expenditure Variance: This is otherwise tenned as "Budget Variance."
It is
25

the difference between the budgeted fixed overheads and the actual fixed overheads
incurred during the particular period. The formula for calculation of this Variance is:
(Budgeted Fixed Overheads) ( Actual Fixed Overheads)
(c) Fixed Overhead Volume Variance: This Variance is the difference between the
budgeted fixed overheads and the standard fixed overheads recovered on the actual
production. The formula is as follows:
(Budgeted Fixed Overheads) ( Standard Fixed Overheads On Actual Production)
d) Fixed Overhead Capacity Variance: This is that portion of volume variance which is
due to
working at higher or lower capacity than the budgeted capacity. In other words, fixed
overhead capacity variance arising due to a particular cause, i.e., unexpected holidays,
breakdown of machinery, strikes, power failure etc. This is calculated as follows :
(Standard Fixed Overheads) ( Budgeted Fixed Overheads)
(e) Fixed Overhead Efficiency Variance: It is that portion of the Volume Variance which
shows the lower or higher output arising from the efficiency or inefficiency of the
workers. This is an outcome of the performance of the workers and is calculated as :
Standard Fixed Overhead Rate Per Hr* {Standard Quantity Actual Quantity)
Combined Overhead Variances
Analysis of overhead variance can be calculated by combined overhead variances
methods. It may be:
(a) Two Variance Method and
(b) Three Variance Method
26

(a) Two Variance Method: If the Overhead Variances are analysed on the basis of both
expenditure and volume is called as "Two Variance Analysis





















27

Sales Variances
The Variances so far analysised are related to the cost of goods sold. Quantum of profit is
derived fromthe difference between the cost and sales revenue. Cost Variances influence
the amount of profit favourably or adversely depending upon the cost from materials,
labour and overheads. In addition, it is essential to analyse the difference between actual
sales and the targeted sales because this difference will have a direct impact on the profit
and sales. Therefore the analsysis of sales variances is important to study profit variances.
Sales Variances can be calculated by Two methods:
I. Sales Value Method.
II. Sales Margin or Profit Method.
I. Sales Value Method
The method of computing sales variance is used to denote variances arising due to change
in sales price, sales volume or the sales value. The sales variances may be calssified as
follows :
(a) Sales Value Variance
(b) Sales Price Variance
(c) Sales Volume Variance
(d) Sales Mix Variance
(e) Sales Quantity Variance
a) Sales Value Variance: This Variance refers to the difference between budgeted sales
and actual sales. It may be calculated as follows :
Sales Value Variance = Actual Value of Sales - Budgeted Value of Sales
28

Note: If the actual sales is more than the budgeted sales, the variance will be favourable
and vice
versa.
(b) Sales Price Variance: This is the portion of Sales Value Variance which is due to the
difference between standard price of actual quantity and actual price of the actual
quantity of sales. The formula is :
Sales Price Variance = Actual Quantity x (Standard Price - Actual Price)
Note : If the actual price is more than standard price the variance is favourable and vice
versa
(c) Sales Volume Variance: It is that part of Sales Value Variance which is due to the
difference
between the actual quantity or volume of sales and budgeted quantity or volume of sales.
The variance is calculated as :
{ Actual Quantity Of Sales- Budgeted Quantity Sales} * Standard Price
Note: If the actual quantity sold is more than the budgeted quantity or volume of sales,
the variance is favourable and vice versa.
(d) Sales Mix Variance: It is that portion of Sales Volume Variance which is due to the
difference between the standard proportion of sales and the actual composition or mix of
quantities sold. In other words it is the difference of standard value of revised mix and
standard value of actual mix: It is calculated as
( Sale value of actual mix )(standard value of revised standard mix)


29

(e) Sales Quantity Variance: It is a sub variance of Sales Volume Variance. This is the
difference
between the revised standard quantity of sales and budgeted sales quantity. The formula
for the calculation of this variance is :
(Revised Standard Sales Quantity -Budgeted Sales Quantity)* Standard Selling Price
II. Sales Margin or Profit Method
Under this method of variance analysis, variances may be computed to show the effect on
profit. The sales variance according to this method can be classified as follows :
(1) Sales Margin Value Variance
(2) Sales Margin Volume or Quantity Variance
(3) Sales Margin Price Variance
(4) Sales Margin Mix Variance

(1) Sales Margin Value Variance: This is the difference between the actual value of
sales margin
and budgeted value of sales margin. It is calculated as follows :
Sales Margin Value Variance = Budgeted Profit - Actual Profit
Note: If the actual profit is more than budgeted profit the variance is favourable and vice
versa.

(2) Sales Margin Volume Variance: It is that portion of Total Sales Margin Variance
which is due to the difference between budgeted and actual quantity sold. The formula is
as follows :
30

{Standard Quantity Actual Quantity}* Standard Profit
Note: If the actual quantity is more than standard quantity. the variance is favourable and
vice versa.

(3) Sales Margin Price Variance: This variance is the difference between the standard
price of the quantity of the sales effected and the actual price of those sales. It is
calculated as follows :
Sales Margin Price Variance = Standard Profit - Actual Profit
Note: If the actual profit is greater than the standard profit. the variance is favourable and
vice versa.

(4) Sales Margin Mix Variance: This is that portion of the Sales Margin Volume or
Quantity
Variance which is due to the difference between the actual and budgeted quantities of
each product of which the sales mixture is composed valuing the difference of quantities
at standard margin. Thus, this variance arises only where more than one product is sold.
It is calculated as follows:
{Revised Standard Quantity-Actual Quantity)* Standard Profit Per Unit
Note: If the actual quantity is greater than the revised standard quantity, the variance is
favourable and vice versa



31

CONCLUSION
This document has illustrated how the use of standard costs enables a firm to perform
detailed variance analysis to help explain differences between actual profits and
budgeted profits. Variances are best thought of as symptoms of problems;investigation
is required to identify the causes of these problems. Thus Standard costing is a control
system that enables any variances from standard cost or budget to be analysed in some
detail. This allows for more effective cost control. standard cost variances often do not
appear as part of profit and loss information. Over half of companies using standard
costing based their reports on actual costs. Some companies added back variances, while
others updated material standards so that they approximated actual costs. Despite not
appearing in the account, most of the standard cost companies calculated some material
and labour variances for control purposes. Overhead variances were much less well used
and reported, and only one company sub-divided both variable and fixed overheads. The
conclusion from the report was that although most manufacturing companies do use
standard costing, they tend to be very selective in their use o\f variance analysis,
especially overhead variances. The use of fixed overheads was particularly scarce.
The analysis of variances facilitates action through management by exception. Here
managers concentrate on business areas that are performing below or above expectations.
Managers can largely ignore those that appear to be conforming to expectation.
The setting of standards and revision and monitoring encourages reappraisal of methods,
materials and techniques. This leads to cost reductions and process improvement.
A properly developed and understood standard costing system with full participation and
involvement creates a positive attitude towards cost control throughout the organisation.
32

Modern technology and reporting software has allowed for variance analysis to be
undertaken automatically without the need for complex manual calculations. Microsoft
Excel Work Essentials is a commonly used tool to undertake variance analysis.




















33

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