Managerial accounting standard costing

	Chapter 2
	Standard costing
	Variance = Standard - Actual
	Favourable= better for company
	Adverse= Not good for company
	Formulae
1	Material Price Variance = (standard price - actual price )x Actual qty of material
2	Material usage Variance = ( Std Qty-Act Qty) x Std Price
3	Material Cost Variance=(Std Qty x Std Price- Act Qty x Actual Price)
	Labour Variances
4	Labour rate Variance=( standard rate-actual rate) x actual hrs
5	Labour efficiency Variance=(std hrs - actual hrs) x std rate
6	Labour cost variance( Std rate x std hrs - act rate x actual hr).
10/6/2012
Example 1	To produce 10 units of product A 4 kg material @ Rs 20 per kg is required
	Company produce 500 units consuming 220 kg materail  amounting to Rs. 4000
		unit	material in KG	price per kg
	Standard	10	4	20
	Standard for actual units		200
	Actual	500	220	18.18
	Material price variance Rs	400	Favourable because we saved this money
	Materail usage varianace	-400	(A) Adverse Un favourable for company
	Material cost variance	0.000
Inference	Due to good negotiation , bulk purchase etc we are saving on price per kg
	But due to wastage or inferior raw materail the consumpsion of material incresed.
	To run profitable business we need to keep the actual price and reduce on the material consumption
Example 2
	To produce 100 units 5hrs are required @ 25 per hour
	company has produced 7000 units by spending 3250 hrs amounting Rs. 85000
	Calculate labour variances
		unit	Time in Hrs	price per hrs
	Standard	100	5	25
	Standard for actual units		350
	Actual	7000	3250	26.15
	Labor rate Variance=( standard rate-actual rate) x actual hrs	-3750	A
	Labor efficiency Variance=(std hrs - actual hrs) x std rate	-72500	A
	Labor cost variance=( Std rate x std hrs - act rate x actual hr).	-76250	A
	Since the time for production is over 10 times than the std all are adverse.
Example 3	Std production 20 units , material A 5Kg @ Rs 30 per kg material B 3 kg @ Rs 50 per kg
	Actual production 2000 units material A 550kg amounting to Rs 15000 & material B 200 kg amounting to Rs 10000
		unit	material in KG	price per kg
	Standard A	20	5	30
	standard B	20	3	50
	standard for Actual A		500
	standard for Actual B		300
	Actual A	2000	550	27.27
	Actual B	2000	200	50
	Material Price Variance A	1500	F
	Material Price Variance B	0	NV
	Material Price Variance A+B	1500	F
	We need to continue to keep the Actual price for A and improve on B
	Materail usage varianace A	-1500	A
	Materail usage varianace B	5000	F
	Material Usage variance A+B	3500	F
	The production efficiency of B is good and improve on A
	Material Cost Variance  A	0
	Material Cost Variance  B	5000	F
	Total Cost variance A+B	5000	F
Example 4	Standard Production 100 units skilled labor 300hrs @ 250 / hrs , unskilled labor 500 hrs @ 175 /hr
	Actuals production 50000 units skilled labor 125000hrs amounting to 30000000 unskilled labors 200000 hrs amounting to 35000000
	S--> Skilled / US --> Unskilled
		unit	Time in hrs	wages per hr
	Standard S	100	300	250
	standard US	100	500	175
	standard for Actual S		150000
	standard for Actual US		250000
	Actual S	50000	125000	240
	Actual US	50000	200000	175
	Labor Rate Variance S	1250000	F
	Labor Rate Variance US	0	F
	Total Labor rate Variance	1250000	F
	Labor efficiency variance S	6250000	F
	Labor efficiency variance US	8750000	F
	Total Labor efficiency variance	15000000	F
	Labor Cost Variance  S	7500000	F
	Labor Cost Variance  US	8750000	F
	Total Cost variance	16250000	F
	Labor rate Variance=( standard rate-actual rate) x actual hrs
	Labor efficiency Variance=(std hrs - actual hrs) x std rate
	Labor cost variance( Std rate x std hrs - act rate x actual hr).