,

15

Standard Costing and Variance Analysis

Any organization, manufacturing or servicing, should aim at controlling costs. They should aim at reducing cost when resources are scarce. Even selling prices are fixed after taking into consideration the cost factors and the existing market conditions. The main thrust is on cost consciousness. As cost is generally predetermined, the management should be vigilant and exercise its authority to maintain it at an optimum level. Management control can be possible only if certain norms or standards exist against which the actual performance may be measured. For this, standard-costing techniques are widely used. Its main aim is to identify, locate, analyse and take corrective action if activities do not attain the norms fixed in advance. Without setting standards or in the absence of pre-fixed norms, any organization would be groping in the dark. It may be compared to a ship navigating in the sea without a compass. The importance of setting standards and installation of a standard-costing system has been recognized nowadays. Hence, the study of standard costing and variance analysis and their implication for management is inevitable, which is the aim of this chapter.

15.1 MEANING AND DEFINITION OF STANDARD, STANDARD COST AND STANDARD COSTING

Standard: Standard means ‘norm’. It is a predetermined estimate of quantities. A standard may be defined as, “a pre-determined measurable quantity set in defined conditions against which actual performance may be compared, usually for an element of work, operation or activity”. While standards may be based on unquestioned and immutable natural law or fact, they are finally set by human judgement and consequently are subject to the same fallibility which attends all human activity. Thus, a standard for a 100% machine output can be fixed by its geared input/output speeds, but the effective realizable output standard is one of judgement. “Standard is a thing serving as a basis for comparison”. It is a relative term.

Standard cost: Standard costs are predetermined costs of a product under present or anticipated future conditions. The very term “standard cost” explicitly consists of two terms “standard” and “cost”.

Standard, as already explained, means norm or benchmark and is a planned and pre-determined estimates in respect of quantities and qualities. The term “cost” means the expression of the standard so determined in monetary values. Standard cost may be defined as, “a standard expressed in money. It is built up from an assessment of the value of cost elements. Its main uses are providing bases for performance measurement, control by exception reporting, valuing stock and establishing selling prices”. Standard costs are scientifically pre-determined costs.

Standard costing: The terminology of CIMA defines standard costing as “A technique which uses standards for costs and revenues for the purpose of control through variance analysis”. Standard costing

1. is a system of cost accounting—i.e., a technique of accounting.
2. determines in advance the standard costs with respect to each element of cost—(material, labour and overhead) for each line of product manufactured or service rendered.
3. compares the actual performances and costs with predetermined standard costs and computes the difference known as variance.
4. analyses the variances and attributes or the causes for such variances of actual from standards.
5. communicates or reports to the appropriate level of management (responsibility centres) in time for appropriate corrective action to be taken.

15.2 FEATURES OF A STANDARD COSTING SYSTEM

1. Flow of Information: Cost information flows in a straight forward manner in a standard-costing system. From the stage of acquiring of raw materials till the stage of final production (finished goods), each activity is properly accounted for and variances are analysed systematically and even such variances are written off against the cost of sales account. Cost information flows smoothly and perfectly under standard-costing system.
2. Role of actual costs: Actual costs have no role to play in a standard-costing system. Actual costs are not at all to be taken into account. In this system, no actual product costs are generated. The main thrust, in this system, is on the number of products manufactured.
3. Performance measurement: A standard-costing system collects, analyses and reports the performance by responsibility centres. It acts as an apt basis for measuring the actual performance. It is a suitable criterion of performance measurement.
4. Suitable for repetitive nature of firms: The standard costing system is suitable for firms which produce identical goods in large numbers. In such manufacturing concerns activities are standardized and repetitive in nature.

15.3 STANDARD COSTING AND BUDGETARY CONTROL

The two systems budgetary control and standard costing are said to be inter-related. Both systems have the common objectives of controlling the business activities. Both techniques are based on the presumption that cost is controllable. In both the systems, data are analysed and reported to the management. Both function in unison. The two systems are said to be inter-related buy they are not inter-dependent. The budgetary control system can be operated without installing the system of standard costing. On the contrary, the standard-costing system cannot function without a budgetary control system. The differences between these two systems are shown in a tabular format as follows:

Distinction between budgetary control and standard costing:

Basis of Distinction	Budgetary Control	Standard Costing
1. Coverage	It is concerned with the entire activities of the business as a whole. So, it is extensive.	It is concerned with the control of expenses. So, it is intensive.
2. Scope	Budgets are prepared for all the departments in an organization	Standards are established in respect of manufacturing activities (production or process).
3. Basis	Budgets are based on the past actual, adjusted to the future trends.	Standard costs are based on the technical assessments.
4. Projection of accounts	Budget is a projection of financial accounts.	Standard cost is the projection of cost accounts.
5. Units of expression	Budgets are expressed in monetary terms.	Standards are expressed are expressed both in terms of money as well as quantity.
6. Period covered	Budgets are prepared for a specified period.	Standards are set for an indefinite period.
7. Dependence	Budgetary control can be operated without the help of standard costing.	Standard costing depends upon budgets to set standards.
8. Targets	Budgets set up maximum limits of expenses beyond which actual expenses should not exceed.	Standards set up targets to be attained by the actual performance.
9. Aim	It aims at formulation of policy, optimal utilization or resources, control and coordination of activities.	Its purpose is to determine the efficiency of cost performance, fix selling price, value inventory and decision making.
10. Variance analysis	In budgetary control, variances are not analysed in detail. It does not reveal variances through different accounts, separately. but reveals in total.	In standard costing, variances are analysed in detail. It reveals variances through different accounts separately.

15.4 STANDARD COSTS AND ESTIMATED COSTS

Both standard costs and estimated costs are pre-determined, that is, they are determined before the process of production commences. But they differ in certain aspects. The important points of difference between the two are described as follows:

Differences between standard cost and estimated cost:

Basis of Difference	Standard Cost	Estimated Cost
1. Applicability	Standard cost can be applied in a business operating under standard costing system.	Estimated cost is used in any business even in historical costing system.
2. Objective	Standards are established for the purpose of controlling future performances.	Estimates are prepared mainly for price-fixing purpose.
3. Basis of preparation	They are determined on a scientific basis.	They are prepared on the basis of past performance or personal opinion.
4. Usage	They are used as a regular system of accounts from which variances are ascertained.	The use of estimated costs is a statistical data only.
5. Coverage	They are to be set with respect to each element of cost. It covers the entire activities of business.	They can be determined for a particular activity or a purpose, individually.

15.5 ADVANTAGES OF STANDARD COSTING

Following are the advantages of standard costing:

1. Cost control: A well-structured standard-costing system would show variance from standard by causes and responsibility centre. This provides management with needed cost-control information. This is an effective tool for the management to exercise cost control and initiate corrective measures, if any adverse variance occurs.
2. Easy identification of sources of wastage and loss: A proper functioning standard-costing system would enable the firm to identify and locate sources of wastages and losses.
3. Cost consciousness: Standard costing creates a sense of cost consciousness among the workers. They are rewarded and encouraged by way of incentives for any efficiency shown in their work.
4. Revenue decisions and diagnosis: All revenue decisions and diagnostic analyses involve predicting the future. Standard costs play a vital role here. A good standard-costing system will predict a better indication of future costs than the historical costs.
5. Enhances the morale of employees: Every worker in an organization will think and act in terms of setting the targets and achieving them. This enhances the morale of the workers.
6. Management by exception: The principle “management by exception” enables the management to pay attention to only those factors which have meant efficiency or inefficiency that requires an immediate action. Thus, the management’s own time can be saved to a great extent.
7. Delegation of authority with responsibility: Creation of responsibility centres and making the concerned personnel accountable is one of the advantages of standard-costing system.
8. Inventory valuation: Standard costs serve as a proper basis for inventory valuation. Using historical costs for valuation of inventory will distort the figure of profit if all the finished goods are not sold. But with a standard-costing system, efficiency variances can be written off in the period in which they are incurred. Above all, an inventory can be valued in the absence of actual rates.
9. Enhances efficiency of operations: Periodical managerial review of costs reveal inefficiency. By correcting such inefficiencies, wastages and losses are eliminated and, thereby, enhances efficiency of operations of the firm. All the resources can be used effectively by this.
10. Simplified procedure: This system results in reduction of paper work, as less number of records are maintained. This leads to saving in clerical time and expenses.
11. Integration of accounts: This system facilitates the integration of accounts. Hence, the need does not arise to reconcile the cost accounts and financial accounts.
12. Performance measurement: As already mentioned, a standard-costing system collects, analyses and reports performance to the appropriate level of authority through responsibility centres. It serves as a constant unit for measuring the actual performance.

15.6 LIMITATIONS OF STANDARD COSTING

1. Not an easy practice: Establishment of standard costs is not an easy practice. The installation and operation of a standard-costing system is difficult in practice.
2. Time consuming and costly: This system requires elaborate procedure and records. Standards established often become rigid. In changing manufacturing and marketing conditions, standards need to be revised frequently. This involves time and cost.
3. Not suitable for non-repetitive activities: This system is suitable for mass and uniform production of a repetitive nature. It is not suitable for types of industries where production is not uniform and non-repetitive activities.
4. Post-mortem activity: Variances are determined and analysed only after an activity is completed. Only past events have been analysed. It is like a post-mortem exercise. Only it may aid future managerial decisions as past could not be rectified.
5. Lack of proper control: Variance analysis with respect to administration, selling and distribution overheads relating to each product cannot be analysed perfectly. As it is difficult to understand the causes of variance, it would be difficult in such cases to exercise adequate control.
6. Unreliable standards: Inaccurate and out-of-date standards may create adverse results. Standards established are not reliable at times.
7. Adverse psychological effects: Standards are usually set at a high level. Non-achievement of targets may cause resentment among the workers. In addition, it will create adverse psychological effects on them.
8. Segregation of variances: In practice, segregation of variances into controllable and uncontrollable becomes difficult. It will result in inaccurate results.
9. Not suitable to certain industries: This system may not be suitable for industries dealing with non-standardized heterogeneous products and where production is a prolonged process spreading to more than one accounting period.

15.7 PRE-REQUISITES FOR INSTALLATION OF STANDARD-COSTING SYSTEM

Certain pre-requisites that are essential for installation of standard costing system are explained as follows:

1. Acceptance by all: The system should be acceptable to all in the firm, that is, the workers as well as the management. The workers should be motivated in such a way that they should not resist the installation of standard-costing system. They should be educated in a proper way by explaining its advantages to workers. Top-level personnel too should be made to realize the importance of such system.
2. Efficient staff: This system requires qualified and trained staff for fixing the standards, measuring the performance, analyzing the variances and reporting to the management.
3. Efficient accounting system: An efficient accounting system is an important and an inevitable requisite for operation of this system. Usage of proper coding system and establishment of cost centres are also essential for a successful functioning of the system. Accounting information also should be proper.
4. Setting of standards: This is another important pre-requisite for installation of this system. The responsibility of setting standards may be vested with a committee comprising all department heads and cost accountant. Fixing of standards should not be at a high level. It should be achieved by an average worker without much difficulty. They should be fixed judiciously.
5. Size: This system can be installed in firms which are of a reasonable size. This cannot be introduced in small concerns. It is suitable for industries producing uniform products of repetitive nature in large numbers. It should not be tried to install in other types of industries or jobs.
6. Delegation of authority and responsibility: This system can be successfully operated if there is proper delegation of authority and responsibility at different responsibility centres. Organization chart should be well-structured with a clear demarcation of authority. Hierarchical level should be depicted without any ambiguity.
7. Budgetary control system: Standard-costing system cannot be operated without a budgetary control system. Budgets fix targets for the period. Standard costs try to achieve them. Hence, budgets are of much importance for a successful functioning of the standard-costing system.

15.8 TYPES OF STANDARDS

Before setting standards, we have to understand the different types of standards at different levels. They are explained as follows:

1. Basic standard: The terminology of CIMA defines basic standard as, “a standard established for use over a long period from which a current standard can be developed”. Basic standards are not changed frequently unless the physical features of the process change. These standards are to be kept unchanged till the quality requirements remain constant. The standard cost is not changed as prices and labour rates change. The main purpose of maintaining the standard as its original figure is to compute variances which reflect trends. Generally, these standards are not used. However, if forward business is carried on, the basic standards need to be adjusted for changes in their business period.
2. Ideal standard: The terminology of CIMA defines ideal standard as “a standard which can be attained under most favourable conditions”. No provision is made, for example, for shrinkage, spoilage, or machine breakdowns. Users believe that the resulting unfavourable variances will remind the management of the need for improvement in all phases of operations. Ideal standards are not widely used in practice because they may influence employees’ motivation adversely. Ideal standards have no practical utility. As this will often result in large adverse variances, it will affect productivity, employees and even the enterprise as a whole. Hence, these standards are also not of much use in practice.
3. Attainable standard: This is also known as the expected standard. It is defined as, “a standard which can be attained if a standard unit of work is carried out efficiently, a machine is operated properly or a material is properly used”. Allowances are made for normal shrinkage, waste and machine breakdowns. The standard represents future performance and objectives which are reasonably attainable. Besides having a desirable motivational impact on employees, attainable standards serve other purposes, for example, cash budgeting, inventory valuation and budgeting departmental performance.
   

   This standard reveals “cost that ought to be” under normal conditions. These standards are realistic. It is suitable for evaluation of performance. It has a positive impact on employee motivation. This is used widely.

4. Normal standard: Normal standard has been defined as “the average standard which it is anticipated can be attained over a future period of time, preferably, long enough to cover one trade cycle”. Standards remain static for a long period—it may be even a decade. During the period of one wave cycle so many changes will occur. If no adjustments can be made accordingly, these standards would loose reality. Hence, these standards are not in use.
5. Current standard: A current standard is a standard for a certain period, for certain circumstances. These standards are fixed after taking into account the current factors that affect standards. It is realistic. These standards highlight the causes for variances that can be avoided. This, in turn, leads to effective control and corrective action to be undertaken by the management. In practice, these standards are widely used as it reflects the anticipated conditions that affect the manufacturing process.
6. Setting standard costs: The success of standard-costing system depends upon the standards. Hence, they should be fixed with great care. Standard is the foundation stone upon which the entire edifice—the standard–costing system functions. Standards have to be predetermined in respect of each element of cost, material, labour and overhead. The fixation of standards is done by an expert committee consisting of materials manager, production manager, design manager, industrial engineer, customer-service manager and the cost accountant.

A detailed study of the functions is essential for the manufacture of the product. The factors that should be considered for establishing production cost standards are:

1. Quantities.
2. Grades.
3. Technical and operational aspects of the firm.
4. Industrial engineering criteria for materials, labour, etc.
5. The type of standard.
6. Detailed classification of accounts to compute the variances.
7. Establishing proper responsibility centres.

A number of techniques are available for setting standards. They are: historical and statistical approaches, comparative and subjective approaches, and theoretical or engineered approaches. The choice of technique depends on various factors to be construed judiciously.

15.9 KINDS OF STANDARDS

15.9.1 Direct Material Cost Standards

The cost of materials constitute two ingredients: quantity and price.

The setting of these related standards are explained as follows:

1. Materials standard: This is also called physical standard or material–usage standard. The aim to set this standard is to achieve maximum economies in material usage. Size and quality of materials should be specified. Then, material requirements have to be analysed. A list is prepared by the committee consisting the details of materials such as size, grade, quantity, price, and so on, to fix the standard. Engineering and technical specifications of this forms the basis for setting standards for material usage. This is known as “standard materials specification”. Before they are finalized, test runs are conducted. Provision for normal wastage has to be made.
2. Material price: Standard purchase price of materials form the basis to fix standards. The purchase department plays a key role. Hence, the purchase department should take into account the following factors while purchasing the materials:
   1. Quantity discount.
   2. Bulk-purchase considerations.
   3. Freight.
   4. Insurance.
   5. Container charges.
   6. Taxes, duty, etc.
   7. Market trend.
   8. Current prices.
   9. Store-keeping functions.
   10. Anticipated price-level changes and market conditions. The prime purpose of setting material price standard is to attain the maximum efficiency in these functions.

15.9.2 Direct Wages Standards

Standard costs for direct labour constitute two related factors: (1) standard time and (2) standard rates.

1. Standard labour time: A study of past procedures and the preparation of process charts and standard operation lists are done. Time spent on each operation per unit of product is determined by time and motion study. The industrial engineering department conducts time and motion study in respect of each operation. The time taken by the most efficient worker and by the most of the workers is taken into consideration. Due allowance should be made for fatigue, idle time, wasted motion, and so on
2. Labour-rate standard: Here, the personnel department plays a key role. While fixing standard hourly wage rate, the following factors should be taken into account:
   1. Labour conditions in the concern.
   2. Future trend of wages that are anticipated.
   3. Wage agreement between labour union and the management.
   4. Guaranteed minimum wages.
   5. Overtime wages (overtime premium).
   6. Bonus plans.

15.9.3 Production Overhead Standards

Following are the steps involved in establishing standards for production overheads:

1. Estimating the level of activities of production department and service departments.
2. Estimation for components of overhead.
3. Classification of overheads into fixed, variable and semi–variable overheads. Estimation of costs expected to incur under each head for each of the production, and service departments should be prepared for a specified period, which are to be depicted in cost budgets.
4. The standard overhead rate for each of the service departments are determined and re-allocated to the production departments
5. However, where the factory is not departmentalized, a single overhead rate for the entire plant may be used and the rates may be arrived as by using the following formula:

Standard rate per

Machine hour

(or)

If it is departmentalized, the formula is:

NOTE:   Instead of machine hour, any other base, that is, labour or wages may be used.

For instance,

For direct wages, the percentage of direct wages may be determined as follows:

It should be noted that separate standard overhead costs are calculated for variable overhead and fixed overhead.

15.10 CONCEPT OF STANDARD HOUR: VARIANCE RATIOS

15.10.1 Standard Hour

Standard hour is a convenient measure of production. It is the expression of output or amount of work in terms of standard time instead of units. Standard hour may be defined as, “The quantity of work achievable at standard performance expressed in terms of a standard unit of work in a standard period of time”. Irrespective of the type of product or their unit of measurement (e.g., kg, units, litres, metre), the standard hour is capable of measuring them. The underlying concept of standard hour is that dissimilar units can be expressed in a single measure.

Illustration 15.1

The standard time allowed for the manufacture of product X is 15 minutes per unit. During the month that ended in June, it is found that the actual production is 1,600 units.

You are required to calculate the standard hours for the output achieved.

Solution

 

Standard time per unit	=	15 minutes.
∴ Standard time for 1,600 units	=	15 minutes × 1,600.
Standard hours	=
	=	400 hours.

15.10.2 Activity Ratio

The activity ratio measures the level of activity of a concern. It is the number of standard hours equivalent to the work produced that is expressed as a percentage of budgeted hours. This may be calculated by using the following formula:

Where the actual production in terms of std. hrs = Actual production × std. hrs.

Illustration 15.2

A company manufactures two products P and Q. The standard time to manufacture product ‘P’ is 1 hour and product ‘Q’ is 5 hours. The budgeted and actual production in November were as follows:

Items	Budgeted Production	Actual Production
P	100 units	80 units
Q	40 units	22 units

Actual total hours worked was 420

You are required to calculate the activity ratio.

Solution

1. Write the formula
   

   or

   
2. Substituting the given values in the formula, we get:
   

15.10.3 Efficiency Ratio

Efficiency ratio is the number of standard hours equivalent to the work produced, which is expressed as a percentage of actual hours. This is computed by using the formula as follows:

where the actual production in terms of std hrs = Actual production × std. hrs.

Illustration 15.3

Same figures as given in illustration 15.2

You are required to compute the Efficiency ratio.

Solution

1. Write the formula:
   

   Or

   

   Substituting the values in the formula, we get:

   

15.10.4 Capacity Ratio

Capacity ratio reveals the capacity utilization of the concern. This may be calculated as follows:

Illustration 15.4

Same figures as given in illustration 15.2. You are required to compute the capacity ratio.

Solution

1. Write the formula:
   
2. Substituting the values in the formula, we get
   

15.11 ANALYSIS OF VARIANCES

Standard costing and budgetary control aim at revealing the difference between the pre-determined standard cost/ budgets and actual costs. Any such difference is referred to as a “variance”.

Variance may be defined as, “the difference between planned, budgeted or standard costs and actual costs (similarly in respect of revenue)”. Variance represents the difference between planned performance and actual performance. Planned performance may be stated in the form of standard costs or budgets.

15.11.1 Meaning and Definition of Variance Analysis

When the actual performance is better than the planned performance, then such condition denotes a “favourable variance”. “Adverse variance” arises when the actual performance is lesser than the planned performance. Variances may be controllable and uncontrollable and they can be expressed in the following two methods:

(i) Absolute variance and (ii) Relative variance.

1. Absolute variance: When variance from standard cost is expressed in terms of money value (amount), it is known as absolute variance.
2. Relative variance: When variance is expressed in terms of percentage, it is called relative variance. Variances of different cost items provide the key to cost control.

15.11.2 Variance Analysis

As the causes of variances are due to many factors, it is inevitable to break this total into its component parts and analysed separately. Analysis is carried out by taking the factor one at a time by assuming that the other factors are kept (remain) constant. The cost of each cause of variation can be identified and thereby the adverse tendencies (causes) may be rectified. The terminology of CIMA defines variance analysis as, “the analysis of variances arising in a standard costing system into their constituent parts”.

All variance analysis consists of a general approach wherein a total variance should be computed first. Then, the total variance is sub-divided into component variances: (1) Price or rate and (2) Usage or Efficiency. To put it in other words, variance analysis involves: (i) ascertainment of individual variance and (ii) determining the cause for each such variance.

15.11.3 Variance Accounting

Variance accounting is a technique used in standard costing and budgetary control. Variance accounting may be defined as, “a technique whereby the planned activities of an undertaking are quantified in budgets, standard cost, standard selling prices, and standard profit margins and the difference between these and actual costs are compared. The procedure is to collect, compare, comment and correct”. Variance accounting involves the following processes:

1. Formulation of plans and establishment of standards.
2. Comparison of actual outcome with the plans and or standards.
3. Analysis of variances and investigation of their causes.
4. Initiating corrective action.

15.11.4 Principles of Variance Analysis

While determining the standard-cost variances, the following general principles should be taken into account:

1. Quantification: Variances should be expressed in terms of money. It should be expressed in the national currency of the country in which the variance analysis is done.
2. Product wise analysis: Variances must be analysed product wise, i.e., each product.
3. Total cost variance: Total cost variance has to be determined.
4. Result of variance analysis: The result of analysis may be favourable or adverse. When the actual cost is lower than the standard, it is said to be favourable, and if the actual cost is higher than the standard, it is said to be adverse variance.
5. Identification of causes: Causes of variances have to be identified for each product.
6. Corrective action: If the variances are adverse to a greater extent, immediate corrective action should be initiated by way of launching apt remedial measures. An adverse variance has to be off-set by a favourable variance.

Important Note

1. Favourable variance is denoted by the letter “F” (or) “Cr”. It increases the profit. It is also called: credit variance or positive variance.
2. Unfavourable variance is denoted by the letter “A” or “Dr”. It reduces the profit. It is also called debit variance or negative variance.

15.11.5 Chart of Variances

The total variance is to be computed first. Then, it has to be sub-divided into its various components. A chart showing the breakup of the total variance into its constituent parts is depicted as follows:

Variance analysis may also be depicted as follows:

15.12 DIRECT MATERIAL COST VARIANCE ANALYSIS

Direct material cost variance shows the difference between the standard material cost of the actual quantity of goods and the actual material cost. The direct material cost variance is an aggregate, that is, the total variance. So, it does not reveal the causes of its occurrence. Material cost variance may be defined as, “the difference in production volume and the actual cost of direct material”.

Direct material cost variations arise due to variations in: (i) standard usage; (ii) standard price; (iii) standard yield; and (iv) standard mix from actual usage, actual price, actual yield and actual mix, respectively.

The material cost variance may be determined by using the following formula:

 

Direct material cost variance	=	Standard cost of materials for actual output – Actual cost of materials used.
Or	=	(Standard price × Standard quantity for actual output) – (Actual price × Actual quantity)

Illustration 15.5

 

Standard output	500 units
Actual output	400 units
Standard price	Rs. 2 per kg
Actual price	Rs. 3 per kg
Actual quantity	2,000 kg
Standard quantity	4 kg per unit

Calculate the material cost variance.

Solution

First write down the formula:

 

Material cost variance	=	(Standard price × Standard quantity for the actual output)
	−	(Actual price × Actual quantity)

Substituting the values in the formula, we get

 

Material cost variance	=	(Rs. 2 × 400 × 4) − (Rs. 3 × 2000)
	=	Rs. 3,200 − Rs. 6,000
	=	Rs. 2,800 (Adverse).

The cause for material variance is due to (i) change in price or (ii) change in quantity or both.

Material cost variances may be subdivided into: (i) material-price variance and (ii) material-usage variance.

15.12.1 Material-Price Variance

Material-price variance is the difference between the standard price and the actual price of material used in production. The terminology of CIMA defines material-price variance as, “that portion of the direct material cost variance which is the difference between the standard price specified and the actual price paid for the direct material used”. It reveals the cost incidence of buying materials at lower or higher prices in comparison to standard prices. It should be noted that variances must be calculated separately for each type of material. The formula for calculating the material-price variance is:

Material-price variance = Actual quantity of materials used × (Standard unit price–Actual unit price).

Illustration 15.6

On the basis of the figures given in illustration 15.5, compute the material-price variance.

Solution

1. Write down the formula for material-price variance:

   Formula:

   Material price variance = Actual quantity (Standard price – Actual price)

2. Substituting the given figures in the formula, we get
   

    

   Material-price variance	=	2,000 kg (Rs. 2 − Rs. 3)
   	=	2,000 kg (− Rs. 1)
   	=	(Rs. 2,000) (Adverse).

    

3. Adverse variance indicates that higher prices have been paid for the purchase of materials.

The reasons for material-price variance may be as follows:

1. Wide range of fluctuations in market prices of materials used.
2. Changes in quantity of purchase (bulk purchase).
3. Failure to avail discounts (cash, trade) at the time of purchase.
4. Quality of materials purchased.
5. Rush orders—in case of shortage of materials.
6. Improper setting of standards.
7. Cost of transportation.
8. Ignoring off-season offer in prices.
9. Use of improper substitute materials.
10. Changes in the structure and rates of taxes and duties.

Usually, the purchasing department is accountable for adverse variances. Some of the above factors may be controlled and some may not be controlled by the management.

15.12.2 Material-Usage Variance (or) Quantity Variance

It may be defined as, “that portion of material cost variance which is due to the difference between the standard quantity of materials specified and the actual quantity used”.

The formula for the computation of variance is:

 

Illustration 15.7

Compute material usage variance by using the same figures given in illustration 15.5

Solution

1. Write down the formula
   

    

   Material-usage variance = Standard price (Standard quantity—Actual quantity)

    

2. Substituting the given figures, we get

    

   Material-usage variance	=	Rs. 2 (2,000 kg − 2,000 kg) (500 × 4 kg)
   	=	Nil.

The reasons for usage variance are listed as follows:

1. Lack of skill in proper use of materials.
2. Inefficiency in production.
3. Wastage and pilferage in the use of materials.
4. Defective production resulting in abnormal loss.
5. Improper maintenance of plant and machinery.
6. Improper setting of standard.
7. Use of a material mix other than the standard mix.
8. Poor inspection and supervision.
9. Substandard materials used.
10. Lack of skilled labour.

Material-usage variance may be further classified into: (i) material-mix variance and (ii) material-yield variance.

15.12.3 Material-Mix Variance

Mix variance arises in case different raw materials are mixed to manufacture a product. Mix variance may be defined as “that portion of the direct material usage variance which is due to the difference between the standard and actual composition of a mixture”. It represents the efficiency with which various types of materials have been mixed and utilized is the manufacturing process.

The formula for calculating material-mix variance is as follows:

    Material-mix variance = Standard price (Revised standard quantity – Actual quantity)

The difference in actual composition and the standard composition of materials may be calculated in any of the two approaches mentioned as follows:

Approach 1: The standard weight of mixture and the actual weight of mixture may remain same, but the actual quantity of components vary (i.e., usage variance is due to the difference in mix only). In this case, the material-quantity variance would be equal to material-mix variance.

Approach 2: Standard weight and actual weight of mix may be different. (The quantity variance may be due to mix as well as due to other reasons.)

Approach 1:

Illustration 15.8

Standard Mix

    Material X = 120 kgs @ Rs. 4 per kg.

    Material Y = 80 kgs @ Rs. 8 per kg.

Actual Mix

    Material X = 112 kgs @ 5 per kg.

    Material Y = 88 kgs @ 10 per kg.

Compute the material-mix variance.

Solution

First, the revised quantity is to be computed:

Then,

 

Mix variance	=	Standard price × (Revised qty − Actual qty)
For Material X	=	Rs. 4 × (120−112) = Rs. 32 (F)
For Material Y	=	Rs. 8 × (80−88) = Rs. 64 (A)
	=	Rs. 32 (A).

Approach 2:

Illustration 15.9

Standard Mix

Material X = 60 kgs @ Rs. 5 per kg

                Y = 40 kgs @ Rs. 10 per kg

Actual Mix

Material X = 80 kgs @ Rs. 4 per kg

                Y = 40 kgs @ Rs. 11 per kg

You are required to compute the usage variance.

Solution

Step 1: Calculation of revised standard quantity:

1. Formula:
   

2.  

   

Step 2: Mix variance is to be calculated as follows:

1. Formula:

   Mix variance = Standard price × (Revised standard quantity – Actual quantity).

2. Substituting the values in the formula, we get

    

   For Material X = Rs. 5 (72–80)	=	Rs. 40 (A)
   For Material Y = Rs. 10 (48–40)	=	Rs. 80 (F)
   Totally	=	Rs. 40 (F)

Step 3: Calculation of revised-usage variance:

1. Formula:

   Revised-usage variance = Standard price (Standard quantity – Revised standard. quantity)

2. Substituting the values in the formula, we get

    

   For Material X = Rs. 5 (60–72)	=	Rs. 60 (A)
   For Material Y = Rs. 10 (40–48)	=	Rs. 80 (A)
   Total	=	Rs. 140 (A)

Step 4: Computation of usage variance:

1. Formula:

   Usage variance = Standard price (Standard quantity – Actual quantity)

2. Substituting the values in the formula, we get

    

   For Material X = Rs. 5 (60–80)	=	Rs. 100 (A)
   For Material Y = Rs. 10 (40–40)	=	Nil
   Total	=	Rs. 100 (A)

Step 5: Verification:

 

Usage variance	=	Mixed variance + Revised-usage variance
	=	Rs. 40 (F) + Rs. 140 (A)
	=	Rs. 100 (A).

15.12.4 Material-Yield Variance

Material-yield variance may be defined as, “that portion of direct material usage variance which is due to the difference between the standard yield specified and the actual yield obtained”. It is the sub-division of material–usage variance. This variance highlights the cost incidence of difference between the quantity produced and the quantity that should have been produced as per norms envisaged for the output/input ratio.

It occurs frequently in case of factories manufacturing chemicals, pharmaceuticals, where the actual quantity manufactured differs from the planned quantity. An adverse variance indicates that for a given input, the actual output is lower than the standard production. Whereas a favourable variance indicates that for a given input, the actual production (output) is higher than the standard production. It should be noted that revised-usage variance is calculated on the basis of input while the material yield variance is to be calculated on the basis of output. This variance occurs mainly due to abnormal conditions such as chemical reaction, spoilage, evaporation and so on. It can also be said that this variance measures the loss or waste in the production. The material–yield variance is calculated by using the formula given as follows:

Material yield variance = Standard cost per unit of output × (Standard output for actual input – Actual output).

Whereas the standard output for actual input can be calculated as:

Illustration 15.10

 

Standard price of material	Rs. 10 per unit
Standard quality	10 units of materials per unit of output.
Standard production	1000 units
Actual production	900 units

Calculate the material–yield variance as follows:

Solution

1. Calculation of standard cost per unit:

    

   Standard cost per unit	=	Standard price × Standard quantity
   	=	Rs. 10 × 10 units = Rs. 100.

2. Material-yield variance is to be computed as:

(a) Formula:

 

Material-yield variance	=	Standard cost per unit (Standard output – Actual output)
	=	Rs. 100 (1,000 units − 900 units)
	=	Rs. 100 × 100 units
	=	Rs. 10,000 (A).

Illustration 15.11

For manufacturing a certain quantity of product, the standard and actual figures relating to materials are as follows:

Calculate material-yield variance.

Solution

Step 1:   Calculation of standard output on the actual input

Step 2:   Calculation of standard cost per unit of output

Material	Quantity	Total Amount
A	90 kgs	90 × Rs. 4 = Rs. 360
B	60 kgs	60 × Rs. 5 = Rs. 300
Total	150 kgs	Rs. 660
Less: Loss	30 kgs	-
	120 kgs	Rs. 660

Step 3:   Computation of material-yield variance:

 

Material-yield variance	=	Standard cost per unit (Standard output on actual input − Actual output)
	=	Rs. 5.50 (160 kgs − 166 kgs)
	=	Rs. 5.50 (+ 6 kg) (∴ actual > std)
	=	Rs. 33 (F).

Illustration 15.12 (Material cost variance—Comprehensive)

From the following information calculate:

1. Material cost variance
2. Material price variance and
3. Material usage variance

   Standard output 200 units

   Standard material per unit 5 kgs

   Standard price per kg Rs. 4

   Actual output 180 units

   Actual price per kg Rs. 5

   Actual materials used 500 kgs.

Solution

1. Calculation of material–cost variance:
   1. Write the formula

       

      Material cost variance = Standard cost – Actual cost

       

   2. Substituting the values in the formula, we get

       

      =	Rs. 4 × (180 unit × 5 kg) − Rs. 5 × 500 kg
      =	Rs. 4 (900 kgs) − 2,500
      =	Rs. 3,600 − Rs. 2,500
      =	Rs. (1,000) (F).

2. Computation of price variance:
   1. Write the formula:

       

      Material-price variance = Actual quantity (Standard price – Actual price)

       

   2. Substituting the values in the above formula, we get:

       

      =	500 kgs (Rs. 4 − Rs. 5)
      =	500 × (−1)
      =	Rs. 500 (A).

3. Calculation of usage variance:
   1. Write down the formula:

       

      Material-usage variance = Standard price (Standard quantity – Actual quantity)

       

   2. Substituting the given values in the formula, we get:

       

      =	Rs. 4 (900 kgs − 500 kgs)
      =	Rs. 4 × 400 kgs
      =	Rs. 1,600 (F).

4. Verification:

    

   Material-cost variance	=	Material-price variance + Material-usage variance
   Rs. 1,100 (F)	=	Rs. 500 (A) + Rs. 1,600 (F)
   Rs. 1,100 (F)	=	Rs. 1,100 (F).

Illustration 15.13

From the following particulars, calculate:

1. Material-cost variance
2. Material-price variance
3. Material-usage variance.

   Quantity of materials purchased = 4,000 units

   Value of materials purchased = Rs. 10,000

   Standard quantity of materials required per tonne of finished product = 20 units

   Standard rate of material = Rs. 2

   Opening stock of material = Nil

   Closing stock of material = 700 units

   Finished production during the period = 100 tonnes

Solution

Step 1: Basic calculations to be made as follows:

 

(i) Actual quantity of material used	=	Opening stock + Purchase − Closing stock
	=	Nil + 4,000 units − 700 units
	=	3,300 units.

 

(ii) Standard quantity of materials required for the actual output	=	100 tonnes × 20 units
	=	2,000 units.

1. Calculation of material-cost variance:
   1. Write the formula:

       

      Material-cost variance	=	Total standard cost − Total actual cost
      (Or)	=	(Std price × Std. qty) − (Actual price × Actual qty)

   2. Substituting the values in the formula, we get

       

      =	(Rs. 2 × 2000 units) − (Rs. 2.50 × 3,300)
      =	Rs. 4,000 − Rs. 8,250
      =	Rs. 4,250 (A).

2. Calculation of material-price variance:
   1. Write the formula:

      Material-price variance = Actual quantity (Standard price – Actual price)

       

   2. Substituting the values, we get

       

      =	3,300 units (Rs. 2 − Rs. 2.50)
      =	3,300 × (−0.50)
      =	Rs. 1,650 (A).

3. Computation of material-usage variance:
   1. Write the formula:
   2. Material-usage variance = Std price (Std qty – Actual qty)
   3. Substituting the values, we get

       

      =	Rs. 2 (2,000 units − 3,300 units)
      =	Rs. 2 ( − 1,300 units)
      =	Rs. 2,600 (A)

4. Verification:

    

   Material-cost variance	=	Material-price variance + Material-usage variance
   Rs. 4,250 (A)	=	Rs. 1,650 (A) + Rs. 2,600 (A)

    

   (a)           (b)           (c)

             Rs. 4,250 (A) = Rs. 4,250 (A).

Illustration 15.14

Standard set for material consumption was 500 kg @Rs. 9 per kg.

In a cost period = Opening stock was 500 kg @ Rs. 9 per kg.

Purchases made = 2000 kg @ Rs. 8 – 80 per kg.

Consumption = 550 kg.

1. Calculate the following:

   (a) Usage variance; (b) Price variance if accumulated at the point of purchase; (c) Price variance when variance is accumulated at the point of issue on FIFO basis; and (d) Price variance when variance is accumulated at the point of issue on LIFO basis.

2. What is the effect on the closing stock valuation when materials are changed out to cost on basis (c) & (d) above?

Solution

1. Calculation of usage variance:

    

   Usage variance	=	Standard price (Std.qty – Actual qty)
   	=	Rs. 9 (500 kg − 550 kg)
   	=	Rs. 9 (− 50 kg)
   	=	Rs. 450 (A).

2. Calculation of price variance:

    

   Price variance = Actual qty (Std price – Actual price)

   (b) At the point of purchase:

    

   =	2000 kgs × (Rs. 9 − Rs. 8.80)
   =	2,000 × (0.20)
   =	Rs. 400 (F).

   (c) At the point of issue of FIFO basis:

    

   =	500 (Rs. 9 − Rs. 9) + 50 (550 − 500) × (9 − 8.80)
   =	0 + 50 (0.20)
   =	Rs. 10 (F).

   (d) At the point of issue of LIFO basis:

    

   =	550 (Rs. 9 − Rs. 8.80)
   =	550 (0.20)
   =	Rs. 110 (F).

II: The stock is to be valued at the latest purchase price when FIFO method of issue of materials is used.

 

Materials used	=	Opening stock + Purchases − Closing stock
	=	500 kg + 2000 kg − 550 kg = 1950 kg.
(i) Effect on (c) above	=	1950 × (Rs. 9 − Rs. 8.80)

The difference in the value would be Rs. 390.

(ii) Effect on (d) above: LIFO method – stock is valued as: 500 kg @ Rs. 9 and 1450 kg @ Rs. 8.80.

    The standard price is Rs. 9 per kg for the entire stock of 1,950 kg.

    Hence, the difference in value would be (Rs. 17,550 − 17,260)

                   = Rs. 290.

Illustration 15.15

For manufacturing a certain quantity of product X, the standard and actual figures in respect of materials are as follows:

You are required to calculate the following variances:

1. Material-cost variance
2. Material-price variance
3. Material-usage variance
4. Material-mix variance
5. Material-yield variance
6. Prepare the actual cost sheet.

Solution

First, the standard cost sheet is prepared as follows to ascertain the standard material cost per unit of output:

Standard material cost per unit of output = Rs. 5.50.

Actual cost sheet is prepared as follows:

1. Material-Cost Variance:

   Formula:

   1. Material-cost variance = (Standard material cost per unit of output × Actual output) – Actual material cost of output.
   2. Substituting the values, we get

       

      =	Rs. 5.50 × 165 kg − Rs. 868
      =	Rs. 907. 50 − Rs. 868
      =	Rs. 39.50 (F).

2. Calculation of Material-Price Variance:

   Formula:

   1. Material-price variance = Actual qty used (Std price – Actual price)

      For Material A:

   2. Substituting the values, we get

       

      =	140 kgs (Rs. 4 − Rs. 3.80)
      =	Rs. 140 × 0.20
      =	Rs. 28 (F).

      For Material B:

       

      	=	60 kgs (Rs. 5 − Rs. 5.60)
      	=	60 kgs ( − Re 0.60)
      	=	Rs. 36 (A).
      Total (A + B)	=	Rs. 28 (F) + Rs. 36 (A)
      	=	Rs. 8 (A).

3. Computation of Material-Usage Variance:

   Formula:

       Material-usage variance = Standard price (Standard qty used in actual production – Actual qty used).

   Standard quantity used in actual production is determined as

   

   Material-Usage Variance:

    

   For Material A	=	Rs. 4 (123.75 − 140 kgs)
   	=	Rs. 4 (16.25 kgs)
   	=	Rs. 65 (A).
   For Material B	=	Rs. 5 (82.50 kg − 60 kg)
   	=	Rs. 5 (22 − 50 kgs) = Rs. 112.50 (F).
   Material A + B	=	Rs. 65 (4) + Rs. 112.50 (F)
   Usage variance	=	Rs. 47.50 (F).

4. Computation of Material-Mix Variance:

   Formula: Material-mix variance = Std cost of standard mix – Std cost of actual mix.

   Standard quantity of each material mixed for actual production is determined as follows:

   

   Material-mix variance:

    

   For Material ‘A’	=	(Rs. 4 × 120 kgs) − (Rs. 4 × 140 kgs)
   	=	Rs. 480 − Rs. 560 = Rs. 80 (A).
   For Material B	=	(Rs. 5 × 80 kgs) − (Rs. 5 × 60 kgs)
   	=	Rs. 400 − Rs. 300 = Rs. 100 (F).
   Materials A + B (Mix variance)	=	Rs. 80 (A) + Rs. 100 (F) = Rs. 20 (F).

   Verification:

    

   Material-usage variance	=	Material-mix variance + Material-yield variance
   Rs. 47.50 (F)	=	Rs. 20 (F) + Rs. 27.50 (F) * (from: (e))
   Rs. 47.50 (F)	=	Rs. 47.50 (F).

5. Computation of material-yield variance:

   Material-yield variance = Std material cost per unit of output (Std output based on actual input – Actual output).

   Standard output based on actual input is calculated as follows:

   

   	=
   Material-yield variance	=	Rs. 5.50 (160 kgs − 165 kgs)
   	=	Rs. 5.50 × (+5 kgs)
   	=	Rs. 27.50 (F).

Illustration 15.16

Guber Ltd. produces an article by blending two basic raw materials. It operates a standard-costing system and the following standards have been set for the raw materials:

   Material Standard Mix Standard Price Per kg

   X 40% Rs. 8.00

   Y 60% Rs. 6.00

The standard loss in processing is 15%.

During January 2010, the company produced 3,400 kgs of finished product (output). The position of stock and purchases for the month of January 2010 is as follows:

Material Stock on 1.1.2010 Stock on 31.1.2010 Purchased During January 2010

You are required to calculate the following:

1. Material-price variance
2. Material-usage variance
3. Material-yield variance
4. Material-mix variance
5. Total material-cost variance

 

[B.Com (Hons) – Delhi; C.S. (inter); C.A. (Inter); I.C.W.A. – (Inter) – Modified]

Solution

Basic calculations:

1. Standard quantity of raw materials required:

   Let the standard quantity of article produced be 100

   Standard loss is 15%, i.e.,                                15

   Then the standard qty of raw materials              85

   To produce 85 kgs of the article, the standard quantity of raw materials required = 100 kg.

   ∴ To produce 3,400 kgs of article, the required standard quantity of raw materials .

   Std quantity of raw materials = 4,000 kgs.

   For Material X: 40% of 4,000 kgs = 1,600 kgs.

   For Material Y: 60% of 4,000 kgs = 2,400 kgs.

   i.e., Total mix = 4,000 kgs.

   Material X = 1,600 kgs.

   Material Y = 2,400 kgs.

2. Computation of standard cost per unit of output:
   

1. Material-Price Variance:

   Formula:

    

   Material-price variance = Actual quantity (Standard rate – Actual rate)

   For Material X: The standard rate and the actual rate are the same relating to 70 kg of raw materials. Hence, there would be no price variance.

    

   For Material X	=	For the remaining 1,590 kg price – variance = 1,590 kgs (Rs. 8 − Rs. 8.50)
   	=	1,590 ( − 0.50)
   	=	Rs. 795 (A).
   For Material Y	=	No price variance relating to 80 kg of raw materials as both the rates are the same.
   For Material Y	=	For the remaining 2,300 kg of raw materials, the price variance
   	=	2,300 kgs (Rs. 6 − Rs. 5)
   	=	2,300 × Re 1
   Total	=	Rs. 795 (A) + Rs. 2,300(F) = Rs. 1,505(F).

2. Material-usage variance:

   Formula:

    

   Material-usage variance	=	Std rate (Std qty for actual output – Actual qty)
   For Material X	=	Rs. 8 (1,600 − 1,660)
   	=	Rs. 8(− 60) = Rs. 480 (A)
   For Material Y	=	Rs. 6 (2,400 − 2,380)
   	=	Rs. 6 (20) = Rs. 120 (F)
   Usage variance for both materials	=	Rs. 480 (A) + Rs. 120 (F)
   	=	Rs. 360 (A).

   (NOTE: Ref the table for the respective figures in the beginning of solution under “Basic calculations”.)

3. Material-yield variance:

   Formula:

    

   (c) Material yield variance	=	Std cost per unit (Std output for actual output – Actual output)
   	=
   	=	Rs. 8 (3,434 − 3400) = Rs. 8 × 34
   	=	Rs. 272 (A).

4. Material-mix variance:

   Formula:

    

   Material-mix variance	=	Std rate (Revised std qty − Actual qty)
   For Material X	=
   	=	Rs. 8 (1,616 − 1,600)
   	=	Rs. 8 (− 44) = Rs. 352 (A).
   For Material Y	=
   	=	Rs. 6 (2,424 − 2,380)
   	=	Rs. 6 × 44 = Rs. 264 (F).

5. Total material-cost variance:

   Formula:

    

   Material cost variance	=	Std cost for actual output – Actual output
   	=	Rs. 27,200 − Rs. 26,055 (Ref: Table in basic calculation )
   	=	Rs. 1,145 (F).

6. Verification:
   1. Material-cost variance = Material-price variance + Material-usage variance

       

      Rs. 1,145 (F)	=	Rs. 1,505(F) + Rs. 360 (A)
      (From– e)		(From – (a) (From – (b)
      Rs. 1,145 (F)	=	Rs. 1,145 (F).

   2. Material-usage variance = Mix variance + Yield variance

       

      Rs. 360 (A)	=	Rs. 88 (A) + Rs. 272 (A)
      (From b)		(From d) (From c)
      Rs. 360 (A)	=	Rs. 360 (A).

15.13 DIRECT LABOUR-COST VARIANCE ANALYSIS

15.13.1 Direct Labour Cost Variance

Direct labour cost variance is the difference between the standard direct labour cost of actual quantity of goods produced and the actual direct labour cost incurred. This may be defined as, “the difference between the standard direct labour cost and actual direct labour cost incurred for the production achieved”.

Direct labour cost variance is compared by using the following formula:

 

(or)

[Standard wage rate per hour × Std direct labour hrs. produced] – [Actual wage rate per hrs × Acutal direct labour hrs] where the standard direct labour hours produced (or) std time for the actual output is calculated as follows:

Standard time for one unit of output × No. of units produced.

Illustration 15.17

Calculate the direct labour cost variance from the following:

 

Standard output	=	500 units
Actual output	=	400 units
Standard time per unit	=	5 hrs
Total actual time taken	=	2,200 hrs
Standard rate of wages	=	Rs. 20 per hour
Actual rate of wages	=	Rs. 25 per hour

Solution

(i) Formula:

Labour cost variance = (Std rate × Std time for actual output) – (Actual rate × Actual time).

(iii) Substituting the values in the formula, we get

 

=	(Rs. 20 × 400 units × 5 hrs) − (Rs. 25 × 2,200 hrs)
=	(Rs. 20 × 2,000) − (Rs. 25 × 2,200)
=	Rs. 40,000 − Rs. 55,000
=	Rs. 15,000 (Adverse).

Thus, it may be seen that the cost of labour is calculated on the basis of labour time and wages. Hence, the labour-cost variance consists of variances relating to time (labour) and wages (labour). So, the labour-cost variance may be categorised into two variances: (i) wage-rate variance and (ii) labour time or Efficiency variance.

The following is the chart depicting the types of labour variances.

Type I: In this case, one type of labour is used:

Std labour per unit of output (Std yield in units – Actual yield in units)

NOTE: If idle time is also to be calculated, then the Efficiency variance is subdivided into two more variances as follows:

Type II: In this case, different grades of labour are used:

15.13.2 Direct Labour Rate Variance

Direct labour (wages) rate variance is the difference between the standard wage rate and the actual wage rate per hour. The terminology of CIMA defines this as, “the difference between the standard and the actual direct labour rate per hour for the total hours worked”.

This variance highlights the cost incidence of using lower or higher rates of direct labour in comparing with the standard rates. It represents the Efficiency with which the direct labour has been recruited, bargaining power of management, control of overtime working, and so on.

When the standard rate is higher than the actual rare, it would result in a favourable variance and vice versa. A favourable variance indicates the use of apprentices or trainees in the place of or instead of regular workers, superior bargaining power of management and so on. On the contrary, an adverse variance indicates the use of higher rated workers, poor bargaining capacity of management and so on.

The direct labour (wage) rate variance is calculated by using the following formula:

   Direct labour rate variance = Actual hours or time (Std wage rate – Actual wage rate)

Illustration 15.18

Figures are same as in illustration 15.16.

Calculate the labour-rate variance.

Solution

1. Write down the formula:

   Direct labour rate variance = Actual time (Std wage rate – Actual wage rate)

2. Substituting the figures in the above formula, we get

    

   =	2,200 hrs (Rs. 20 − Rs. 25)
   =	2,200 (− Rs. 5)
   =	Rs. 11,000 (Adverse).

Wage-rate variance occurs due to the following reasons:

1. Wage structure—better payment would have been made,
2. Skilled workers would have been inducted in the place of less-efficient workers.
3. Overtime work in excess of standard rate.
4. Failure to pay full normal wages to new entrants.
5. Change in piece rate.
6. Employment of one or more workers of a different grade.
7. Use of different methods of payment.
8. Higher wages for special orders.
9. Wage rise due to demands by trade unions.
10. Shortage of skilled labour.
11. Factors which are unforeseen or uncontrollable such as decisions of wage boards.

The direct labour cost variance may further be classified into the following categories:

15.13.3 Direct Labour Time or Efficiency Variance

Direct-labour Efficiency is the difference between the standard direct labour hours prescribed for actual production and the actual direct labour hours. The terminology of CIMA defines direct labour Efficiency variance as, “the difference between the standard hours for the actual production achieved and the hours actually worked, valued as the standard labour rate”.

This variance indicates the Efficiency of the labour in the manufacturing process. It is a usage variance. A favourable variance denotes the use of higher grade of workers, that is, more skilled labour, use of standard quality of materials, improved production planning and schedule. On the other hand, an adverse variance indicates the use of lower grade of workers, sub-standard quality of materials, inadequate production planning and schedule.

The direct labour Efficiency is computed as follows:

    Labour Efficiency variance = Standard wage rate per hour × (Std direct labour hours produced – Actual direct labour hours)

Illustration 15.19

Same figures as given in illustration 15.16.

Compare direct labour Efficiency variance.

Solution

(i) Write the formula:

 

Direct labour-efficiency variance	=	Std rate (Std time for actual output – Actual time)
	=	Rs. 20 (5 hrs × 400 units − 2,200 hrs)
	=	Rs. 20 (2,000 hrs − 2,200 hrs)
	=	Rs. 20 (− 200 hrs)
	=	Rs. 40,000 (Adverse).

Labour-Efficiency variance arises due to the following causes:

1. Sub-standard and defective materials.
2. Defective machinery.
3. Inefficiency of workers.
4. Insufficient training to workers.
5. Poor working conditions.
6. Improper schedule of jobs.
7. Lack of adequate supervision.
8. Delayed and vague instructions from management.
9. Increase in labour turnover.

15.13.4 Direct-Labour Idle-Time Variance

Direct-labour idle-time variance is the difference between the actual hours paid and the hours actually worked. It is a sub-classification of labour-Efficiency variance. It forms a part of wage-Efficiency variance, represented by the standard cost of the actual hours for which the workers remain idle.

The variance is calculated by using the formula:

Direct-labour idle-time variance = Std wage rate per hour × Abnormal idle hours

(or)

= (Actual hours paid for × Std wage rate) – (Actual hours worked × Std wage rate).

Illustration 15.20

Figures are same as in illustration 15.16.

If the idle time is 100 hours, Compute:

1. Idle-time variance and
2. Efficiency variance.

Solution

1. Write down the formula for idle-time variance:

   Idle-time variance	=	Std wage rate × Idle hours per hours
   	=	Rs. 20 × 100 hours
   	=	Rs. 2,000 (Adverse).

   NOTE: Idle-time variance would be always adverse.

2. Efficiency variance:

3.  

   Formula	=	Std rate × (Std time for actual output – Actual time)
   	=	Rs. 20 (5 hrs × 400 units − 2,200 hrs − Idle time 100)
   	=	Rs. 20 (2,000 hrs − 2,100 hours)
   	=	Rs. 20 (− 100 hours)
   	=	Rs. 2000 (Adverse).

15.13.5 Direct-Labour-Mix Variance (Group Composition)

Direct-labour-mix variance is the difference between the standard composition and the actual composition of direct labour. This variance arises due to the change in composition of the labour force arising from the use of various grades of labour in the manufacturing. Direct-labour-mix variance denotes the Efficiency in the composition of the labour force arising from the use of various grades of labour in the process of manufacturing. A favourable variance indicates the use of lower grade of labour whereas an adverse variance indicates the use of higher grade of labour.

The formula for computing labour-mix variance is as follows:

Direct labour mix variance = Std rate (Revised std labour hours – Actual labour hours)

(or)

Labour-mix variance = (Actual hrs at Std rate of actual gang – Actual hrs at Std rate of std gang)

The revised Efficiency variance is calculated as:

Revised labour-Efficiency variance = Std rate (Std (time) hrs for actual output – Revised std time (hours))

Illustration 15.21

Standard

Actual

Compute labour-mix variance.

Solution

1. Revised standard hours = 50 hours

   (Because standard hours and actual hours are 50 hours)

2. Computation of labour-mix variance:

   Formula: Labour-mix variance = Std rate (Revised std time – Actual time)

    

   For Grade X	=	Rs. 4 (50 hrs × 40 workers − 50 hrs × 45 workers)
   	=	Rs. 4 (2000 hrs – 2,250 hrs)
   	=	Rs. 4 (− 250 hrs)
   	=	Rs. 1,000 (A).
   For Grade Y	=	Rs. 2 (50 hrs × 60 workers − 50 hrs × 55 workers)
   	=	Rs. 2 (3,000 hrs − 2,750 hrs)
   	=	Rs. 2 (250 hrs)
   	=	Rs. 500 (F).

   Total for Grade A + Grade B	=	Rs. 1,000 (A) + Rs. 500 (F)
   	=	Rs. 500 (A).

15.13.6 Direct-Labour-Yield Variance

This is the variation in the labour cost due to an increase or decrease in the output in comparison to the standard specified. To put in simpler words, this variation arises due to the difference in the standard output specified and the actual output obtained. Labour-yield variance is computed by using the formula as follows:

Direct-labour-yield variance = Standard cost per unit (Standard production for Actual mix – Actual production)

If the actual output or production is more than the standard output, it results in a favourable variance and vice versa.

Illustration 15.22

 

Actual production	=	950 units
Standard production	=	1,000 units
Standard rate of wages	=	Rs. 25 per hour
Standard time	=	4 hours per unit

Compute labour-yield variance.

Solution

 

Step 1: Computation of standard cost per unit	=	Standard rate of wages × Standard time
	=	Rs. 25 × 4 hours
	=	Rs. 100.

Step 2: Computation of labour-yield variance.

1. Write the formula:

   Labour-yield variance = Std cost per unit (Std output – Actual output)

2. Substitute the values:

    

   =	Rs. 100 (1,000 units − 950 units)
   =	Rs. 100 (50 units)
   =	Rs. 5,000 (Adverse).

Illustration 15.23

The standard cost card reveals the following:

Labour rate = Re 1 per hour

Hours set per unit for production = 10 hours

The actual dates are as follows:

Units produced = 1,000

Hours worked = 12,000

Actual labour cost = Rs. 15,000

Calculate labour variances.

Solution

Basic calculations:

1. Calculation of standard time:

    

   Standard time	=	Hours per unit of output × Units produced
   	=	10 hours × 1,000 units
   	=	10,000 hours.

2. Calculation of standard cost:

    

   Standard cost	=	Standard rate × Standard time
   	=	Re 1 × 10,000 hrs
   	=	Re 10,000.

1. Computation of labour-cost variance:
   1. Write down the formula:

      Labour-cost variance = Standard cost – Actual cost

   2. Substituting the values, we get:

       

      Labour-cost variance	=	(Rs. 10,000 − Rs. 15,000)
      	=	(Rs. − 5,000)
      	=	Rs. 5,000 (Adverse).

2. Calculation of labour-rate variance:
   1. Write the formula:
      
   2. Substituting the values in the formula, we get:

       

      Labour-rate variance	=	12,000 hrs (Re 1 – Re 1.25)
      	=	12,000 hrs (− Re 0.25)
      	=	(−3,000)
      	=	Rs. 3,000 (A).

3. Computation of labour-Efficiency variance
   1. Write the formula:

      Labour-Efficiency variance = Standard rate (Standard time – Actual time).

   2. Substituting the values in the formula, we get:

       

      =	Re 1 (10,000 hrs – 12,000 hrs)
      =	Re 1. (−2,000 hrs)
      =	Rs. 2,000 (A).

4. Verification:

   Labour-cost variance = Labour-rate variance + Labour-efficiency variance

   Rs. 5000 A) = Rs. 3000 (A) + Rs. 2,000 (A)

   (Ref: (a)           (Ref: (b)           (Ref: (c))

   Rs. 5,000 (A) = Rs. 5,000 (A).

Illustration 15.24

Standard cost specification for a product

    Time = 10 hours per unit

    Cost = Rs. 5 per hour.

Actual performance in a cost period production = 750 units.

 

Hours taken production	7,600 hours
Idle time	150 hours
	7,750 hours

Payment made = Rs. 40,300 (Average per hour Rs. 5.20)

You are required to calculate labour variances.

Solution

1. Calculation of labour-cost variance:

    

   =	Standard cost − Actual cost
   =	(Rs. 5 × 10 × 750 − Rs. 40,300)
   =	(Rs. 37,500 − Rs. 40,300)
   =	Rs. 2,800 (A).

2. Calculation of labour-rate variance:
   1. Write the formula:

      Labour-rate variance = Actual time (Std rate – Actual rate)

   2. Substituting the values in the formula, we get

       

      =	7,750 hours (Rs. 5.00 − Rs. 5.20)
      =	7,750 (−Re 0.20)
      =	Rs. 1,550 (A).

3. Calculation of time or Efficiency variance:
   1. Write the formula:

      Time variance = Standard rate (Standard time for actual output – Actual time)

   2. Substituting the values in the formula, we get

       

      =	Rs. 5 (7,500 hours − (7,750 − Idle Time 150 hrs)
      =	Rs. 5 (7,500 hours − 7,600 hours)
      =	Rs. 5 (−100 hours)
      =	Rs. 500 (A).

4. Computation of idle-time variance:
   1. Formula:

       

      Idle-time variance	=	Idle time (Std. hourly rate)
      	=	150 hours × Rs. 5
      	=	Rs. 750 (A).

5. Calculation of total-Efficiency variance:

   This is the aggregate of time variance and idle-time variance.

   This is calculated by using the formula:

    

   Total-efficiency variance	=	Std. rate (Std time for Actual output − Actual time)
   	=	Rs. 5 (7,500 hours − 7,750 hours)
   	=	Rs. 5 (−250 hrs)
   	=	Rs. 1,250 (A).

6. Verification:

   Labour-cost variance	=	Labour-rate variance + Time variance + Idle-time variance
   Rs. 2,800 (A)	=	Rs. 1,550 (A) + Rs. 500 (A) + Rs. 750 (A)
   Rs. 2,800 (A)	=	Rs. 2,800 (A).

Illustration 15.25

Calculate the labour variances from the following data:

Standard wages:

     Grade A: 100 labourers @ Rs. 3 per hour

     Grade B: 50 labourers @ Rs. 4 per hour

Actual wages:

     Grade A: 90 labourers @ Rs. 3.50 per hour

     Grade B: 60 labourers @ Rs. 3 per hour

     Budgeted hours: 2,000

     Actual hours: 1,900

     Budgeted gross production: 4,000 units

     Standard loss: 10%

     Actual loss: 300 units

Solution

Step 1: Standard hours, Standard cost, Actual hours and Actual cost have to be computed as follows:

Step 2: Calculation of standard cost per unit:

Step 3: Calculation of standard output for the actual mix:

Step 4: Calculation of labour-cost variance:

1. Write the formula

   Labour-cost variance = Std cost for actual production – Actual cost

2. Substituting the values in the formula, we get

    

   =	Rs. 278 × (4,000 − 300 units) − Rs. 9,40,000
   	(Step 2)           (Step 1)
   =	Rs. 278 × 3,700 units − Rs. 9,40,000
   =	Rs. 10,28,600 − Rs. 9,40,000
   =	Rs. 88,600 (F).

Step 5: Calculation of labour-rate variance:

1. Write down the formula:

   Labour-rate variance = Actual time (Std rate – Actual rate).

2. Substituting the values in the formula, we get

    

   Grade A	=	1,71,000 (Rs. 3 − 3.50)
   	=	1,71,000 (− Re 0.50) = Rs. 85,500 (A)
   Grade B	=	1,14,000 (Rs. 4 − Rs. 3)
   	=	1,14,000 (Re. 1) = Rs. 1,14,000 (F)
   Total	=	Grade A + Grade B = Rs. 28,500 (F)

Step 6: Calculation of labour-mix variance:

1. Write the formula:
   
2. Substituting the values in the formula, we get

    

   The Grade A	=
   	=	Rs. 3 (1,90,000 hrs − 1,71,000 hrs)
   	=	Rs. 3 (19,000) = Rs. 57,000 (F).
   For Grade B	=
   	=	Rs. 4(95,000 hrs − 1,14,000 hrs)
   	=	Rs. 4(−19,000 hrs) = Rs. 76,000(A)

   Total (Grade A + Grade B) = Rs. 19,000(A)

Step 7: Calculation of labour-yield variance:

1. Write down the formula:

   Labour yield variance = Std cost per unit (Std output for actual mix   Actual output).

2. Substituting the values in the formula, we get

    

   =	Rs. 278 (3,420 units − 3,700 units)
   	(step 3)           (4000 − 3000)
   =	Rs. 278 (− 280 units) = Rs. 77,840 (F).

15.14 OVERHEAD VARIANCES

Overhead comprises: (i) indirect material; (ii) indirect labour; and (iii) indirect expenses. Overhead variances are related to factory, office or selling and distribution of overheads. Overheads are generally classified into two categories: (i) variable and (ii) fixed.

15.14.1 Variable-Overhead Variance Analysis

The variable portion of overheads will increase proportionately with the volume of production. Variable overheads fluctuate with the number of hours worked. Now, it has been recognized that time worked is a better indicator of the activity level. Variable-overhead variance arises on account of variations in the budgeted-labour Efficiency or budgeted expenditure from the actual Efficiency or expenditure.

The variable-overhead cost variance is the difference between the standard overhead allowed for actual production and the actual variable overhead incurred. This is computed by using the following formula:

Variable-overhead variance = (Std. variable-overhead rate × Actual production) – Actual variable overhead.

For the purpose of variance analysis, planning and control, the variable-overhead cost variance may be further classified into: (i) expenditure variance and (ii) Efficiency variance.

Illustration 15.26

From the following data, calculate the variable-overhead expenditure variance:

     Budgeted production: 2,000 units.

     Actual production: 1,500 units.

     Budgeted variable overhead: Rs. 4000.

     Actual variable overhead: Rs. 2,500.

     Standard hours per unit: 1 hour.

     Actual hours worked: 1,800 hrs.

Solution

Step 1: Calculation of budgeted hours:

 

Budgeted hours	=	Budgeted production × Std hrs. per unit
	=	2,000 units × 1 hour
	=	2,000 hours.

Step 2: Computation of standard-variable overhead rate per hour.

Step 3: Calculation of variable-overhead expenditure variance:

 

Variable-overhead expenditure variance	=	(Std-variable overhead rate per hour × Actual hours worked) – Actual variable overhead
	=	(Rs. 2 × 1,800 hrs) − Rs. 2,500
	=	Rs. 3,600 − Rs. 2,500
	=	Rs. 1,100 (F).

Favourable variance indicates the use of services in an economical manner or savings in costs incurred.

15.14.2 Variable-Overhead-Efficiency Variance

It is the difference between the standard time allowed for actual production and the actual time taken. It highlights the cost incidence of the difference between the actual Efficiency and the standard Efficiency relative to the actual time taken for one unit of production and the standard time prescribed. The formula for computation of variable-overhead-Efficiency variance is as follows:

Variable-overhead-efficiency variance = Std. variable overhead rate per hour (Actual output in terms of Std. hours – Actual hours worked)

A favourable variance indicates the use of higher grade of skilled workers, use of superior quality of materials, lesser time in production, enhanced production planning and scheduling. Where as an adverse variance indicates the use of inferior quality of materials, unskilled or semi skilled labour, poor production planning and schedule.

Illustration 15.27

The same figures as in illustration 15.26. Compute variable-overhead-Efficiency variance.

Solution

Step 1: Calculation of the actual output in terms of std. hours:

 

=	Actual output × Std. hrs, per unit.
=	1,500 units × 1 hour
=	1,500 hours.

Step 2: Calculation of variable-overhead-Efficiency variance:

1. Write the formula:
   Variable-overhead-efficiency variance = Standard-variable-overhead. rate/hour (Actual output in terms of std. hrs – Actual hours worked).
2. Substituting the values, we get

    

   Variable-overhead-efficiency variance	=	Rs. 2 (1,500 hrs − 1,800 hours)
   	=	Rs. 2 (−300 hrs)
   	=	Rs. 600 (A).

Illustration 15.28

Following are the data obtained from the books of a manufacturing company with respect to variable overheads:

   Budgeted production: 600 units.

   Budgeted variable overhead: Rs. 15,600.

   Standard time for 1 unit: 20 hours.

   Actual production: 500 units.

   Actual hours worked: 9,000 hrs.

   Actual variable overhead: Rs. 14,000.

   Compute variable-overhead variances:

Solution

Step 1: Computation of standard variable cost per unit.

Step 2: Computation of standard-variable overhead cost of the actual output

          = Actual production × Std. variable cost/unit

          = 500 units × Rs. 26 = Rs. 13,000.

(a) Calculations of variable-overhead variance:
  Variable-overhead variance = Standard cost – Actual cost.

(ii) Substituting the values, we get
  (Rs.13,000 – Rs.14,000) = Rs.1,000(A).

(b) Computation of variable-overhead-expenditure variance

Step 1: Calculation of standard-variable overhead per hour:

1. Formula:
   
2. Substituting the values, we get:
   

Step 2: Calculation of standard-variable overhead on the hours worked:

 

Actual hrs worked	×	Std-variable overhead per hour
	=	9000 hours × Rs. 1.30
	=	Rs. 11,700.

Step 3: Variable-overhead-expenditure variance

          = (Rs. 11,700 − Rs. 14,000)

          = Rs. 2,300 (A).

(c) Computation of variable-overhead-efficiency variance:

(i) Formula:

  Variable-overhead-efficiency variance = Std. Variable overhead

  Rate per hour (Actual output in terms of Std. hours – Actual hrs worked)

 

=	Rs. 1.30 (500 unit × 20 hrs − 9,000 hrs)
=	Rs. 1.30 (10,000 hrs − 9,000) = Rs. 1.30 (1000 hrs)
=	Rs. 1,300 (F).

 

(d) Variable overhead total variance	=	Expenditure variance + Efficiency variance
	=	Rs. 2,300 (A) + Rs. 1,300 (F)
	=	Rs. 1,000 (A).

(e) Verification:

       Variable-overhead total variance: Expenditure variance + Efficiency variance

       Rs. 1,000 (A) = Rs. 2,300 (A) + Rs. 1,300 (F)

       (Ref: A)        (Ref: step 3)        (Ref: C)

       Rs. 1,000 (A) = Rs. 1,000 (A).

15.15 FIXED OVERHEAD VARIANCE ANALYSIS

15.15.1 Fixed Overhead Variance

It is the difference between the standard cost of the fixed overhead for the actual output and the actual fixed overhead incurred.

One may argue that fixed cost remains constant irrespective of fluctuations in the activity level within a specified range. Then, how can variance arise? The answer is simple. Fixed-overhead cost variance occurs on account of variations in the budgeted volume of output or budgeted expenditure from the actual output or expenditure. Further, owing to the labour Efficiency, the differences in number of days worked and in the number of hours worked in the actual production may vary from the budget, that is, higher or lower than the budget. It will not highlight any reasons for variance. Fixed-overhead variance is the total or aggregate variance. This is computed by using the following formula:

Fixed-overhead variance = (Std. fixed overhead rate × Actual output) – Actual fixed overheads

(or)

(Std. hours produced × Std. fixed overhead rate per hour) – Actual fixed overheads.

15.15.2 Fixed Overhead-Expenditure Variance

It is the difference between the budgeted fixed overhead and the actual fixed overhead. This is also known as budget variance or level variance. It is computed as follows:

Fixed overhead expenditure variance = Budgeted fixed overheads – Actual fixed overheads.

A favourable variance (actual overheads< budgeted overheads) indicates use of services in an economical manner or savings in costs incurred, whereas an adverse variance (actual overheads > budgeted overheads) indicates an excessive use of services or an increase in the cost of services.

15.15.3 Volume Variance

The difference between the overhead absorbed on actual production and those on the budgeted production (output) is known as the fixed overhead-volume variance. This variance highlights the over- or under-absorption of overheads incurred during a specified period.

A favourable variance occurs if the actual output is more than the standard one (over-recovery of fixed overheads), whereas adverse variance results in if the actual output is less than the standard output (under recovery of overheads). This volume variance can be computed as:

 

	Volume variance = (Standard rate × Actual output) – Budgeted fixed overheads
(or)	Standard rate (Actual output – Std output)
(or)	Standard rate per hour (Standard hrs produced – Budgeted hours)
(or)	Std fixed overhead rate (Budgeted output – Actual output).

Fixed overhead-volume variance may be classified into the following types:

15.15.4 Fixed Overhead-Capacity Variance

This shows the difference between the number of hours that should have been worked (actual no. of days worked) as per the budgeted norms and the actual hours worked by the standard fixed-overhead rate.

This variance is a part of the volume variance. It represents that portion of the volume variance which is due to working at higher or lower capacity than the standard capacity. It indicates the extent of capacity utilization. A favourable variance indicates a higher capacity utilization whereas an adverse variance denotes a lower capacity utilization. It is calculated by using the following formula:

Fixed overhead-capacity variance = Std. fixed-overhead rate (Available hours − Actual hours worked)

(or)        Capacity variance = Std. rate (Std units − Revised budgeted units)

(or)        = Std. rate (Actual hours − Revised budgeted hours).

15.15.5 Fixed Overhead Calendar Variance

This is the difference between the actual number of days worked during the budget period and the number of days anticipated at the time of preparation of the budget evaluated at the standard fixed-overhead rate. This is a part of volume variance. It is that portion of volume variance which is due to the difference between the number of working days anticipated in the budget period and the actual working days. It highlights the cost of incidence of the difference between the budgeted number of days and the number of days worked.

A favourable variance occurs if the actual days exceed the standard days and whereas an adverse variance denotes vice versa. It is calculated as follows:

Standard fixed-overhead rate (Budgeted number of days – Actual number of days)

(or)     Std. rate (Revised budgeted units – Budgeted units)

(or)     Std. rate (Revised budgeted hours – Budgeted hours)

15.15.6 Fixed Overhead-Efficiency Variance

This is the difference between the actual Efficiency and the budgeted Efficiency. This is a part of volume variance. A favourable variance denotes higher Efficiency and vice versa.

This is computed as follows:

Std. fixed-overhead rate (Actual hours worked – Output in terms of std. hours).

where, the output in terms of std. hours = Actual output × Std hours per unit of output.

Illustration 15.29

XYZ Co.’s records reveal the following data for the month of June. You are required to calculate all the fixed-overhead variances for the month of June:

    Budgeted output: 1,000 no’s.

    Actual output: 700 no’s.

    Budgeted fixed overhead: Rs. 4,000.

    Actual fixed overhead: Rs. 3,500.

    Standard hours per unit: 2.

    Hours available during June: 500.

    Actual hours worked: 450.

Solution

Step 1: Calculation of standard fixed-overhead rate:

1. Formula:
   
2. Substituting the values in the formula, we get
   

Step 2: Computation of fixed-overhead expenditure variance:

1. Fixed-overhead expenditure variance = Budgeted fixed overhead – Actual fixed overhead.
2. Substituting the values in the formula, we get

       = Rs. 4,000 − Rs. 3,500

       = Rs. 500 (F).

Step 3: Calculation of fixed-overhead volume variance:

1. Formula:

    

   Volume variance	=	Std. fixed overhead rate (Budgeted output − Actual output)
   	=	Rs. 2 (step: 1) (1,000 Nos − 700 Nos)
   	=	Rs. 2 (300)
   	=	Rs. 600 (F).

Step 4: Computation of calendar variance:

1. First, the budgeted number of days in the month has to be calculated (as it is not given in the problem) as follows:

    

   Budgeted no. of days in June	=	Budgeted output × Standard hrs per unit of output
   	=	1,000 units × 2
   	=	2,000 hours.

2. As actual no. of days in the month are not given in the problem, actual hours are to be taken into account.
3. Formula:

   Fixed-overhead calendar variance = Std fixed-overhead rate (Budgeted no. of days – Actual no. of days).

4. Substituting the values in the formula, we get

       = Rs. 2 (2,000 hrs − 500 hrs)

       = Rs. 2 (1,500 hrs)

       = Rs. 3,000 (F).

Step 5: Computation of fixed-overhead capacity variance:

1. Formula:

   Capacity variance = Std. fixed-overhead rate (Available hours – Actual hours worked)

2. Substituting the values in the formula, we get

          = Rs. 2 (500 hrs − 450 hrs)

          = Rs. 2 (50) = Rs. 100 (F).

Step 6: Calculation of fixed-overhead efficiency variance:

1. Formula:

   Efficiency variance = Std. fixed-overhead rate (Actual hours worked – Output in terms of std. hrs)

2. Output in terms of standard hours are not given in the problem, but it is calculated as follows:

       = Actual output × Std. hrs. per unit of output

       = 700 nos × 2 hrs

       = 1,400 hrs.

3. Efficiency variance = Rs. 2 (450 – 1,400 hrs)

       = Rs. 2 × 950 = Rs. 1,900 (A).

Illustration 15.30

From the following data, compute the fixed-overhead variances:

   Budget output for the year: 30,000 units.

   Budget fixed overheads for the year: Rs. 30,000.

   Standard production per hour: 15 units.

   Actual output for the month: 2,550 unit.

   Actual overheads for the month: Rs. 3,000.

The year is budgeted to 50 working weeks on a 40-hour week basis. Two hours in every week are lost due to abnormal idle time. The month consists of four working weeks.

The unit has to curtail its production operation to 4 days in a week instead of the usual 5 days as a result of power cut.

 

[C.S. (Inter) Modified]

Solution

The problem can be solved in two ways:

1. Calculation on the basis of units of production
2. Calculation on the basis of hours of production

Method 1: Calculation on the basis of units of production.

1. Calculation of fixed-overhead cost variance:
   1. First, the standard rate has to be calculated.
      

   2. Fixed-overhead cost variance	=	Std cost − Actual cost
      	=	(Re. 1 × 2,550 units − Rs. 3,000)
      	=	(Rs. 2,550 − Rs. 3,000)
      	=	Rs. 450 (A).

2. Calculation of fixed-overhead expenditure variance:
   1. First, the budgeted overheads is to be calculated as:
      

   2. Expenditure variance	=	Budgeted overheads – Actual overheads
      	=	(Rs. 2,400 − Rs. 3,000)
      	=	Rs. 600 (A).

3. Calculation of volume variance:
   1. First, the budgeted units have to be computed as follows:
      
   2. Volume variance = Std rate (Actual units – Budgeted units)

          = Re. 1. (2,250 − 2,400 units)

          = Re. 1 (150 units) = Rs. 150 (F).

4. Calculation of calendar variance:

   Calendar variance	=	Decrease in production due to less working hours × Standard rate
   	=	8 × 4 × 15 units × Re. 1
   	=	Rs. 480 (A).

   The same may be computed by using another formula:

   Calendar variance = Std rate (Revised budget units – Budgeted units).

    

   Where, revised budgeted units	=	Budgeted production per hour × Revised budgeted hours per week
   	=	15 units × (40−8) = 15 × 32
   	=	480 units per week
   	=	480 units × 4 weeks = (month).

    

   Revised budgeted units for a month	=	1,920 units per month.
   Calendar variance	=	Re. 1 (1,920 − 2,400 units)
   	=	Re. 1 (480) = Rs. 480 (A).

5. Calculation of capacity variance:

   Capacity variance = Std rate (Std units – Revised budgeted units)

   Standard units have to be computed:

   Std. units = Actual hrs × Std production per hour

                 = 30 × 15 units = 450 units/week.

    

   Std units for a month	=	450 × 4 = 1,800 units
   Capacity variance	=	Re. 1 (1,800 units – 1,920 units)
   	=	Re. 1 (120 units)
   	=	Rs. 120 (A).

6. Calculation of Efficiency variance:

    

   Efficiency variance	=	Std rate (Actual units − Standard units)
   	=	Re. 1 (2,550 − 1,800 units)
   	=	Re. 1 (750) = Rs. 750 (F).

7. Verification:
   1. Cost variance = Expenditure variance +Volume variance

        Rs. 450 (A) = Rs. 600 (A) + Rs. 150 (F)

        Rs. 450 (A)= Rs. 450 (A).

   2. Volume variance = Calendar variance + Capacity variance + Efficiency variance

          Rs. 150 (F) = Rs. 480 (A) + Rs. 120 (A) + Rs. 750 (F)

          Rs. 150 (F) = Rs. 150 (F).

Method II: Calculation on the basis of hours of production.

1. Calculation of fixed-overhead cost variance:

   First, the std rate per hour and std cost for the month have to be calculated as follows:

   1.  

      

      Std. hours for the month:

   2.  

      
   3. Overhead cost variance = Std cost − Actualcost

                               = Rs. 2,550 − Rs.3,000

                               = Rs.450 (A).

2. Calculation of expenditure variance:
   1. First, Budgeted cost is to be calculated as under:
      
   2. Expenditure variance = Budgeted cost – Actual cost

                               = Rs. 2,400 − Rs. 3,000

                               = Rs. 600 (A).

3. Calculation of volume variance:
   1. First, Budgeted production for the month is to be Computed:
      

   2.  

      
   1. Volume variance = Std rate (Std.hrs – Budgeted hrs)

                               = Rs. 15 (170 − 160 hours)

                               = Rs. 150 (F).

4. Calculation of capacity variance:
   1. First, the revised budgeted hours have to be computed
      
   2. Actual hours = No of weeks ×(Hours per week) – (No of hours lost)

                          = 4 × 40 − [(4×8) + (4 × 2)]

                          = 120 hours

   3. Capacity variance = Std rate (Actual hours – Revised budgeted hour)

                                  = Rs. 15 (120 − 128 hours)

                                  = Rs. 15 × 8

                                  = Rs. 120 (A).

5. Calculation of calendar variance:

   Calendar variance = Std rate (Revised budgeted hours – Budgeted hours)

                            = Rs. 15 (128 hrs − 160 hrs)

                            = Rs. 480 (A).

6. Calculation of Efficiency variance:

   Efficiency variance = Std rate (Std hours – Actual hours)

                            = Rs. 15 (170 − 120 hrs)

                            = Rs. 750 (F).

7. Verifications:
   1. Cost variance = Expenditure variance + Volume variance

      Rs. 450 (A) = Rs. 600 (A) + Rs. 150 (F)

      Rs. 450 (A) = Rs. 450 (A).

   2. Volume variance = Calendar variance + Capacity variance + Efficiency variance

                Rs. 150 (F) = Rs. 480 (A) + Rs. 120 (A) + Rs. 750 (F)

                Rs. 150 (F) = Rs. 150 (F).

NOTE: Students may adopt either of the methods described above to compute fixed-overhead variances.

15.16 REVISION VARIANCE

Standards set need to be revised because they are quite often distorted due to uncontrollable factors. The difference between the original standard cost and the revised standard cost is known as revision variance. Revision variance may be defined as,

“the difference between an original and a revised standard cost. It arises when an interim adjustment of a standard cost is made without adjusting the budget, and is required to allow full analysis of the difference between budgeted and actual profit. The variance can be further analysed to reflect revisions to prices of materials, labour and overhead rates and changes in methods”

Illustration 15.31

Razdan & Co. manufactures a new product. It had to revise its standard cost owing to temporary distortions caused to its standards by uncontrollable factors. During that month, it manufactured 1,000 kgs of the product. The following price details are available from its records for the month of March.

You are required to compute material variances.

Solution

Revision variance and Price variance are to be calculated as follows:

I. Revision Variance

II. Price Variance

	Rs.	Rs.
Standard material cost		13,000
Revision variance	2,900 (A)
Price variance	3,600 (A)	6,500 (A)
Actual material cost		19,500

15.17 SALES VARIANCES

Sales variance is also termed as “sales-value variance” or “sales-revenue variance.” Sales variance may be defined as, “the difference between budgeted value of sales and the actual value of sales achieved in a given period”. Sales variance may be analysed in two ways:

1. Sales-margin variance—On the basis of profit
2. Sales-value variance—On the basis of turnover

15.17.1 Sales Variances with Reference to Profit Method

Sales-margin variance is the difference between the actual profit and the standard profit (budgeted profit). This is computed by using the following formula:

Sales variance = (Actual quantity of sales × Actual profit per unit) – (Budgeted quantity of sales × Budgeted profit per unit).

This variance may further be classified into:

1. Sales-price variance and
2. Sales-volume variance.

The classification of sales variance (based on profit) is presented in the following chart:

15.17.2 (a) Sales-Price Variance

Selling-price variance is the difference between the budgeted sale price and the actual sale price. This variance highlights the profit incidence of the difference between the budgeted selling price and the actual sales price. This is computed by using the formula:

                Sales-price variance] = Actual quantity sold (Standard profit per unit – Actual profit per unit)

(or)

                = Actual quantity sold (Budgeted selling price – Actual selling price)

The following terms must be understood at this junction:

1. Budgeted profit = Budgeted (standard) quantity of sales × Standard profit per unit.
2. Actual profit = Actual quantity of sales × Actual profit per unit.
3. Standard profit = Actual quantity of sales × Standard profit per unit.
4. Revised std. profit = Revised STD sales or Sales-margin variance × Standard rate of profit

5.  

   

A favourable sales-price variance indicates that the actual sales price is higher than the budgeted selling price, whereas an adverse variance indicates that the actual selling price is lower than the budgeted sales price.

15.17.3 Sales-Volume Variance

This variance represents the difference between the profit realized on the budgeted volume and the actual volume of sales. Sales-volume variance reflects the Efficiency of the sales department. A favourable variance (Standard profit > budgeted profit) indicates the sales of more units than the budgeted ones whereas an adverse variance (Standard profit < budgeted profit) denotes that the actual sales is lower than the budgeted ones.

Sales-volume variance may be calculated by using the following formula:

Sales-volume variance = Standard profit per unit (Budgeted quantity of sales – Actual quantity of sales)

Sales-volume variance may further be sub-classified into:

(i) mix variance and (ii) quantity variance.

15.17.4 Sales-Mix Variance

When more than one product is manufactured and sold, the profit may differ. This is due to the fact that the actual mix and the budgeted mix of sales will vary. Different products may earn different profit. Sale of different proportion of products from one given in the budget is the main cause of arising this variance.

A favourable variance (Standard profit > Revised std. profit) denotes that the proportion of products (sales mix) with a higher profit have been sold and vice versa.

The formula for computing mix variance is as follows:

Sales-mix variance = (Std. value of actual mix – Std. value of revised standard mix).

If data for each product is given, the sales-mix variance is computed as follows:

Step 1: Calculation of sales value of each product at the budgeted price:

Sales value = Actual quantity × Budgeted selling price.

Step 2: Calculation of total sales value of all products:

Total sales value = Add all the values calculated in Step 1 (sum of all products).

Step 3: Calculation of value of each production in the budgeted proportion:

Step 4: Compute the difference:

= Step 1 – Step 3.

This difference may be favourable or adverse.

Step 5: Computation of variance:

= Step 4 (difference) × budgeted profit as a percentage of sales value.

Where the budgeted profit as a percentage of sales value

15.17.5 Sales-Quantity Variance

Sales-quantity variance reflects the impact on profit arising out of the difference between the budgeted quantity and the actual quantity of sales in a given period. When the sales value in the budgeted proportion exceeds the budgeted sales value it results in a favourable variance and vice versa.

Sales-quantity variance is computed by using the following formula:

Quantity variance	= Std. selling price per unit (Std. proportion for actual sales quantity – Budgeted quantity of sales)
(or)	= Budgeted profit – Revised standard profit
(or)	= Revised Std. sales value – Budgeted sales value.

The sales quantity variance in respect of each product may be calculated as follows:

Step 1 → Calculation of budgeted sales value:

Budgeted sales value = Budgeted quantity × Budgeted selling price.

Step 2 → Calculation of total sales value at budgeted price:

= Budgeted selling price × Actual quantity.

Step 3 → Calculation of sales value of each product in budget proportion:

Step 4 → Computation of “difference”:

Difference = Step 1–Step 3.

Step 5 → Computation of variance:

Variance = Step 4 × Budgeted profit as a percentage of sales value

Some basic formulae to compute the sales variance are as follows:

1. Budgeted sales value = (Budgeted quantity × Budgeted selling price) in budgeted proportion.
2. Sales value in budgeted proportion = (Actual quantity × Budgeted selling price) in budgeted proportion.
3. Sales-volume variance = Sales-mix variance + Sales-quantity variance.

Illustration 15.32

The sales manager of a company that produces and sells three products A, B and C, provides you the following information for the month of August.

 

A	800 units for Rs. 9,600.
B	1,200 units for Rs. 10,800.
C	1,500 units for Rs. 13,500.

You are required to calculate the following sales variances on the basis of profit:

1. Sales-price variance

2. Sales-volume variance

3. Sales-mix variance

4. Sales-quantity variance

Solution

Basic calculations:

(i) Actual profit per unit is calculated as follows:

For Product A: Actual selling price per unit − (Budgeted selling price per unit − Standard profit per unit)

1. Calculation of sales-price variance:

1. Write formula:

   Sales-price variance = Actual qty of sales (Actual profit per unit – Std profit per unit).

2. Substituting the values for each product, we get

   Product A = 800 units (Rs. 5 - Rs. 8) = Rs. 2,400 (A)

   Product B = 1,200 units (Rs. 4 - Rs. 5) = Rs. 1,200 (A)

   Product C = 1,500 units (Rs. 3 - Rs. 2) = Rs. 1,500 (F)

                                                    Total = Rs. 2,100 (A)

2. Calculation of sales-volume variance:

1. Write formula:

   Sales-volume variance = Std profit per unit (Actual qty of sales – Standard qty of sales).

2. Substituting the values, we get:

   For Product A = Rs. 8 (800 units − 1,000 units) = Rs. 1,600 (A)

   Product B = Rs. 5 (1,200 units − 1,000 units) = Rs. 1,000 (F)

   Product C = Rs. 2 (1,500 units − 1,000 units) = Rs. 1,000 (F)

                                                             Total = Rs. 400 (F)

3. Calculation of sales-mix variance:

1. Write the formula:

   Sales-mix variance = Std. profit per unit (Actual qty of sales – Standard proportion of actual sales) Standard proportion of actual sales is to be calculated as:

   
2. Substituting the values, we get

   Sales-mix variance:

   Product A = Rs. 8 (800 − 1,167 units) = 8 × 367 = Rs. 2,936 (A)

   Product B = Rs. 5 (1,200 − 1,167) = 5 × 33 = Rs. 165 (F)

   Product C = Rs. 2 (1,500 − 1,167) = 2 × 333 = Rs. 666 (F)

                                                             Total = Rs. 2,105 (A)

4. Calculation of sales-quantity variance:

1. Write formula:

   Sales-qty variance = Std profit per unit (Std proportion of actual sales – Budgeted qty of sales).

2. Substituting the values, we get

   For Product A = Rs. 8 (1,166 − 1,000) = 8 × 166 = Rs. 1,328 (F)

   Product B = Rs. 5 (1,167 − 1,000) = 5 × 167 = Rs. 835 (F)

   Product C = Rs. 2 (1,167 − 1,000) = 2 × 167 = Rs. 334 (F)

                                                             Total = 2,497 (F)

Illustration 15.33

ABC & Co. manufactures and sells two products M & N. The following data are available in respect of the products for the month of July. The company operates a budgetary control system.

 

Budgeted cost per unit of each product:

M – Rs. 6

N – Rs. 3

You are required to calculate all the sales variances.

Solution

This problem is solved in a different way as follows:

1. Budgeted profit per unit and percentage of sales value are calculated.
2. Budgeted proportion is computed.

1. Computation of budgeted profit and percentage of sales value:

Particulars	M Rs.	N Rs.
Budgeted selling price	10	5
Less: Budgeted cost per unit	6	3
Budgeted profit per unit	4	2
Budgeted profit as a
percentage of Selling price	40 %	40 %

2. Computation of budgeted proportion

Particulars	M Rs.	N Rs.
Budgeted sales value	5,000	5,000
Budgeted proportion of sales	1	1
	= 50%	50%
	(M)	(N)

3. Calculation of budgeted profit: Budgeted profit

4. Calculation of Actual profit

Calculation of variances:

(a) Calculation of profit variance due to sales:

1. Formula:

    

   Profit variance	=	Budgeted profit − Actual profit
   	=	Rs. 4,000 − Rs. 100
   		(Step 3)        (Step 4)
   	=	Rs. 3,900 (A).

(b) Calculation of selling-price variance:

      Formula:

      Sales-price variance = Actual qty sold (Budgeted selling price – Actual selling price)

      Substituting the values, we get

      Product M = 400 units (10 − 5) = 400 × 5 = Rs. 2,000 (A).

      Product N = 500 units (5 − 4) = 500 × 1 = Rs. 500 (A)

                                     Total = Rs. 2,500 (A)

(c) Calculation of sales-volume variance:

1. Formula:

   Sales-volume variance = Std profit per unit (Budgeted qty – Actual qty)

2. Substituting the values, we get

   Product M = Rs. 4 (500 − 400 units) = 4 × 100 = Rs. 400 (A)

   Product N = Rs. 2 (1,000 − 500 units)= 2 × 500 = Rs. 1,000(A)

                           Total sales volume variance = Rs. 1,400(A)

(d) Calculation of sales-mix variance:

(e) Calculation of sales-quantity variance:

Verifications:

1. Profit variance = Sales price variance + Sales volume variance

    

   (a)	(b)	(c)
   Rs. 3,900 (A)	= Rs. 2,500 (A) +	Rs. 1,400 (A)
   Rs. 3,900 (A)	= Rs. 3,900 (A).

2. Volume variance = Mix variance + Quantity variance

    

   (c)	(d)	(e)
   Rs. 1,400 (A)	= Rs. NIL +	Rs. 1,400 (A)
   Rs. 1,400 (A)	= Rs. 1,400 (A).

15.18 SALES VARIANCES—(BASED ON TURNOVER)—TURNOVER METHOD

15.18.1 Sales Value Variance

This variance represents the difference between the budgeted value of sales and the actual value of sales. This is computed by using the formula:

Sales-value variance = (Budgeted quantity × Budgeted selling price – Actual qty × Actual selling price)

Where the actual sale is more than the budgeted sales, it results in a favourable variance and vice versa.

Sales-value variance is further classified into:

1. Sales-price variance and

2. Sales-volume variance.

(i) Selling-Price Variance: This represents the difference in the sales value due to the difference between the budgeted selling price and the actual selling price. (Note: Instead of the term “budgeted,” “standard” may also be used). When the actual selling price is higher than the budgeted selling price, the difference results in a favourable variance and vice versa.

This variance is calculated as follows:

Selling-price variance = Actual quantity sold (Budgeted selling price – Actual selling price)

(ii) Sales-Volume Variance: Sales-volume variance represents the difference in the sales value due to the difference between the actual quantity of sales and the standard quantity of sales. When the standard quantity exceeds the actual quantity of sales, it results in adverse variances and vice versa. This variance is calculated as follows:

Sales-volume variance = Std. selling price per unit (Std. quantity of sales – Actual quantity of sales) Sales-volume variance may be further classified into:

1. Sales-mix variance and
2. Sales-quantity variance

(iii) Sales-mix variance: This variance is that part of the sales-volume variance which arises due to the difference in the proportion in which various articles are sold and the standard proportion in which various articles were to be sold. It is calculated as follows:

Sales-mix variance = (Std. value of actual mix – Std. value of revised std mix).

In case of more than one product, those different products have different selling prices. Hence, the selling products in a proportion which is different from the one in the budget will give rise to variance. An adverse variance indicates that an unprofitable mix – that is, a higher proportion of products having a lower selling price have been sold and vice versa.

This is computed as follows:

Step 1 → The sale value of each product at budgeted selling price is calculated by using the formula: Actual quantity × Budgeted selling price.

Step 2 → Total sales values of all products is calculated by adding the sales value of each product as done in Step 1.

Step 3 → Sales value of each product in budgeted proportion is calculated as:

Step 4 → Variance is computed: (Step 1 – Step 3)

15.18.2 Sales-Quantity Variance

This variance is that part of the sales-volume variance which arises due to the difference between the revised std sales quantity and budgeted sales quantity. This is computed as follows:

Quantity variance = Std selling price per unit (Std proportion for the actual sales quantity – Budgeted quantity of sales)

(or)

Revised std sales value – Budgeted sales value.

Qty variance is computed separately in respect of each product as follows:

Step 1 → Budgeted sales value is computed as:

   = Budgeted quantity × Budgeted selling price.

Step 2 → Total sales value of each product at budgeted selling price is calculated as:

   Actual qty × Budgeted selling price.

Step 3 → Sales value of each product in budgeted proportion is calculated as:

Step 4 → Variance is calculated as:

   (Step 1 – Step 3).

Illustration 15.34

XYZ & Co. manufactures and sells three products. It provides the following data for the month of September

You are required to calculate the following variances on the basis of turnover.

1. Sales-price variance
2. Sales-volume variance
3. Sales-mix variance and
4. Sales-quantity variance.

Solution

Calculation of sale variances on the basis of “turnover.”

1. Calculation of sales-price variance:
   1. Formula:

      Sales-price variance = Actual quantity of scales (Std price per unit – Actual price per unit)

   2. Substituting the values, we get:

      Product A: 1,100 units (Rs. 15 − Rs. 13) = 1,100 × 2 = Rs. 2,200 (A)

      Product B: 1,900 units (Rs. 10 − Rs. 9) = 1,900 × 1 = Rs. 1,900 (A)

      Product C: 3,000 units (Rs. 8 − Rs. 9) = 3,000 × 1 = Rs. 3,000 (F)

                         Sales price variance (Total) = 1,100 (A)

2. Calculation of sales-volume variance:
   1. Formula:

      Sales-volume variance = Std. price per unit (Actual qty of sales – Std qty of sales)

   2. Substituting the values, we get

       

      		Rs.
      Product A:Rs. 15 (1,100 − 1,500 units)	=	Rs. 15 × 400 = 6,000 (A)
      Product B: Rs. 10 (1,900 −1,500 units)	=	Rs. 10 × 400 = 4,000 (F)
      Product C:Rs. 8 (3,000 −1,500 units)	=	Rs. 8 × 1,500 = 12,000 (F)
      Sales volume variance (Total)	=	10,000 (F)

3. Sales-mix variance:

   Formula:

   Standard-mix variance = (Std value of actual mix – Std value of revised std mix)

   1. Std value of actual mix is to be calculated as follows:

      Product A:1,100 units × Rs. 15 = Rs. 16,500

      Product B:1,900 units × Rs. 10 = Rs. 19,000

      Product C: 3,000 units × Rs. 8 = Rs. 24,000

                                                          59,500

   2. Revised std mix is to be calculated as follows:
      
   3. Std. value of revised std mix is calculated as:

                                                                Rs.

      Product A: 2,000 units × Rs. 15 = 30,000

      Product B: 2,000 units × Rs. 10 = 20,000

      Product C: 2,000 units × Rs. 8 = 16,000

                                                           66,000

   4. Now, substituting the values in the formula, we get sales-mix variance = (Rs. 59,500 – Rs. 66, 000) = Rs. 6,500 (A).
4. Calculation of sales-quantity variance:
   1. Formula:

      Sales-qty variance = Std selling price per unit (Std proportion for actual sales – Budgeted qty of sales)

   2. Substituting the values, we get:

                                                                               Rs.

      Product A: Rs. 15 (2,000 units − 1,500 units) = Rs. 15 × 500 = 7,500 (F)

      Product B: Rs. 10 (2,000 units − 1,500 units) = Rs. 10 × 500 = 5,000 (F)

      Product C: Rs.8 (2,000 units − 1,500 units) = Rs. 8 × 500 = 4,000 (F)

                      Sales quantity variance (Total) = 16,500 (F)

Verification:

Sales-volume variance = Sales-mix variance + Sales-qty variance

Rs. 10,000 (F) = Rs. 6,500 (A) + Rs. 16,500 (F)

(2)           (3)           (4)

Rs. 10,000 (F) = Rs. 10,000 (F)

Illustration 15.35

Same figures as given in illustration 15.33. Calculate all the sales variances on the basis of Turnover Method.

Solution

Step 1: Computation of budgeted proportion:

 

	M	N
Budgeted sales value	→ Rs. 5,000	Rs. 5,000
Budgeted proportion sales	1	1
(or)
(or)	50%	50%

Step 2: Computation of budgeted sales and actual sales:

Step 3: Calculation of sales-value variance:

1. Formula:

   Sales-value variance = (Budgeted sales – Actual sales)

2. Substituting the values, we get

   Sales-value variance: (Rs. 10,000 – Rs. 4,000) = Rs. 6,000 (A).

Step 4: Calculation of sale-price variance:

1. Formula:

   Selling-price variance = Actual qty sold (Budgeted selling price – Actual selling price).

2. Substituting the values, we get

   Product M: 400 units (Rs. 10 − Rs. 5): 400 × Rs. 5 = Rs. 2,000 (A)

   Product N: 500 units (Rs.5 − Rs. 4): 500 − Rs. 1 = Rs. 500 (A)

   Selling price variance (Total) = Rs. 2,500 (A)

Step 5: Calculation of sales-volume variances:

1. Formula:

   Sales-volume variances = Std selling price per unit (Budgeted quantity – Actual quantity)

2. Substituting the values in the formula, we get

   Product M:Rs. 10 (500 units − 400 units) = Rs. 10 × 100 = Rs. 1,000 (A)

   Product N:Rs. 5 (1,000 units − 500 units) = Rs. 5 × 500 = Rs. 2,500 (A)

   Sales volume price (Total) = Rs. 3,500 (A)

Step 6: Calculation of sales-mix variances:

Step 7: Calculation of sales-quantity variance:

Step 8: Verifications

1. Sales-value variances = Selling-price variances + Sales-volume variances

   Rs. 6,000 (A) = Rs. 2,500 (A) + Rs. 3,500 (A)

   Rs. 6,000 (A) = Rs. 6,000 (A).

2. Sales-volume variance (5) = Sales-qty variance (7) + Sales-mix variance (6)

   Rs. 3,500 (A) = Rs. 3,500 (A) + Nil

   Rs. 3,500 (A) = Rs. 3,500 (A)

FOR PROFESSIONAL COURSES

15.19 REPORTING OF VARIANCES TO MANAGEMENT

The most important duty of the cost accountant is the preparation of management reports on variances. These reports mainly highlight all the variances in addition to reconciliation of the actual profit with the budgeted profit. This facilitates the task of taking corrective action and avoiding unfavourable variances. Hence, the reporting of variances should not be delayed. The concerned personnel or department responsible for adverse variances have to be identified in time. For example, the price variance in the purchases of raw materials would be the responsibility of the purchase manager and the like. The reports should be presented to the management in such a way that the factors responsible for adverse variances should be highlighted and thereby the management must understand clearly the causes for changes in the profit.

15.19.1 Reporting of Variances to Management

In order to prepare a standard and effective reporting of variances, the following factors should be considered.

1. Each factor should be segregated and analysed separately. Variance for each factor has to be shown individually and should not be clubbed together as it would lead to wrong inferences.
2. Controllable as well as uncontrollable variances have to be shown separately and should be reported in time.
3. As no standardized format is available, care should be taken to present all relevant factors without omission.
4. Proper reconciliation of budgeted profit and actual profit has to be undertaken to arrive at profit figures on the basis of variances.
5. Factors should be presented in such a way that the management should be in a position to locate the areas that show adverse variances.

Illustration 15.36

In a chemical manufacturing company, production is carried on in batches. Details of standard input of materials, labour and overheads are as follows:

Standard input of materials per batch of 1,000 kg:

 

A:	60% of input at Rs. 15/kg
B:	20% of input at Rs. 20/kg
C:	20% of input at Rs. 25/kg
Labour:	1,200 hrs per batch @ Rs. 10 per hour.
Variable overhead:	Rs. 2 per kg.
Fixed overhead:	Rs. 50,000 per month.
Selling price:	Rs. 50 per kg.
Std. production per months:	10 batches (No process loss).
Actual details for November were as follows:
No. of batches processed:	8
Materials consumed:	X – 5,000 kgs – Rs. 76,000.
	Y – 1,500 Kgs – Rs. 30,000
	Z – 1,500 Kgs – Rs. 48,000
Labour engaged for 9,800 hrs and wages paid:	Rs. 95,000.
Variable overhead:	Rs. 15,000.
Fixed overhead:	Rs. 52,000.

The output for the month was sold at Rs. 54 per kg. You are required to prepare a comprehensive management report on the variance for the period.

 

[I.C.W.A. – Inter]

Solution:

Basic Calculations

Step 1: Calculation of standard cost per kg.

This is obtained by preparing a cost sheet as follows:

Cost sheet

Step 2: Computation of budgeted gross profit.

 

Budgeted gross profit	=	Budgeted sales value – Std. cost
	=	(1,000 kg × 10 batches × Rs. 50 − 1000 Kg × 37 Rs.)
	=	(Rs. 5,00,000 − Rs. 3,70,000)
	=	Rs. 1,30,000.

Step 3: Calculation of actual rate and actual gross profit.

Step 4: Calculation of material-price variance:

1. Formula:

   Material-price variance = Actual qty used (Std price – Actual price)

2. Substitute the values:

   Material A = 5,000 kgs (Rs. 15 – Rs. 15.20) = Rs. 1,000 (A)

   Material B = 1,500 kgs (Rs. 20 – Rs. 20) = Nil

   Material C = 1,500 kgs (Rs. 25 – Rs. 32) = Rs. 10,500 (A)

Step 5: Calculation of material-usage variance:

1. Formula:

   Material-usage variance = Std price (Std qty used in actual production – Actual qty used)

2. Substitute the values:

   Material A: Rs. 15 (4,800 kgs – 5,000 kgs) = Rs. 3,000 (A)

   Material B: Rs. 20 (1,600 kgs – 1,500 kgs) = Rs. 2,000 (F)

   Material C: Rs. 25 (1,600 kgs – 1,500 kgs) = Rs. 2,500 (F)

Step 6: Calculation of labour-rate variance:

1. Formula:

   Labour-rate variance = Actual hours (Std wage rate per hour – Actual wage rate per hour)

2. Substituting the values, we get = 9,800 hrs (Rs. 10 – Rs. 9,6939) = Rs. 3,000 (F)

Step 7: Calculation of labour-Efficiency variance:

1. Formula:

   Labour-efficiency variance = Std wage rate per hr (Std labour hrs – Actual labour hrs)

                      = Rs. 10 (9,600 hrs − 9,800 hrs)

                      = Rs. 2,000 (A).

Step 8: Calculation of variable-overhead variance:

1. Formula:

   Variable-overhead variance = (Std. variable-overhead rate × Actual production) – Actual variables overhead.

2. Substituting the values, we get:

                      = (Rs. 2 × 8,000 kgs) − Rs. 15,000.

                      = Rs. 16,000 − Rs. 15,000 = Rs. 1,000 (F).

Step 9: Calculation of fixed-overhead variance:

1. Formula:

   Fixed-overhead variance = (Budgeted fixed overheads – Actual fixed overheads)

2. Substituting the values, we get:

        = Rs. 50,000 – Rs. 52,000 = Rs. 2,000 (A).

Step 10: Calculation of fixed-overhead volume variance:

1. Formula:

   Fixed-overhead volume variance = Std. fixed-overhead rate (Budgeted output – Actual output)

2. Std. fixed-overhead rate is to be found out as:
   
3. Substituting the values in the formula, we get

   Vol. Variances = Rs. 5 (10,000 kgs − 8,000 kgs)

                      = Rs. 5 (2,000 kgs)

                      = Rs. 10,000 (A).

Step 11: Calculation of sale-price variance:

1. Formula:

   Sale-price variance = Actual qty sold (Budgeted selling price – Actual selling price).

2. Substituting the values, we get

                      = 8,000 kgs (Rs. 50 − Rs. 54)

                      = Rs. 32,000 (F).

Step 12: Calculation of sales-volume variance:

1. Formula:

   Sales-volume variance = Std. profit per unit (Budgeted quantity – Actual quantity)

2. Standard profit per unit is to be found out as:

   Std. profit per unit = (Std selling price per unit − Std cost per unit)

                               = (Rs. 50 − Rs. 37) = Rs. 13.

3. Substituting the values in the formula, we get

   Sales-volume variance = Rs. 13 (10,000 kgs − Rs. 8,000 kgs)

                                  = Rs. 13 (2,000 kgs)

                                  = Rs. 26,000 (A).

Step 13: Now, all these values are to be shown in the variance report to be prepared as follows:

Variance Report to Management

Particulars	Amount Rs.	Amount Rs.
(a) Budgeted gross profit		1,30,000
1. Sales-profit variance:
Selling-price variance	32,000 (F)
Sales-volume variance	26,000 (A)	6,000 (F)
		1,36,000
(b) Cost variances:
1. Material-cost variance:	1,000 (A)
(i) Material A: Price variance:	1,000 (A)
Usage variance	3,000 (A)
(ii) Material B: Price variance	Nil
Usage variance	2,000 (F)
(iii) Material C: Price variance	10,500 (A)
Usage variance	2,500 (F)	10,000 (A)
(c) Labour-cost variance:
(i) Rate variance	3,000 (F)
(ii) Efficiency variance	2,000 (A)	1,000 (F)
(d) Variable-overhead variance		1,000 (F)
(e) Fixed-overhead variance:
(i) Expenditure variance	2,000 (A)
(ii) Volume variance	10,000 (A)	12,000 (A)
(f) ACTUAL GROSS PROFIT		1,16,000

15.20 TREATMENT OF VARIANCES IN COST ACCOUNTS

Usually, at the end of an accounting period the cost variances should be accounted for in the cost accounts. This is also known as “disposal of variances” or “disposition of variances”. It is important to take a correct decision with respect to the method of disposition. This is due to the variation of costing system maintained by the companies. It varies from company to company. The size of the variance and its nature determines the method of accounting to be selected. The methods that are used for accounting treatment of variances are explained as follows:

Method 1:

Allocation of variances to cost of sales, closing finished goods inventory and closing work-in-progress inventory:

In this method, a suitable basis is adopted (e.g., value, units). Variances are to be distributed to cost of sales, finished goods and work-in-progress (WIP) in proportion to the closing balances of each such account. They are valued at the actual cost. This kind of valuation at the actual cost (adjustment) should be made separately in the financial statements. This highlights the weakness of the standard-costing system to the management.

Advantage of this method: As the actual costs represent the real costs, it is a suitable basis that inventory is valued at actual costs and hence, it will not distort the profit value.

Method 2:

Transfer to costing profit and Loss Account:

When variance is not significant, this method may be adopted. Under this method, variances are transferred to the costing profit and loss account (P&L A/c). Cost of sales, finished goods and WIP are all maintained at a standard cost. All variances are to be charged to costing P&L A/c at the end of the accounting period.

ADVANTAGES:

1. Valuation of inventory takes place quickly.
2. It facilitates a comparison between the gross profit of different periods with ease.

Method 3:

Transfer of controllable and non-controllable variances:

Under this method, controllable variances should be transferred to costing P&L A/c as in the Method 2. Uncontrollable variances have to be adjusted against the cost of sales, finished goods and WIP, as discussed in Method 1. This method has the advantages of both the above two methods.

Method 4:

Transfer to reserve account:

This method involves the carry forward of favourable variances till they are set-off by adverse variances. Variances are carried forward to the next financial year by transfer of cost variances to the reserve account.

This is an advantage to companies where seasonal factors cause variances.

FOR PROFESSIONAL COURSES

Illustration 15.37

Model: Material-cost variance

The following information has been extracted from the records of a chemical company:

 

Standard price	: Raw material ‘A’ – Rs. 2 per kg.
	Raw material ‘B’– Rs. 10 per kg.
Standard mix	: A – 7%; B – 25 % (By weight).
Standard yield	: 90 %.

In a period, the actual costs, usages and output were as follows:

 

Used :	2,200 kgs of ‘A’ costing Rs. 4,650.
	800 kgs of ‘B’ costing Rs. 7,850.
Output :	2,850 kgs of products.

You are required to calculate material-cost variances.

 

[C.S. (Inter)]

Solution

[Step-by-step-wise explanation is not needed as this part is meant for Advanced Level]

I: Basic calculations:

1. Calculation of standard quantity used in actual production:

   Standard yield is given as 90 %.

   Let the standard material quantity be taken as 100.

   Standard yield: 90.

   Actual production: 2,850 kg.

   
2. 1. Standard qty of Material A: 75 % of 3,167 kgs = 2,375 kgs.
   2. Standard qty of Material B: 25 % of 3,167 kgs = 792 kgs.
3. Standard material cost of output is determined by preparing a standard cost sheet as follows:

    

   Standard Cost Sheet
   
4. Calculation of actual cost
   

Calculation of variances:

1. Direct material-cost variances = (Std. material cost per unit of output × Actual output) × Actual material cost of output

                = (Rs. 4.45 × 2,850 kgs) − Rs. 12,500

                = Rs. 170 (F).

2. Direct material-price variance = (Std. material price—Actual price) Actual quantity used.

             Material A = (Rs. 2 − Rs. 2.114) × 2,200 kgs

                                  = (−114) × 2,200 kgs

                                  = Rs. 250 (A).

             Material B = (Rs. 10 − Rs. 9.813) × 800

                                = (0.187) × 800 = Rs. 150 (F).

                      Total = Rs. 100 (A).

3. Direct material-usage variance =

   Std. price (Std qty used in actual production – Actual quantity used)

         Material A = Rs. 2 (2,375 kg − 2,200 kg)

                            = Rs. 2 (175 kg)        = Rs. 350 (F).

         Material B = Rs. 10 (792 kg − 800 kg)

                            = Rs. 10 (8)        = Rs. 80 (A).

                                        Total = Rs. 270 (F).

4. Direct material-mix variance =
   1. Standard cost of std mix – Std cost of actual mix. Actual total input = A – 2,200 kgs B – 800 kgs 3,000 kgs.

      Actual total input = A − 2,200 kgs

                            B − 800 kgs

                            3,000 kgs.

   2. Std. mix of actual total input.

      A = 75 % of 3,000 kgs = 2,250 kgs

      B= 25 % of 3,000 kgs = 750 kgs

   3. Mix variance:

            Material A = Rs. 2 (2,250 – 2,200 kg)

                               = Rs. 2 (50 kg)        = Rs. 100 (F).

            Material B = Rs. 10 (750 – 800 kg)

                               = Rs. 10 (50 kg)        = Rs. 500 (A).

                                           Total = Rs. 400 (A).

5. Direct material-yield variance =
   1. Std output based on actual output
      
   2. ∴ Material-yield variance

      = Rs. 4.45 (2,700 − 2,850 kgs)

      = Rs. 4.45 × (150 kgs)

      = Rs. 667 (F).

Illustration 15.38

Model: Labour-cost variances

The direct labour strength of a section of an engineering factory is 100 workers, paid at the rate of Rs. 6 per day of 8 hours each. The normal production is 1,000 pieces per week of 48 hours. During a particular week, an order for 1,500 pieces was completed expending 7,650 hours made up of 6,300 hours at normal wages and 1,350 hours at overtime wages at double rate. The total wages came to Rs. 6,300.

Calculate the average labour cost per piece during the week and analyse the labour-cost variance for the work.

 

[I.C.W.A. – Inter]

Solution

Basic calculations:

1. Standard rate per hour
   
2. Std time for one unit of output
   
3. Equivalent normal man hours = Normal hrs + (Overtime × 2 hours)

                   = 6,300 hrs + (1,350 × 2)

                   = 6,300 + 2,700 = 9,000 hrs.

4. Calculation of average labour cost per piece (actual):
   

Calculation of variances:

1. Direct labour-cost variance = (Std wage rate × Std direct labour-time produced) – Actual wage rate × (Actual labour time)
   1. Std. direct labour-time produced = Std. time for one unit of output × No of units produced

                                           = 4.8 hrs × 1,500 Units = 7,200 hrs

   2. Labour-cost variance = (Re 0.75 × 7,200 hrs) – (Re 0.70 × 9,000 hrs)

                               = Rs. 5,400 − Rs. 6,300

                               = Rs. 900 (A).

2. Direct labour- efficiency variance = Std. wage rate (Std. direct labour-time produced – Actual direct-labour hours)

                            = Re 0.75 (7,200 hrs − 7,650 hours)

                            = Re 0.75 (450 hrs) = Rs. 338 (A).

3. Direct labour-rate variance = Actual hrs (Std wage rate per hour – Actual wage rate per hour)

                            = 7,650 hrs (Re 0.75 − 0.70)

                            = Rs. 382 (F).

4. Direct labour-overtime variance = Actual overtime hours (Overtime wage rate – Normal wage rate)

                            = 1,350 hrs (Rs. 1.40 − 0.70)

                            = 1,350 hrs (0.70)

                            = Rs. 945 (A).

5. Direct labour-mix variance:

   This variance does not arise, as there is only one grade of worker is employed.

Illustration 15.39

Model: Overhead variances

A cost accountant of a company was given the following information regarding the overheads for February:

1. Overheads cost variance                       = Rs. 1,400 adverse.
2. Overheads volume variance                  = Rs. 1,400 adverse.
3. Budgeted hours for February                = 1,200 hours.
4. Budgeted overheads for February          = Rs. 6,000.
5. Actual rate of recovery of overheads     = Rs. 8 per hour.

You are required to assist him in computing the following for February:

1. Overheads-expenditure variance.
2. Actual overheads incurred.
3. Actual hours for actual production.
4. Overheads-capacity variance.
5. Overheads-Efficiency variance.
6. Standard hours for actual production.

[C.A. Inter]

Solution

1. Overheads-expenditure variance:

   Formula:

   Overheads-expenditure variance = Overheads-cost variance – Overheads-volume variance

             = Rs. 1,400 (A) − Rs. 1,000 (A) = Rs. 400 (A).

2. Actual overheads incurred:

   Formula:

   Actual overheads incurred = Budgets overheads – Overheads-expenditure variance

             = Rs. 6,000 + Rs. 400 (A)

             = Rs. 6,400.

3. Actual hours for actual production:

   Formula:

   
4. Overheads-capacity variance:

   Formula:

   Std. rate of overheads (Actual hours – Budgeted hours)

   1. Std rate of overhead
      
   2. Capacity variance = Rs. 5 (800 hrs − 1,200 hrs)

                      = Rs. 5 (400 hrs) = Rs. 2,000 (A).

5. Overhead-efficiency variance:

   Formula:

   Efficiency variance = (Overheads-volume variance – Overheads-capacity variance)

                   = Rs. 1,000 (A) − Rs. 2,000 (A)

                   = Rs. 1,000 (F).

6. Standard hours for actual production:

   Overheads-volume variance = Std. overheads rate (Std. hours for actual production – Budgeted hours).

   As std. hrs. for actual production is not given, let it be taken as x.

   

Illustration 15.40

Model: Sales variances

The standard cost data of three products x, y and z manufactured by a company are given as follows, together with the budgeted sales and unit-selling prices for 2009–2010:

In April 2009, the cost department of the company gathered the following details for 2009–2010:

You are required to determine:

1. the budgeted and the actual profit for 2009 – 2010.
2. the variance in profit analysed into:
   1. Cost variance
   2. Sales-price variance
   3. Sales-volume variance

[I.C.W.A. (Inter) – Modified.]

Solution

1. Determination of budgeted profit:

   Profit for:

   1. Product X = (Sales value – Actual cost of sales)

                        = (25,000 Units × 40 − 25,000 × Rs. 28)

                        = (Rs. 10,00,000 − Rs. 7,00,000) = Rs. 3,00,000.

   2. Product Y = (20,000 Units × 60 − 20,000 × Rs. 48)

                        = (Rs. 12,00,000 − Rs. 9,60,000) = Rs. 2,40,000.

   3. Product Z = (15,000 Units × Rs. 80 − 15,000 × Rs. 64)

                        = (Rs. 12,00,000 − Rs. 9,60,000) = Rs. 2,40,000.

   4. Total profit (X + Y + Z) (budgeted) = Rs. 7,80,000
2. Determination of actual profit:

   Profits for:

   1. Product X = (20,000 Units × Rs. 42 − 20,000 × Rs. 30)

                        = Rs. 8,40,000 − Rs. 6,00,000 = Rs. 2,40,000.

   2. Product Y = (22,000 Units × Rs. 56 − 22,000 × Rs. 50)

                        = (Rs. 12,32,000 − Rs. 11,00,000) = Rs. 1,32,000.

   3. Product Z = (16,000 Units × Rs. 81−16,000 Units × Rs. 63)

                        = (Rs. 12,96,000 × Rs. 10,08,000) = Rs. 2,88,000.

   4. Total actual profit (X + Y + Z) = Rs. 6,60,000
3. Determination of variance in profit:

   Variance in profit = Budget profit – Actual profit

                            = Rs. 7,80,000 − Rs. 6,60,000

                            = Rs. 1,20,000 (A).

4. Determination of cost variance:

   Total cost variance = (Actual qty sold × Std cost of sale per unit) – Actual cost of sales.

   1. Product X = (20,000 units × Rs. 28) − (20,000 × Rs. 30)

                        = (Rs. 5,60,000 − Rs. 6,00,000) = Rs. 40,000 (A).

   2. Product Y = (22,000 units × Rs. 48) − (22,000 × Rs. 50)

                        = (Rs. 10,56,000 − Rs. 11,00,000) = Rs. 44,000 (A).

   3. Product Z = (16,000 units × Rs. 64 − 16,000 × Rs. 63)

                        = (Rs. 10,24,000 − Rs. 10,08,000) = Rs.16,000 (F).

   4. Total cost variance (X + Y + Z) = Rs. 68,000 (A).
5. Determination of sale-price variance:

   Selling-price variance = Actual quantity sold (Budgeted selling price – Actual selling price)

   1. Product X: 20,000 units (Rs. 40 – Rs. 42) = Rs. 40,000 (F).
   2. Product Y: 22,000 units (Rs. 60 − Rs. 56) = Rs. 88,000 (A).
   3. Product Z: 16,000 units (Rs. 80 – Rs. 81) = Rs. 16,000 (F).
   4. Selling-price variance (X + Y + Z) = Rs. 32, 000 (A).
6. Determination of sales-volume variance:

   Sales-volume variance = Std profit per unit (Budgeted quantity – Actual quantity)

   Where Std profit per unit = Std selling price per unit – standard cost per unit.

Std profit per unit:

 

(i) For product X	=	(Std selling price per unit – Std cost per unit)
	=	(Rs. 40 – Rs. 28) = Rs. 12.
(ii) Product Y	=	(Rs. 60 − Rs. 48) = Rs. 12.
(iii) Product Z	=	(Rs. 80 − Rs. 64) = Rs. 16.

Sales-volume variance:

1. Product X: Rs. 12 (25,000 Units − 20,000 units) = Rs. 60,000 (A).
2. Product Y: Rs. 12 (20,000 Units − 22,000 units) = Rs. 24,000 (F).
3. Product Z: Rs. 16 (15,000 Units − 16,000 Units) = Rs. 16,000 (F).
4. Sales-volume variance (X + Y+ Z) = Rs. 20, 000 (A).

Illustration 15.41

Model: All variances

A company producing a standard product is facing a declining sales and dwindling profits. It has, therefore, decided to introduce a standard-cost system to control the cost. To motivate the workers to improve productivity, the management has also decided to introduce an incentive scheme under which employees are paid 20% of the standard cost of materials saved and also 40% of the labour time saved valued at a standard labour rate.

The following are the details of the standard cost of the product:

 

Standard cost per unit	Rs.
Direct material–10 kgs at Rs. 12	120
Direct labour–3 hrs at Rs. 10	30
Variable overheads – 3 hrs at Rs. 5	15
Fixed overheads– (based on budgeted output of 10, 000 units)	25
	190

       Selling price per unit = Rs. 240.

During one particular month, 9,600 units of the product were manufactured and sold incurring the following actual cost:

 

	Rs.
Direct material – 90,000 kg	12,10,000
Direct labour – 25,000 hrs	2,54,000
Variable overheads – 25,000 hrs	1,47,000
Fixed overheads	2,50,000
	18,61,000
Net profit	4,19,000
Sales	22,80,000

Required:

1. Variances that incurred during the months, duly reconciling the standard profit of actual production with actual profit.
2. Bonus amount earned by the workers during the month under the incentive scheme.

[I.C.W.A. – inter]

Solution

I: Basic Calculations

No. 1:

No 2: Std qty used in actual production = Std material qty per unit × Actual output

                                                 = 10 kgs × 9,600 units

                                                 = 96, 000 kg.

No 3: Actual wage rate per hour

No 4: Std direct-labour time produced = Std. time for one unit of output × No of units produced

                                                 = 3 hrs × 9,600 units

                                                 = 28,800 hours.

No 5: Std profit per unit = Std selling price – Std cost/unit

                                      = Rs. 240 – Rs. 190

                                      = Rs. 50.

II: Calculation of Different Variances

1. Direct material-cost variances:

1. Direct material-price variance = Actual qty used (Standard price – Actual price)

                                            = 90,000 kgs (Rs. 12 – Rs. 13.44 (Ref: No 1)

                                            = 90,000 kgs (Rs. 1.44)

                                            = Rs. 1,29,600 (A)

2. Direct material-usage variance = Std price (Std qty used in actual production – Actual quantity used)
   

   = Rs. 12 (6,000 kgs) = Rs. 72,000 (F).

2. Direct labour-cost variances:

1. Direct labour-rate variance = Actual hours (Std wage rate per hour – Actual wage rate per hour)
   

   = 25,000 (Re 0.16)

   = Rs. 4,000 (A).

2. Direct labour-efficiency variance = Std wage rate (Std direct-labour time produced – Actual wage rate per hour)
   

   = Rs. 10 (3,800) = Rs. 38,000 (F).

3. Overhead variances:

1. Variable overhead-expenditure variance = (Std. variable overhead rate per unit × Actual output) – Actual variable overhead

                = (Rs. 15 × 9,600 units) − Rs. 1, 47,000

                = Rs. 1,44,000 − Rs. 1,47,000

                = Rs. 3,000 (A).

2. Fixed-overhead variance = (Std fixed-overhead rate × Actual production) – Actual fixed overhead

                = (Rs. 25 × 9,600 units) − Rs. 2,50,000

                = (Rs. 2,40,000 − Rs. 2,50,000)

                = Rs. 10,000 (A).

4. Sales variances:

1. Selling-price variance = Actual qty sold (Budgeted selling price – Actual selling price) = 9,600 units (Rs. 240 – Rs. 237.50*)

                     = Rs. 24,000 (A).

   [* Rs. 22,80,000 ÷ 9,600 = Rs. 237.50].

III: Reconciliation Statement

Particulars	Rs.	Rs.
(a) Standard profit based on actual		4,80,000
production - Rs. 50 × 9,600 units
(b) ADD: (favourable variances):
(i) Direct material-usage variance (F)	72,000
(ii) Direct labour-efficiency variance (F)	38,000	1,10,000
		5,90,000
(c) Less: (Adverse variances)
(i) Direct material-price variance (A)	1,29,600
(ii) Direct labour-rate variance (A)	4,000
(iii) Variable overhead-expenditure variance (A)	3,000
(iv) Fixed-overhead variance (A)	10,000
(v) Selling-price variance (A)	24,000	1,70,600
(d) ACTUAL PROFIT (B – C)		4,19,400

IV: Bonus earned by workers

1. Incentive earnings based on materials saved 20% of material-usage variance; 20% of Rs. 72,000 = 14,400.

   Add:

2. Incentive earnings based on labour time saved 40% of labour. Efficiency variance, 40% of Rs. 38,000 = 15,200.

                   Total bonus earned under the incentive scheme = 29,600.

Illustration 15.42

Model: Variance ratios

Navang Ltd. produces two commodities, “Good” and “Better” in one of its departments. Each unit takes 5 hrs and 10 hrs as production time, respectively. 1,000 units of “Good” and 600 units of “Better” were produced during March 2010. Actual man hours spent in this production were 10,000. Yearly budgeted hours were 96,000.

Calculate the variance ratios.

 

[C.S. Final – Modified]

Solution

1. Calculation of capacity ratio:

   Formula:

   

   where,

   Budgeted no. of hours (per month)

   ∴ Capacity ratio

   
2. Calculation of activity ratio:

   Formula:

   

   Where actual production in terms of standard hours Std time for one unit of output × Actual output

   (i) Product “Good” : 5 hrs × 1,000 units = 5,000 hrs.

   (ii) Product “Better”: 10 hrs × 600 units = 6,000 hrs.

                                                 = 11,000 hrs.

   
3. Calculation of Efficiency ratio:

   Formula:

   

Standard means a pre-determined estimate of quantities. Standard costing is a technique which uses standards for costs and revenues for the purpose of control through variance analysis.

Features of a standard costing system are: (i) Flow of information, (ii) No place for actual costs (iii) Criterion of performance measurement and (iv) Suitable for firms producing identical goods in large numbers.

Advantages: (i) Effective tool to exercise cost control (ii) Easy identification of sources of wastage and loss (iii) Creation of cost consciousness (iv) Facilitates revenue decisions and diagnosis (v) Enhances morale of employees (vi) Delegation of authority with responsibility (vii) A proper basis for inventory valuation (viii) Enhance Efficiency of operations (ix) Facilitates integration of accounts (x) Serves as a constant unit for measuring performance.

Limitations: (i) Time consuming (ii) Non-suitability for types of industries where production is not uniform and non repetitive (iii) Only past events are analysed (iv) Costly (v) Lack of proper control (vi) Difficulty in segregation of variances and (vii) Unreliable standards.

Pre-requisites for installation of standard costing system: (i) Should be acceptable by all (ii) Requirement of qualified and trained staff (iii) An efficient accounting system (iv) Setting of standards (v) Optimum size (vi) Proper delegation of authority and responsibility (vii) Effective budegetary control system Types of standards: (a) Basic standard (b) Ideal standard (c) Attainable standard (d) Normal standard (e) Current standard fixation of standards: Various techniques available, the choice of technique, are all explained in detail in the text. Standard hour: It is the expression of output or amount of work in terms of, standard time instead of units. The underlying concept of standard hour is that dissimilar units can be expressed in a single measure.

Analysis of variances: The difference between planned, budgeted or standard costs and actual costs is termed as variance. Principles of variance analysis: (i) Quantification (ii) Product wise analysis (iii) Total cost variance (iv) Result of variance analysis (v) Identification of causes & (vi) Corrective action.

Total variance—its various components—features and formula to compute each variance are all discussed in detail in Text by way of Illustrations (No 15.5 to 15.41).

Standard: It is a pre-determined measurable quantity needed in respect of an element of work.

Standard Cost: A predetermined cost which is usually expressed on a per unit basis.

Standard Costing: A technique which uses standards for costs and revenues for the purpose of control through variance analysis.

Standard Hour: The quantity of work achievable at a standard performance expressed in terms of a standard unit of work in a standard period of time.

Variance: The difference between planned, budgeted or standard cost and actual costs.

Variance Analysis: The analysis of variances arising in a standard-costing system into their constituent parts.

Variance Accounting: A technique whereby the planned activities of an undertaking are quantified in budgets, standard cost, standard selling prices and standard profit margins, and the difference between these and actual costs are compared. The procedure is to collect, compare, comment, and correct.

Revision Variance: The difference between an original and a revised standard cost.

Basic Standard: A standard established for use over a long period from which a current standard can be developed.

Ideal Standard: A standard which can be attained under most favourable conditions.

Attainable Standard: A standard which can be attained if a standard unit of work is carried out efficiently. The standard represents future performance and objectives which are reasonably attainable.

Activity Ratio: Ratio that measures the level of activity at which the firm is operating.

Efficiency Ratio: It measures the Efficiency of a firm’s operations.

Capacity Ratio: It measures the capacity utilization of the firm.

QUESTION BANK

I: State whether the following statements are True or False

1. Standard costs are pre-determined costs.
2. Standard costs are solely based on historical costs.
3. Standard costs are expressed on a per unit basis.
4. The difference between the standard and the actual costs is termed as “differential costing”.
5. Standard cost is the projection of cost accounts.
6. Standard-costing system can exist without budgets.
7. In a standard-costing system, no actual product costs are generated.
8. A standard-costing system is more suitable for industries whose activities are of repetitive in nature.
9. In a standard-costing system, standards are set for a short period only.
10. Standards are expressed in terms of money only.
11. Usually “basic standards” are established for use over a long period.
12. A “current standard” can be developed from a basic standard.
13. Standard costs can be ascertained for a part of the business.
14. The use of standard costs is as per statistical data only.
15. Generally, it is difficult to set standards where the work is not repetitive in nature.
16. A standard-costing system facilities “management by exception” principle.
17. There exists no conceptual difference between the terms “budgeted costs” and “standard costs”.
18. Irrespective of the type of product or their unit of measurement, the standard hour is capable to measure them.
19. Once the differences are determined, the process of variance accounting is said to be completely over.
20. Variances should be stated in any unit other than monetary terms.
21. An adverse material-price variance indicates that lower prices have been paid for the purchase of raw materials.
22. An adverse material-usage variance indicates a higher usage of materials.
23. A favourable material-yield variance indicates that the actual production is lower than the standard production.
24. A favourable material-mix variance denotes the use of inferior quality of materials.
25. A favourable direct-labour-Efficiency variance indicates the use of a higher grade of labour.
26. An adverse labour-rate variance shows the use of higher rated workers.
27. A favourable variable-overhead-expenditure variance indicates the use of services in an economical manner.
28. A fixed overhead-calendar variance highlights the cost incidence of the difference between the budgeted number of hours and the actual number of hours worked.
29. Sales-mix variance represents the Efficiency with which only one specified type of product has been sold.
30. When the original standard costs are compared against the actual costs, it is termed as “revision variance”.

Answers:

 

1. True	2. False	3. True	4. False
5. True	6. False	7. True	8. True
9. False	10. False	11. True	12. True
13. False	14. False	15. True	16. True
17. True	18. True	19. False	20. False
21. False	22. True	23. False	24. True
25. True	26. True	27. True	28. False
29. False	30. True

II: Fill in the blanks with apt word(s)

1. A standard is a ______ estimate of quantities of input, namely, material, labour and other expenses.
2. Standard costs are expressed on a ______ basis.
3. The difference between the actual costs incurred and the standard costs is termed as ______ .
4. The variance accounts at the end of the specified periods are ______ against the cost of the sales accounts.
5. In a standard-costing system, the WIP inventory is ______ with standard costs of products produced.
6. In a standard-costing system, ______ are not taken into account.
7. A standard-costing system is suitable for industries where activities are of ______ in nature.
8. Standards are set for a ______ period.
9. A standard which can be attained under most favourable conditions is known as ______ .
10. A standard established for use over a long term is known as______.
11. The setting of a standard cost requires (i) price and (ii) ______.
12. The volume of output or amount of work to be performed in an hour is called______.
13. The activity ratio measures ______ of the firm.
14. In all variance analysis, ______ variance is to be computed first.
15. Total variance is subdivided into two component variances Price and (ii)______.
16. Variance accounting is a technique uses in standard costing and______.
17. Variances must be expressed in______.
18. Variances may be adverse or______.
19. Material-usage variance = Material______– variance + Material-yield variance.
20. Direct material-cost variance = (______ × Actual output) – (Actual material cost of output).
21. Material-price variance =______(Std price – Actual price).
22. Standard output on actual input =______ × Actual total material input.
23. The direct-labour Efficiency-variance direct labour his poduced= ______ (std Actual direct labour hours).
24. Direct labour-rate variance = ______ (Std wage rate per hour – Actual wage rate per hour).
25. Direct labour-cost variance = ______+ Labour-variance rate + Labour-rate—time variance.
26. Variable-overhead variance = (Std variable-overhead rate x______) – Actual variable overhead.
27. Fixed-overhead variance = (______ × Actual production) – Actual fixed overhead.
28. The divergence between the original standard costs and the revised standard costs is known as
29. Selling-price variance = ______ (Budgeted selling price – Actual selling price).
30. Controllable variances are transferred to ______ A/c while non-controllable variances are to be adjusted against ______.

Answers:

1. pre-determined
2. per unit
3. variance
4. written off
5. credited
6. actual product costs
7. repetitive
8. an indefinite
9. ideal standard
10. basic standard
11. quantities
12. standard hour
13. level of activity
14. total
15. usage
16. budgetary control
17. monetary terms
18. favourable
19. mix
20. standard material cost per unit of output Standard output
21. Actual quantity used
22. 
23. Standard wage rate per hour
24. Actual hours
25. Labour-Efficiency variance
26. Actual production
27. Standard fixed overhead rate
28. Revision variance
29. Actual quantity sold
30. Profit and Loss; cost of sales

III: Multiple choice questions choose the correct answer:

1. A standard is
   1. pre-determined measurable quantity
   2. based on past records
   3. based on previous experience
   4. a rough estimate of future
2. Standard cost is expressed in
   1. quantity
   2. price and quantity
   3. per unit basis
   4. terms of money or money’s worth.
3. Standard costing is a
   1. technique
   2. system of keeping records
   3. set of costs
   4. none of these
4. The objective of standard costing is
   1. to maintain standards
   2. to delegate authority
   3. to generate standard cost
   4. to control costs through variance analysis
5. One of the following principles of management is adhered in standard costing:
   1. management by objective
   2. management by exception
   3. delegation of authority
   4. maximizing profits
6. A standard-costing system is suitable for industries
   1. where activities are of repetitive in nature
   2. of small size
   3. of big size
   4. producing different types of goods in large numbers
7. In standard-costing system, standards are set
   1. for a short period say 3 months or 6 months
   2. for an accounting period only
   3. for an indefinite period
   4. none of these
8. A standard established over a long period is called as
   1. ideal standards
   2. basic standard
   3. attainable standard
   4. none of the above
9. The difference between standard costs and actual costs is known as
   1. budgetary control
   2. variance
   3. variance analysis
   4. variance accounting
10. Variance should be stated in
    1. money terms
    2. grade
    3. quantity
    4. none of the above.
11. Variances should be analysed
    1. in total
    2. for each product
    3. for each transaction
    4. none of these
12. Sales-volume variance
    1. Sales-price variance + Sales-value variance
    2. Sales-value variance + Sales-quantity variance
    3. Sales-mix variance + Sales-value variance
    4. Sales-mix variance + Sales-quantity variance
13. Revision variance arises due to the difference between
    1. actual cost and budgeted cost
    2. actual cost and standard cost
    3. standard cost and revised standard cost
    4. none of the above

Answers:

 

1. a	2. c	3. a	4. d	5. b
6. a	7. c	8. b	9. b	10. a
11. b	12. d	13. c

1. Define “standard”.
2. What do you mean by standard cost?
3. Explain the term: standard costing.
4. Enumerate the differences between budgets and standard costs.
5. Mention the salient features of a standard-costing
6. Define “Basic standard”.
7. What do you mean by “Ideal standard”?
8. Explain the term “Attainable standard”.
9. What factors are to be considered for establishing standard costs?
10. Write a short note on “material quantities” and “material price”.
11. What are the methods available for determining standard overhead rate?
12. Mention the problems in setting standards.
13. Explain the term “standard hour” with an illustration.
14. What is “activity ratio”? How can it be computed? What is its significance?
15. Explain the term: “Efficiency ratio”.
16. Write a short note on “capacity ratio”. system.
17. Define: variance.
18. What do you mean by variance analysis?
19. Explain the term: “variance accounting”.
20. Write short notes on:
    1. Material-cost variance
    2. Material-price variance
    3. Material-usage variance
    4. Material-mix variance
    5. Material-yield variance
21. Enumerate the causes for arising material-cost variance and material-price variance.
22. Write short notes on:
    1. Direct labour-cost variance
    2. Direct labour-Efficiency variance
    3. Direct labour-rate variance
    4. Direct labour-mix variance
    5. Direct labour-idle-time variance
23. What are the causes for arising direct labour-Efficiency variance and labour-rate variance?
24. Write short notes on:

    1. Variable-overhead variance

    2. Variable overhead-expenditure variance
    3. Variable overhead-Efficiency variance
25. Explain briefly:
    1. Fixed-overhead variance
    2. Fixed overhead-calendar variance
    3. Fixed overhead-capacity variance
    4. Fixed overhead-Efficiency variance
    5. Fixed overhead-expenditure variance
    6. Fixed overhead-volume variance
26. Define “revision variance”.
27. Write short notes on:
    1. Sales-price variance
    2. Sales-volume variance
    3. Sales-mix variance
    4. Sales-quantity variance
28. Explain the significance of “reporting variances to management”.
29. What do you understand by the term “disposition of variances”? Mention the methods that are used for accounting treatment of variances.
30. Mention the three different types of standard which are used as the basis for a standard-costing system?

1. What is (i) standard; (ii) standard cost; and (iii) standard costing? What are the advantages of standard costing? Enumerate the limitations of standard costing.
2. Distinguish between standard costing and budgetary control. Discuss the inter-relationship between budgetary control and standard-costing system.
3. What do you understand by “a standard-costing system”? What are the pre-requisites for installation of a standard-costing system?
4. Distinguish between estimated cost and standard cost.
5. How standards are set for (i) direct materials; (ii) direct labour; and (iii) overheads?
6. Discuss the main types of variances by way of a chart.
7. “Standard costing and budgetary control methods are inter-related but not interdependent”—Discuss.
8. “Variance analysis is an integral part of standard costing”– discuss.
9. List five types of Efficiency in the use of materials that may be discovered as the result of investigating material-quantity variances. What measures may be taken in each such situation to prevent their recurrence?
10. Explain the Efficiency variance as to material, labour and overhead and show the relation among them.
11. What are the causes for (i) material-price variance and (ii) material-usage variance? Suggest the remedial action to be taken.
12. Explain the reasons for occurrence of (i) direct labour-Efficiency variance and (ii) direct wage-rate variance. How can their recurrence be prevented?
13. Enumerate the causes for (i) overhead-expenditure variance; (ii) overhead-Efficiency variance; and (iii) overhead-capacity variance. Suggest the ways to check their recurrence.
14. Sales variances can be computed under two different methods. Name them. Explain the necessity of computing sales variances under those two different methods by way of a simple illustration.
15. Explain the different methods of accounting treatment of variances in cost accounts.
16. In standard costing, certain ratios are used to illustrate the effective use of the resources of the firm. Discuss any two of these ratios with imaginary figures.
17. Explain the term “management report on variances”. Construct a “format” to report the variances in an effective manner, as no standardized formats are in vogue now.
18. You are a cost accountant. You are approached by a company to install a system of cost accounting. How would you install such a system that is new to the concern? Also explain the difficulties you foresee and how will you overcome those obstacles?

 

[Model: Material variances]

1. From the following particulars, calculate:

 

(a) Material-cost variance;
(b) Material-price variance and
(c) Material-usage variance.
Quantity of materials purchased	3,000 units.
Value of materials purchased	Rs. 9,000.
Standard quantity of material
required per tonne of finished product	25 units.
Standard rate of material	Rs. 2 per unit.
Opening stock of raw material	Nil.
Closing stock of raw material	500 units.
Finished production	80 tonnes

 

[Madurai Kamaraj University]

[Ans: (a) Rs. 3,500 (A); (b) Rs. 2,500 (A); (c) Rs. 1,000 (A)]

2. From the following information, calculate:

1. Material-cost variance
2. Material-usage variance and
3. Material-price variance separately for X and Y

[Madras University]

[Ans: (a) Rs. 11 (A); (b) Rs. 23 (A); (c) Rs. 12 (F)]

3. From the following, calculate all material variances:

[Ans: MCV, Rs. 12 (A); MPV – Rs. 6 (F); MUV Rs. 18 (A); M.Mix.V – Rs. 2 (A); MYV – Rs. 16 (A).]

4. Mixers Ltd is engaged in producing a standard mix, using 60 kg of chemical X and 40 kg of chemical Y. The standard loss of production is 30 y. The standard price of X is Rs. 5 per kg and of Y is Rs. 10 per kg.

The actual mixture and yield were as follows:

X – 80 kgs at Rs. 4.50 per kg.

Y – 70 kgs at Rs. 8 per kg.

Actual yield – 115 kgs.

Calculate material variances (Price, Usage, Yield, Mix)

 

[Madras University]

[Ans: MPV – Rs. 180(F); MUV. Rs. 50 (F); MYV: Rs. 100 (F); MMV – Rs. 50 (A)]

5. The standard cost of a chemical mixture is as follows:

4 tonnes of materials ‘A’ at Rs. 40 per tonne.

6 tonnes of material ‘B’ at Rs. 60 per tonne.

Standard yield 90% of input.

Actual cost for a period is as under:

4.5 tonnes of material A at Rs. 30 per tonne.

5.5 tonnes of material B at Rs. 68 per tonne.

Actual yield is 9.1 tonnes.

Calculate all material variances:

[Ans: MCV – Rs. 16.78 (F); MPV – Re 1 (F); MUV 15.78 (F); MMR – Rs. 10 (F); MYV – Rs. 5.78 (F)]

6. The standard cost of a certain chemical mixture is as follows:

40% of Material A at Rs. 20 per kg.

60% of Material B at Rs. 30 per kg.

A standard loss of 10% is expected in production during a period when the usage was:

90 tonnes of material at the cost of Rs. 38 per tonne.

110 tonnes of materials at the cost of Rs. 34 per tonne. The weight produced is 180 tonnes of a good product. Calculate the material variances.

 

[Modified – Madras]

[Ans: MPV Rs. 2060 (A); MUV – Rs. 360 (F); MMV – Rs. 100 (F); MYV Rs. 260 (F)]

[Model: Labour variances]

7. From the following data, calculate cost, rate and efficiency variances for the Department A:

 

Actual gross wages (direct)	Rs. 2,000.
Standard hours for production	8,000.
Standard rate per hour	Re 0.30.
Actual hours worked	8,200.

[Ans: LCV – Rs. 400 (F); LRV – Rs. 460 (F); LEV – Rs. 60 (A)]

8. Calculate labour variances from the following data:

 

Gross direct wages	Rs. 6,000
Standard hours produced:	3,200
Standard rate per hour:	Rs. 3

Actual hours paid, 3,000 hours of output of which hours not worked (abnormal idle time) 100 hours

[Ans: LCV – Rs. 3,600 (A); LPV – Rs. 600 (F); LEV – Rs. 300 (F); Idle-time variance – Rs. 300 (A)]

9. The labour budget of a company for a week is as follows:

20 skilled men at Rs. 5 per hour for 40 hours.

40 unskilled men at Rs. 3 per hour for 40 hours.

The actual employment was as follows:

30 skilled men at Rs. 5 per hour for 40 hours.

30 unskilled men at Rs. 4 per hour for 40 hours.

Calculate labour variances.

[Ans: LCV Rs. 2,000 (A); LRV Rs. 1,200 (A); LEV Rs. 800 (A); LMV Rs. 800 (A)]

10. A gang of workers consisting of 100 skilled workmen, 40 semi-skilled workmen and 60 unskilled workmen were to work for 30 weeks to get a contract job completed. The standard weekly wages were Rs. 60, Rs. 36 and Rs. 24, respectively. The job was actually completed in 32 weeks by 80 skilled, 50 semi-skilled and 70 unskilled workmen who were paid Rs. 65, Rs. 40 and Rs. 20, respectively, as weekly wages.

Find out the labour-cost variance, labour-rate variance, labour-mix variance and labour-Efficiency variance.

[Ans: LCV Rs. 8,800 (A); LRV Rs. 10,240 (A); LMV Rs. 19,200 (F); LEV Rs. 17,760 (A)]

[Model: Labour and material variances]

11. The following details relating to the product X during the month of March 2010 are available. You are required to compute the material- and labour-cost variances:

Standard cost per unit:

Material 50 kg at Rs. 40 per kg.

Labour 400 hours at Re 1 per hour.

Actual cost for the month:

Material 4,900 kg at Rs. 42 per kg.

Labour 39,600 hours at Rs. 1.10 per hour.

Actual production – 100 units.

[Ans: MCV- Rs. 5,800 (A); MPV- Rs. 9,800 (A); MUV- Rs. 4,000 (F); LCV- Rs. 3,560 (A); LRV- Rs. 3,960 (A); LEV- Rs. 400 (F)]

[Model: Overhead variance – variable]

12. From the following details, you are required to compute the variable-overhead variances.

 

Budgeted variable overhead	Rs. 10,000.
Budgeted output in units	5,000.
Actual variable overhead	Rs. 8,000.
Actual output in units	4,800.
Standard output for actual time	4,600.

[Ans: Variable overhead-cost variance – Rs. 1,600 (F); Variable overhead-expenditure variance – Rs. 1,200 (F); Variable overhead-Efficiency variance – Rs. 400 (F)]

[Model: Fixed overhead variances]

13. From the following data, calculate the fixed-overhead expenditure and volume variances: Fixed-overhead budget for November – Rs. 1, 00,000. Budgeted production for the month 50,000 units. Actual production for the month – 54,000 units. Actual fixed overhead incurred – Rs. 1, 20,000.

[Ans: Fixed overhead-expenditure variance – Rs. 20,000 (A); Fixed overhead-volume variance – Rs. 8,000 (F)]

[Model: Fixed overhead variances]

14. The following information is available from the records of a factory:

	Budget	Actual
Fixed overhead for June (Rs.)	10,000	12,000
Production in June (units)	2,000	2,000
Standard time per unit (hrs)	10	–
Actual hours worked in June	–	22,000

Compute: (i) Fixed overhead-cost variance; (ii) Expenditure variance; (iii) Volume variance; (iv) Capacity variance; and (v) Efficiency variance.

[Ans: (i) Rs. 1,500 (A); (ii) Rs. 2,000 (A); (iii) Rs. 500 (F); (iv) Rs. 1,000 (F); (v) Rs. 500 (A)]

[Model: Fixed and variable overhead variances]

15. A company produces one product and the standard cost contains the following information:

	Budget	Actual
Output for the month	4,000 units	4,400 units
Fixed overhead	Rs. 24,000	Rs. 26,000
Variable overhead	Rs. 24,000	Rs. 34,000

Calculate:

1. Total overhead-cost variance
2. Fixed overhead-cost variance
3. Variable overhead-cost variance

[Ans: (a) Rs. 7,200 (A); (b) – Rs. 400 (F); (c) Rs. 7,600 (A)]

16. The standard overhead rate of a product is developed as follows:

Variable – Rs. 4 per unit

Fixed (budgeted production – 10,000 units) Rs. 6 per unit with standard time allowed for production of one unit of product is 5 hours. The following actual data are available for a month:

 

	Production	9,600 units
	Time taken	47,900 units
Overhead:
	Variable	Rs. 38,500
	Fixed	Rs. 60,500

Compute overhead variances.

 

[Ans:	Variable at cost variance: Rs. 100 (A);
	Variable overhead-expenditure variance —
	Rs. 180 (A);
	Variable overhead-Efficiency variance – Rs. 80 (F);
	Fixed overhead-cost variance – Rs. 2,900 (A);
	Fixed overhead-expenditure variance – Rs. 500 (A);
	Fixed overhead-volume Variance – Rs. 2,400 (A);
	Fixed overhead-capacity variance – Rs. 2,520 (A);
	F.OH. Effective variance – Rs. 120 (F).]

[Model: Sales variance – Turnover]

17. The budgeted and actual sales for a period in respect of two products are as follows:

Calculate the sales variances.

 

[Ans:	Sales-price variance – Rs. 200 (F);
	Sales-volume variance – Rs. 200 (A);
	Sales-margin variance – Rs. 200 (A);
	Sales-quantity variance – NIL.]

18. From the following compute:

1. Sales-price variance and
2. Sales-volume variance

Budgeted sales:

10,000 units @ Rs. 3 – Rs. 30,000.

Actual sales:

5,000 units @ Rs. 3 – Rs. 15,000.

8,000 units @ Rs. 2.50 – Rs. 20,000.

[Ans: (a) Rs. 4,000 (A); (b) – Rs. 9,000 (F)]

[Model: Sales variance – Based on profit]

19. A company’s summarized budget and actual working results for 2009–2010 are given as follows:

Calculate the analysis of the variance in profit into the following:

1. Price variance
2. Sales margin-volume variance
3. Sales-value variance

[Ans: (a) Rs. 40,000 (A); (b) Rs. 46,000 (F); (c) Rs. 6,000 (F)]

[Model comprehensive]

20. The following details relating to the product X during the month of March 2010 are available: you are required to compute the material and labour variances as follows:

Standard cost per unit:

Material – 50 kg at Rs. 40 per kg.

Labour – 400 at Re 1. per hour.

Actual cost for the month:

Material – 4,900 kg at 42 per kg.

Labour – 39,600 hours at Rs. 1.10 per hour.

Actual production – 100 units.

[Ans: MCV – Rs. 5,800 (A); MPV – Rs. 9,800 (A); MUV – Rs. 4,000 (F); LCV – Rs. 3,560 (A); LRV – Rs. 3,960 (A); LEV – Rs. 400 (F)]

 

[Model: Material-cost variances)

21. The following information has been extracted from the records of a chemical company:

 

Standard price:	Raw Material A – Rs. 2 per kg.
	Raw material B – Rs. 10 per kg.
Standard mix:	A – 75%; B – 25% (by weight).
Standard yield:	90%.

In a period, the actual costs, usages and output were as follows:

 

Used:	2,200 kg of A costing Rs. 4,650.
	800 kg of B costing Rs. 7,850.
Output:	2,850 kg of products.

Calculate material-cost variances.

 

[C.S – Inter]

[Ans:	(i) Direct material-cost variance	= Rs. 170 (F)
	(ii) Direct material-price variance	= Rs. 100 (A)
	(iii) Direct material-mix variance	= Rs. 400 (A)
	(iv) Direct material-usage variance	= Rs. 270 (F)
	(v) Direct material-yield variance	= Rs. 667 (F)]

[Model: Material cost variances]

22. X Ltd is producing floor covers in rolls of standard size measuring 3 metres wide and 30 metres long, by feeding continuous raw materials to continuous process machines. The standard mixture fixed for a batch of 900 sq. meters of floor cover is as follows:

2,000 kg of Material A at Re. 1/kg.

800 kg of Material B at Rs. 1.50/kg.

20 litres of Material C at Rs. 30/litre.

During the period, 1,505 standard size rolls were produced from the material issued for 150 batches. The actual usage and the cost of material were:

3, 00,500 kg of Material A at Rs. 1.10/kg.

1, 19,600 kg of Material B at Rs. 1.65/kg.

3,100 litres of Material C at Rs. 29.50/litre.

Prepare the figures to the management showing the breakup of material-cost variances arising during the period.

 

I.C.W.A. – Inter – Modified]

[Ans:	(i) DMCV = Rs. 47,440 (A);
	(ii) DMPV = Rs. 64,440 (A);
	(iii) DMUV = Rs. 1,000 (A);
	(iv) DMMV = Rs. 2,900 (A);
	(v) DMYV = Rs. 1,900 (F).]

[Model: Material variances]

23. The standard cost of a chemical mixture AB is

40% of Material A at Rs. 400 per kg.

60% of Material B at Rs. 600 per kg.

A standard loss of 10% is anticipated in the production. The following particulars are available for the month of December 2009:

180 kg of Material A has been used at Rs. 360 per kg.

220 kg of Material B has been used at Rs. 680 per kg.

The actual production of AB is 369 kgs.

Calculate all the material variances.

 

[I.C.W.A. – Inter – Modified]

[Ans: DMCV = Rs. 1,200 (A); DMPV = Rs. 10, 400 (A); DMUV or DMQV = Rs. 9,200 (F); DMMV = Rs. 4,000 (F); DMYV = Rs. 5,200 (F)]

24. Vinak Ltd produces an article by blending two basic raw materials. It operates a standard-costing system and the following standards have been set for raw materials:

Material	Standard Mix	Standard Price/kg
A	40%	Rs. 4.00
B	60%	Rs. 3.00

The standard loss in processing is 15% during April when the company produced 1,700 kg of finished output. The position of stock and purchases for the month of April is as follows:

Calculate the following variances:

1. Material-price variance
2. Material-usage variance
3. Material-yield variance
4. Material-mix variance
5. Total material-cost variances

[C.A. – Inter; C.S. – Inter]

[Ans: (a) Rs. 376.25; (b) 90 (A); (c) Rs. 68 (A); (d) Rs. 22 (A); (e) Rs. 286.25] for both A and B.

25. Compare the missing data indicated by the question marks from the following:

Particulars	A	B
Standard price/unit	Rs. 12	Rs. 15
Actual price/unit	Rs. 15	Rs. 20
Standard input (kgs)	50	?
Actual input (kgs)	?	70
Material-price variance	?	?
Material-usage variance	?	Rs. 300 (A)
Material-cost variance	?	?

Material-mix variance for both products together is Rs. 45 (Adverse).

 

[C.A. – Inter]

[Ans:	Standard input of Product B − 50 Kg.
	Actual input of Product A − 40 kg.
	Material A − MPV Rs. 120 (A); MUV Rs. 120 (F);
	MCV − NIL
	Material B − MPV Rs. 350 (A); MCV Rs. 650 (A)]

[Model: Labour-cost variances]

26. The direct labour strength of a section of an engineering factory is 100 workers paid at the rate of Rs. 6 per day of 8 hours each. The normal production is 1,000 pieces per week of 48 hours. During a particular week, an order for 1,500 pieces was completed expending 7,650 hours made up of 6,300 hours at normal wages and 1,350 hours at overtime wages at double rate. The total wages come to Rs. 6,300.

Calculate the average labour cost per piece during thae week and analyze the labour-cost variance for the week.

 

[I.C.W.A. – Inter]

[Ans:	Average labour cost per piece (actual) = Rs. 4.20
	Direct labour-cost variance – Rs. 900 (A);
	Direct labour-expenditure variance – Rs. 338 (A);
	Direct labour-rate variance – Rs. 382 (F);
	Direct labour-overtime variance – Rs. 945 (A)]

[Model: Labour-cost variances]

27. The following details are available from the records of ABC Ltd. engaged in manufacturing article A for the week that ended 28 February:

Standard labour hours and rates of payment per article are as follows:

The actual production was 1,000 numbers of article for which the actual hours worked and the rates are given as follows:

From the above set of data, you are required to calculate:

1. Labour-cost variance
2. Labour-rate variance
3. Labour-Efficiency variance
4. Labour-mix variance

[Ans 1:L.C.V – Rs. 8,600 (A); 2. LRV – Rs. 7, 00 (A); 3. LEV – Rs. 1,600 (A); 4. LMV – Rs. 4,200 (F)]

[Model: Labour-cost variances]

28. The following was the composition of a gang of workers in a factory during a particular month, in one of the production departments. The standard composition of workers and wage rate per hour were as follows:

 

Skilled: Two workers at a standard rate of Rs. 20 per hour each.

Semi-skilled: Four workers at a standard rate of Rs. 12 per hour each.

Unskilled: Four workers at a standard rate of Rs. 8 per hour each.

The standard output of the gang was four units per hour of the product.

During the month in question, however, the actual composition of the gang and hourly rates paid were as follows:

Nature of Worker	No. of Workers	Wage Rate Paid Per Worker Per Hour Engaged Rs.
Skilled	2	20
Semi-skilled	3	14
Unskilled	5	10

The gang was engaged for 200 hours during the month, which included 13 hours when no production was possible, due to machine break down and about 810 units of the product were recorded as the output of the gang during the month.

You are required to:

1. Compute the standard unit-labour cost of the product.
2. Compute the total-variance labour cost during the month.

3. Analyse the variance in B above into sub-variances and reconcile.

[I.C.W.A. – Inter]

[Ans 1. L.C.V – Rs. 8, 600 (A); 2. LRV – Rs. 7,000 (A);
3. LEV – Rs. 1,600 (A); 4. LMV – Rs. 4,200 (F)]

[Ans: (a) Standard labour cost per unit – Rs. 30. (b) LCV – Rs. 2,100 (A); LEV – skilled – Rs. 340 (F); Semi-skilled – Rs. 2,664 (F); Unskilled – Rs. 1, 424 (A)].

 

LRV – Skilled – Nil; Semi-skilled – Rs. 1,200 (A); Unskilled – Rs. 2,000 (A); Total – Rs. 3,200 (A).

LMV – Skilled – Rs. 240 (F); Semi-skilled – Rs. 2,544 (F); Unskilled – Rs. 1504 (A); Total – Rs.1,280 (F).

Labour idle-time variance: Skilled – Rs. 240 (A); Semi-skilled Rs. 144 (A); Unskilled – Rs. 96(A); Total: Rs. 480 (A).

Reconciliation statement: (Std. labour cost of actual output Rs. 24,300 +LRV + LITV – LEV = Actual labour cost Rs. 26, 400.)

[Model: Overhead variances]

29. The following information has been obtained from the records of a manufacturing organization using standard-costing system:

	Standard	Actual
Production (units)	4,000	3,800
Working days (days)	20	21
Fixed overheads (Rs.)	40,000	39,000
Variable overhead (Rs.)	12,000	12,000

You are required to calculate the following overhead variances:

I Variable-overhead variance

II Fixed-overhead variance:

1. Expenditure variance
2. Volume variance
3. Efficiency variance
4. Calendar variance
5. Capacity-usage variance

[I.C.W.A. – Inter]

[Ans: I: Rs. 600(A)

II: (a): Rs.1, 000 (F)

     (b): Rs.2, 000 (A)

     (c): Rs. 4,000 (A)

     (d): Rs. 2,000 (F)

     (e): Rs. Nil]

30. (Overhead Variances)

 

Budgeted overhead (fixed)	Rs. 50,000
Budgeted production per day	5,000 units
Budgeted no. of days	20
Standard production per hour	50 units
Actual overhead	Rs. 60,000
Actual direct-labour hours	2,000
Actual no. of days	18
Actual production units	1,20,000 units

You are required to calculate the budget variance, calendar variance, capacity variance, Efficiency variance, volume variance and total overhead variance.

 

[Ans:	Budget/expenditure variance	= Rs. 10,000 (A).
	Calendar variance	= Rs. 5,000 (A).
	Capacity-usage variance	= Rs. 5,000 (F).
	Efficiency variance	= Rs. 10,000 (F).
	Total overhead variance	= Nil.]

[Model: Variable-overhead variances]

31. The following data are given:

	Budget	Actual
Production (in units)	400	360
Max. hours to produce above	8,000	7,000
Variable overheads (Rs.)	10,000	9,150

The standard time to produce one unit of a product is 20 hours. Calculate variable-overhead variances.

 

[C.A. – Inter]

[Ans:	Variable-overhead variance – Rs. 150 (A).
	Variable overhead-expenditure variance – Rs. 400 (A).
	Variable overhead-Efficiency variance – Rs. 250 (F).]

[Model: Overhead variances)

32. AB Co. Ltd. is having a standard-costing system in operation for quite sometime. The following data relating to the month of April 2010 are available from the cost records:

	Budgeted	Actual
Output (in units)	30,000	32,500
Operating hours	30,000	33,000
Fixed overheads (Rs.)	45,000	50,000
Variable overheads (Rs.)	60,000	68,000
Working days	25	26

You are required to work out the relevant variances (on the basis of output)

 

[I.C.W.A. – Inter]

[Ans:	V.OH. V – Rs. 3,000 (A); V.OH.ExV – Rs. 2,000 (A);
	V.OH. Eff.V – Rs. 1,000 (A); F.OH.V – Rs. 1,250 (A)
	F.OH.exp.V – Rs. 5,000 (A); F.OH.Vol.V – Rs. 3,750 (F)
	F.OH.Eff.V – Rs. 750 (A); F.OH.C.V – Rs. 4,500 (F);
	F.OH.Cal-V – Rs. 1,800 (F)]

33. The following information was obtained from the records of a manufacturing unit using standard-costing system.

	Standard	Actual
Working days (days)	20	21
Production (units)	4,000	3,000
Fixed overhead (Rs.)	40,000	39,000
Variable overhead (Rs.)	12,000	12,000

You are required to calculate the following overhead variances:

1. Variable-overhead variance:
2. Fixed-overhead variance:
   1. Expenditure variance
   2. Volume variance
   3. Efficiency variance
   4. Calendar variance
3. Also prepare a reconciliation statement for the standard fixed expenses worked out at the standard fixed overhead rate and actual fixed overhead

[C.A. – Final and I.C.W.A. – Inter]

[Ans:	(a) Rs. 600 (A)
	(b) Fixed overhead-expenditure variance – Rs. 1,000 (F).
	Volume variance – Rs. 2,000 (A).
	Efficiency variance – Rs. 4,000 (A).
	Calendar variance – Rs. 2,000 (F)]

34. The following data have been collected from the records of a unit for computing the variances for a period:

No. of budgeted working days (days) 25

Budgeted man hours per day (hours) 8,000

Output (budgeted) per man hour (units) 1

Fixed-overhead cost as budgeted Rs. 1,50,000

Actual no. of working days 27

Actual max. hours per day 6,300

Actual output per max. hours (units) 0.9

Actual fixed-overhead incurred Rs. 1,50,000

Calculate all the fixed-overhead variances.

 

[I.C.W.A. Inter]

[Ans:	Fixed overhead variances – Rs. 2,910 (A).
	Expenditure variance – Rs. 6,000 (A).
	Volume variance – Rs. 3,090 (A).
	Capacity variance – Rs. 8,100 (F).
	Calendar variance – Rs. 12,000 (F).
	Efficiency variance – Rs. 17,010 (A).]

[Model: Sales variances]

35. X Ltd had budgeted the following sales for the month of March 2010:

Product A = 800 units @ Rs. 100 per unit.

Product B = 700 units @ Rs. 200 per unit.

The actual sales for month were as follows:

Product A = 900 units @ Rs. 110 per unit.

Product B = 800 units @ Rs. 180 per unit.

The costs per unit of products A and B were Rs. 80 and Rs. 170, respectively.

You are required to compute the different variances to explain the difference between the budgeted and the actual profits.

 

[I.C.W.A. – Inter – Modified]

 

[Ans:	Sales margin-price variance	= Rs. 7,000 (A);
	Volume variance	= Rs. 5,000 (F);
	Mix Variance	= Rs. 61 (F);
	Quantity variance	= Rs. 4,939 (F);
	Total	= Rs. 2,000 (A)]

36. SQC Ltd provides the following data for the month of March 2010:

You are required to compute: (i) sales margin-quantity variance; (ii) sales margin-mix variance; (iii) sales margin-volume variance; (iv) sales margin-price variance; and (v) sales margin-total variance.

 

[C.A. Inter – Modified]

[Ans: (i) Rs. 1,040 (A) ; (ii) Rs. 320 (F) ; (iii) Rs. 720 (A); (iv) Rs. 1,280 (A) ; and (v) Rs. 2000 A]

37. For a month, the budgeted and actual figures for the sales are as follows:

Calculate the sales variances:

1. With reference to turnover.
2. With reference to profits, if the budgeted cost for different products are:

1. Rs. 1.50
2. Re 0.80
3. Rs. 2.00
4. Rs. 3.00

[Ans: (a) With reference to turnover

(b) With reference to profits:

[Model: Sales variance, cost variance and reconciliation of actual and budgeted profit]

38. The standard cost data of three products X, Y and Z, manufactured by a company are given in the following together with the budgeted sales and the unit-selling prices for 2009–2010:

In April 2009, the cost department of the company gathered The following details for 2009–2010:

You are required to determine:

1. The budgeted and actual profit for 2009–2010.
2. The variance in profit analyzed into
   1. Cost variance
   2. Sales-price variance
   3. Sales-volume variance

[I.C.W.A. – Inter]

[Ans:	(a) Budgeted profit – Rs. 7,80,000; Actual profit – Rs. 6,60,000; Variance in profit – Rs. 1,20,000(A)]
	(b) (i) X − Rs. 40,000 (A);	Y − 44,000 (A);
	Z − Rs. 16,000 (F)	= Total Rs. 68,000 (A).
	(ii) X − Rs. 40,000 (F);	Y − Rs. 88,000 (A);
	Z − Rs. 16,000 (F)	= Total Rs. 32,000 (A).
	(iii) X − Rs. 60,000 (A);	Y − Rs. 24,000 (F);
	Z − Rs. 16,000 (F)	= Total Rs. 20,000 (A).]

[Model: Sales variances]

39. Ultra Modern Cassette Ltd had budgeted the following sales for February 2010:

 

VCD cassette	1,100 units at Rs. 50 per unit
DVD cassette	950 units at Rs. 100 per unit
MP3	1,250 units at Rs. 80 per unit

As against this, the actual sales were:

 

VCD	1,300 units at Rs. 55 per unit
DVD	1,000 units at Rs. 95 per unit
MP3	1,200 units at Rs. 78 per unit

The cost per unit of CD, DVD and MP3 was Rs. 45, Rs. 85 and Rs. 70, respectively.

Compute the different variances to explain the difference between the budgeted and the actual profit.

 

[C.S. – Inter – Modified]

[Ans:	Profit variance: Rs. 350 (F);
	Budgeted profit – Rs. 32,250; Actual profit – Rs. 32,600]

[Model: Comprehensive]

40. A company producing a standard product is facing declining sales and dwindling profits. It has, therefore, decided to introduce a standard-cost system to control the cost. To motivate workers to improve productivity, the management has also decided to introduce an inactive scheme under which employees are paid 20% of standard cost of materials saved and also 40% of the labour time saved valued at standard labour rate.

Following are the details of the standard cost of the product: Standard cost per units

Selling price per unit – Rs. 240.

During one particular month, 9,600 units of the product were manufactured and sold incurring the following actual cost:

Required:

1. Variances that occurred during the month and duty-reconciling profit of the actual production with the actual profit.
2. Bonus amount earned by the workers during the month under the incentive scheme.

[I.C.W.A. – Inter]

[Ans:

1. Direct material-cost variances:
   1. D.M.P.V: Rs. 1, 29,600 (A)
   2. D.M.U.V: Rs. 72,000 (F)
2. Direct labour-cost variances:
   1. L.R.V: Rs. 4,000 (A)
   2. L.E.V: Rs. 38,000 (F)
3. Variable overhead-expenditure variance – Rs. 3,000 (A).
4. Fixed-overhead variance – Rs. 10,000 (A).
5. Sales variances:

   Selling-price variance – Rs. 24,000 (A).

6. Reconciliation statement:

   Std profit (on actual production) – Rs. 4, 80,000 +

   (DMUV – Rs. 72,000 + DLEV – Rs. 38,000)—

   {DMPV + LRV + VOH + F. OH + Selling-price variance} = Actual profit = Rs. 4, 19,400.

7. Bonus earned by workers – Rs. 29,600.]