CA Inter Costing | STANDARD COSTING | Parag Gupta sir

What is Standard costing?

Standard costing is a cost accounting technique where we calculate a planned or ‘standard’ cost of materials, labour and overhead, and then compare that to the actual costs to evaluate performance using variances.
Standard costing is a recognised method of performance evaluation, as well as a recognised control and planning technique, and is used for decision-making because it provides benchmarks by which to assess activity efficiency, as well as allow for deviations from standards for cost purposes at the intermediate level recommended by ICAI.

Importance
Variance analysis provides important information to managers by identifying where and why actual costs diverge from standards and allows for implementation of targeted corrective actions to improve processes, profitability, and ultimately pricing by focusing on areas of research, development, or production cost development that are inefficient.
Standard costing also facilitates budgeting and performance evaluation, making it useful as a control mechanism in manufacturing companies and service industries.

Key terminology
Standard cost – planned unit cost of a product, component or service for a time period stipulated under defined conditions.
Variance – money-value difference (i.e., excess or shortfall) between actual and standard; favourable variance: favourable if it decreases cost or increases profit; adverse variance: adverse if it increases costs or decreases profit
Standard quantity (SQ), Standard price/rate (SP/SR), Actual quantity/hours (AQ/AH), Actual price/rate (AP/AR) – the core drivers of material, labour, and overhead variances.

Thus, the commonplace price could be a pre-determined price, the calculation of that is finished when taking into thought, on the idea management’s standards of economical operation, the relevant necessary expenditure. the quality cost accounting technique was evolved for the aim of eliminating the shortcomings of historical cost accounting.

Techniques of Standard Costing

The techniques of ordinary Standard Costing square measure the following:

• There is a pre-determination of knowledge that square measure associated with production. so pre-determination of materials & labor operations in details that are important for every product; pre-determination of losses that square measure inescapable, level of expected potency, level of activity, etc square measure concerned in commonplace standard costing.

• For each part i.e., material, labor & overhead, commonplace prices square measure set up very well.

• Ascertainment of variances, that arises as a result of variations between the particular prices & corresponding commonplace price very well wise; is finished by the comparison the particular prices & performance with corresponding standards.

• For the aim of decisive the causes for the variations between the particular prices, analysis of variances square measure done.

• Presentation is formed in an exceedingly most fitting manner to the acceptable management, of the data that is offered from the higher than analysis so it becomes doable to require remedial measures or the redaction the standards if it’s necessary.

Types of Standards

Standards may be established as basic, ideal, attainable, or current depending on whether the intent is to establish benchmarks for time frames far into the future, optimum conditions, achievable levels of efficiency, or the manner in which we currently undertake activities.
A key component in the derivation of standards is generally the use of technical specifications, engineering calculations, and past experiences to predict resources and rates of use that are aligned with policy and capacity assumptions.

Core formulas

• Materials: MCV=(SQ×SP)−(AQ×AP)\textbf{MCV} = (SQ \times SP) – (AQ \times AP)MCV=(SQ×SP)−(AQ×AP); MPV=(SP−AP)×AQ\textbf{MPV} = (SP – AP)\times AQMPV=(SP−AP)×AQ; MUV=(SQ−AQ)×SP\textbf{MUV} = (SQ – AQ)\times SPMUV=(SQ−AQ)×SP.
  
• Labour: LCV=(SH×SR)−(AH×AR)\textbf{LCV} = (SH \times SR) – (AH \times AR)LCV=(SH×SR)−(AH×AR); LRV=(SR−AR)×AH\textbf{LRV} = (SR – AR)\times AHLRV=(SR−AR)×AH; LEV=(SH−AH)×SR\textbf{LEV} = (SH – AH)\times SRLEV=(SH−AH)×SR.
  
• Variable OH: VOHCV=Std VOH for production−Actual VOH\textbf{VOHCV} = \text{Std VOH for production} – \text{Actual VOH}VOHCV=Std VOH for production−Actual VOH; Expenditure=(SR−AR)×AH\text{Expenditure} = (SR – AR)\times AHExpenditure=(SR−AR)×AH; Efficiency=(SH−AH)×SR\text{Efficiency} = (SH – AH)\times SREfficiency=(SH−AH)×SR.
  
• Fixed OH: cost, expenditure, and volume variances with capacity, efficiency, and calendar sub-variances, e.g., FOVV=(Budgeted units−Actual units)×Budgeted rate per unit\text{FOVV} = (\text{Budgeted units} – \text{Actual units})\times \text{Budgeted rate per unit}FOVV=(Budgeted units−Actual units)×Budgeted rate per unit.

Variance analysis overview

In standard costing, total cost variance can be broken down into material, labour and overhead variances, which can be analyzed into price/rate and quantity/efficiency effects in order to precisely identify the cause of the variance.
This structure enables a specific investigation and disposition of variances, thus providing clear accountability to departments concerning control measures.