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Standard Costing (Analysis of Advanced Variances (Relevant Cost Approach…

- - - - Changing the composition of team might result in a cheaper labour mix (favourable mix variance) but lower productivity (adverse yield variance)
      - Workers trying to improve productivity (favourable efficiency variance) in order to get bonus (adverse rate variance) might use materials wastefully in order to save time (adverse materials usage)
      - Using more skilled labour to do the work will result in an adverse labour rate variance, but productivity might be higher as a result due to experienced labour
      - Cutting sales prices (adverse sales price variance) might result in higher sales demand from customers (favourable sales volume variance)
      - Use of cheaper material which is of poorer quality, the material price variance will be favourable, but this can cause more wastage of materials leading to adverse usage variance
      - Similarly, favourable sales price variance may result in adverse sales volume variance
  - - - Poor supervision of the workforce
      - Learning curve effect upon the labour efficiency levels
      - Industrial action in relation to workforce
      - Resource shortages causing an unexpected delay and lowering of labour efficiency levels
      - Workforce mix can have an impact upon labour efficiency levels
      - Using inferior quality of material
      - Improvement in work or productivity efficiency
      - Introduction of new machinery resulting in improvement of labour productivity levels
    - - Fixed Overhead Volume Variance are often caused by changes in production volume
      - Variable Overhead Expenditure Variance are often caused by changes in machine running costs
      - Fixed Overhead Expenditure Variance (adverse) are caused by spending in excess of the budget
      - Variable Overhead Efficiency Variance - Causes are similar to those for a direct labour efficiency variance
    - - The effect of low price offers during a marketing campaign
      - Poor performance by sales personnel
      - Higher discounts given to customers in order to encourage bulk purchases
      - Market conditions or economic conditions forcing changes in prices across the industry
    - - Changes made in the material mix
      - Careless way of handling material by production department
      - Increased efficiency in production can help in bringing down wastage rate
      - Change in method of production/design
      - Implementation of better quality control
      - Pilferage of material from the production department
      - Purchase of inferior quality material
      - Poor inspection
    - - Unexpected changes in customer preferences and buying patterns
      - Failure to satisfy demand due to production difficulties
      - Successful or unsuccessful marketing efforts (for example, the effects of an advertising campaign)
      - Higher demand due to a cut in selling prices, or lower demand due to an increase in sales prices
      - Successful or unsuccessful direct selling efforts
    - - Order size can result in variance
      - Any form of unexpected increase in buying costs such as higher delivery charges
      - Might be caused due to the use of a different supplier
      - Efficiency or inefficiency associated with the buying procedure adopted
      - Lack of appropriate inventory control can result in emergency purchase of material resulting in adverse variance
    - - Level of experiences of the labour can impact the direct cost of labour
      - Payment of bonuses added to the direct labour cost
      - Unexpected increase in the pay rate of labour
      - Change in the composition of the workforce can impact direct labour cost
  - - - Cost
      - Pattern in variance
      - Type of variance
      - Budgetary process
      - Size
    - - Statistical Decision Model
        
        In-control state
        
        Out of control state
      - Statistical Control Charts
        
        Decision Rule : IF PB > C
        Where,
        P is the probability that the process is out of control
        B is the benefit associated with returning the process to its 'In-Control' state if the process is 'Out of Control'
        C is the cost that will be incurred when an investigation is undertaken
  - - - How close the actual cost performance is with reference to standard cost performance
      - The analysis and causes of variances
      - The concerned executives should be informed about what the cost performance should have been
      - Reporting should be based on the principle of management by exception
      - The magnitude of variances should also be stated
- - - - Labour Rate Variance
        
        = Standard Cost of Actual Time (-) Actual Cost
        (SR x AH) - (AR x AH)
      - Labour Efficiency Variance
        
        Gang Variance
        
        Standard Cost of Actual Time Worked in Standard Proportion (-) Standard Cost of Actual Time Worked
        (RAH x SR) -(AH x SR)
        
        Sub-efficiency Variance
        
        Standard Cost of Standard Time for Actual Production (-) Standard Cost of Actual Time Worked in Standard Proportion
        (SH x SR) - (RAH x SR)
        
        = Standard Cost of Standard Time for Actual Production (-) Standard Cost of Actual Time
        (SH x AH) - (AH x SR)
      - Standard cost (-) Actual Cost
        (SH x SR) - (AH x AR)
      - Direct Labour Idle Time Variance
        
        = Standard Rate per Hour x Actual Idle Hours
        (Actual Hours Paid for - Actual Hours Worked) x SR
    - - Expenditure Variance
        
        = Budgeted Fixed Overhead (-) Actual Fixed Overheads)
      - Volume Variance
        
        Capacity Variance
        
        Budgeted Fixed Overhead for Actual Hours (-) Budgeted Fixed Overheads
        (SR/hr x AH) - (SR/hr x BH)
        
        Efficiency Variance
        
        = Absorbed Fixed Overheads (-) Budgeted Fixed Overheads for Actual Hours
        (SR/hr x SH for Actual Output) - (SF/hr x AH)
        
        = Absorbed Fixed Overheads (-) Budgeted Fixed Overheads for Actual Hours
      - = Absorbed Fixed Cost (-) Actual Fixed Cost
    - - Price Variance
        
        = Standard Cost of Actual Quantity Less Actual Quantity
        (SP x AQ) - (AP x AQ)
      - Usage Variance
        
        Mix Variance
        
        Standard cost of actual quantity in standard proportion (-) Standard cost of actual quantity
        (RAQ - SP) - (AQ x SP)
        
        Yield Variance
        
        Standard Cost of standard quantity for actual production (-) Standard Cost of Actual Quantity in Standard Proportion
        (SQ x SP) - (RAQ x SP)
        
        = (Standard Cost of Standard Quantity for Actual Production) - (Standard Cost of Actual Quantity
        (SQ x SP) - (AQ x SP)
      - = Standard Cost (-) Actual Cost
        (SQ x SP) - (AQ x AP)
    - - Expenditure Variance
        
        Budgeted Variable Overheads for Actual Hours (-) Actual Variable Overheads
      - Efficiency Variance
        
        = Standard Variable Overheads for Production (-) Budgeted Variable Overhead for Actual Hours
      - = Standard Variable Overheads for Production (-) Actual Variable Overheads
  - - - Sales Margin Mix Variance
        
        = (Standard Margin) less (Revised Standard Margin)
        (AQ x SM) - (RAQ x SM)
        
        Alternative Formula = (Total acutal Qty (units)) x ((Average Standard Margin per unit of Actual Mix) - (Average Budgeted Margin per unit of Budgeted Mix))
      - Sales Margin Volume Variance
        
        Alternative Formula = (Average Budgeted Margin per unit of Budgeted Mix) x ((Total Actual Qty. (units)) - (Total Budgeted Qty. (units))
        
        Market Size Variance
        
        = (Budgeted Market Share %) x (Actual Industry Sales Quantity in units - Budgeted Industry Sales Quantity in Units) x (Average Budgeted Margin Per Unit)
        
        Market Share Variance
        
        = (Actual Market Share % (-) Budgeted Market Share %) x ( Actual Industry Sales Quantity in Units) x (Average Budgeted Margin Per Unit)
        
        = (Revised Standard Margin) less (Budgeted Margin)
        (SM x AQ) - (SM x BQ)
      - Standard Margin less Budgeted Margin
        (SM x AQ) - (SM x BQ)
    - - = Actual Margin less Standard Margin
        (AM x AQ) - (SM x AQ)