Standard Costing is often described as estimated future cost because it is set before undertaking any project. The idea is to plan the total cost of materials, labours and overheads and estimating the sales as well. At the end of the period, when the project gets completed, actual costs are analysed and compared with the standard costs. Any difference is called the variance and it may be favourable and adverse. It depends on the situation under consideration.
Objective
The objectives of Standard Costing are as follows:
- Performance evaluation – By setting standard for costs such as materials, labours and overheads, the actual results can be compared to judge the performance,
- Accurate Budgeting – By continuous implementation of standard costing, a time comes when the entity set an accurate budget which acts like a yardstick,
- Planning – By knowing the required materials, labours and overheads, an effective plan can be developed to improve efficiency,
- Grey Areas – This method of costing helps the management in identifying the loopholes and grey areas where it needs to focus to improve performance.
Variances
The deviation of standard cost from the actual cost is referred to as Variance. Thre are various types of variances calculated in standard costing which are as follows:
Material Variance
Labour Variance
Overhead Variance
Related Posts: Material Price Variance MCQS | Standard Costing Problems with Solution
Standard Costing Problems and Solutions helps you understand the detailed concept of the topic. Apart from this, regular practice of exam style questions will increase your chances of getting higher marks in the Standard Costing questions in the exam.
The standard and actual cost data of Tota Silk Mills Limited, are as follows:
| Standard | Actual |
| Direct material: 20,000 units at the rate of Rs.4/- | 19,600 units at the Rate of Rs.3/50 |
| Direct labor: 10,000 hours at the Rate of Rs.6/- | 12,000 hours at the Rate of Rs. 6/50 |
REQUIRED
a)
i) Material price variance and material quantity variance.
ii) Labour rate variance and labor time variance
iii) Overhead variance
b) General Journal entries to record the above information and to close the variance accounts
| Standard Cost Variances | ||
| Favorable | Unfavorable | |
| Rs. | Rs. | |
| Rs. | ||
| FOH Cost | 80,000 | |
| Controllable variance | 5,000 | |
| Volume variance | 8,000 |
REQUIRED
i) Determine actual FOH Cost
ii) Record FOH Cost and its variance in general journal
Solution
Variances
| a) Quantity variance | = Difference in Quantity X Standard | |
| Quantity variance | = 400 X 4 | |
| = 1600 Cr. | ||
| b) Price Variance = | Difference in price X Actual Quantity | |
| .50 X 19,600 | ||
| = | 9,800 Cr. | |
| 2. | Direct Labor | |
| a) Time variance = | Difference in Hours X Standard Rate = 2,000 X 6 = 12,000 Dr. | |
| b) Rate variance = | Difference in Rate X Actual hours = 0.50 X 12,000 | |
| = 6000 Dr. |
Tota Silk Mills, Journal Entries
| No. | Particulars | Folio | Debit | Credit |
| 1 | Work in process | 80,000 | ||
| Quantity Variance | 1,600 | |||
| Price Variance | 9800 | |||
| Raw Material | 68,600 | |||
| To record the material cost and variances | ||||
| 2 | Work in process | 60,000 | ||
| Time Variance | 12,000 | |||
| Rate Variance | 6,000 | |||
| Accrued Payroll | 78,000 | |||
| To record the labor cost and variances |
Actual Cost
| Standard Cost | 80,000 |
| Add: Unfavorable volume variance . | 8,000 |
| 88,000 | |
| Less: Favorable controllable variance | 5,000 |
| Actual Cost | 83,000 |
Journal Entries
| No. | Particulars | Debit | Credit |
| 1 | Work in process | 80,000 | |
| F.O.H. Volume variance | 8,000 | ||
| F.O.H. Controllable variance | 5,000 | ||
| Factory overhead To record the overhead cost & variance | 83,000 |