COST & MANAGEMENT ACCOUNTING

Presented by

Muhammad Shahidullah Tasfiq

Lecturer in Finance Department of Management Studies Jagannath University

Standard Costing

Standard cost

A standard cost is a planned or pre-determined

cost which is calculated from managements

standard of efficient operation & the relevant

necessary expenditure.

Standard costing
Standard

costing

is

the

preparation

of

standard costs and applying them to measure

the variations from actual costs and analyzing

the causes of variations with a view to maintain maximum efficiency in production.
It can be used as a process of measuring and

correcting actual performance to ensure that the plans are properly set and implemented.

Purpose of Standard Costing

Establishing budgets.
Controlling costs,

Promoting possible cost reduction.

Simplifying costing procedures and expediting

cost reports.

Directing

and

motivating

employees

and

measuring efficiencies.

Setting Standard

Standard must be established for a definite

period of time so that they can be effective in

performance evaluation, control & analysis of

costs.

Standards are developed for

Materials

Labor
Overhead

Factors in Setting Price Standard

Purchase Price
Freight

Receiving & handling

Purchase discount

Factors in Setting Quantity Standard

Basic materials input i.e. materials requirement

as specified in the bill of material.

Allowance for waste & spoilage

Allowances for rejecting defective materials

Evaporation
Leakage

Factors in Setting Rate Standard

Basic wage rate per hour
Employment taxes

Fringe benefit
Union negotiation Experience of the worker

Factor in Setting Time(Hour) Standard

Basic labor time

Allowance for breaks & personal needs

Allowance for cleanup & machine downtime

Allowance for reject Allowance for set-up time Allowance for fatigue Waiting time of operator

Variance analysis
A variance is the difference between the

standards and the actual performance

When the actual results are better than the

expected results, there will be a favorable

variance (F).
If the actual results are worse than the

expected results, there will be an adverse

variance (A).

Three types of cost variance

Material cost variance
Labor cost variance

Overheads variance
Variable overheads variance Fixed overheads variance

Material Variance Materials cost variance (AQ*AP SQ*SP)

Actual Units Produced*SQ P/U

Material Price variance AQ*AP AQ*SP

Material Usage Variance AQ*SP SQ*SP

Mix Variance

Yield Variance

Labor Variance
Labor Cost Variance AH*AR SH*SR

Actual Units Produced*SH P/U

Rate Variance AH*AR AH*SR

Efficiency Variance AH*SR SH*SR Idle Time Variance SR*Hours Lost

Mix Variance

Yield Variance

Overhead variance
Variable Overhead variance (AH*AR SH*SR)

VO Expenditure/Spending/ Budget Variance AH*AR AH*SR

VO Efficiency Variance AH*SR SH*SR

Actual Units Produced*SVMO P/U

Variable Overhead variance

Fixed Overhead variance AOC SH*SFOR

Fixed O/H Expenditure Variance AFOH - SFOH

Fixed O/H Volume variance (AP SP)*SFOHR PU

Calendar variance

Efficiency variance

Capacity Variance

Assignment Problem

ZB Company produce a single product. Variable

manufacturing overhead is applied to products on the basis of direct-labor-hours. The standard costs for one unit of product are as under:
Standard Standard Standard Quantity or Hour Price or Rte Cost

Direct Materials Direct Labor Variable Manufacturing O/H

3 Pound 2.5 Hours 2.5 Hours

Tk. 4 Tk. 14 Tk. 3

Tk. 12 Tk. 35 Tk. 7.5

Total Standard Cost

Tk. 54.50

Problem

During June, 2011, 2000 units were produced.

The costs associated with Junes operations were as under
Actual Quantity Actual Price Or Hour or Rate Actual Cost

Direct Materials 6500 Pound Tk. 3.80 Tk. 24700 Direct Labor 5400 Hours Tk. 13.75 Tk. 74250 Variable 5400 Hours Tk. 2.85 Tk. 15390 Manufacturing O/H

Assignment Problem

Compute & Comment on the material variance if

All of the material purchased was used

during June.

5000 units of materials is used during the

period of to produce 1600 units of products

Compute & Comment on the Labor variance. Compute & Comment on Manufacturing Overhead Variance.

Assignment Problem # 03

What will be the BEP? Show your result in PV graph.

Margin of Safety (MOS)

Margin of safety (MOS) is the excess of

budgeted or actual sales over the break even

volume of sales.

It stats the amount by which sales can drop

before losses begin to be incurred.

The higher the margin of safety, the lower the

risk of not breaking even.

Margin of Safety (MOS)

Margin of safety can be improved by lowering fixed and variable costs, increasing volume of

sales or selling price and changing product mix

so as to improve contribution and overall P/V

Ratio.

Margin Safety (MOS) MOS in = Total Budgeted Break-even or Actual Sales Revenue Sales
Actual or MOS in = estimated units Units of activity OR MOS as % = MOS in Amount TB/A S (%) OR Units at breakeven point

TB/A S = Total Budgeted or Actual Sales

Margin of Safety
TR/TC Profit Area BEP TR TC

TVC
Loss Area FC
Margin of Safety

B/AS

Assignment problem # 04

ZB Co. Sold in two successive years 7,000 and

9,000 units and incurred a loss of Tk.10,000 and earned Tk.10,000 as profit respectively. The selling price per unit is Tk.100. What is the amount of fixed costs, What is the number of units to breakeven, and What is the number of units to earn a profit of Tk.50,000.

Cost Structure

Cost

structure

refers

to

the

relative

proportion of fixed and variable costs in an

organization.

Target Net Income & Income Taxes

When managers want to know the effect of

their decisions on income after taxes, CVP

calculations must be stated in terms of target

net income instead of target operating income. TNI = TOP (1- Tax rate)

Target Net Income & Income Taxes

Will Income taxes Change Break Even Point ?

NO
Because by definition Operating Income at BEP is ZERO. And thus no income taxes will be paid.

Contribution margin Vs Gross margin

Contribution

income

statement

emphasizes

contribution margin.

Revenues Variable cost of goods sold

Variable operating costs = Contribution margin

Contribution margin Fixed operating costs =

Operating income

Contribution margin Vs Gross margin

Financial

accounting

income

statement

emphasizes gross margin.

Revenues Cost of goods sold = Gross margin

Gross margin Operating costs = Operating

income

Sensitivity Analysis and Uncertainty

Sensitivity analysis is a what if technique

that examines how a result will change if the

original predicted data are not achieved or if

an underlying assumption changes.

Sales Mix

Sales mix is the combination of products that a

business sells.