By reading this you will get to know about the standard costs and variance analysis.

1. Standard Cost

2. Standard costs
• Most companies use standard costs to develop their flexible
budgets. Each unit has standards for price and quantity. It
contains details of standard amount of each resource that
will be utilized in providing the service or manufacturing the
product.
-Definition:
The estimated cost of a process, resources, or items used in manufacturing
enterprise entered in an account and compared with the actual cost so
that anomalies are readily detectable.

3. Continued….
• Standards are benchmarks or “norms” for measuring
performance. Two types of standards are commonly used.
• Examples:- McDonald, manufacturing and const-
ruction companies.
Quantity standards
Specify how much of
an input should be
used to make a
product or provide a
service.
Price standards
Specify how much
should be paid for the
each unit of input.

4. Purpose of Standard costing
• To indicate what is attainable by efficient working.
• To compare the product cost to what it ought to cost.
• To facilitate speedy corrective action when adverse
variances are detected.
• With the help of standard cost the variances can be
calculated and responsibilities are identified.
• Benchmark for measuring performance.
• To control costs by establishing standards and analysis
of variance.
• To motive staff and management

5. Variance analysis
• An important part of standard cost
accounting is a variance analysis, which
breaks down the variation between actual
cost and standard costs into various
components (volume variation, material
cost variation, labor cost variation, etc.) so
managers can understand why costs were
different from what was planned and take
appropriate action to correct the
situation.

6. • Variance is the difference between the
planned, budgeted or standard cost and
actual cost as well as in respect of
revenues.

7. Variance can be divided into following
categories:-
• Material Variance
• Labor Variance
• Variable overhead variance
• Fixed over head variance
• Sales variance
• Profit variance

8. Material cost variance
• Standard cost of material – Actual cost of
material
• (Standard units × Standard price) –
(Actual units × Actual price)