standard cost and labour cost

1. Standard
Costing
Presented By:
Gita Bhatia 2
Amruta Deshmukh 17
Jackie Kajwalkar 40
Parin Sanghavi 97
Hitasha Sharma 100
Amit Rawool 161

2. What is Costing ?
Costing (or cost-benefit analysis) is the
process of analyzing the costs and benefits
of different options to determine
what approach should be taken to a
particular conflict.
what solution or resolution should be
chosen once various options are being
considered.

3. Historical Cost & it’s Limitations
Historical cost systems
are associated with
recording of historical or
actual cost. Historical
costing is the
ascertainment of costs
after they have been
incurred.
Ineffective in cost control.
No standards or goals so
cost reduction isn’t an option.
Not reliable for
management tasks.

4. What is Standard ?
A Standard may be a norm or a
measure of comparison in terms
of specific items such as
Pounds or kilos for material.
Labour hours required.
Plant capacity used in hours.
Real Life Examples :
ISO – International Standards
for Business, Government &
Society.
CMMI – Process improvement
approach from Carnegie Mellon
University, USA.
NBA – an AICTE program for
institution evaluation.

5. A Standard Cost is a
planned cost for a unit of
product or service
rendered.
In the words of Backer and
Jacobsen, “Standard cost is
the amount the firm thinks
a product or the operation
of the process for a period
of time should cost, based
upon certain assumed
conditions of efficiency,
economic conditions and
other factors.”
Standard Costing

6. Classification of Standards
Theoretic Normal
Basic
Currently
Attainable
The two principal
considerations for
classification of
standards are :
†Attainability of
standards.
†Frequency with
which the standards
are revised.

7. This is the standard which represents a
high level of efficiency. Ideal standard is
fixed on the assumption that favourable
conditions will prevail and management
will be at its best. The price paid for
materials will be lowest and wastes etc.
will be minimum possible. The labour
time for making the production will be
minimum and rates of wages will also be
low. The overhead expenses are also set
with maximum efficiency in mind. All the
conditions, both internal and external,
should be favourable and only then ideal
standard will be achieved.
Ideal standard is fixed
on the assumption of
those conditions which
may rarely exist. This
standard is not
practicable and may not
be achieved.

8. Basic standard is established for a long
period and is not adjusted to the preset
conations. The same standard remains in
force for a long period. These standards
are revised only on the changes in
specification of material and technology
productions. It is indeed just like a
number against which subsequent
process changes can be measured. Basic
standard enables the measurement of
changes in costs.
Basic
The changes in
manufacturing costs
can be measured by
taking basic
standard, as a base
standard cannot
serve as a tool for
cost control purpose
because the standard
is not revised for a
long time.

9. Normal standard has been defined as a
standard which, it is anticipated, can be
attained over a future period of time,
preferably long enough to cover one trade
cycle.
The standard attempts to cover variance
in the production from one time to
another time. An average is taken from
the periods of recession and depression.
Normal
The normal standard
concept is theoretical
and cannot be used
for cost control
purpose. Normal
standard can be
properly applied for
absorption of
overhead cost over a
long period of time.

10. It is presumed that
conditions of
production will
remain unchanged.
In case there is any
change in price or
manufacturing
condition, the
standards are also
revised. Current
standard may be
ideal standard and
expected standard.
A current standard is a standard which is
established for use over a short period of
time and is related to current condition.
It reflects the performance that should
be attained during the current period.
The period for current standard is
normally one year.
Current

11. Determination of
Standard Costs
The following preliminary
steps must be taken before
determination of standard
cost

12. The responsibility for setting standard is vested
with the Standard Committee. It consists of
(a) Purchase Manager
(b) Production Manager
(c) Personnel Manager
(d) Time and Motion Study Engineers
(e) Marketing Manager and Cost Accountant(4)
Organization
for Standard
Costing

13. 5) Setting of
Standard
The Standard Committee is responsible
for setting standards for each element
of costs as given below :
I. Direct Material
II. Direct Labour
III. Overheads
(a) Fixed Overheads
(b) Variable Overheads

14. I. Standard
for Direct
Material
Cost
• The following are the standard involved in direct
materials cost: 0) Material Quantity or Usage
Standard.
• (ii) Material Price Standard.
(i) Material Usage Standard: Material Usage
Standard is prepared on the basis of material
specifications and quality of materials required to
manufacture a product.
(ii) While setting of standards proper allowance
should be provided for normal losses due to
unavoidable occurrence of evaporation, breakage
etc.
• (iii) Material Price Standard:.
• When this type of standard is used, it is essential to
consider the important factors such as market
conditions, forecasting relating to the trends of
prices, discount etc.

15. II. Standard
for Direct
Labour Cost
• II. Standard for Direct Labour Cost
• The following standards are established:
• (i) Fixation of Standard Labour Time
• (ii) Fixation of Standard Rate
(i) Fixation of Standard Labour Time:
(ii) It depends upon the nature of cost unit,
nature of operations performed, Time and
Motion Study etc. While determining the
standard time normal ideal time is allowed
for fatigue and other contingencies.
• (iii) Fixation of Standard Rates: The standard
rate fixed for each job will be determined on
the basis of methods of wage payment such as
Time Wage System, Piece Wage System,
Differential Piece Rate System and Premium
Plan etc.

16. • (1) Determination of standard overhead cost
• (2) Estimating the production level of activity
to be measured in terms of common base like
machine hours, units of production and labour
hours.
• Setting of overhead standards is divided into
fixed overhead. variable overhead and semi-
variable overhead
• The determination of overhead rate may be
calculated as follows :
• (a) Standard Overhead and variable overhead
Rate = Standard Overhead for the budget period
Standard production for the budget period.

17. Labour
Costing

18. Introduction
 Labour cost represents the human
contribution to production.
 Labour cost is a amount which is paid to
worker or employee.
 Labour cost consist of Basic Pay and Fringe
Benefits
Basic Pay
The pay according to worked performed by
workers.
Fringe Benefits
It is substantial element of labour cost. It consist
of employer share of FICA Tex, Overtime
Premium Pay, Insurance Benefits and pension
Cost, that should be added in labour cost.

19. Why labour cost is important?
• For getting the maximum productivity
• For better output by the use of
minimum resources
• It is useful for minimum waste of
time, material and resources
• Increase the ability, efficiency and
skill of workers.
• It is useful to increase the company
competiveness & profitability.

20. How to improve labour productivity
• To provide employees handsome
wages/incentive
• Offer to employees bonus and better
workplace
• Encourage to employees to meet standard in
production and get earn more and higher
• Give to employees basic needs like safety,
education, family protection etc

21. The remuneration for labour is wages. The
workers put effort & get wages in exchange
of that. On the basis of pay scale & other
allowances which are prescribed in the terms
of employment, calculation of wages paid to
direct or indirect workers is done. By terms of
agreement between the employees & the
employer, this may be modified from time to
time. On the basis of job evaluation, merit
rating, incentive plans, profit sharing &
labour contract, the wages for the workers
are determined.
Labour Remuneration:

22. Remuneration is payment or
compensation received for services
or employment. This includes the
base salary and any bonuses or
other economic benefits that an
employee or executive receives
during employment.
Reward for employmentt in
the formm of pay, salary, or wage,
including allowances, benefits (such
as company car,
medical plan, pension plan),
bonuses, cash incentives,
and monetary value of the noncash
incentives

23. Methods of Remuneration
(systems of wage payment)
• There are two basic methods of labour
remuneration:
• (a) Time Rate System; and (b) Piece Rate System
(a) Time Rate System
• Under the time rate system, workers are paid
according to the time for which they work.
Payment may be on hourly basis, daily basis or
monthly basis. In this system, no consideration is
given to the quantity or quality of work done.
When payment is made on hourly basis, total
wages payable are calculated as follows:
• Wages = No. of hours worked x Rate per hour
• for example,if the worker is paid at 25 per hour,his
wages for a day of 8 hours will be : 8 hours
*25=200.

24. (b) Piece Rate System
• Wages under this system are paid according
to the quantity of work done. A rate is fixed
per unit of production and wages are
calculated by the following formula:
• Wages = Rate per unit x No. of units
produced.
• for example,if the rate per unit is 17 and
during a day of worker has completed 10
units,then his wages will be 17*10 units
=170.
Methods of Remuneration
(systems of wage payment)(Contd)

25. Advantages Of Time Rate System
The following are some of the important advantages
of time rate system of wage payment:
* Time rate system is simple to understand and
easy to calculate.
* Time rate system is quite useful for
organizations that use costly inputs for quality
outputs.
* Time rate system is beneficial for average and
below workers.
* Time rate system does not discriminate the
workers and is preferred by trade unions

26. Disadvantages Of Time Rate System
The following are some notable disadvantages of time rate
system of wage payment.
* Time rate system does not help in increasing output
and improving efficiency as there is no correlation
between effort and reward.
* Time rate system is not justifiable between efficient
and inefficient workers and skilled and unskilled
workers.
* Time rate system pays for idle time, which increases
the cost of production.
* It is difficult to estimate exact labor cost in advance.
* It requires strict supervision to get the required
quantity of output.

27. Advantages Of Piece Rate System
The following are some important advantages of
piece rate system of wage payment.
• Piece rate system pays wages according to
the output produced by the workers. It
encourages efficient workers.
• Piece rate system helps to reduce idle time.
• Piece rate system helps the management to
determine the exact labor cost per unit for
submitting quotation.
• Piece rate system reduces per unit cost of
production due to increased volume of
production.
• Piece rate system requires less supervision
cost.

28. Disadvantages Of Piece Rate System
The following are the notable disadvantages of
piece rate system
• Piece rate system does not help for
a uniform flow of production and makes
difficult to regulate the production schedule.
• It is very difficult to fix an acceptable and
reasonable piece rate for each item of output
or job.
• Piece rate system adversely affect the
workers' health as well.
• It requires extra supervision cost for quality
output and effective use of materials, tools
and equipment.