Unit 4: Standard Costing and Variance Analysis

Standard Costing and Variance Analysis

Meaning of Standard Cost

• Standard Cost is the pre-determined cost of manufacturing a product or providing a service under normal conditions.
• It is based on past data, future estimates, and expected efficiency.
• It includes standard material cost, standard labor cost, and standard overheads.

Meaning of Standard Costing

• Standard Costing is a cost control technique where actual performance is compared with standard costs, and variances (differences) are analyzed to improve efficiency.
• It helps in identifying the causes of cost over-runs or savings.

Variance Analysis

Variance Analysis is the process of analyzing the differences between standard cost and actual cost to identify:

• Favorable Variances (Cost Saving)
• Unfavorable Variances (Cost Overrun)

Example: If Standard Cost of production = ₹100/unit, Actual Cost = ₹110/unit, Then, Variance = ₹10/unit (Unfavorable)

Advantages of Standard Costing

Limitations of Standard Costing

Applications of Standard Costing

Standard Costing and Variance Analysis are powerful tools for cost control, performance evaluation, and financial decision-making. While highly beneficial in manufacturing and production setups, they need to be updated regularly and applied carefully in dynamic environments.

Material Variance

Material variance analyzes the difference between the standard cost of materials and the actual cost incurred.

Types of Material Variance

Overhead Variance

Overhead variance compares the standard overhead cost with the actual overhead cost incurred.

Types of Overhead Variance

Sales Variance

Sales variance compares the budgeted sales with the actual sales to measure the sales team’s performance.

Types of Sales Variance

Sales Margin Variance

Sales margin variance looks at the difference in profit margins due to change in sales quantity or price.

Types of Sales Margin Variance:

Summary Table