CA SURENDRA KUMAR RAKHECHA
(Practising CA at Surat)
(26263 Points)
Replied 04 May 2010
First of all -
1. It seems that you are not clear about Standard Costing.
2. I also presume that you have not referred theory part of Standard Costing properly.
3. Without knowing how formulae of standard costings are derived; you have tried to solve practical questions of Standard Costing.
Please note the following :
1. Standard Cost is that cost which management targets to achieve in most efficient conditions.
2. The above target is set from the past results which are relevant to the current scenario. If there are changes in the cost; then standard costs are revised to that extent.
Suppose in previous period standard cost was Rs.10.00 per unit. Due to increase in labour cost by Rs.0.50 per unit; the standard cost for coming period (budgeted period) will be Rs.10.50 per unit.
3. The objective of standard cost is towards lowest possible per unit cost.
4. On the basis of standard costs; prices are fixed.
Suppose we are dealing in a product called 'CLASSIC.' During the process of manufacturing of the product we may have inquiry to supply 10,000 units. If the product is new one in the market and we don't know exactly what is our likely cost at normal efficiency level; then we would not be able to fix sale price.
5. After a period; we compare Actual Cost with Standard Costs to know the variances. We calculate various variances to decide due to which factor there is a variance in the costs.
a. Price Variance : Due to change in price.
b. Usage Variance : Due to change in quantity
c. Material Cost Variance : Due to change in total cost (Total of a + b)
and so on....
6. The focus of Budgeted Cost is towards overall (total) expenditure and income rather than per unit cost.
7. Budgeted costs are pre-decided according to the plan of the management. It is prepared on the basis of target production and/or sales and its related costs of production and non-production costs. Accordingly profits are planned.
At the end of the period; first of all; overall performance is judged. If there are certain variances in different elements of costs (material, labour and overheads) then each element is separately checked with the help of standard costing (with the help of different variances) to decide due to which factor variances have occurred.
Remedial actions are taken to control the variances in next period.
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