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STANDARD COSTING (PART 03)
COST CONTROL

Fixed Overhead Variance
In Part 02 we discussed in detail all about the variable cost variances. Here we will discuss about the Fixed Overhead Variances, Revenue Variances, Etc. Fixed Overhead is a peculiar natured expenditure. The example of Fixed Overhead is Salary, Rent, Depreciation, Etc. This type of expenditure does not change according to change in number of units produced. In Standard Costing we, first of all, set a standard Fixed Overhead Recovery Rate (F.O.R.R) in Per Unit Basis. And then such standard Fixed Overhead Recovery Rate is multiplied with Actual output to find the total Fixed Overhead Recovered. The result of total Fixed Overhead Recovered & Actual Fixed Overhead is either under recovery or over recovery of Fixed Overhead. Therefore variance in Fixed Overhead Cost is nothing but the Under Recovery or Over Recovery Fixed Overhead. 
Formulae
Fixed Overhead Cost Variance = Standard Cost for Actual Output – Actual cost
      = Std. F.O.R.R*Actual Output – Actual Fixed Overhead
       Or
      = Volume Variance + Expense Variance

If we go through the further analysis to such cost variance, then we will find that the reason behind such cost variance should be
1. Volume Variance
Volume variance means difference between actual production & standard production multiplied by standard F.O.R.R. Volume variance occurs when actual production differ the standard production due to efficiency of the labour & change in capacity utilization.
Formulae
= Standard Cost for Actual Output – Standard Fixed Overhead or Original Fixed
          Overhead.
Or
= Efficiency Variance + Capacity Variance.
• Efficiency Variance
Due to improvement or deterioration in efficiency of the workers sometimes total production may increase or decrease up to some extent. Such increase or decrease in total production due to change in efficiency is called Efficiency Variance.   
Formulae
= Std. cost for Actual Output – Actual Time taken measured by Std. F.O.R.R.
= (Std. Time for A.O. – Actual Time)*Std. F.O.R.R.
• Capacity Variance
Another reason for change in overall production is Capacity Variance. Capacity Variance means difference between actual capacity utilized to budgeted or Std. Capacity measured in Std. F.O.R.R.
Formulae
= (Actual Hour – Std. Hour)*Std. F.O.R.R.
Note: - As we assumed that actual is always favourable, therefore here Actual comes first. 

2. Expense Variance
Expense Variance means difference in Standard Fixed Overhead & Actual Fixed Overhead.
Formulae
= Std. Fixed Overhead – Actual Fixed Overhead.
Sales Variance
Sales Variance means difference in Actual sale value & Budgeted sales value.
Formulae
= Actual Sales – Budgeted sales.
Sales Variance may be categorised in the following ways: -
On the basis of sales value or price
- Selling Price Variance
It means when actual price varies to budgeted price.  It may be defined as gain or loss on Selling Price per unit computed on the basis of actual output.
Formulae
 = (Actual price per unit – Budgeted price per unit)*Actual Unit
- Sales Volume Variance
Sales Volume Variance means difference between Actual Quantity sold & Budgeted Quantity measured in Budgeted Price per unit.
Formulae
= (Actual Quantity – Budgeted Quantity)*Budgeted Price per unit.

The reason for Sales Volume Variance is 
> Sales Mix Variance
When there are two or more products sold then the difference among them in actual quantity & budgeted quantity which is measured in budgeted price per unit is called Sales Mix Variance. For example there are two products, A & B, sold in the market.
Formulae
= Budgeted Price per unit for each product*Actual Quantity for each product – Budgeted Sales*(Total Actual quantity/Total Budgeted quantity).
For Eg.
= (B.P./unit *Actual quantity for A + B.P/unit*Actual quantity for B) –
   (B.P./unit*Budgeted quantity for A + B.P/unit*Budgeted quantity for B)*
   (Total Actual quantity of product A & B/Total Budgeted quantity of product
   A & B).
> Sales Quantity Variance
Sales quantity variance means difference in Total Aggregate Budgeted Value of all products in terms of Total Actual Quantity & Total Budgeted Sale.
Formulae  
= Budgeted Sales*(Total Actual quantity for all products/Total Budgeted quantity for all products) – Budgeted Sales.
For Eg.
= (B.P./unit*Budgeted quantity for A + B.P/unit*Budgeted quantity for B)*
   (Total Actual quantity of product A & B/Total Budgeted quantity of product
   A & B) – Budgeted sales for A & B.
In the next part we will discuss more about the other aspects of Sales
Variance & other matters of Standard Costing.

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DIRECT EXPENSES & OVERHEAD

Intro: Expenses can be classified as direct and indirect expenses.
     Direct Expenses: are defined as “costs other than material or wages, which are incurred for a specific product/production process or providing of services”.
     Indirect Expenses: are those expenses which cannot be directly allocated to a specific cost & service. For example: rent, rates, insurance of factory etc.
     Overhead: is the aggregate of indirect material costs, indirect labour cost and indirect expenses which cannot be conveniently identified with and directly allocated to a particular cost centre or cost object in an economically feasible way. It is also known as indirect cost.
 
The whole discussion is divided into 2 parts, Here if the first part.

Q1. Freight inward is a direct expense.
(a)    True
(b)    False

NOTE: Freight inward is a direct expense, if the goods are handled by an outside carrier whose charges may be related to individual units/group of Unit.

Q2. Which direct expense can be charged as a rate per unit?
(a)    Hire charges of plant
(b)    Royalties
(c)    Freight
(d)    Traveling expenses
NOTE:
>    Hire charges of plant : is used for specific job
>    Royalties is charged as a rate per unit
>    Freight: handled by an outside carrier whose charges can be related to individual units.
>    Traveling expenses: incurred on a particular contract.

Q3. Which of the following are not indirect expenses?
(a)    Rent
(b)    Insurance
(c)    Salesman commission
(d)    Advertisement
NOTE:
>    Rent and Insurance is not directly related to specific job
>    Advertisement can not conveniently allocated to cost center or cost unit
>    Salesman Commission is based on the value of particular units sold



Q4. In modern industrial undertakings, overheads include various kinds of direct costs.
(a)    True
(b)    False

NOTE: Overhead is the aggregate of indirect material costs, indirect labour cost and indirect expenses which cannot be conveniently identified with and directly allocated to a particular cost centre or cost object in an economically feasible way. It is also known as indirect cost. For example: rent, rates, insurance of factory, etc.

Q5. Which of the following shows the correct number of bases of overheads classification?
(a)    Two
(b)    Three
(c)    Four
(d)    Five

NOTE: Overheads are classified into 3 types which include function-wise classification, behavior – wise classification and element –wise classification.
>    Functional-wise classification: Production overhead, administrative overhead, selling overhead, distribution overhead.
>    Behavior- wise classification: Fixed overhead, variable overhead, semi-variable overhead
>    Element-wise classification: Indirect materials, indirect labour, indirect expenses.

Q6. In the modern Industrial undertakings, manufacturing overheads include all direct costs incurred in the running of manufacturing division of the factory.
(a)    True
(b)    False

NOTE: Manufacturing overheads include all indirect costs i.e. indirect materials, indirect labour and indirect expenses incurred in manufacturing and production department.

Q7. The classification of overheads expenditure depends upon the nature of the product or service.
(a)    True
(b)    False

NOTE: Classification of overheads is the process of grouping the various items of overheads into distinct class /group on the basis of some common characteristics. So
the classification of overheads expenditure depends upon the type and size of a business and the nature of the product or the service rendered.


Q8. Which of the following is a behavioral overhead?
(a)    Fixed Overheads
(b)    Indirect Expenses
(c)    Distribution Overheads
(d)    Administrative Overheads

NOTE: Based on the behavior patterns, overhead are classified into fixed overheads, variable overheads and semi-variable overheads.

Q9. In large factories, standing order numbers help in grouping smaller and similar indirect expenses.
(a)    True
(b)    False

NOTE: Standing order number system is the system under which a number is allotted to each item of expense for the purpose of identification. So in the large factories it becomes easy to classify the indirect expenditure in the groups.
The following are the methods used to allot the identification code under standing order number system:
(1)    Numerical coding: Under this system, a fixed number is allotted
(2)    Mnemonic method: This system uses alphabets and letters to help the memory. For example: AD as Administration
(3)    Decimal method: Under this system, a whole number like 1.1 or 3.2.1 is allotted for the head of the expenditure or master group while the decimals are allotted to the primary or secondary items.
(4)    Field method: Under this method, codes are used as numeric in nature and each code number is consists of nine digits. For example: in code 20 130 02 06 whereas 20 stands for variable costs, 130 stands for idle time etc.
(5)    Combination of symbol and numbers: Under this method, a combination of symbol alphabet and a number is used as code. For example: M1 stands for Maintenance of building.

Q10. The cost of indirect materials purchased in a month from which of the following account?
(a)    Wages account
(b)    Cost ledger control account
(c)    Stores ledger control account
(d)    Factory overhead control account

NOTE: At the end of each month, the total of indirect materials is charged or debited from factory overhead control account and credited to stores ledger control account.



Q11. At the end of the month, the total of indirect expenses is credited to which of the following account?
(a)    Wages account
(b)    Cost ledger control account
(c)    Stores ledger control account
(d)    Factory overhead  control account

NOTE: At the end of the period, the total of factory overheads of indirect expenses would be debited to factory overhead control account and credited to the cost ledger control account.


Q12. The location of various departments is fixed as per the sequence of operation.
(a)    True
(b)    False

NOTE: A factory is divided into parts or sub-division. These sub-divisions are done in such a manner so that every department represents a division of activity of the organization. For example: Repairs department, power house department, tools department etc.So the sequence of operations is taken into consideration while determining the location of various departments.


Q13. In how many broad categories are the departments of a factory divided?
(a)    2
(b)    3
(c)    4
(d)    5

NOTE: The departments in a factory can be broadly categorized into 3 types namely: producing or manufacturing departments, service departments and partly producing departments.
>    Manufacturing Department: is depends upon the nature of the industry, type of the work performed & the size of the factory.
>    Service Department: is not directly engaged in production but render a special service for the benefit of other departments
>    Partly production department: is dealing with both manufacturing and service department.

Q14. How many primary bases are there for apportioning the items of overhead expenses?
(a)    Seven
(b)    Eight
(c)    Nine
(d)    Ten

NOTE: Apportionment means the distribution of overhead among department equally. The following are the basis for apportioning the items of overhead expenses:
(1)    Floor rate : Rent, rates
(2)    No. of the employees or wages of each department: Group insurance, canteen expenses, general welfare expenses
(3)    Capital Values: Insurance and depreciation of plant or machinery
(4)    Direct Labour hours: Work  managers remuneration, overtime rate etc
(5)    No. of light points: Electric light
(6)    Horse power of machines or machine hours: Electric power
(7)    Audit Fee
(8)    Value or weight of direct material: Stores overhead
(9)    Weight, volume, tonne, mile: Delivery expenses


Q15. How many criteria for the secondary distribution of overheads are there for apportioning the items of overheads expenses?
(a)    Four
(b)    Five
(c)    Six
(d)    Seven

NOTE:
>    Service or used method: where overheads are distributed as per the basis of service rendered.
>    Analysis or survey method: is the method where overhead are apportioned to measure the benefit received from each department.
>    Ability to pay
>    Efficiency or incentive method: is the method where overhead apportionment is done as per the production target.


Q16. Under direct distribution method of re-distribution of service department costs to production departments, services from one service department to another department are not considered.
(a)    True
(b)    False

SELF EXPLANATORY

Q17. Which of the following methods are used for dealing with inter-services department transfer?
(a)    Simultaneous equations methods
(b)    Repeated distribution method
(c)    Concentric circled method
(d)    Linear equations method

NOTE: When there is 2 or more service department and the services are rendered to each other department. This is called Inter-service department transfer. There are 3 methods for dealing, they are as follows:
>    Simultaneous equation method: where cost of service department is ascertained and then distributed among the production department.
>    Repeated distribution method: Under this method, costs are apportioned over and over other department such as production as well as service department until the costs is exhausted.
>    Trial & Error method: where is the cost of one service department is apportioned to other service department.


Q18. Pre-determined overhead rate is an ideal method for the calculation of the rate in the situation of cost estimating and competitive pricing.
(a)    True
(b)    False

NOTE: Pre-determined overhead rate = Budget overhead for the period/ budget base for the period

Q19. There is one common overhead rate used for the whole factory in blanket overhead rate method.
(a)    True
(b)    False

NOTE: Blanket overhead rate method is used only on those factories where only one major product is produced or several products but passes through the entire department and takes equal time in the entire department.
Blanket overhead rate = Overhead cost for the entire factory/ base for the period  


Q20. Which of the following is used as a base in method of percentage of direct material cost for the absorption of factory overheads?
(a)    The cost of direct materials used in the manufacture of a product
(b)    The cost of indirect materials used in the manufacture of a product
(c)    The cost of direct and indirect materials
(d)    The cost of direct and indirect materials and direct

SELF EXPLAINATORY 

                                                       to be continued to next week

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For Actual output of 5800 units,
 
                          Standard               Actual                  Variance
Usage/Input/Qty. 232000Kg*Rs.50  290000Kg*Rs.50   (-)2900000
Variance           =Rs.11600000        =Rs.14500000

Rate Variance     290000*Rs50       290000*Rs55        (-)1450000
                        =Rs.14500000        =Rs.15950000

Material Cost    232000kg*50        290000kg*Rs55     (-)4350000
Variance           =Rs11600000        =Rs.15950000  

Therefore,
Material cost Variance     =    Usage Variance + Rate Variance

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