Definition of standard Costing
Standard Costing discloses the cost of
deviations from standard and classifies
these as to their causes , so that
management is immediately informed of
the sphere of operations in which
remedial action is necessary.
Difference btw Budgeting & Standard costing
Budgeting Standard costing
1. Concerned with 1. Related with the
operations of the control of expenses.
business as a whole.
2.More extensive 2. More intensive
3. It is a projection of 3. It is the projection of
financial accounts cost accounts.
4 .does not involve 4. It involves
standardization of standardization of
products. products.
5.It can be adopted in 5. It cannot be
part or full. operated in parts.
6. It can operate 6.It cannot exist
without standard without budgeting.
costing.
Determination of Standard Cost
Establishment of cost centers
Classification and codification of
accounts.
Period of use
Reasonable level of attainment
Activity level
Setting of Standards
• Elements of standard cost :-
• Direct Material- Quantity standard
Price standard
• Direct Labour- Time standard
Rate standard
• Overheads – Fixed overheads
Absorption costing
• It is termed as full cost method
• The cost of product is determined after
considering both fixed and variable cost.
• Variable cost charged directly
• Fixed cost apportioned on a suitable basis.
• All costs are identified with the manufactured
products.
Marginal costing
• It is a technique where only variable costs are
charged to products.
• Fixed costs are met from contribution.
• Fixed costs are not charged to products
directly.
Diff. btw Absorption costing &Marginal costing
Absorption costing Marginal costing
1. Both fixed and 1. Only variable overheads
variable overheads are charged to
are charged to production and fixed
production. overheads are charged to
costing P/L A/c.
2. The amount of stocks 2. The amount of stocks
include the does not include the
component of fixed component of fixed
overheads. overheads , hence stocks
are under-valued.
3 .fixed overheads of 3.fixed overheads of
one period are carried one period are not
forward to the next carried forward to the
period , since they are next period , since they
included in stocks. are not included in
stocks.
Stocks are valued only
at variable costs.
Marginal cost
• The amount at any given volume of output by
which aggregate costs are changed if the
volume of output is increased or decreased by
one unit.
• It is thus the total variable cost
• Marginal cost = D.Material + D. Labour +
Other Variable
costs
Contribution
• Difference between Selling Price and Variable
Costs.
• Fixed costs + Profit= contribution
• No profit no loss if contribution= fixed costs.
Profit Volume Ratio(P/V Ratio)
• Relationship between contributiona nd sales
value.
• Called as contribution/sales ratio
• P/V Ratio= Contribution /Sales
Key Factor
• Key factor is that factor which limits the
volume of output in the activities of an
undertaking at a particular time or period.
• Decisions are made ,generally on the basis of
contribution.
• Contribution in terms of key factor is
considered for relative profitability.
• It is the governing/principal/ limiting factor.
• Profitability can be measured by
Contribution/Key factor.
Cost Volume Profit Analysis
• It is an important tool of profit planning
• It shows relationship btw cost, SP, volume of
activity.
• It provides information about:-
1. Behaviour of cost in relation to volume
2. Volume where business will break even
3. Senstivity of profit due to changes in output
4. Profit for budgeted sales
5. Qty of production and sales for a desired profit.
Usefulness of Cost Volume Profit
Analysis
• Forecasting
• Setting flexible budgets
• Performance evaluation
• Formulation of pricing policy
• Determination of overheads.
Break-even Analysis
• No Profit – No Loss situation
• Level of activity where cost = selling price
• It shows relationship btw cost of production,
volume of production and sales value.
• BEP of output= FC/Cont. per unit
• BEP of Sales = FC/Cont. per unit x SP per unit
OR
FC/ PV Ratio
Margin of safety
• MoS= Total Sales- BEP of Sales
• MoS= Net Profit/ PV Ratio
• MoS represents soundness of the business
• MoS can be rectified by:-
1.Selling prices may be increased.
2.Fixed or variable costs may be reduced
3.Production may be increased.
4.Unprofitable products may be stopped and
profitable products adopted.
Steps of decision- making
• Defining the problem
• Identifying the alternatives
• Evaluating alternatives
• Obtaining additional information
• Selection of alternative
• Appraisal of result:-
1. Determination of sales mix 6.own or hire
2. exploring new markets 7.change vs. status quo
3. discontinuance of product 8.expand or contract
4. Make or buy 9.shut down or continue
5. Equipment replacement 10. choice of market
strategy.
