NAME: Yash Gawande

ROLL NO: 16 SYBMS

CLASS: SYBMS SEM-IV Academic Year: 2021-22

SUBJECT: STRATEGIC COST MANAGEMENT

Standard Costing and Variance analysis as an aid to

management decision making.
Introduction:

Standard costing

This is generally best suited to organisations with repetitive activities. It is probably most
relevant to manufacturing organisations with repetitive production processes. Standard costing
cannot be applied easily to non-repetitive activities because there is no clear basis for observing
and recording operations. It is difficult to determine a clear standard. Two commonly used
approaches are used to set standard costs.

1. Past historical records can be used to estimate labour and material usage.

2. Engineering studies can be used. This may involve a detailed study or

observation of operations in terms of material, labour and equipment usage.

The most effective control is achieved by identifying standards for quantities of

material, labour and services to be used in an operation, rather than an overall

total product cost. Variances from standard on all component parts of cost

should be reported to identify the cause – and ultimate responsibility – for the

variance from standard.

 Features of Standard Costing

Standard costing is a technique of cost accounting.

The cost or service or product is predetermined.

The predetermined cost is known as standard cost.

Actual cost of product and service is ascertained.

The comparison is made between standard cost and actual cost and variances are noted.

Variances are analysed to find out the reason.

Variances are reported to management in order to take corrective action.

Variance analysis :

Variance analysis is the procedure of computing the differences between standard costs and

actual costs and recognizing the causes of those differences. Studies indicated that variance is

the difference between standard performance and actual performance. It is the process of

scrutinizing variance by subdividing the total variance in such a way that management can

assign responsibility for off-Standard Performance.

Variance analysis has four steps:

1. Compute the amount of the variance.

2. Determine the cause of any significant variance.

3. Identify performance measures that will track those activities, analyse the results of the

tracking, and determine what is needed to correct the problem.

4. Take corrective action.

CASE STUDY:
Fortran Steel company was established in the year 1991. Their main business
was manufacturing steel utensils. They had decent business for many years.
Due to low demand in steel products their production was reduced drastically.
But in recent years, people have started using steel utensils and it gave rise to
massive demand. the Production and sales also Increased Rapidly.

Given:

Standard:

Material for 70 kgs Finished products: 100 kg

Price of materials: Rs. 1 per kg

Actual:

Output: 2,10,000 kg

Material Used: 2,80,000 kg

Cost of material: Rs. 2,52,000

Calculate:

1. Material usage Variance.

2. Material Price Variance.
3. Material Cost Variance.

Solution:

1. Standard Quantity:
Standard quantity of material = 100 kg
 2,10,000 kg. of finished products = 2,10,000 x 100
70
= 3,00,000 kg
2. Actual Price per kg. = 2,52,000
2,80,000
= Rs.0.90

a) Material Usage Variance = SP (SQ – AQ)

= 1 (3,00,000 – 2,80,000)
= Rs 1 x 20,000
= Rs. 20,000 (Favourable)
b) Material Price Variance = AQ (SP – AP)
= 2,80,000 (1 – 0.90)
= Rs 2,80,000 x 0.10
= Rs. 28,000 (Favourable)
c) Material Cost Variance = (SQ x SP) – (AQ x AP)
= (3,00,000 x 1) – (2,80,000 x 0.90)
= 3,00,000 - 2,52,000
= Rs. 48,000 (Favourable)
Conclusion:

Standard Costing is an aid to management decisions making because it

helps to perform managerial decision effectively. It helps in functions like
Planning, Organizing, Co-ordinating, Motivating, Controlling. It also helps in
Measurements of Efficiency, Quick Reporting, Less Cost of operations,
Inventory Valuation, etc.

Variance Analysis is an aid to management decisions making because it helps

organization assigning responsibilities to individuals, help to take corrective
action immediately to improve performance, ensure cost control, provide
motivation to individuals, help to find out their causes, etc.

In the Case Study of Fortran Steel, we observed that the price of utensils
whichthey assume is different to its actual price in this situation with the help
of Standard Costing & Variance Analysis they found the difference between
assumed price & actual price.
Importance of marginal Costing technique in
Pricing Decision in a manufacturing Company.

Introduction:

The marginal cost of production is the change in total production cost that comes from making
or producing one additional unit. To calculate marginal cost, divide the change in production
costs by the change in quantity. The purpose of analyzing marginal cost is to determine at what
point an organization can achieve economies of scale to optimize production and overall
operations. If the marginal cost of producing one additional unit is lower than the per-unit
price, the producer has the potential to gain a profit.

Features of Marginal Costing :

The following are the special features of Marginal Costing:

1. Marginal costing is a technique of working of costing which is used in conjunction with

other methods of costing (Process or job).

2. Fixed and variable costs are kept separate at every stage. Semi – Variable costs are also
separated into fixed and variable.

3. As fixed costs are period costs, they are excluded from product cost or cost of production or
cost of sales. Only variable costs are considered as the cost of the product.

4. As fixed cost is period cost, they are charged to profit and loss account during the period in
which they incurred. They are not carried forward to the next year‟s income.

5. Marginal income or marginal contribution is known as the income or profit.

6. The difference between the contribution and fixed costs is the net profit or loss.

7. Fixed costs remains constant irrespective of the level of activity.

8. Sales price and variable cost per unit remains the same.

9. Cost volume profit relationship is fully employed to reveal the state of profitability at various
levels of activity.

Case Study:
Zodiac Manufacturing is into ink Book manufacturing business. They started
their manufacturing plant in the year 2018. They started with regular books
slowlythey started expanding their business by taking orders from the
companies who wanted Books for the company.They use to provide best Book
quality. They export their pens to various places like Mumbai, Kolkata,
Singapore,UK etc.

In the year 2019-2020 the company’s sales increased a lot and also the
expenses increased accordingly.

Now Zodiac Manufacturing wants to know the profit they earned in the
year 2019-2020.

Given:
Selling price Per pen – ₹ 50/-
Variable Cost per pen – ₹ 25/-
Fixed Cost – ₹ 2,40,000/-
Required to calculate these three questions which is given below:
1) P/V Ratio
2) Calculate breakeven point and margin of safety in units and in amount.
3) Assume that 6,000 new pens were sold in a year. Find out the net profit
of the firm.

Answer:

1. PV ratio.

PV ratio = 𝑆𝑎𝑙𝑒𝑠 − 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 × 100

𝐶𝑜𝑠𝑡

𝑆𝑎𝑙𝑒𝑠

50 − 25
× 100
=
100

25
× 100
=
100

PV Ratio = 25%

2. I) BEP

BEP = Fixed Cost / PV Ratio

= 2,40,000 / 25%
BEP = 9,60,000
 II) MOS
MOS = Actual Sales (Units) – BEP(Units)
=20,000 x 50 - 9,60,000
=10,00,000 – 9,60000
=40000
MOS=40000

3. Profit over 24,000 pens

Sales = 24,000 x 50
Sales = 12,00,000
P=C-F
= 25% of 12,00,000 – 4,80,000
= 9,00,000 - 4,80,000
Profit = 4,20,000
 Conclusion / Observations:

Marginal costing helps in price decision making in company because there are
advantages of its like Constant in nature, Realistic, simplified overhead
treatment, facilitates control, Meaningful reporting, Relative profitability, Aid
to profit planning and also, it’s help to determine Break-even point.

In Case Study we observed that how marginal costing is helpful for any firm,
business, or in company. How marginal costing is deals with the aspects like
sales, profit, fixed cost, variable cost, break-even point, etc.

We also studied the case study of Zodiac manufacturing and Solved PV ratio, BEP
and the total Net Profit.