Standard Costing - Sales Variances

 

COST AND MANAGEMENT ACCOUNTING

STANDARD COSTING

(VARIANCE ANALYSIS)

SALES VARIANCES

 

Part A: Discussion of basic theories including various relevant formulas

Part B: 5 Illustrations with solutions

Part A:

Definition of Standard Costing

Standard Costing is a method of costing where actual costs/revenues are compared with pre-determined standard costs/revenues in order to:-

1.  Calculate different variances (namely Material Variances, Labour Variances, Overhead Variances and Sales Variances);

2.  Analyse the reasons for the variances, which may be positive as well as negative;

3.  Identify the concerned departments or departmental heads responsible for such variances;

4.  Fix responsibilities for the concerned departmental heads towards achieving   certain standards in the future; and

5.  Take necessary steps wherever required either for achieving the standards or for modifying the standards.

 

Therefore, in standard costing the most important pre-requisite is fixing the standards. Once the standards are determined, then only different variances can be calculated by comparing the actual results with the pre-determined standards. The variances are basically of two types: (a) Cost Variances and (b) Sales Variances.

 

Cost Variances may be of the following four types:

1.  Material Variances

2.  Labour Variances

3.  Variable Overhead Variances

4.  Fixed Overhead Variances

 

Sales Variances may be of the following two types:

1.  Sales Turnover Variances

2.  Sales Margin Variances

 

Standard Costing is also termed as Variance Analysis because the whole of the Standard Costing System revolves around calculating the variances and analysing them in order to control different costs and operations of the business.

 

Sales Turnover Variances

1	Sales Turnover Value Variance	= ST4 – ST1
2	Sales Turnover Price Variance	= ST2 – ST1
3	Sales Turnover Volume Variance	= ST4 – ST2
4	Sales Turnover Mix Variance	= ST3 – ST2
5	Sales Turnover Quantity / Sub-Volume Variance	= ST4 – ST3

 

 Where,

ST1	= AP x AQ
ST2	= BP x AQ
ST3	= BP x RSQ
ST4	= BP x BQ
AP	= Actual Sales Price
AQ	= Actual Quantity Sold
BP	= Budgeted Sales Price
RSQ	= Revised Standard Quantity = AQ in the ratio of standard (or Budgeted) Sales Mix
BQ	= Budgeted Sales Quantity

 

 Sales Margin Variances

1	Sales Margin Value Variance	= SM4 – SM1
2	Sales Margin Price Variance	= SM2 – SM1
3	Sales Margin Volume Variance	= SM4 – SM2
4	Sales Margin Mix Variance	= SM3 – SM2
5	Sales Margin Quantity / Sub-Volume Variance	= SM4 – SM3

 

 Where,

SM1	= AM x AQ
SM2	= BM x AQ
SM3	= BM x RSQ
SM4	= BM x BQ
AM	= Actual Margin = Actual Price per Unit – Standard Cost per Unit
AQ	= Actual Quantity Sold
BM	= Budgeted Margin
RSQ	= Revised Standard Quantity = AQ in the ratio of standard (or Budgeted) Sales Mix
BQ	= Budgeted Sales Quantity

 

IMPORTANT NOTE:

In case of the Cost Variances, i.e. in case of

1.  Material Variances

2.  Labour Variances

3.  Variable Overhead Variances

4.  Fixed Overhead Variances

Negative variances are adverse variances and positive variances are favourable variances.

       

But in case of the Sales Variances, i.e. in case of

1.  Sales Turnover Variances

2.  Sales Margin Variances

Negative variances are favourable variances and positive variances are adverse variances.

Reconciliation Statement

Method: 1

	Particulars	Rs
	Budgeted Sales (ST4)	×××
ADD	Favourable Sales Turnover Variances	×××
LESS	Adverse Sales Turnover Variances	×××
	Actual Sales (ST1)	×××
LESS	Standard Cost of Actual Sales [(M4 or M5) + (L5 or L6) + (V3 or V4) + F5]	×××
	Standard Profit (SM1)	×××
ADD	Favourable Cost Variances	×××
LESS	Adverse Cost Variances	×××
	Actual Profit	×××

 

Method: 2

	Particulars	Rs
	Budgeted Profit (SM4)	×××
ADD	Favourable Sales Turnover Variances	×××
LESS	Adverse Sales Turnover Variances	×××
	Standard Profit (SM1)	×××
ADD	Favourable Cost Variances	×××
LESS	Adverse Cost Variances	×××
	Actual Profit	×××

 

Part B:

 

 Illustration: 1

Standard			Actual
Quantity	Price (Rs)	Total	Quantity	Price (Rs)	Total
A – 1,600	24	38,400	A – 2,400	20	48,000
B – 1,400	18	25,200	B – 1,400	18	25,200
C – 600	12	7,200	C – 750	14	10,500
D – 400	15	6,000	D – 450	14	6,300
4,000		76,800	5,000		90,000

 

From the above data calculate various sales variances.

 

Solution: 1

Illustration: 2

Budgeted and actual sales for the month of December, 2012 of two products A and B of M/s. XY Ltd. were as follows:

Product	Budgeted Units	Sales Price p.u. (Rs)	Actual Units	Sales Price p.u. (Rs)
A	6,000	5	5,000	5
			1,500	4.75
B	10,000	2	7,500	2
			1,750	1.90

 

Work out from the above data the following variances:

i.     Sales Value Variance, ii. Sales Price Variance, iii. Sales Volume Variance, i v. Sales Mix Variance and v. Sales Quantity Variance.

 

 

Solution: 2

 

Illustration: 3

From the following particulars for a period reconcile the actual profit with the budgeted profit.

                                                      (Rs in lakhs)

Particulars	Budgeted (Rs)	Actual (Rs)
Direct Material	50	66
Direct Wages	30	33
Variable overheads	6	7
Fixed overheads	10	12
Net Profit	4	8.5
	100	126.5

 

Actual material price and wage rates were higher by 10%. Actual sales prices are also higher by 10%.

 

Solution: 3

Illustration: 4

                                                                                                                  (Rs in lakhs)

Particulars	Budgeted (Rs)	Actual (Rs)
Sales	120	129.6
Prime cost of sales	80	91.1
Variable overheads	20	24
Fixed overheads	15	18.5
Net Profit	5	(4)

 

During the budget period average prices increased over the budgeted prices as follows:

(1) 20% in case of Sales (2) 15% in case of Prime Cost (3) 10% in case of overheads.

Prepare a statement showing reconciliation of budgeted profit and actual profit.

 

 

 Solution: 4

 

 

Illustration: 5

ABC Limited adopts a Standard Costing System. The standard output for a period is 20,000 units and the standard cost and profit per unit is as under:

Particulars	Rs
Direct Material (3 units @ Rs 1.50 p.u.)	4.50
Direct Labour (3 hrs. @ Rs 1.00 per hour)	3.00
Direct expenses	0.50
Factory overheads : Variable	0.25
Factory overheads : Fixed	0.30
Administration overheads : Fixed	0.30
Total Cost	8.85
Profit	1.15
Selling Price (Fixed by government)	10.00

 

The actual production and sales for a period was 14,400 units. There has been no price revision by the government during the period.

 

The following are the variances worked out at the end of the period:

		Favourable (Rs)	Adverse (Rs)
Direct Material
	Price		4,250
	Usage	1,050
Direct labour
	Rate		4,000
	Efficiency	3,200
Factory OH
	Variable – Expenditure	400
	Fixed – Expenditure	400
	Fixed – Volume		1,680
Administration OH
	Fixed – Expenditure		400
	Fixed – Volume		1,680

 

You are required to:

1.    Ascertain the details of actual costs and prepare a Profit and Loss Statement for the period showing the actual Profit / Loss; and

2.   Reconcile the Actual Profit with Standard Profit.

Solution: 5