Page 225 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes Self Assessment

Fill in the blanks:
6. …………………… has been defined as “A location, person or item of equipment (or group
of these) in respect of which costs may be ascertained and related to cost units.”
7. …………………… standard is a standard established for use over a short period of time,
related to current conditions.
8. Ideal Standard is a standard which can be attained under most …………………… conditions.
9. …………………… standard is a standard which can be attained if a standard unit of work
is carried out efficiently, on a machine properly utilised or material properly used.
10. The standard …………………… is a convenient measure of production.
11. Standard …………………… is the resultant effect of a number of factors that vary from
time to time in different situations, both internal and external.
12.4 Analysis of Variances

When a comparison between the actual and the standard is made, some difference is normally
found. The difference between the actual and the standard is called variance. When actual cost is
less than standard cost or actual result is better than standard result, it is known as favourable
variance. On the other hand, when actual cost exceeds standard cost or actual result is not up to
standard, it is known as unfavourable or adverse variance. In accounting language, the
unfavourable and favourable variances are known as debit and credit variances respectively.
The analysis of variance will help to pinpoint responsibilities.

Example: The purchase manager will be held responsible for unfavourable material
price variance, the production manager for unfavourable material usage variance, the sales
manager for unfavourable sales volume variance, etc.

12.4.1 Principles of Analysis of Variance

A number of principles must be borne in mind at the time of calculation of standard cost
variances. These are as follows:
(a) Variances should be stated in monetary terms. In other words, it should be expressed in
the currency,

(b) Variances should be analysed product-wise. In other words, it should be calculated for
each product,
(c) Variances could be favourable or unfavourable (adverse), and
(d) Total cost variance happens to be the difference between the standard cost of actual output
and the actual cost incurred.

12.4.2 Classification and Computation of Variances

The classification and computation of variances are the objectives of standard costing. Variances
can be found out with respect to all the elements of cost, i.e., direct material, direct labour and
overheads. For understanding of the classification and computation of variances, variances are
classified into the following:

1. Material Variances,

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