Cost Accounting

Variance Analysis: Material & Labour Variances! The function of standards in cost accounting is to reveal variances between standard costs which are allowed and actual costs which have been recorded. The Chartered Institute of Management Accountants  defines variances as the difference between a standard cost and the comparable actual cost incurred during a period. Variance analysis can be defined as the process of computing the amount of, and isolating the cause of variances between actual costs and standard costs.  Standard costs provide information that is useful in performance evaluation. Standard costs are compared to actual costs, and mathematical deviations between the two are termed variances. Favorable variances result when actual costs are less than standard costs, and vice versa. The following illustration is intended to demonstrate the very basic relationship between actual cost and standard cost. AQ means the “actual quantity” of input used to produce the output. A

Meaning of Standard Costing: It is a method of costing by which standard costs are employed. According to ICMA, London, Standard Costing is  “the preparation and use of standard costs, their comparison with actual cost and the analysis of variances to their causes and points of incidence” . According to Wheldon, it is a method of ascertaining the costs whereby statistics are prepared to show: (i) The standard cost; ADVERTISEMENTS: (ii) The actual cost; (iii) The difference between these costs which is termed the variance. But W. Bigg expresses: “Standard Costing discloses the cost of deviations from standards and clarifies these as to their causes, so that management is immediately informed of the sphere of operations in which remedial action is necessary.” Thus, from the above, it becomes clear that Standard Costing involves: (i) Ascertainment and use of Standard Costs; (ii) Recording the actual costs; (iii) Comparison of actual costs with standard co