PowerPoint Presentation: STANDARD COSTING & VARIANCE ANALYSIS - Leena Sawant MFM 2 nd Year (Part Time), Bharati Vidyapeeth Institute of Management STANDARD COSTING - DEFINITION: STANDARD COSTING - DEFINITION STANDARD COSTING may be defined basically as a technique of cost accounting which compares the “standard cost” of each product or service with the actual cost, to determine the efficiency of the operation, so that any remedial action may be taken immediately. STANDARD COST: STANDARD COST The “ Standard cost ” is a predetermined cost which determines what each product or service should cost under given circumstances. STEPS IN STANDARD COSTING: STEPS IN STANDARD COSTING Standard costing involves : The setting of standards Ascertaining actual results Comparing standards and actual costs To determine the variances Investigating the variances and taking appropriate action where necessary. ADVANTAGES OF STANDARD COSTING: ADVANTAGES OF STANDARD COSTING Provides a yardstick against which the actual costs can be measured. The setting of standard involves determining the best materials and methods , which may lead to economies. A target of efficiency is set for employees to reach, and cost consciousness is stimulated . Variances can be calculated which enable the principle of “management by exception ” to be operated. STANDARD COSTING - LIMITATIONS: STANDARD COSTING - LIMITATIONS VARIATION IN PRICE VARYING LEVELS OF OUTPUT CHANGING STANDARD OF TECHNOLOGY ATTITUDE OF TECHNICAL PEOPLE MIX OF PRODUCTS DO NOT REFLECT THE TRUE VALUE AND EXCHANGE BASED ON THEORETICAL MAXIMUM EFFICIENCY, ATTAINABLE GOOD PERFORMANCE & AVERAGE PAST PERFORMANCE VARIANCE ANALYSIS: VARIANCE ANALYSIS VARIANCE ANALYSIS: VARIANCE ANALYSIS Definition: Process aimed at computing variance between actual and budgeted or targeted levels of performance, and identification of their causes. Explanation: “Variance” is the difference between a budgeted or standard cost and the actual cost during a given period.