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Costing Notes
Chapter – Standard Costing
Standard costing is Variance analysis between the Standard and Actual components.
Variance Analysis shows the performance of company or a project with budgets / std.
Std. costing is defined by the ICMA, London, “As the preparation and use of Std. costs,
their comparison with actual costs and the analysis of variances to their causes and point of
incidence.”
Std. costing is a system of costing which can be used in any method of costing, like job
costing, process costing, etc.
1. Material Cost Variances
2. Labour Cost Variances
3. Overhead Variances
4. Sales Variances
5. Reconciliation between std. profit and actual profit
For Cost variance = Std. – Actual and for Profit Variance = Actual – Std./Budgeted.

1.Mateiral Cost Variances:

Material cost = Qty. x Price ( Q x P )
Std. Cost = Std. qty. x Std. Price (SQ*SP)
Actual Cost = Actual qty. x Actual Price(AQ*AP)

Material Variance occurs by two factors : 1. Usages (Qty.) , 2. Price

- Variance in usages is responsibility of production department to use unit in efficiently
manner and reduce the scrap, abnormal losses.
- Variance in price is responsibility of purchase department to purchase raw materials at
cheap rate and reduce cost to availed discount, etc
Material Cost Variance (MCV) = Material Usage Variance (MUV) = Material Price Variance (MPV) =
SMC – AMC (SQ – AQ) x SP (SP – AP) x AQ
(SQ*SP) - (AQ*AP) (SQ*SP) – (AQ*SP) (AQ*SP) – (AQ*AP)
SMC – (AQ*SP) (AQ*SP) – AMC
Material Yield Variance (MYV / MSUV / MQV) = (SQ – RSQ) x SP OR (SQ*SP) – (RSQ*SP)
Material Mix Variance (MMV) = (RSQ – AQ) x SP OR (RSQ*SP) – (AQ*SP)
Here, RSQ = Total Qty. in Std. Ratio
1 2 3 4
SQ * SP RSQ * SP AQ * SP AQ * AP
Material CostVariance = ( 1 ) – ( 4 )

Material Usage Variance = ( 1 ) – ( 3 ) Material Price Variance = ( 3 ) – ( 4 )

Material Yield Variance = ( 1 ) – ( 2 ) Material Mix Variance =( 2 ) – ( 3 )

MCV = MUV + MPV And MUV = MYV + MMV

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2.Labour Cost Variances:

Labour cost = Labour hour x Rate ( LH x R )
Std. Cost = Std. Hour x Std. Rate (SH*SR)
Actual Cost = Actual Hour x Actual Rate (AH*AR)

Labour Variance Occur by two factors: 1. Hour, 2. Rate

- Variance in hour is responsibility of Production department to use Labour efficiently
manner.
- Variance in Rate is responsibility of HR department to hire the labour.

Table for basic Labour variance for 1st level understanding (for single unit variance)

Labour Cost Variance (LCV) = Labour Eff. Variance (LEV) = Labour Rate Variance (MRV) =
SLC – ALC (SH – AH) x SR (SR – AR) x AH
(SH*SR) - (AH*AR) (SH*SR) – (AH*SR) (AH*SR) – (AH*AR)
SLC – (AH*SR) (AH*SR) – ALC

1. Labour Cost Variance (LCV) = SLC – ALC OR (SH*SR) – (AH*AR)

2. Labour Time Variance (LTV) = (SH – AH) x SR OR (SH*SR) – (AH*SR)
3. Labour Rate Variance (MRV) = (SR – AR) x AH OR (AH*SR) – (AH*AR)
4. Labour Eff. Variance (LEV) = (SH – AHW) x SR OR (SH*SR) – (AHW*SR)
5. Labour Idle time (LIT) = (AH – AHW) x SR OR (AH*SR) – (AHW*SR)
6. Labour Sub. Eff. Variance (LSEV) = (SH – RSH) x SR OR (SH*SR) – (RSH*SR)
7. Labour Mix Variance (LMV)= (RSH – AHW) x SR OR (RSH*SR) – (AHW *SR)
Here,
AHW = AH – Idle Time , RSH = Hour Worked in Std. Ratio (Actual hour * Std. Ratio)
1 2 3 4 5
SH*SR RSH*SR AHW*SR AH*SR AH*AR

Labour Cost Variance = ( 1 ) – ( 5 )

Labour Time Variance = ( 1 ) – ( 4 ) Labour Rate Variance = ( 4 ) – ( 5 )

Labour Eff. Variance = ( 1 ) – ( 3 ) Labour Idle Time = ( 4 ) – ( 3 )

Labour Sub. Eff. Variance = ( 1 ) – ( 2 )

Labour Mix Variance = ( 2 ) – ( 3 )

Here,
LCV = LTV + LRV, LTV = LEV + LIT, LEV = LSEV + LMV

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3. Overhead Cost Variances:

Overhead is indirect expenses of a company and they are absorbed in units produce by
company in pre-determine basis.
Overhead Total Cost = Fixed Overhead Cost (FC) + Variable Overhead Cost (VC).
Overhead Total Cost Variance = Std. Total OH. Cost – Actual Total OH. Cost
Overhead Volume Variance = (Std. Qty. – Actual Qty.) x Std. F.OH./Unit
Overhead Expenditure Variance = (SR – AR) AH

Overhead costs Variance are mainly divided into two parts:

1. Fixed Overhead Cost Variance
2. Variable Overhead Cost Variance
Fixed Overhead Variances
1. Fixed OH. Cost Variance (FOCV) = SFO – AFO
* SFO = Overhead recovered by charging on actual units
= AQ @ BFO/Unit
= SH produce @ BFO/ Hour
* SH = AQ x BH/Unit
2. Fixed OH. Expenditure/ Budget Variance (FOEV / FOBV) = BFO – AFO
3. Fixed OH. Volume Variance (FOVV)
In Units = (AQ – BQ) x BFO/Unit
In Hour = (SH – BH) x BFO/Hour
In Budget = SFO – BFO
4. Fixed OH. Calendar Variance (FO Cal. V) = (Actual Days – Budgeted Days) x BFO/Day
5. Fixed OH. Capacity Variance (FO Cap. V) = (AH – RBH) x BFO/Hour
RBH = (Actual Days/ Budgeted Days) * Budgeted Hours
6. Fixed OH. Eff. Variance (FO Eff. V) = (SH – AHW) x BFO/Hour
7. Fixed OH. Idle Variance (FOIV) = Idle Hour * BFO/Hour

FOCV

FO Vol.V FO Exp.V

FO Cal.V FO Cap.V FOEff.V FOIV

Variable Overhead Variances

1. Variable OH. Cost Variance (VOCV) = SVO – AVO
* SVO = AQ @ Std. V.OH/Unit
= SH @ SVO / Hour
= Overhead recover by Budgeted recovery rate.
2. Variable OH. Eff. Variance (VO Eff. V) = (SH – AH) x SR/Hour OR SVO – BVO
3. Variable OH. Exp. Variance (VO Exp. V) = (SR – AR) x AH OR BVO – AVO

Variable OH. Cost Variance (VOCV)

Variable OH. Eff. Variance (VOEff.V) Variable OH. Exp. Variance (VOExp.V)

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4. Sales Variances :
Sales is a main goal of a profit generating entity so for achievement of future target study on
sales is very important and it is responsibility of sales department to increase sales.

Sales Value = Unit Price (Qty.) X No. of Units (Price)

Std. Sales Value = Std. Qty. x Std. Price (SQ*SP)
Actual Sales Value = Actual Qty. x Actual Price (AQ*AP)

1. Total Sales Variance (TSV) = (AQ X AP) – (BQ X BP)

2. Sales Volume Variance (SVV) = (AQ – BQ) BP
3. Sales Price Variance (SPV) = (AP – BP) AQ
4. Sales Sub Volume Variance (SSVV) = (RBQ – BQ) x BP OR (RBQ * BP) – (BQ * BP)
5. Sales Mix Variance (SMV) = (AQ – RBQ) x BP OR (AQ * BP) – (RBQ * BP)

1 2 3 4
AQ * AP AQ * BP RBQ * BP BQ * BP

Total Sales Variance = ( 1 ) – ( 4 )

Sales Volume Variance = ( 2 ) – ( 4 ) Sales Price Variance = ( 1 ) – ( 2)

Sales Sub Volume Variance = ( 3 ) – ( 4 ) Material Mix Variance =( 2 ) – ( 3 )

5. Sales Margin Variances:

1. Total Sales Margin Variance = (BQ * BM) – (AQ * AM)
2. Sales Margin Volume Variance = (AQ – BQ) x BM
3. Sales Margin Price Variance = (AM – BM) x AQ OR (AP – BP) x AQ

6. Market Size / Market Share Variances:

1. Market Size Variance =
(Actual Market Size – Budgeted Market Size) x Std. % on Market x Std. Price
2. Market Share Variance =
(Actual Units Sold – Std. Share in Actual Market Size) x Std. Price

Some extra Variances:

Material Price Variance = ( SP – AP ) * Qty. Purchase
Sales Qty. Variance = ( TAQ – TBQ ) * Avg. Std. price

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Reconciliation of Profit with Variances:

Particulars Inner column Outer column
Total Std. Sales ----------
Std. Cost of Sales ---------
(1) Std. Profit ----------
Variances:
MUV ---------
MPV ---------
LEV ---------
LRV ---------
Overhead Variance ---------
SVV
SPV
(2) Variance balance -----------
Actual Profit (1) – (2) -----------

OR 
Particulars Inner column Outer column
Budgeted Profit (1)
Variances:
MUV ---------
MPV ---------
LEV ---------
LRV ---------
VO Eff. V ---------
VO Exp. V ---------
FO Vol. V ---------
FO Exp. V ---------
SMVV ---------
SMPV --------- (2)
Actual Profit (1) – (2) ------------

Above Reconciliation statement prepare on absorption concept. If we want to convert

this format to marginal costing concept then ignore FO Vol. Variance because in marginal
costing Fixed cost not calculated in per unit.

In absorption costing margin = Sales/unit – (VC/U + FC/U) but in marginal costing

margin = Sales/unit – (VC/U), due to change in margin in marginal costing statement of
reconciliation FO Vol. variance not taken into the calculation of Actual profit.

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Accounting of Variances:
1. Partial Plan
2. Single Plan

1. Partial Plan:
In this plan the variance analysis done at the end of accounting period. So for this
reason this plan not a very useful plan and also called as Delay Plan or Post-mortem Plan.

Raw material and WIP A/c OR Manufacturing A/c

B/d (Std. Cost) Finished Goods (Std. Cost)
Material (AQ*AP)
Wages (AH*AR)
AVO
AFO All Adverse variance
All Favorable Variance Closing Stock (Std. Cost)

9 Administration Cost Variance dealt in finished goods A/c.

9 Selling and distribution Cost Variance dealt in cost of goods sold A/c.
9 Sales Price and Volume Variance in Sales A/c.
9 After that all variance transfer to Costing P&L A/c.

2. Single Plan:
In this plan all Variances is calculated at they incurred. Each a/c is transfer at Std. cost.
Particulars Accounts Cost Integrated A/c Non-integrated A/c
Purchase of Purchase A/c (AQ*SP) Store Ledger A/c Store Ledger A/c
Raw material To Bank A/c (Adv.) Purchase Price V. Purchase Price V.
(AQ*AP) To Bank A/c To CLC A/c
Issue of Raw (SQ*SP) WIP A/c WIP A/c
to WIP a/c (Adv.) MUV A/c MUV A/c
(AQ*SP) To Store Ledger A/c To Store Ledger A/c
Wages Wages A/c (AH*SR) Wages Control A/c Wages Control A/c
incurred To Bank A/c (Adv.) LRV A/c LRV A/c
(AH*AR) To Bank A/c To CLC A/c
Wages (SH*SR) WIP Control A/c WIP Control A/c
Charged to (Adv.) LEV A/c LEV A/c
WIP (AH*SR) To Wages Control A/c To Wages Control A/c
Variable Direct Exp. A/c (AVO) Variable OH A/c Variable OH A/c
Overhead To Bank A/c (AVO) To Bank A/c To CLCA/c
Charged to (SVO) WIP Control A/c WIP Control A/c
WIP (Adv.) VO Eff. V. A/c VO Eff. V. A/c
(Adv.) VO Exp. V A/c VO Exp. V A/c
(AVO) To Variable OH A/c To Variable OH A/c
Fixed Direct Exp. A/c (AFO) Fixed OH A/c Fixed OH A/c
Overhead To Bank A/c (AFO) To Bank A/c To CLCA/c
Charged to (SFO) WIP Control A/c WIP Control A/c
WIP (Adv.) FO Eff. V. A/c FO Eff. V. A/c
(Adv.) FO Exp. V A/c FO Exp. V A/c
(AFO) To Variable OH A/c To Variable OH A/c
WIP to F. (Std.) Finished goods A/c Finished goods A/c
Goods (Std.) To WIP A/c To WIP A/c

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Administrative Expense A/c (Actual) Ad. OH control A/c Ad. OH control A/c
overhead To Bank A/c (Actual) To Bank A/c To CLC A/c
Charge to (Std.) Finished good A/c Finished good A/c
finished goods (Adv.) Ad. OH V A/c Ad. OH V A/c
(Actual) To Ad. OH control A/c To Ad. OH control A/c
S&D Expense A/c (Actual) S&D OH control A/c S&D OH control A/c
overhead To Bank A/c (Actual) To Bank A/c To CLC A/c
Charge to (Std.) Cost of Sales A/c Cost of Sales A/c
Cost of Sales (Adv.) S&D OH V A/c S&D OH V A/c
(Actual) To S&D OH control A/c To S&D OH control A/c

Raw material Control (RMC)A/c

To Balance b/d Std. Cost By WIP A/c SQ*SP
To Purchase A/c AQ*SP By Costing P&L A/c Adv. Variance
To Costing P&L A/c Fav. Variance By Balance c/d Std. Cost

WIP Control A/c Wages A/c (Variable and Fixed)

To Balance b/d Std. By F. goods A/c Std. To Bank A/c Actual By WIP A/c Std.
To RMC A/c Std. To P&L A/c Fav. By P&L A/c Adv.
To Wages A/c Std. By Balance c/d Std.

Finished Goods A/c Administration Overhead A/c

To Balance b/d Std. By Cost of Std. To Bank A/c Actual By F. goods A/c Std.
goods Sold A/c
To WIP A/c Std. To P&L A/c Fav. By P&L A/c Adv.
To Wages A/c Std. By Balance c/d Std.

Sales A/c
P&L A/c Fav. Variance Sales Actual Sales
P&L A/c Std. Sales P&L A/c Adv. Variance

Costing P&L A/c

Cost of goods sold (Std. Cost) Sales (Std. Sales)
Adv. Variance --------- Favorable Variance ---------
--------- ---------
-------- --------
-------- --------
Net profit (Actual) --------

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Chapter - Marginal Costing

Marginal Cost means Change in total cost due to Change in one unit of output. In
marginal cost all variable cost are change to the production but fixed cost of the period are to
be W/o in which that cost are incurred .

Sales = Variable Cost + Contribution ( S = V+C ) AND

Contribution = Fixed cost + Profit ( C = F+P ) AND
Sales = Variable Cost + Fixed Cost + Profit ( S = V+F+P )

BEP/ MOS Statement ( Break even point / Margin of safety )

Particulars BEP Sales MOS Sales Total Sales
Sales
Less: Variable Cost
Contribution
Less: Fixed Cost Nil
Profit Nil

• BEP Sales ( % ) + MOS Sales ( % ) = 100 %

• Contribution at BEP = Fixed cost
• Contribution at MOS = Profit
• Contribution on BEP + Contribution on MOS = Total Contribution
• Fixed Cost = BEP Sales * PV Ratio
• Profit = MOS sales * PV Ratio
• BEP Sales = Fixed Cost / PV Ratio
• MOS Sales = Profit / PV Ratio
• Variable cost = per unit cost is constant but change in total amount.
• Fixed cost = Change in per unit cost but total cost are constant.
• Semi variable Cost = It is Combination of Variable cost and fixed cost.
• If sales price constant than variable cost change in same ratio to sales changes.
• If sales price is change but sales Qty is same than Variable cost also constant but only
change in P/V Ratio.
• Question say find out increase in sales price to req. BEP at ….% Than
% increase in Sales price = (C.BEP – R.BEP) / R.BEP

Break Even Point ( BEP ) :

1. BEP in Amount :Fixed Cost / PV Ratio
2. BEP in units :Fixed Cost / Conti per unit

Profit – Volume Ratio (P/V Ratio):

1. Contribution * 100 C* 100 S-V* 100 4. Change in Contribution * 100 ∆C*100

Sales S S Change in Sales ∆S
Fixed Cost* 100 F* 100 5. Change in Profit * 100 ∆P*100
2. BEP Sales BEP Change in Sales ∆S
3. Profit * 100 P * 100
MOS Sales MOS

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Other Types of BEP:

1. Cash BEP: In the Cash BEP in fixed cost taken at cash cost (only Cash cost), in this no non
cash item not considered. e.g. Depreciation, W/o etc. This cost known as out of pocket fixed
cost. This BEP is used in slack period for short time.

2. Composite BEP (Overall BEP) : BEP in case of two or mare than two products combined BEP
for one company.
Particulars Unit A Unit B Product A and B sales different product at
Sales Rs. 20.00 Rs. 45.00 different price and product have different cost
Variable cost Rs. 15.00 Rs. 30.00 and different sales mix. Required to find
combined BEP of company in Amount when
Contribution Rs. 05.00 Rs. 15.00 fixed cost =360,000?
Sales mix 6000 Unit 4000 Unit
P/V Ratio 1/4 1/3
Answer:
In unit ratio – Avg. contribution per unit In sales ratio – Avg. P/V ratio per unit
(5*6 + 15*4)/10 = Rs. 9 per combo unit (5*6 + 15*4)/(20*6 + 45*4) = 30%
360,000/9 = 40,000 units 360,000/30% = 1200,000
A 40000/10 * 6 = 24000, B 40000/10 * 4 = 16000

3. BEP in case of opening stock :

Opening stock 6000 Unit @ Rs.10.00 (VC at 60%) = 60,000
Production 44000 Unit @ (fixed cost = 187000) = 484,000
Selling Price = Rs.10.50 in current year.
Answer:
Particulars Total Cost Variable cost Per U. Fixed cost
Opening stock 60,000 36,000 6.00 Not tr. In this year
Produce units 484,000 297,000 6.75 187,000
Contribution required for absorption of fixed cost Rs. 187,000
Contribution earn by opening units 6,000 *(10.5-6) Rs. 27,000
Balance contribution Rs. 160,000
160,000/3.75 = 42,667
Total sale of units = 6,000+42,667 = 48,667.

4. BEP in case of change in variable cost at various level of production.

First 5000 Units @ Rs. 3.00 Contribution 2.00
Next Units @ Rs. 2.80 Contribution 2.20
Sales price = Rs. 5.00 and fixed cost = Rs. 27500.00
Answer: 5,000 + 12,500 = 17,500

5. BEP in case of Differential fixed cost at differential production levels:

Sales price = 20.00 and VC = 15.00
Fixed cost , Rs. 30,000 up to 8000 units and Rs. 45000 above 8000 Unit.
Answer:
BEP up to 8000 units: 30,000/5 = 6,000 units
BEP above 8000 units: 45,000/5 = 9,000 units.

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6. Cost BEP : it is used for profit earning capacity after a specific level of production.
Particulars Plant A Plant B Which is more profitable and state the level in
units and compare the cost par unit when
Variable cost (per unit) 8.00 6.50
production is 15000 units or 25000 units?
Fixed cost 90,000.00 120,000.00
Answer:
(120,000-90,000) / (8.00-6.50) = 20,000 Units.

7. BEP in case of semi variable cost:

Engine fixed cost = 32,000, Train bogie Fixed cost = 12,000
Capacity = 60 persons per bogie, Ticket Contribution = Rs. 300
Determine the BEP in Bogie number and in persons?
Answer:
Contribution per bogie = 300*60 – 12000 = 6,000.00
Bogie required for BEP = 32,000 / 6000 = 5.3333 or 6.00
BEP tickets = 104,000 / 300 = 347 tickets

8. BEP in case of merger of plants / company:

Particulars Plant A Plant B 1. Find out the combined BEP of
Working capacity 70% 60% company?
Sales 350.00 240.00 2. Find out profit/loss at 50% capacity?
VC 280.00 180.00
Contribution 70.00 60.00
Fixed cost 50.00 45.00
Profit 20.00 15.00

Answer:
(1)Fixed cost = 50.00 + 45.00 = 95.00
Capacity at 100% A B Total
Sales 500 400 900
Less: VC (100%) 400 300 700
Contribution 100 100 200
Common P/v ratio = (200/900)*100 = 22.22 %
Sales value on BEP = 95/22.22% = Rs.427.50

(2) At 50 % capacity
Sales 900 * 50% = 450.00
Contribution 450 * 22.22% = 100.00
Less : Fixed cost = 95.00
Profit = 5.00

9. Profit BEP : in Amount :(Fixed cost + Desired profit) / PV ratio

in Unit : (Fixed cost + Desired profit) / Contribution per unit

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Difference between marginal and absorption costing:

For understanding this we take common example for both marginal and absorption
costing.
Example:
Sales 10, 00,000
Production cost (Variable) 4, 00,000
Production cost (Fixed) 2, 00,000
S&D cost (Variable) 2, 00,000
S&D cost (Fixed) 1, 00,000
Normal production in year is 10, 000 units.
Six month production is 5, 500 units and sales of 5, 000 units in this term.

Solution:
Absorption costing
1. Absorption of production cost (Fixed cost) = 200,000/10,000 = Rs. 20.00
Total absorption cost for six month = 5,500 * 20 = 110,000

2. Over absorption of production cost ;

Absorbed cost 110,000
To be absorbed 200,000/2 100,000
Extra absorption of cost 10,000

Absorption costing
Particular Amount(Rs.)
Income from sales of goods(A) 5000 * 100 500,000.00
Production cost
Variable cost 5500 * 40 220,000.00
Fixed cost 5500 * 20 110,000.00
Total 5500 * 60 330,000.00
Less: closing stock 500 * 60 30,000.00
Total production cost 300,000.00
Variable S&D cost 5000 * 20 100,000.00
Fixed S&D cost 100000/2 50,000.00
Total cost for sales (B) 450,000.00
Non adjusted profit 50,000.00
Over absorption 10,000.00
Actual profit 60,000.00

Marginal costing
Particulars Amount(Rs.)
Income from sales (A) 5000 * 100 5,00,000.00
Variable cost
Production 5000 * 40 200,000.00
S&D 5000 * 20 100,000.00 3,00,000.00
Contribution 2,00,000.00
Fixed cost
Production cost 200,000/2 100,000.00
S&D 100,000/2 50,000.00 150,000.00
Actual Profit 50,000.00

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Budgetary Control
Different Types of budgets:
Budget

Capacity Coverage Period Statics

Fixed Flexible Working Master Long term Short term Main Current
Budget Budget Budget Budget Budget Budget Budget Budget

Functional Budgets:
1. Sales Budget
2. Production Budget
3. Plan Usage Budget
4. Raw material Usage Budget
5. Raw material Purchase Budget
6. Direct wages Budget
7. Factory Overhead Budget
8. Production cost Budget
9. Closing stock Budget
10. Selling and distribution Budget
11. Administrative Budget
12. R & D Budget
13. Capital expenditure Budget
14. Cash Budget
15. Master Budget.

Example:
Sales Budget
Particulars Product A Product B Total
Qty. Rate Amount Qty. Rate Amount amount

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