Standard Costing System and Variance Analysis in Business Finance

This case study discusses the importance of standard costing and variance analysis in business finance. It covers topics such as break-even point, margin of safety, absorption costing, and computation of contribution per unit. It also explains the usefulness of standard costing system and analysis of variance, along with the calculation of material usage variance, material price variance, labour efficiency variance, labour rate variance, and fixed overhead variance. The subject is business finance and the course code is not mentioned. The content is relevant for students pursuing finance courses in any college or university.

Business finance

Table of Contents
INTRODUCTION ..........................................................................................................................3
MAIN BODY...................................................................................................................................3
PART A...........................................................................................................................................3
Working of closing Inventory:.........................................................................................................6
Working of closing inventory and Overall variable overhead:........................................................7
PART B............................................................................................................................................8
Determine the usefulness of Standard costing system and analysis of variance....................8
Calculation of Material usage variance, Material price variance, Labour efficiency variance,
Labour rate variance and Fixed overhead variance. Provide comments on each variance.
................................................................................................................................................9
Consider the standard cost card for Apparel limited and creating budgets for having better
control over operations: Direct labour budget, Direct material budget, Fixed overhead
expenditure budget and Variable overhead budget. ............................................................10
CONCLUSION .............................................................................................................................10
REFERENCES..............................................................................................................................12

INTRODUCTION
The case study discuss about the requirement of standard costing and how changes can be
analysed and assist in providing good outcomes towards the firm selection (Sharma and Chandel,
2021). It also consider in account based analysis that would assist in providing best outputs and
create sales revenue and profits also. It also helpful and give direction to the supervisors along
with the customers too and the requirement of budgets for estimating the performance being
provided. Apart from this it also considers in account how the resources are needed to be
maintain and utilization in dependent businesses and organization. It also describes the break
even measures, margin of safety and absorption costing which assist in knowing and providing a
complete view of its profitable and stability of the company.
PART A
Computation of contribution per unit:
This is the procedure which describe the profit with the regard of sale revenue of one unit
and decrease all expenditure variable on it and the value occurs is called as contribution (Johnsen
and Hvam, 2019). It is useful to determine how many products to be sold to recoup the relative
variable or fixed cost.
Contribution per unit = sales revenue per unit – variable expenditure per unit
= £120 – £50
= £70 per unit
The above calculation shows that sale revenue of per unit of company Lobelia is £120 and
variable cost is £50 per unit. The results came out after computation of contribution per unit is
£70.
Computation of break-even point and break-even sales:
The procedure of break-even analysis plays a important role to compute weights which
include expenses of firm and item against the selling price unit help to determine the position of
break even point (Paquibut and Al Naamany, 2020). Basically, Break even is the situation where
the level of sales and total amount of fixed expenditure and variable expenditure are on same
levels. It is the point where a company neither generate profit and loss.

In the other words, It refers to the point where the revenue from sales cover the cost of
fixed as well as variable cost. Low level of sales shows low level of break even stage. Break-
even point describe the company's performance over a period of time.
Description of Break- even point:
Break-even stage is a expression of provisions (Kay, 2019).
lesser the sum of break-even, is favourable for its business.
The Computation of break-even point and break-even sales:
Break-even point = Fixed expense / (sales revenue per unit – variable expense per unit)
Break-even point = £700000 / (£120 - £50)
= £10000 units
In the above calculation break-even stage is measure in which fixed expenditure is divide
by the contribution per unit and the value of fixed expenditure is already given £700000 and the
amount of Contribution per unit is taken from above computation is £70.
Break- even sales in % = Fixed expense / Contribution margin
break- even sales = £700000 / £2800000 *100
= 25 %
As per above calculation the break-even sales of the Lobelia company is 25 % and if it
calculated in units then its express the equal unit of break even point.
Computation Margin of Safety as a percentage of budgeted sales:
The concept of margin of safety analyse the involvement between the level of sale and
the break-even sales of a company. It express the level of safety that a company communicate
before incurring the losses (Irfan and Ahmad, 2018). It decrease the level of break even point. It
is a investing principle which provide safety while market price is low that its intrinsic value.
Computation of Margin of safety:
Greater margin of safety is more favourable for the company.
Measuring margin of safety:
Margin of safety(MOS) = Budgeted sales of the firm – Break-even stage / budgeted sales * 100
= £40000 units - £10000 units / £40000 units *100
= £30000 units / £40000 units *100
= 75%

The budget revenue sale is given £40000 and break even level is £10000 as above computation.
The margin of safety is 75% for the company Lobelia ltd.
Computation of number of units that is to be sold for making a profit of £700,000 during
the year:
In this particular point a company wants to measure the requirement of necessary sales
units which are sold to make a profit of £700000 in a year. Here are is formula which help in
computation of desired sale units.
Required sales units = fixed cost + target profit / Contribution margin per unit
= £700000 + £700000 / £70 units
= £1400000 / £70 units
= £20000 units
As per above computation this states that firm needs to sale £20000 units to meet a profit of
£700000.
Create a memo to your Financial Manager to analysing the significance of Contribution. In
your memo recommend how contribution can be used for making business decisions and
how contribution create an impact on margin of safety.
To: Financial Managerial
From: Lobelia Ltd.
Subject: Analyses of significance of Contribution
Significance of contribution:
It serves as a guide to the company to understand the contribution of different companies or
various product lines. It also help to understand strength and weakness of the company or
product and services. It also measure the profit of the company after selling its products.
Recommend how contribution margin help to take organisation decisions:
Contribution margin is a important tool for decision making and budgeting which manges
accounting goals and help manager in decision-making process. Contribution have various uses
in decision making process such as: Constant minimum sale unit method point out the sale
amount I will recoup both fixed as well as variable expenses. To measure the actual profit
condition, it provide profit volume chart and it is very easy to understand company position.
How contribution affect margin of safety:

As per above computation of break-even pint it states that the positive and negative changes in
contribution margin effect the level of break even point and as per the reason margin of safety
also affected because in the above computation of the formula of Mos break-even is less into the
budgeted revenue sale of the company (Shah and et.al., 2019).
Calculation of Marginal costing
Particulars Budgeted profit( £) Actual profit( £ )
Sales 110000 96800
Variable cost:
Direct material
Direct labour
Variable overhead
35000
45000
15000
33600
43200
14400
Marginal cost
Less: Closing Inventory
Add: Fixed overhead
95000
_
9000
91200
(7600)
9000
Cost of sales 104000 92600
Gross profit (sales – cost of sales)
Less: Administration, selling and distribution cost
6000
_
4200
_
Net profit 6000 4200
Working of closing Inventory:
 The revenue of budgeted sales and business production is same £5000 units and there is
no closing inventory left behind (Bhimani and et.al., 2019). Absorption rate of company
is
Absorption rate = marginal cost / budgeted production
= £95000 / £5000
= £19 per unit
 Actual production of the company is 4800 units while its actual sale is 4400 units. The
closing inventory of the company is 400 units and the absorption rate of the firm is

Absorption rate = marginal cost / budgeted production
= 91200 / 4800
= 19 per unit
So, the actual closing stock of the company is (400 * 19 = 7600)
Calculation of Absorption costing
Particulars Budgeted profit( £) Actual profit( £ )
Sales 110000 96800
Variable cost:
Direct material
Direct labour
Total Variable overhead
35000
45000
24000
33600
43200
23400
Absorption cost
Less: Closing Inventory
104000
_
100200
(8350)
Cost of sales 104000 91850
Gross profit (sales – cost of sales )
Less: Administration, selling and distribution cost
6000
_
4950
_
Net profit 6000 4950
Working of closing inventory and Overall variable overhead:
 The revenue of budgeted sales and business production is same £5000 units and there is
no closing inventory left behind (Paul, 2018). Absorption rate of company is
Absorption rate = Absorption cost / budgeted production
= £104000 / £5000
= £20.8per unit
 Actual production of the company is 4800 units while its actual sale is 4400 units. The
closing inventory of the company is 400 units and the absorption rate of the firm is
Absorption rate = Absorption cost / budgeted production
= £100200 / £4800
= £20.875 per unit

So, the actual closing inventory of the enterprise is (£400 * £20.875 = £8350).
The total variable overhead = Variable overhead + fixed overhead
= £14400 + £9000
= £23400
PART B
Determine the usefulness of Standard costing system and analysis of variance
Standard costing, it is an exercise which is used for exchanging an predicted cost for an
real cost in the books of accounting records. Afterwards, Variance are write down to analyse the
difference among the predicted cost and real or actual cost. This practice is easy to represent and
a best alternative to cost covering system, where day to day cost information must be finance for
the items of inventory control in stock (Andhov and et.al., 2019).
Standard Costing system is a factor helpful for business operation on the basis of
budgeting forecasting, maintaining the costs and asses the performance of cost management. It is
tool which works for measuring the total amount of cost are required in a manufacturing process.
This cost is also termed for increasing the demands of a specific company. The following are
some reason where standard costing systems are used:
Examination of interim gain and valuation of goods: After competing the financial and
accounting period the company is helpful in examining the actual profit comes from its
company selling goods. It is responsibility or duty of every organization to make a record of
all transaction done in given period of time because due to this company in analysing the
profit and future decision making.
Effectiveness in succeeding budgets and assuming outcomes: The standard costing system are
helpful in proper planning budgets or predicting future outcomes. This budget is depend on
the two benefits; a one particular superior in an authority centre would not be assist with
volume of budget and the second benefits says variance can be identified with the quality of
an single people.
Cost are useful for future forecasting and decision making: The result of standard cost are
analysed after preparing and collecting the data and information respectively. It is also
helpful at the time of projecting where it suggest about what would be the amount of

estimate cost and what type of project is helpful for making more profits (Pavlatos and
Kostakis, 2022).
Focus on achieving targets: The target costs are usually include various expenses and cost in
which are not negotiated by authority centre. The management analyse all the outcomes of
authority department on daily basis after that the result will be calculated against the
established standards. Variances are taken place in every data and it is also reported for
specific action plan.
Calculation of Material usage variance, Material price variance, Labour efficiency variance,
Labour rate variance and Fixed overhead variance. Provide comments on each variance.
1. Material usage variance: It measure the changes in the material cost due to material
consumption (Zhang and et.al., 2018).
MSV = Standard Price * (Standard Quantity – Actual Quantity)
= 4 * {(10000*4 – 5*10000)}
= 4 * (40000 – 50000)
As per above computation it states that company using more raw material a s compare to
budgeted quantity. It is recommended that company has to reduce its material expenses.
2. Material price variance: It measure the Fluctuation in the cost of material which is due
to change in purchase price then budgeted price of material.
calculation is as under:
= Actual Quantity * (Standard Price – Actual Price)
= (5 * 10000) * (4 -6)
= (100000)
As per above computation it states that the cost of material is higher than budgeted because they
are using more material. Company has to find cheaper source of material.
3. Labour productive variance: This rate represent the changes in the working hours of
the employees or workers (Nuhu, Baird and Appuhami, 2019).
= Standard rate * (Standard time – Actual time)
= 27 * (3 -3)
= Nil

As per above computation it states that the labour or worker are working with their full
efficiency according to the company requirement.
Labour price variance: This rate represent the changes in the price rate of the amount which paid
to the labour or workers (Batey, 2018).
= Actual Time * (Standard Rate - Actual Rate)
= (10000 * 3) * (27 – 30)
= (90000)
As per above computation it state that Company is paying to the workers more than the budgeted
amount that increase the expenses of company.
 Fixed overhead variance: It refers to the changes in the budgeted fixed overheads from
the actual fixed overheads (Ferguson, 2019).
= (Recovered overhead – Standard overhead)
= (15000- 20000)
= (5000)
As per above computation it state that company is not able to mange its fixed expenase because
it exceed from the budgeted overheads.
Consider the standard cost card for Apparel limited and creating budgets for having better
control over operations: Direct labour budget, Direct material budget, Fixed overhead
expenditure budget and Variable overhead budget.
The statement of budget states that the control over operations of Apparel Plc:
Particulars Budget
Direct Material (4 * 4 * 10000)
Add: Direct Labour (3 * 9 * 10000)
160000
270000
Prime Cost
Add: Variable Overhead (2 * 3 * 10000)
Add: Fixed budget Cost
430000
60000
20000
Total Budgeted Cost of Apparel Plc 510000

CONCLUSION
The above report prepared in the reference of standard costing that guide company to
manage and control outcomes of various departments. It includes how different variances would
support in understanding and analysing the efficiency of the company. Better understanding help
a firm to achieve its goals. It help in comparing actual results with the budget results to find out
any deviation and provide measure to correct them. This report includes calculations and
recommendation which are necessary for better working of the company.

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