|... From Page M:3|
|Revising the Standards|
Revising the standard implies changing the standard itself. This will (may) result in the change in either the quantity of material consumed per unit of production or the rate of material per unit. Revision is necessary in some situations where the planned conditions do not exist.
Say for example, the organisation has planned to manufacture a product using materials X, Y and Z in equal proportions i.e. in the ratio, 1 : 1 : 1. Subsequently, Material X has become scarce and it would be difficult or costly to obtain Material X to the extent needed. To overcome this situation, the production plan has been changed to manufacture the product using X, Y and Z in the ratio 1 : 2 : 2. The actual production has been carried on using the revised plan.
If you are to compare the actual data with the original standard it would give erroneous conclusions. Therefore the standard data should be revised to incorporate this change and that revised data should be used for comparison with the actual data.
Since the actual production (10 units) and the standard production (10 units) are the same, the data can be straight away used for comparing and evaluating variances. This data gives us the idea that there is variance in material cost. The actual cost incurred is Rs. 44,000 as against a standard of Rs. 40,000.
This is erroneous because the data does not take into consideration the revision in standard that has been made. Had the revision been considered, the materials X, Y and Z as per the standard should have been 300 kgs, 600 kgs and 600 kgs respectively of a total material of 1,500 kgs.
The above data with the revised standard would be:
On considering the revised standards we can see that the production was actually carried on with efficiency with regard to mixing the materials. The cost incurred being Rs. 1,000 less (Rs. 45,000 − Rs 44,000) than the standard cost.
Where does this count?When once a variance is identified, the next logical step is to find out the reasons for variance and then take corrective action. If the revised standards are not considered the organisation may draw wrong conclusions and take action against those who are not really responsible for the variance.
Here, the actual data compared with the unrevised standard indicates that the cost incurred is more than the standard to the extent of Rs. 4,000 whereas there was a saving in cost to the extent of Rs. 1,000. This is revealed only when the revised standard has been used for finding out the variances.
Taking another case where the organisation has fixed the standard price for purchasing materials at Rs. 125 per unit. The market conditions have changed and it is imperative that the organisation has to make purchases under the revised conditions where the material would cost Rs. 150 per kg. Even in this situation it would be appropriate to revise the standard price to reflect the current market price of materials so that effective comparisons can be made.
|Recalculating Standards vs Revising Standards|
Recalculating the standard is needed to enable us to have data which is straight away capable of being used for comparison with the actual data. This has no other relevance. In recalculating the standard, you are neither changing the quantity of material per unit nor the price of material per unit. You are only obtaining the data or values for a production level other than the one that is given in the standard.
This concept should be clearly understood, since in majority of the cases, in solving problems what the student does is recalculating the standard and not revising the standard.
We need to revise the standard when there is an indication regarding the same.
You may not need to recalculate the standard !!!In solving problems, we can make use of formulae which would enable us to calculate all the material variances without recalculating the standard, by incorporating the adjustment factor in the formulae itself.
But, there is no such arrangement with regard to revision of standards. Where you are required to revise the standard, you have to.
|Author Credit : The Edifier||... Continued Page M:5|