Financial Concepts for Loans and Real Estates

After a huge discussion on financial chapter we have come to “Standard Costing” chapter to discuss about it. About it management says that it is the standard costing is an important tool to planning and cost control.

Objectives of Standard Costing:

Meaning of Standard Costing

Nature of Variance Analysis

Calculate Variances

According to the ICMA, London Standard Cost is, “the pre-determined cost based on technical estimate for materials, labour and overhead for a selected period of time and for a prescribed set of working conditions.”

You should know that Standard Cost is different from “Estimated Cost” and it express what should be the cost, in advance of actual production.

Along with we should know about Standard Costing also. The definitions of Standard Costing also look from ICMA, London, “the preparation of standard costs and applying them to measure the variations from standard costs and analyzing the causes of variations with a view to maintain maximum efficiency in production.”

Standard Costs involves in:

a. Ascertainment of standard costs for each element costs – material, labour, overhead
b. Use of standard costs as a guide and measure of actual costs
c. Measurement of actual costs
d. Comparison of actual costs with the standard costs
e. Measurement and analysis of deviations of actual costs from standard costs

After having understood about the standard costs we should proceed with Variance Analysis. According to the MBA book of SMU variance is, “the difference between a standard cost and the actual cost incurred during a period.

In the variance analysis mainly two elements involved which are:

Measurement of individual variances and
Identification of causes of each variance

We can illustrate here some formula about variance:

Material usage variance = (Standard Quantity – Actual Quantity) x Standard Price

[MUV = (SQ –AQ) x SP]

Computing mix variance:

Material mix variance = [standard cost of standard mix] – [standard cost of actual mix]

Or

[Standard mix – actual mix] x standard rate per unit

Or

[Revised standard mix of actual input – actual mix] x Standard price.

I think now all the things are clear about the standard costs and variance from the financial book. I have already explained the entire chapter before much clearly with some example. I think to publish here about some new chapter of finance and loans also.

1st thing is trail balance purpose. It is prepared to check not only arithmetical accuracy of ledger balances but also to take an overview of the operations of the business as on a particular date. It is prepared on the basis of weekly, monthly, quarterly, half yearly and yearly. A trail balance contains the elements of financial statements – assets, liabilities, equity, income and expenses.

How to Prepare Trail Balance

I will give an example of trail balance preparation. We make an assumption that the capital of M/s XYZ as on 1st August 2006 was Rs. 1, 05,000 then the format will be:

Trail Balance As on 31st August, 2006

This is not solved. It is only format of trail balance sheet.

Final Accounts

Final accounts popularly known as the profit and loss account and the balance sheet are together called the final accounts.

Now, I want to let you know about the terms of trail balance and final accounts.

Error of Principle is the term of balance accounting and it is known as a principle and concepts. It is an error and it is committed because of lack of proper knowledge of accounting principles or concepts of finance.

Like it there are some more – error of omission, error of commission, compensation error, trading account, profit and loss account, profit and loss appropriation account, balance sheet, suspense account, gross profit and net profit. These terms are commonly known for trail balance and final accounts chapter. I will write about in the further chapter as more details.