Unit 2: Financial statement analysis & standard costing
Cost and Management Accounting notes · PTU syllabus (BBA 303-18)
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Unit summary
Financial statements become meaningful when compared and analysed. Standard costing sets what costs should be and explains why actual costs differ. This unit covers types and methods of financial analysis — comparative, trend and common-size statements — and standard costing with material, labour, overhead and sales variances.
After this unit you can
- Prepare comparative, common-size and trend statements
- Explain the meaning, advantages and limitations of standard costing
- Calculate material and labour variances
- Calculate overhead and sales variances
PTU syllabus topics
- Types and methods of financial analysis
- comparative statements
- trend analysis
- common size statements
- meaning of standard costing
- advantages and limitations
- material
- labour
- overhead and sales variance analysis
Material cost variance
(SQ × SP) − (AQ × AP)
Material price variance
AQ × (SP − AP)
Material usage variance
SP × (SQ − AQ)
Labour rate variance
AH × (SR − AR)
Labour efficiency variance
SR × (SH − AH)
Topic 1
Types and methods of financial analysis
Types: external vs internal, horizontal (over years) vs vertical (one year), and short-term vs long-term.
| Method | How it works |
|---|---|
| Comparative statements | Show figures for two or more years side by side with absolute and percentage changes |
| Common-size statements | Express each item as a percentage of a total (sales = 100 or total assets = 100) |
| Trend analysis | Express each year's figure as a percentage of a base year (= 100) |
| Ratio analysis | Relationships between items |
| Fund flow and cash flow | Sources and uses of funds or cash |
Example
Sales: 2024 ₹10 lakh (base 100), 2025 ₹12 lakh (120), 2026 ₹15 lakh (150) — a trend of strong growth.
Topic 2
Standard costing
A standard cost is a predetermined cost of what a product should cost under efficient conditions. Standard costing compares standard and actual costs, analyses the variances and takes corrective action. Advantages: cost control, management by exception, better pricing and budgeting, and cost consciousness. Limitations: setting standards is difficult, standards become outdated, and it is costly for small firms.
Topic 3
Material and labour variances
Material cost variance
(SQ × SP) − (AQ × AP)
Material price variance
AQ × (SP − AP)
Material usage variance
SP × (SQ − AQ)
Check
MCV = MPV + MUV
Labour cost variance
(SH × SR) − (AH × AR)
Labour rate variance
AH × (SR − AR)
Labour efficiency variance
SR × (SH − AH)
Idle time variance
Idle hours × SR
Example
Standard: 10 kg at ₹5 = ₹50; actual: 12 kg at ₹4.50 = ₹54. MCV = 50 − 54 = ₹4 (A). MPV = 12 × (5 − 4.5) = ₹6 (F). MUV = 5 × (10 − 12) = ₹10 (A). Check: 6F + 10A = 4A.
Exam tip
A positive answer is favourable (F) and a negative answer adverse (A) when the formulas are written as standard − actual.
Topic 4
Overhead and sales variances
- Variable overhead variance = standard variable overhead for actual output − actual variable overhead (split into expenditure and efficiency).
- Fixed overhead variance = absorbed fixed overhead − actual fixed overhead (split into expenditure and volume).
- Sales value variance = actual sales − budgeted sales, split into sales price variance = AQ × (AP − BP) and sales volume variance = BP × (AQ − BQ).
Key terms
- Common-size statement
- Items shown as percentages of a total
- Trend analysis
- Figures shown as percentages of a base year
- Standard cost
- A predetermined cost under efficient conditions
- Variance
- The difference between standard and actual
- Favourable variance
- Actual cost lower (or revenue higher) than standard
Quick revision
- Comparative = side by side; common-size = % of total; trend = % of base year.
- MCV = MPV + MUV; LCV = LRV + LEV (+ idle time).
- F = favourable, A = adverse.
- Sales variance = price + volume.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.What is a common-size statement?
- Q2.What is trend analysis?
- Q3.Define standard costing.
- Q4.Write the formula for material price variance.
- Q5.What is labour efficiency variance?
Long-answer questions
- Q1.Prepare comparative and common-size income statements from given data and interpret them.
- Q2.Explain standard costing with its advantages and limitations.
- Q3.Calculate material and labour variances from given data.
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