Standard Costing: Definition, Features, Advantages, Disadvantages, Process

Standard Costing is used to ascertain the standard cost under each element of cost, i.e., materials, labours, overhead. Over the years, the cost of raw materials and labour has increased, and improved production methods have been adopted. So the basic standard cost does not represent the current costs anymore.

Inventory Control

• It helps to provide valuable guidance in several management functions such as formulating policies, determining price level, etc.
• But when actual cost is compared with such standard, huge variance arise.
• (d) Uncertainty in standard costing can be caused by inflation, technological change, economic and political factors etc.
• (7) To provide a formal basis for asserting operational efficiency of the concern.
• (b) To control costs by establishing standards and analysis of variances.

The standard costing amount by which actual costs exceed the standard costs or budgeted costs. Also, the amount by which actual revenues are less than the budgeted revenues. Costing system wherein fixed manufacturing overhead is allocated to (or absorbed by) products being manufactured. This system, which treats fixed manufacturing costs as a product cost, is required for external financial statements. A term used with standard costs to report a difference between actual costs and standard costs.

Variable Manufacturing Overhead: Standard Cost, Spending Variance, Efficiency Variance

If the standards set do not meet any of these requirements, these standards cannot help the management of the business meet the objectives of standard costing. For example, if the standard set is not specific, then normal balance the management and the employees of the business will not realize what is expected of them. Thus, variances are based on either changes in cost from the expected amount, or changes in the quantity from the expected amount.

Helpful in Budgeting

Standard Costing is a tool for the management to gain reduction in the cost and control over it. Under this technique, differences are analyzed and responsibilities are determined. To help the management in formulating production policy and helps in fixing the price quotations as well as in submitting tenders of Accounting for Marketing Agencies various products. The calculation for the price variance is generally done at the end of each manufacturing cycle. If the manufacturing department needs immediate feedback to take corrective measures, this method will slow down feedback and become irrelevant.

New Business Terms

(m) Greater variety, diversity and complexity of products are not taken into consideration in traditional systems. (g) Service related costs like professional services, banking services, insurance services have increased considerably in the last few decades. (c) Factoring the variance into individual components and investigation of the significant differences.

Inventory Control Techniques

• However, any effective planning and control system must have a foundation on which to operate.
• This system helps fix the price of the finished product before the manufacturing process is complete.
• Since cost accounting is used internally and not shared with external parties, such as shareholders, cost accounting does not require to be reported using specific standards or rules.
• In this case, the manufacturers cannot use standard costing to draft a contract with the client.
• Period – Period for use of standard should be fixed clearly and a suitable standard should be selected.

If the quantity of direct materials actually used is less than the standard quantity for the products produced, the company will have a favorable usage variance. The amount of a favorable and unfavorable variance is recorded in a general ledger account Direct Materials Usage Variance. (Alternative account titles include Direct Materials Quantity Variance or Direct Materials Efficiency Variance.) We will demonstrate this variance with the following information. Aids to inventory costing – Inventories of raw materials, work-in-progress and finished goods may be carried at standard costs.

• Standard costing is the process of estimating manufacturing expenses in advance.
• Vari­ance reporting is a mechanism to provide feedback to managers on variances from target results.
• Costing system wherein fixed manufacturing overhead is allocated to (or absorbed by) products being manufactured.
• M) Transfer prices are based on standard rather than actual costs.
• In setting the standards, time and motion study staff, technical and drawing office staff should come together and accomplish the work by coordinating their efforts.
• There are strong behavioural and motivational factors involved in this process.

These costs have space for both man and machine failures and allow for machine breakdowns, wastage and loss of time. However, the expression ‘reasonable’ is vague; it is very difficult to assess at what point, above actual costs and below ideal costs, the standard should be set. The attainable standard is influenced by the subjective assessment of the person setting the standard. A standard costing system benefits most of the organization that produces identical items in large quantity. For example, standard costing system can be used by a firm producing consumer durables or by a firm that employs the process cost system. Standard costing, if applied in a non-repetitive production environment, might bring out misleading variances.