significance of standard costing

Cost accounting mainly involves determining different costs of a business and classifying them using different methods. For example, it can be used to identify the variable, fixed, direct and indirect costs of a business. Once these costs are determined, cost accounting involves the use of different costing techniques to determine the costs of different products, departments or areas of the business. Another particular method that is used within cost accounting is Standard Costing. Standard cost is a pre-determined calculation of how much costs should be under specified working conditions.

It only suggests establishing standards for each element of cost and ensuring that the activities are performed by incurring not more than the pre-determined or standard costs. Therefore, the prospective approach can be introduced into any of the methods of Product Costing. That means, it can be used with any method of Costing viz., Process Costing and Job Costing.

Direct Materials Purchased: Standard Cost and Price Variance

The management of the business have to decide which standard they must use that is suitable for the needs of the business. A firm may set standards at an ideal level or at the attainable level or at the basic level depending on the objective it desires to achieve through the standard costing system. Variances between actual and standard are reported for investigation and corrective actions are taken standard costing system to remove the causes of adverse variances. Favourable variances must also be investigated and standards are reviewed and revised, if necessary. It provides a stable and sound basis for comparison of actual costs with standard costs according to different elements of costs separately. It also shows places where remedial action is necessary and how far improvement is possible in the long run.

Now these element-wise cost variances are analysed critically to find out the exact causes or circumstances leading to it, so that the management can exercise proper control. A suitable analysis will reveal that some of the variances https://www.bookstime.com/blog/budgeting-for-nonprofits are controllable while others are not so. (b) To control cost by introducing standards and analysis of variances. It is the difference between the budgeted overheads and the standard overheads absorbed in production.

Basic or Bogey Standards

The standards should be changed only when they reflect something which no longer exists. Only unforeseen, substantial and apparently permanent price rise makes a case for revision of standards. It has been proved that standards set were fundamentally wrong. For example, in the coke oven factory, both coke and gas are produced. Coke is measured in tonnes, while gas is measured in cubic feet.

The technique by which standard costs are used is known as—Standard costing. It involves the setting of predetermined cost estimates in order to provide a basis for comparison with actual. Standard cost is universally accepted as an effective tool for cost control in industries. An ‘ideal’ standard is one which can be attained under the most favourable conditions. It represents the level of performance attainable with the ‘best’ or ideal set-up, i.e., best quality materials at favourable prices, highly skilled labour and best equipment.

Standard Costing – Advantages of Standard Cost

Hence, a standard figure is one against which one can measure an actual figure to ascertain how much actual figures differ from standard. (b) Standard costing is usually confirmed to organizations whose processes or jobs are repeti­tive. F) Standard costing simplifies bookkeeping, as information is recorded at standard, instead of a number of historic figures. (d) Deciding on the appropriate mix of component materials, where some change in the mix is possible.

Actual manufacturing data are collected after the period under consideration is finished. Actual data includes the exact number of units produced during the period and the actual costs incurred. The actual costs and quantities incurred for direct materials, direct labor, and variable manufacturing overhead are reported in Exhibit 8-1. It is important to establish standards for cost at the beginning of a period to prepare the budget; manage material, labor, and overhead costs; and create a reasonable sales price for a good.