Chapter 9: Standard costing and basic variances

standard costing

The features of are related to the objectives of standard costing. Using a standard costing system may have its own advantages and disadvantages. Standard Cost Accounting (or Standard Costing) is a form of cost accounting that uses predetermined costs for materials, labor, and overhead to estimate the costs of goods or services.

It is only on the issues of exceptions that they have to concentrate. The existing problems must be taken due case of while introducing the system. The rigid marshalling of effort within a factory is a fact of like which must be accepted.

Practical Standards

In other words, a business may not revise standards to keep pace with the frequent changes in manufacturing conditions. Consistency of Standard because the standards of marginal costing fluctuate and vary time to time, it is difficult to always sustain and continue the same standards. Standard Costing is a tool for the management to gain reduction in the cost and control over it.

standard costing

Actual costs are compared with the standards costs and variances are determined. The current cost is also similarly expressed and the two percentages are compared to find out how much the actual cost has deviated from the current standard. The percentages are next compared with those of the previous periods to establish the trend of actual and current standard from basic cost.

Understanding the variance

In fixing the standards, realistic allowances are set for normal wastes. This type of standard is best suited from control point of view. (2) The should be in consistent with the technical process of production of enterprise.

Production is usually articulated in physical units such as tons, pounds, gallons, numbers, kilograms, liters, etc. When a company is manufacturing different types of products, it is almost impossible to increase the production, which cannot be expressed in the same unit. Standard costing is expensive and unsuitable for job manufacturing industries as they manufacture non standardized products such as catering, tailoring, printing, etc. Standard costing may be found unsuitable and costly in the case of industries dealing with non-standard products and repair jobs which keep on changing in accordance with customers’ specifications.

Using the Standard Costing Variance Analysis template on Magnimetrics

Management concentrates on matters which are not proceeding according to plan on the basis of the “principle of exception”. Where the work is not repetitive, e.g., construction work, contract work, ship-building and erection work etc., it is difficult to set standards and therefore, standard costing would not be suitable. But in certain cases, it can be applied partially though not fully, at least to some advantage of the concerns. (ii) Normal Standard – This standard is based on past experience.

Standard costing is the practice of substituting an expected cost for an actual cost in the accounting records. Subsequently, variances are recorded to show the difference between the expected and actual costs. While cost accounting is often used by management within a company to aid in decision-making, financial accounting is what outside investors or creditors typically see. Financial accounting presents a company’s financial position and performance to external sources through financial statements, which include information about its revenues, expenses, assets, and liabilities.

How Does Cost Accounting Differ From Traditional Accounting Methods?

These activities are also considered to be cost drivers, and they are the measures used as the basis for allocating overhead costs. These standards reflect the management’s anticipation of what actual costs will be for the current period. These are the costs which the business will incur if the anticipated prices are paid for the goods and services and the usage corresponds to that believed to be necessary to produce the planned output. Basic standards are, however, well suited to businesses having a small range of products and long production runs. Basic standards are set, on a long-term basis and are seldom revised. When basic standards are in use, variances are not calculated.

  • In addition, standard costing can be a valuable tool for companies that are trying to improve their production processes.
  • (7) To provide a formal basis for asserting operational efficiency of the concern.
  • Reliable relevant information are collected to ensure that standards are realistic.
  • However, if employees are offered a bonus for achieving standard costs, this could increase their incentive to set low standards of performance, i.e. include ‘slack’ in the standard cost.

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