Standard Costing: An Overview
Standard costing is a system of accounting that utilizes predetermined standard costs for direct material, direct labor, and factory overheads. It is a cost control technique that assists management in monitoring and controlling costs effectively. The primary purpose of standard costing is to provide management with information for day-to-day control of operations and cost control.
Key Facts
- Definition: Standard costing is a system of accounting that uses predetermined standard costs for direct material, direct labor, and factory overheads.
- Purpose: The main purpose of standard costing is to provide management with information for day-to-day control of operations and cost control.
- Estimating Costs: Standard costs are determined based on management’s standards of efficient operation and are calculated from past experience, research findings, or experiments.
- Variances: Standard costing involves comparing actual costs with standard costs to identify variances. Variances can be analyzed to determine the factors leading to differences and to take corrective actions.
- Advantages: Standard costing provides a yardstick for comparing actual costs, facilitates cost control and reduction, helps in setting budgets, and provides useful information for managerial planning and decision-making.
- Applicability: Standard costing is applicable in industries that produce standardized products or follow process costing methods. It has been successfully applied in industries such as sugar, fertilizers, cement, footwear, breweries, and distilleries, as well as public utilities like transport organizations and electricity supply companies.
- Types of Standards: There are different types of standards used in standard costing, including ideal standards (maximum efficiency level), basic standards (long-term standards), and currently attainable standards (best attainable performance).
Estimating Standard Costs
Standard costs are determined based on management’s standards of efficient operation. These standards are calculated from past experience, research findings, or experiments. The standards represent the best judgment of management about what costs should be under normal operating conditions.
Variances in Standard Costing
Standard costing involves comparing actual costs with standard costs to identify variances. Variances are the differences between actual costs and standard costs. Variances can be favorable (when actual costs are lower than standard costs) or unfavorable (when actual costs are higher than standard costs). Variances are analyzed to determine the factors leading to these differences and to take corrective actions.
Advantages of Standard Costing
Standard costing offers several advantages, including:
- It provides a yardstick for comparing actual costs, facilitating cost control, and cost reduction.
- It helps in setting budgets and provides useful information for managerial planning and decision-making.
- It assists in evaluating staff performance and management efficiency.
- It serves as a control technique that follows the feedback control cycle, helping to eliminate unwanted costs in the future and potentially reduce costs.
Applicability of Standard Costing
Standard costing is applicable in industries that produce standardized products or follow process costing methods. It has been successfully applied in industries such as sugar, fertilizers, cement, footwear, breweries, and distilleries, as well as public utilities like transport organizations and electricity supply companies.
Types of Standards in Standard Costing
There are different types of standards used in standard costing, including:
- Ideal Standards: These are maximum efficiency level standards that may not be attainable in practice. They represent the best possible performance.
- Basic Standards: These are long-term standards that remain the same after being computed for the first time. They provide a basis for comparing actual costs over time with a constant standard.
- Currently Attainable Standards: These are the most commonly used standards. They represent the best attainable performance with reasonable effort and efficiency.
Conclusion
Standard costing is a valuable tool for cost control and management. By comparing actual costs with standard costs, organizations can identify variances and take corrective actions to improve efficiency and reduce costs. Standard costing also helps in setting budgets, making informed decisions, and evaluating staff performance.
References:
- https://www.indeed.com/career-advice/career-development/standard-costing-definition
- https://www.financestrategists.com/accounting/variance-analysis/standard-costing/
- https://www.freshbooks.com/hub/accounting/standard-cost
FAQs
What is standard costing?
Standard costing is a system of accounting that uses predetermined standard costs for direct material, direct labor, and factory overheads. It is a cost control technique that assists management in monitoring and controlling costs effectively.
What is the purpose of standard costing?
The primary purpose of standard costing is to provide management with information for day-to-day control of operations and cost control. It helps identify variances between actual costs and standard costs, enabling corrective actions to improve efficiency and reduce costs.
How are standard costs determined?
Standard costs are determined based on management’s standards of efficient operation. These standards are calculated from past experience, research findings, or experiments. The standards represent the best judgment of management about what costs should be under normal operating conditions.
What are variances in standard costing?
Variances are the differences between actual costs and standard costs. Variances can be favorable (when actual costs are lower than standard costs) or unfavorable (when actual costs are higher than standard costs). Variances are analyzed to determine the factors leading to these differences and to take corrective actions.
What are the advantages of standard costing?
Standard costing offers several advantages, including:
– It provides a yardstick for comparing actual costs, facilitating cost control, and cost reduction.
– It helps in setting budgets and provides useful information for managerial planning and decision-making.
– It assists in evaluating staff performance and management efficiency.
– It serves as a control technique that follows the feedback control cycle, helping to eliminate unwanted costs in the future and potentially reduce costs.
What are the types of standards used in standard costing?
There are different types of standards used in standard costing, including:
– Ideal Standards: These are maximum efficiency level standards that may not be attainable in practice. They represent the best possible performance.
– Basic Standards: These are long-term standards that remain the same after being computed for the first time. They provide a basis for comparing actual costs over time with a constant standard.
– Currently Attainable Standards: These are the most commonly used standards. They represent the best attainable performance with reasonable effort and efficiency.
How is standard costing applied in practice?
Standard costing is applied in various industries, including those that produce standardized products or follow process costing methods. It has been successfully implemented in industries such as sugar, fertilizers, cement, footwear, breweries, and distilleries, as well as public utilities like transport organizations and electricity supply companies.
What are the limitations of standard costing?
Standard costing may have certain limitations, including:
– It assumes that standards are accurate and attainable, which may not always be the case.
– It can be challenging to set realistic standards, especially for new or complex products or processes.
– Standard costing may not be suitable for industries with highly variable costs or rapid technological changes.