Standard Costing: A Comprehensive Overview

Standard costing is a widely used accounting system that employs predetermined standard costs for direct materials, direct labor, and factory overheads (Financestrategists, 2023). The primary purpose of standard costing is to provide management with detailed information for day-to-day control of operations and effective cost control (Accounting Professor, 2023). This article delves into the concept of standard costing, exploring its definition, purpose, advantages, applicability, objectives, and types of standards used.

Definition and Purpose of Standard Costing

Standard costing is a systematic approach that assigns predetermined costs to products or services (Financestrategists,2023). These standard costs serve as benchmarks against which actual costs are compared to identify variances and assess performance. The main purpose of standard costing is to assist management in controlling costs, budgeting, and making informed decisions (Accounting Professor,2023).

Advantages of Standard Costing

Standard costing offers several advantages to organizations, including:

• Cost Control: Standard costing enables organizations to set targets and monitor actual costs against these standards, facilitating cost control and reduction efforts.
• Performance Evaluation: By comparing actual costs with standard costs, organizations can assess the efficiency and effectiveness of various departments and processes.
• Incentive Schemes: Standard costing can be used to establish incentive schemes that motivate employees to achieve or exceed standard performance levels.
• Reliable Basis for Decision-Making: Standard costing provides a reliable basis for evaluating performance, controlling costs, and making informed decisions related to pricing, product mix, and production levels.

Applicability of Standard Costing

Standard costing is particularly applicable in industries that produce standardized products or follow process costing methods (Accounting Professor,2023). It has been successfully implemented in industries such as sugar, fertilizers, cement, footwear, breweries, distilleries, and public utilities like transport organizations and electricity supply companies.

Objectives of Standard Costing

Organizations implement standard costing systems with several objectives in mind, including:

• Cost Control: Standard costing aims to control costs by setting targets and monitoring actual costs against these standards.
• Budgeting: Standard costs serve as the foundation for budgeting and planning, providing a basis for estimating future costs and allocating resources.
• Decision-Making: Standard costing provides valuable information for managerial planning and decision-making, enabling organizations to evaluate different scenarios and make informed choices.
• Performance Evaluation: Standard costing facilitates the assessment of performance and efficiency by comparing actual costs with standard costs.
• Cost Reduction: Standard costing helps identify areas where costs can be reduced or eliminated, leading to improved profitability.

Types of Standards in Standard Costing

There are different types of standards used in standard costing, each serving a specific purpose:

• Ideal Standards: Ideal standards represent the maximum efficiency level that can be achieved under perfect conditions, assuming no unplanned work stoppages or inefficiencies.
• Basic Standards: Basic standards are long-term standards that remain relatively stable over time. They are based on historical data and industry benchmarks.
• Currently Attainable Standards: Currently attainable standards represent the best attainable performance under normal operating conditions. They consider factors such as machine breakdowns, delays, and unavoidable inefficiencies.

Conclusion

Standard costing is a valuable tool for organizations seeking to control costs, improve performance, and make informed decisions. By setting predetermined standard costs and comparing them with actual costs, organizations can identify variances, assess efficiency, and take corrective actions to optimize operations and enhance profitability. The applicability of standard costing extends to various industries, and its objectives align with the need for cost control, budgeting, performance evaluation, and cost reduction. With different types of standards available, organizations can tailor their standard costing system to suit their specific requirements and achieve desired outcomes.

References

• Financestrategists. (2023). Standard Costing. Retrieved from https://www.financestrategists.com/accounting/variance-analysis/standard-costing/
• Accounting Professor. (2023). Standard Costing – What it is and Why it Matters. Retrieved from https://accountingprofessor.org/standard-costing-what-it-is-and-why-it-matters/
• Khuntia, S. (2018). Standard Costing: A Sharp Tool of Management Information Systems. Retrieved from https://www.linkedin.com/pulse/standard-costing-sharp-tool-management-information-systems-khuntia

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 to estimate the cost of production.

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 effective cost control. It helps organizations identify variances between actual costs and standard costs, assess performance, and make informed decisions.

What are the advantages of standard costing?

Standard costing offers several advantages, including:

• Cost control and reduction
• Performance evaluation
• Incentive schemes for employees
• Reliable basis for decision-making

When is standard costing used?

Standard costing is particularly applicable in industries that produce standardized products or follow process costing methods. It is commonly used in industries such as sugar, fertilizers, cement, footwear, breweries, distilleries, and public utilities.

What are the objectives of standard costing?

Organizations implement standard costing systems with several objectives in mind, including:

• Cost control
• Budgeting
• Decision-making
• Performance evaluation
• Cost reduction

What types of standards are used in standard costing?

There are different types of standards used in standard costing, including:

• Ideal standards: Represent the maximum efficiency level achievable under perfect conditions.
• Basic standards: Long-term standards based on historical data and industry benchmarks.
• Currently attainable standards: Represent the best attainable performance under normal operating conditions.

How does standard costing help in decision-making?

Standard costing provides valuable information for managerial planning and decision-making. By comparing actual costs with standard costs, organizations can assess the efficiency of different processes, evaluate alternative scenarios, and make informed choices related to pricing, product mix, and production levels.

How does standard costing contribute to cost control?

Standard costing facilitates cost control by setting targets and monitoring actual costs against these standards. Variances between actual costs and standard costs are analyzed to identify areas where costs can be reduced or eliminated, leading to improved cost control and profitability.