What is standard costing PPT? - Angola Transparency

Standard Costing: A Comprehensive Explanation

Definition and Purpose of Standard Costing

Standard costing is a technique in cost accounting that involves predetermining the costs of manufacturing a product or providing a service. These predetermined costs, known as standard costs, serve as benchmarks for evaluating actual costs and identifying areas where inefficiencies or deviations from the expected norms occur. The primary purpose of standard costing is to maintain optimal efficiency in production processes by measuring and analyzing variations between standard costs and actual costs.

Key Facts

Definition: Standard costing is a predetermined cost that is used for cost control and is a technique known as standard costing.
Purpose: The purpose of standard costing is to maintain maximum efficiency in production by measuring and analyzing variations in costs.
Standards: Standards are predetermined unit costs that are used as measures of performance .
Setting Standards: Setting standards requires input from all individuals responsible for costs and quantities, and the standards need to be current and continuously reviewed .
Variances: Variances occur when there are differences between total actual costs and total standard costs. Unfavorable variances occur when too much is paid for materials and labor or when there are inefficiencies, while favorable variances occur when there are efficiencies in incurring costs and using materials and labor .
Analyzing Variances: Variances must be analyzed to determine their significance. This involves determining the cost elements that comprise the variance and analyzing each manufacturing cost element into a price variance and a quantity variance .
Types of Variances: There are various types of variances in standard costing, including materials price standard, materials quantity standard, labor price standard, labor quantity standard, manufacturing overhead standard, and more .
Reporting Variances: All variances should be reported to appropriate levels of management as soon as possible so that corrective action can be taken. The form, content, and frequency of variance reports may vary among companies .

Setting Standards

Establishing standard costs is a crucial step in the standard costing process. It requires input and collaboration from various individuals responsible for costs and quantities, ensuring that the standards are realistic, achievable, and aligned with the organization’s goals. These standards are continuously reviewed and updated to reflect changes in production processes, market conditions, and technological advancements.

Variances: Understanding the Differences

In standard costing, variances are the differences between total actual costs and total standard costs. Variances can be favorable or unfavorable. Favorable variances indicate that costs were lower than expected, while unfavorable variances signal that costs exceeded the predetermined standards. Analyzing variances helps identify areas where costs can be controlled and improved.

Analyzing Variances: Identifying Root Causes

To effectively manage costs, it is essential to analyze variances and determine their root causes. This involves examining the cost elements that comprise the variance and categorizing them into price variances and quantity variances. Price variances reflect differences between the standard price and the actual price paid for materials, labor, or overhead. Quantity variances, on the other hand, arise from deviations between the standard quantity of inputs used and the actual quantity consumed.

Types of Variances in Standard Costing

Standard costing encompasses various types of variances, each providing insights into specific areas of cost incurrence. Common variances include:

Materials Price Variance

The difference between the standard price and the actual price paid for materials.
Materials Quantity Variance

The variation between the standard quantity of materials specified for production and the actual quantity used.
Labor Price Variance

The difference between the standard labor rate and the actual rate paid to workers.
Labor Quantity Variance

The variation between the standard labor hours allocated for production and the actual labor hours incurred.
Manufacturing Overhead Variance

The difference between the standard overhead rate and the actual overhead costs incurred.

Reporting Variances: Communicating Cost Deviations

To facilitate effective cost control and decision-making, variances should be reported to appropriate levels of management in a timely manner. The form, content, and frequency of variance reports may vary among organizations, but the goal is to provide clear and concise information that enables managers to take corrective actions and improve cost efficiency.

Conclusion

Standard costing is a valuable tool for cost control and performance evaluation in various industries. By establishing predetermined standards, analyzing variances, and taking corrective measures, organizations can optimize their production processes, minimize costs, and enhance profitability. Standard costing empowers management to make informed decisions, identify areas for improvement, and ultimately achieve operational excellence.

References

FAQs

What is standard costing?

What is the purpose of standard costing?

The primary purpose of standard costing is to maintain optimal efficiency in production processes by measuring and analyzing variations between standard costs and actual costs. It helps organizations identify areas where costs can be controlled and improved.

How are standard costs set?

Standard costs are established through a process that involves input and collaboration from various individuals responsible for costs and quantities. These standards are based on technical estimates, historical data, and industry benchmarks. They are continuously reviewed and updated to reflect changes in production processes, market conditions, and technological advancements.

What are variances in standard costing?

Variances in standard costing are the differences between total actual costs and total standard costs. Variances can be favorable or unfavorable. Favorable variances indicate that costs were lower than expected, while unfavorable variances signal that costs exceeded the predetermined standards.

What are the different types of variances in standard costing?

There are various types of variances in standard costing, including:

Materials Price Variance: The difference between the standard price and the actual price paid for materials.
Materials Quantity Variance: The variation between the standard quantity of materials specified for production and the actual quantity used.
Labor Price Variance: The difference between the standard labor rate and the actual rate paid to workers.
Labor Quantity Variance: The variation between the standard labor hours allocated for production and the actual labor hours incurred.
Manufacturing Overhead Variance: The difference between the standard overhead rate and the actual overhead costs incurred.

How are variances analyzed in standard costing?

Variances are analyzed to determine their root causes and identify areas for cost control and improvement. This involves examining the cost elements that comprise the variance and categorizing them into price variances and quantity variances. Price variances reflect differences between the standard price and the actual price paid, while quantity variances arise from deviations between the standard quantity of inputs used and the actual quantity consumed.

How are variances reported in standard costing?

Variances should be reported to appropriate levels of management in a timely manner to facilitate effective cost control and decision-making. The form, content, and frequency of variance reports may vary among organizations, but the goal is to provide clear and concise information that enables managers to take corrective actions and improve cost efficiency.

What are the benefits of using standard costing?

Standard costing offers several benefits, including:

Improved cost control and performance evaluation
Identification of areas for cost reduction and efficiency improvement
Timely reporting of cost deviations
Facilitation of informed decision-making
Enhancement of operational excellence