Overviews of
Standard Costing
Accounting
Presented to:
Dr. Vivek Kumar
Presented by:
Tarun(46)
MBA Gen.
Contents
Introduction
Advantages of Standard Costing
Limitation of Standard Costing
Preliminaries for Establishing Standard Costing System
Types of Standards
Analysis of Variance
Classification of Variance
“Standard Costing‟ is that technique which helps
management to control costs and business
operations. It aims at eliminating wastes and
increasing efficiency in performance through setting
up standards or formulating different cost plans.
Theword ‘standard’ means a benchmark or gauge.
The ‘standard cost’ is a predetermined cost which
determines in advance what each product or service
should cost under given circumstances.
ADVANTAGES OF STANDARD COSTING
1. Measurement of Efficiency: It is a tool for assessing
the efficiency after comparing the actual costs with
standard costs to enable the management to evaluate
performance of various cost centres.
2. Production and Price Policy Formulation: It
becomes easy to formulate production plans by taking into
account standard costs. It is also supportive for finding
prices of various products.
3. Reduction of Work: In this system, management is
supplied with useful information and necessary information
is recorded and redundant data are avoided.
4.Management by Exception: Management by exception
means that everybody is given a target to be achieved and
management need not supervise each and everything. The
responsibilities are fixed and everybody tries to achieve his
targets.
LIMITATIONS OF STANDARD COSTING
1. Standard costing cannot be used in those concerns
where non-standard products are produced.
2. The time and motion study is required to be undertaken
for the process of setting up standards. These studies
require a lot of time and money.
3. There are no inset circumstances to be considered for
fixing standards. The revision of standard is a costly
process.
4. This system is expensive and small concerns may not
afford to bear the cost.
5. The fixing of responsibility is not an easy task. The
responsibility can be fixed only for controllable variances
not in the case of uncontrollable.
PRELIMINARIES FOR ESTABLISHING
STANDARD COSTING SYSTEM
1. Determination of Cost Centre: A cost centre may be a
department or part of a department or item of equipment or
machinery or a person or a group of persons in respect of
which costs are accumulated and one where control can be
exercised.
2. Classification of Accounts: Classification of accounts is
necessary to meet a required purpose i.e., function, asset or
revenue item. Codes can be used to have a speedy
collection of accounts. A standard is a predetermined
measure of material, labour and overheads.
Types of Standards
Current Standard – A current standard is a standard
which is established for use over a short period of time and
is related to current condition. It reflects the performance
which should be accomplished during the current period.
Basic Standard- A basic standard is established for use
for an indefinite period or a long period. These standards
are revised only on the changes in specification of material
and technology production.
Ideal Standard – This standard represents a high level of
efficiency. It is fixed on the assumption that favourable
conditions will prevail and management will be at its best.
The price paid for materials will be lowest and wastages
cost of labour and overhead expenses will be minimum
possible.
ANALYSIS OF VARIANCES
The divergence between standard costs, profits or sales
and actual costs, profits or sales respectively will be known
as variances. The variances may be favourable and
unfavourable.
If actual cost is less than the standard cost and actual
profit and sales are more than the standard profits and
sales, the variances will be favourable.
if actual cost is more than the standard cost and actual
profit and sales are less than the standard profits and
sales, the variances will be unfavourable.
Classification of Variance
The variances may be classified into four categories such as
Direct Materials Variances
Direct Labour Variances
Overheads Cost Variances
Sales or Profit Variances
Direct material variances are also known as material cost
variances. The material cost variance is the difference
between the standard cost of materials that should have
been incurred for manufacturing the actual output and the
cost of materials that has been actually incurred.
Material Cost Variance comprises of:
(i) Material Price Variance
(ii) Material Usage Variance
Labour Cost Variance or Direct Wage Variance is the
difference between the standard direct wages specified for
the activity and the actual wages paid. It is the function of
labour rate of pay and labour time variance. It arises due
to a change in either a wage rate or in time or in both.
Idle Time Variance this variance is the standard cost of
actual time paid to workers for which they have not
worked due to abnormal reasons. Reasons for idle time
may be power failure, defect in machinery, and non supply
of materials
Overhead Variance is the aggregate of indirect material
cost, indirect wages (indirect labour cost) and indirect
expenses.
Thus, overhead costs are indirect costs and are important
for the management for the purposes of cost control.
Under cost accounting, overhead costs ace absorbed by
cost units on some suitable basis. Under standard costing,
overhead rates are predetermined in terms of either labour
hours (per hour) or production units (per unit of output).
References
in.indeed.com/what-is-standard-costing.html
accountingtools.com/articles/standard-costing.htm
G.J.U Distance EBook MBA-104.pdf
Thank You
