Standard Costing: Types, Advantages, and Variance Analysis


Added on  2019-09-23

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2Blog Writing . Introduction In the modern world, standard costs intensively recognized throughout every country. Standard cost is a predetermined cost which is calculated from the management’s standards of efficient operation and the relevant necessary expenditure. Estimated cost as a realistic approach deal withthe prehistorical cost and estimated cost. According to ICMA, London, causes, and points of incidence determine the standards, set out the established standard cost based on accuracy and reliability. Organizations main aspect of the production process to produce at low cost and manage the resources, cost accounting has a widely used application of costing. Cost standards ensure to attain goals through standard costing. To ascertain this method standard cost is prepared to reflect the comparison between actual cost and standard cost known as a variance. By using variance analysis the cost control is possible in a manufacturing concern. Standard cost is a predetermined cost which is calculated from the management's standards of efficient operation and the relevant necessary expenditure. Brown and Howard explained standard costing

3Blog Writing as every product and every service cost as they are pre-determined costs. Validation is important for standard cost variance calculation on its baseline.For controlling and planning standard cost is used in its effective way. Identify and measure variances for the set standards. The determinant of standard costing used actual and standard positions to evaluate the performance of an organization. Management facilitates through managers for pricing decisions included product pricing, distribution policy. Product price involving direct material, direct labor and overhead to measure standard cost. Manufacturing concern and service organizations major difference show that they both don’t have direct material cost in standard costing. The process of standard costing involves the setting of standards, ascertainment of the actual cost, comparison of actual and standard cost to determine the variance and the last one includes investigation of variances and taking appropriate action thereon wherever necessary. ( Cooper, R.2017)Types of standardsThe accuracy and the relevance of an established standard cost depend upon the reliability of the standards set up. To record standard cost and actual cost individually standard cost is calculated through prime cost, WIP, finished goods stock and COGS (cost of goods sold). To compute the standard, the degree of accuracy is necessary. There are four different bass or standards which should be considered. These standards have been discussed below: Ideal standards: This standard represents the level of performance attainable when prices are made for material and labor are most favorable, when the highest output is achieved with the

4Blog Writing best equipment and layout and when the maximum efficiency in utilization of resources utilized in maximum output with minimum cost. Normal standards: These standards may be achieved under normal operating conditions. The normal activity has been defined as ‘' the number of standard hours which will produce at normalefficiency sufficient goods to meet the average sales demand over a term of years. These standards are difficult to set because they require a degree of forecasting.Basic standards: These standards are used only when they are likely to remain constant or unaltered over a long period. According to this standard base year is chosen for comparison purposes in the same way as statisticians use price indicates since basic standards do not represent what should be attained in the present period, the current standard should also be prepared if basic standards are used. Current standards: This standard reflects the management’s anticipation of what actual cost will be for the current period. This is the costs, which the business will incur if the anticipated prices are paid for the goods and services and the uses correspond to that believed necessary to produce the planned output.Uses of standard costs:The use of standard cost is an effective way of planning and controlling costs. Pricing decisions and decisions involving the submission of a quotation, answering tenders, etc. is also facilitated by the use of standard costs. Identification and measurements of variances from standards have been made possible with the use of standard cost, to improve performance or to correct loose standards, if any. Standard cost also facilitates management by exception. (Sherman, J. D., et al 2018)

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