Selection of Costing Technique

This document discusses the appropriate costing technique to be employed in a business, specifically focusing on standard costing. It explains the concept of standard costs, the characteristics of standard costing, and factors to consider when selecting a costing system. The document also highlights the benefits of using standard costing, such as better cost control, improved decision making, and increased savings in costs.

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MEMO 2
To: A
From: B
Re: Selection of the costing technique
Date: July 12, 2019
Question presented: appropriate costing technique to be employed in the business
Standard costing should be the method to be employed.
The concept of standard costs includes the ascertaining of the manufacturing costs of one
single unit and then deciding budgets for the remaining number of units. These are the costs
that are planned costs of the product and are under the current or the anticipated conditions
that exists in the market. These are based upon the normal or the ideal conditions or the
efficiency along with volume that are incurred as the factory overheads.
These are the costs that are duly ascertained before any task is executed. The number of the
raw material units used, the number of the direct labour hours incurred and the number of the
hours of the plant capacity would be ascertained using these pre-determined or the pre
ascertained costs.
The physical standards form the very basis of the calculation of these standard costs that are
kept with the greatest accuracy. In the majority of the cases, these costs do not change except
when there are changes in the methods of the operations that have been employed or the in
the products that are being manufactured.
The two forms of the costs included in the standard costs are the basic standards and the
current standards.

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The basic standard forms the foundation of the expected along with the actual performance
that have to be compared with one another.
The current standard is mainly for a certain period and for some of the conditions and also for
some of the situations. It forms the part of the actual costs and also finds way towards the
books of accounts in which these have to be accounted for (Oreilly, 2019).
The following are the characteristics of standard costing:
 It helps in the correct and accurate ascertainment of the determination of the costs.
These are the costs that are calculated on the basis of the past experiences and also on
the future trends of the business.
 As and when the actual costs have been determined, then these are set as against the
budgeted costs so that the comparison between them could be made (Lumen learning,
2019).
 When the above comparison is made, then the variances could be calculated and the
adequate and the appropriate decisions to control these costs could be taken.
 These variances calculated could be verified adequately since and the future variances
could be checked accordingly and also be controlled.
 For the purposes of serving the top most management, the reports could be prepared
and be despatched to the persons that are responsible for the purpose of calculating
the variances.
 Then revision could be made and the corrective actions and the relevant suggestions
could be taken and made (Play accounting, 2019).
The following are the factors that are to be considered for the purposes of selecting the
costing system:

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 A thorough understanding of the structure of the organisation, the process and the
procedures that are followed for manufacturing the products, the process of the selling
and distribution which is followed along with the various types of the information
which are required for the purposes of carrying the business.
 The need of the selection of the costing technique to be followed must conform to the
standards that exists in the normal business. The selected costing techniques could
include the standard or the actual costing or the absorption costing (Basic college
accounting, 2019).
 The selected technique of costing must be in line with the plans that are required to be
undertaken for the future business operations, the purpose of collating along with the
allocation and the absorption of the overheads needs to be considered. The proper and
the method chosen must be able to treat the waste and the scraps.
 There must be an existence of the relevant forms that must be designed in order to
make sure that there is an adequate collection and the disposal of the relevant costs
and the information.
 The selecting costing technique must be able to control the actual costs and then be
compared with the budgeted figures and the variances that are bale to analyse the
various decisions that have been taken by the management.
The company hopes to achieve the following benefits from this technique:
 Better controlling of the costs
 Gathering of the information which would be useful for the company and for the
management and which would help in better decision making for the company (St
Pauls, 2019).
 Measurements of the inventory in an adequate manner

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 Increased savings in costs and help in keeping up the records
 Better utilisation of the costs incurred in production (Strategic CFO, 2019).

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References:
Advantages and Disadvantages of Standard Costing | Managerial Accounting. (2019).
Retrieved from https://courses.lumenlearning.com/sac-managacct/chapter/advantages-
and-disadvantages-of-standard-costing/
Factors To Consider When Designing A Cost Accounting System - College Accounting
Coach | College Accounting Coach. (2019). Retrieved from
http://basiccollegeaccounting.com/2008/05/factors-to-consider-when-designing-a-cost-
accounting-system/
Management Accounting. (2019). Retrieved from
https://www.oreilly.com/library/view/management-accounting/9788131774960/xhtml/
chapter008.xhtml
What are the characteristics of Standard Costing? - Play Accounting. (2019). Retrieved from
https://www.playaccounting.com/qa/mqa/sc-qa/q-6-what-are-the-characteristics-of-
standard-costing/
Selecting the most appropriate method of production. (2019). Retrieved from
http://textbook.stpauls.br/Business_Textbook/Operations_management_student/
page_20.htm
Wilkinson, J. (2019). Standard Costing System | Advantages of Standard Costing. Retrieved
from https://strategiccfo.com/standard-costing-system/