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Standard Costing and Variance Analysis
What is Standard Costing and Variance Analysis?Hello, how are you? In this blog we understand the standard costing concept and variance analysis. In the modern world, standard costs intensively recognized throughout every country. The concept of standard costing helps you to solve the variation and volatility in finance and costing.What standard costing is?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 with the prehistorically 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 costingas 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. 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 bestequipment and layout and when the maximum efficiency in utilization of resources utilized in maximum output with minimum cost. The types of standards are criticized on three grounds:1. Since such standards would be attainable, no one would take them seriously2. The variances disclosed would be variances from ideal standards. These would not, therefore, indicate the extent to which they could have been reasonably and practically avoided.3. There would be no logic method of disposing of these varianceNormal 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.
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