Q. 4. What is the difference between standard costing and historical costing?
Cost may be divided into two broad categories – historical cost and predetermined cost. Historical costs are computed after the completion of production of goods, thus the cost figures have value only from a historical point of view. Though the figures obtained at the end of the production process may have a definite value in correcting past practices if they are carefully analyzed, the inefficiencies and errors in production are not brought out until after the damage has been done.
Cost analysis requires the use of predetermined cost estimates made on a more or less scientific basis which result in ‘standard cost’ or a cost prepared in advance of production or supply, correlating technical specification of materials and labor to the prices and wage rates estimated for a selected period of time.
The following differences may be pointed out between historical costing and standard costing as:
1. Cost used. Standard costing includes those figures of costs which are predetermined based on the past experience and experts advise. In historical costing data are included of the cost which is actually being incurred.
2. Cost calculation. Standard costs are determined and known before start and completion of production but historical cost is known only after completion of productiom
3. Cost control. Standard costs are helpful for control of costs, judging efficiency and improving working of the organisation, while historical costing not provide these advantages to the management.