Q. 1. What is Standard Costing? What are its features ? Discuss the essentials of an effective standard costing.
What is standard costing?
The efficiency of management, among other things, depends upon the control of costs. For controlling costs management should not only know the actual cost. but also see the variation in pre-determined cost to actual costs. Standard costing is the most effective way of controlling costs. It provides criteria to evaluate and compare the operating performance of executives.
It is a technique of cost calculation and control. The standard costs are prepared and used to clarify the final results of a business. particularly by measurement of the variations of actual costs from standard costs and the analysis of the causes or variations for the purpose of maintaining efficiency by executive action.
Definitions of standard costing
The following are the main definitions of standard costing:
Standard cost is the cost which is used for comparison. Standard cost means “Something established as rule or basis of comparison in measuring or judging quantity, quality, value etc. ” This standard cost is the cost used for comparison of actual cost. Standard cost is being defined by different experts and institutes as follows.
1. H. J. Weldon “Standard costs are pre-determined or forecast estimates of the cost to manufacture a single unit or a number of units of product, during a specific immediate future period.
2. Bloker and Weltmer “Predetermined costs, based upon engineering specifications and representing highly efficient productions for quantity standard and forecast of future market trends and price standards, With a fixed amount expressed in dollars for material, labor and for an estimate quantity of production.
3. I.C.NT.A. London “The preparation and use of standard costs, their comparison with actual costs and the analysis of variances to their causes and points of incidence.
4. We B. Lawrence “A standard cost system is a method of cost accounting in which standard costs are used in recording certain transactions and the actual costs are compared with the standard costs to learn the amount and reason for any variation from standard.”
5. W. Strachan “The underlying idea of standard cost is to be shown what the cost production of maximum efficiency at every stage of manufacture and to compare this with the actual cost as shown by costing records.
6. W. W. Bigg “Standard costing discloses the cost of durations from standard and classifies these as to their causes, so that management is immediately informed of the sphere of operations at which remedial action is necessary.
Features of Standard Costing
The important features of Standard Costs are as.
1. Determination of standard costs of various elements of costs such as standard cost of direct material, direct labor and various overheads.
2. Comparison of standard costs and actual costs of production.
3. Finding differences (variances) between actual costs and standard costs. These variances may be favorable as well as unfavorable or adverse.
4. Analyzing the variances to find the cause of variances.
5. Remedial steps are suggested so that unfavorable variances may not be repeated in the future.
6. Reporting these variances to top management for remedial action.
Essentials of an effective system of standard costing
The following are the elements of a sound system of standard costing:
(i) Standard costing is most suitable to such organizations which followed repeated output and similar output again and again.
(ii) It is a technical process of operation must be coordinated so that it can be accepted and followed by the employees of the organization.
(iii) It must be designed to give cost of operation, rather than product. The standard should be simple.
(iv) Management must take interest in controlling cost and must be aware of the merits.
(v) Standard cost must properly be set so that both management and operational process have each other’s confidence.
(vi) The management must be informed at all levels of process.
(vii) The system of standard costing should be simple.
(Viii) The standard must be set so that the variations can be known easily and can be checked soon.