Standard Costing
Standard Cost : It means setting a predetermined acceptable level of cost performance of
a product , which is determined through appropriate methods.
Standard Costing : It is the management technique to use standard cost for measuring the
performance and controlling the cost.
Under this a comparison between standard and actual is made to determine the variance
of the performance and according corrective actions are taken.
It involves Determination of standard+ Cost comparison + Computing Variance+ and
taking corrective actions .
When Standard Costing is suitable ? – In case where production process and product are
of standard quality it is suitable.
Advantages
a) Gives motivation of better performance
b) Best and optimal use of resources
c) Helps managers do management by exception
d) It is an effective managerial tool
e) It helps in evaluating performance and doing cost control
f) Doing inventory evaluation
Limitations of Standard Costing
a) Not suitable when nature of product changes
b) It causes oppressive pressure on employees to meet the standards leading to loss
of their flexibility of operation
c) It is rigid and complex since it is not easy to change and upgrade the standards too
often
d) It may reduce the burden from shoulders of top management but managers can
not run away from the their responsibility towards their involvement performance
under standard costing technique
e) Setting of budget and working as per budget can not be done away with
How to set up Standard Costing system
a) Identify and set up cost centers
b) Classify each of the account
c) Determine the right type of Standard
Basic Standard: Remains fixed and constant for a long period of time
Ideal Standard : It is the standard which can be achieved under most favorable
conditions. Large variances may arise against this standard
Expected Standard : What we believe to achieve in future. It is set considering
changes in the future
Normal Standard : Normal standard which can be achieved under normal
economic situations over long period of time. It is not appropriate if cost
control is objective because future is uncertain.
For what we establish standards?
Material Cost Standard : Standard for material quantity( based on Input and
Output ratio) and Material Price is established
Labor Cost standard : Standard for labor time and their wage rate.
Overhead Standard
Overhead Standard : Standards are fixed after bifurcating cost in fixed, variable
and semi variable. Determine standard overhead cost , estimate production
and finally calculate standard overhead rate.
VARIANCE ANALYSIS
Variance means difference between actual and standard. The gap and cause of
gap is identified. And it is seen that filling that gap is within the capacity of the
management or not
Objectives of Variance analysis
a) Conduct evaluation
b) Controlling cost and their reduction
c) Managing by expectation by only concentrating on those which are responsible for
the gap
Types of Variance
a) Controllable and Non Controllable : Curb the variance cause due to internally
inefficiency are called the controllable variance and variance which cannot be
corrected or is due to external force is called non controllable variance
b) Favorable and non-favorable variance : When variance is in the favor of business it is
called favorable variance and which is against the interest of the business is called
unfavorable variance.
Variances are calculated for Material, Labour and Overheads
