STANDARD COSTING

What is Standard ? When you want to measure some thing, you must take some parameter or yardstick for measuring. We can call this as standard. What are your daily expenses? An average of $50! If you have been spending this much for so many days, then this is your daily standard expense. The word standard means a benchmark or yardstick. The standard cost is a predetermined cost which determines in advance what each product or service should cost under given circumstances.

A Standard Cost is a planned cost for a unit of product or service rendered. It is determination in advance of production , what should be the cost.
In the words of Backer and Jacobsen, Standard cost is the amount the firm thinks a product or the operation of the process for a period of time should cost, based upon certain assumed conditions of efficiency, economic conditions and other factors.

 When

standard cost is used for purpose of cost- control, the technique is called STANDARD COSTING. Standard Costing is a technique which uses standards for costs and revenues for the purpose of control through variance analysis Standard is a predetermined measurable quantity set in defined conditions against which actual performance can be compared, usually for an element of work, operation or activity.

Basically a standard means Predetermined estimates Established for inputs and outputs Applicable to all routine aspects of an organization's operations Accounting for standard costs and obtaining variances Reporting to management for taking appropriate action wherever necessary.

Objectives of Standard Costing

To

provide a formal basis for assessing performance and efficiency To control Costs by establishing standards and analysis of variances To enable the principle of Management by Exception to be practised at the detailed operational level. To assist in setting budgets

 To

assist in assigning responsibility for non-standard performance in order to correct deficiencies or to capitalise on benefits. To motivate staff and management To provide a basis for estimating To provide guidance on possible ways of improving performance

Classification of Standards
The two principal considerations for classification of standards are :

IDEAL

BASIC

Attainability of standards. Frequency with which the standards are revised.

NORMAL

CURRENT

TYPES OF STANDARD

IDEAL STANDARD:
Ideal standard is fixed on the assumption of those conditions which may rarely exist. This standard is not practicable and may not be achieved. This is therefore a theoretical standard. This is the standard which represents a high level of efficiency. Ideal standard is fixed on the assumption that favourable conditions will prevail and management will be at its best. The price paid for materials will be lowest and wastes etc. will be minimum possible. The labour time for making the production will be minimum and rates of wages will also be low. The overhead expenses are also set with maximum efficiency in mind. All the conditions, both internal and external, should be favourable and only then ideal standard will be achieved. It breed frustration among employees.

BASIC STANDARD
Basic standard is established for use unaltered over a long period of time. The same standard remains in force for a long period. Basic standard is established for some base year and is not changed for long period as material prices, hour rates and other expenses change. Deviation of actual cost from basic standard will not serve any practical purpose because standards remain unaltered for long period of time. These standards are revised only on the changes in specification of material and technology productions. This type of standard is not suitable for cost control

NORMAL STANDARD:
The average standard which it is anticipated can be attained over a future period of time, preferably long enough to cover one trade cycle. such standard is established on the basis of average estimated performance over a future period of time( 5 years) covering on trade cycle. It is difficult to follow normal standard in practice as it is not possible to forecast with reasonable degree of accuracy for long period of time. Such standards are attainable under anticipated normal condition That is why they are not useful device for cost control purpose.

CURRENT STANDARD
A standard which is related to current condition and is established for use over a short period of time. This standard is fixed on basis of ideal standard or expected standard. It reflects the performance that should be attained during the current period. The period for current standard is normally one year. EXPECTED STANDARD: This is standard which is anticipated during a future specified budget period. In fixing this standard, present condition and circumstances prevailing in industry is taken into consideration. An allowance is made for unavoidable losses. These are more realistic than ideal standard and best suited for cost control as it reveals real variance.

STEPS IN STANDARD COSTING

Standard costing involves: The setting of standards Ascertaining actual results Comparing standards and actual costs to determine the variances Investigating the variances and taking appropriate action where necessary.

ADVANTAGES OF STANDARD COSTING

Provides a yardstick against which the actual costs can be measured. The setting of standards involves determining the best materials and methods, which may lead to economies. A target of efficiency is set for employees to reach, and cost consciousness is stimulated. Variances can be calculated which enable the principle of management by exception to be operated. The standards are being constantly analyzed and an effort is made to improve efficiency. Whenever a variance occurs, the reasons are studied and immediate corrective measures are undertaken. The action taken in spotting weak points enables cost control system. Provides a valuable aid to management in determining prices and formulating policies It enables and provides useful information to the management in taking important decisions

LIMITATIONS OF STANDARD COSTING

It cannot be used in those organizations where non-standard products are produced. If the production is undertaken according to the customer specifications, then each job will involve different amount of expenditures. The process of setting standard is a difficult task, as it requires technical skills. The time and motion study is required to be undertaken for this purpose. These studies require a lot of time and money. There are no inset circumstances to be considered for fixing standards. The conditions under which standards are fixed do not remain static. With the change in circumstances, if the standards are not revised the same become impracticable. The fixing of responsibility is not an easy task. The variances are to be classified into controllable and uncontrollable variances. Standard costing is applicable only for controllable variances.

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