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Unit Four - 01

Standard costing is a managerial tool used to control costs by comparing pre-determined costs with actual costs to analyze variances. It involves setting standards for materials, labor, and overheads, assessing actual costs, and reporting variances to management for corrective action. The document outlines the objectives, advantages, disadvantages, and types of standards associated with standard costing.

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2 views

Unit Four - 01

Standard costing is a managerial tool used to control costs by comparing pre-determined costs with actual costs to analyze variances. It involves setting standards for materials, labor, and overheads, assessing actual costs, and reporting variances to management for corrective action. The document outlines the objectives, advantages, disadvantages, and types of standards associated with standard costing.

Uploaded by

Tsheten Wangmo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Unit IV: Standard Costing: A

Managerial Tool
Learning Objectives
 By the end of the session, you should be bale to:

• define the term standard cost, standard costing

• explain steps in standard costing

• explain objectives on standard costing

• explain advantages and disadvantages of standard costing

• explain the differences between standard cost and estimated cost

• explain types of standards


Standard Costing:

 Standard costing is one of the most important tools to control cost. In this
technique, all costs are pre-determined, (costs are determined in
advance of production). Such pre-determined costs are compared with
actual costs. The difference between the actual and pre-determined
costs, known as variances, are then analyzed and investigated to know
their reasons. Variances are reported to management for taking
corrective actions so that actual costs adhere to pre-determined or
standard costs
Meaning of Standard cost

 The word standard means ‘a norm’ or a criterion. Standard cost is thus a


criterion cost which may be used as a yardstick to measure the efficiency
with which actual cost has been incurred.

Definition of Standard cost:

 According to C.I.M.A., London, “Standard cost is the pre-determined cost


based on technical estimates for materials, labour and overhead for a
selected period of time for a prescribed set of working conditions”.
Meaning of standard costing:

 It is simply the name given to a technique whereby standard costs are


computed and subsequently compared with actual costs to find out the
differences between the two. These difference (known as variances) are
then analyzed to know the causes thereof so as to provide a basis of
control.
Definition of standard costing

 The C.I.M.A., London has defined standard costing as “the


preparation of standard costs and applying them to measure the
variations from actual costs and analyzing the courses of variations
with a view to maintain maximum efficiency in production”.
Steps in standard costing:

 The setting of standard for different elements of cost, i.e., material Labour
and overheads.

 Ascertaining actual costs.

 Comparing standard with actual costs to determine the differences between


the two, known as variances.

 Analyzing variances for ascertaining the reasons thereof.

 Reporting these variances and analysis thereof to management for


appropriate corrective action, where necessary.
Objectives of Standard costing
 To provide a formal basis for assessing performance and efficiency

 To control costs by establishing standards and analysis

 To enable the principles of management by exception to be practiced at the


detailed operational level

 To assist in setting budget

 To provide guidance on possible ways of improving performance

 To fixed the responsibility to particular person / unit

 To motivate the staff or management


Advantages of Standard Costing

 Effective cost control

 Helps in planning

 Provides incentive

 Fixing prices and formulating polices

 Reduce wastes

 Economical and simple


Disadvantages of Standard Costing

 The system may not be appropriate to the business

 The staff may not be capable of operating the system

 A business may not be able to keep standards up-to-date

 Inaccurate and unreliable standards cause misleading results and thus may
not enjoy the confidence of the users of the system

 Operation of the standard costing system is a costly affairs and small firms
cannot afford it

 Standard costing is expensive and unsuitable in job order industries which


are manufacturing non-standard products.
Standard Costs and Estimated Costs – Comparison
Standard cost Estimated cost
Standard cost should aim at what cost Estimated cost is an assessment of what the
should be. cost will be.
Standard costs are planned costs which Estimated costs are based on average of the
after taking into account certain level of efficiency. Past figures, taking into consideration anticipated
changes in future.

Standard costs are usually incorporated into the accounts, Estimated costs are used as statistical data for comparing
from which variances of actual from standard are with actual figures. Such costs are not entered in the
ascertained. books of
accounts.

Standard costs are meant to be used for a concern Estimated costs may be used in any concern
operating on a standard costing system. operating on a historical cost system.

Standard costs serve the purpose of cost control. Estimated costs do not serve the purpose of cost control.
such costs serve other purposes, like quoting selling price
of new products, decision to buy or manufacture.
Types of Standards:

 Basic standards:

These are the standards which are established for an indefinite period of time. It
is similar to an index number against which all later results are measured.
However, basic standards are of no practical utility from the point of view of cost
control.

 Current standards:

These standards remain in operation for a limited period and are related to
current conditions. These standards are revised at regular intervals. Current
standards are of three types:
 Ideal standards:
This is a theoretical standard which is rather not practical to attain. It pre -
supposes that performance of men, materials and machines is perfect and thus
makes no allowance for loss of time, accidents, machine break-downs wastage of
materials. This ideal standard is obviously unrealistic and unattainable.

 Expected or practical standard:


This is a standard which may be anticipated to be attained during a future period.
Such standards are based on expected performance after making a reasonable
allowance for unavoidable losses and other inevitable lapses from perfect
efficiency.

 Normal standards:
This is known as past performance standard because it is based on the average
performance in the past. The aim of such standard may be to eliminate the

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