Standard Costing

STANDARD COSTING
CONTENTS
 Introduction
 What Is Standard Costing
 Meaning And Definition
 Objective Of Study
 Formula(standard Costing) With Example
 Importance
 Advantages
 Disadvantages
 Conclusion
INTRODUCTION TO STANDARD
COSTING
Standard costing system is not a distinct system of accounting. Standard costing is
primarily a cost control technique. It is used either with the process or operation type,
or with the specific order type of cost accounting system. Its main purposes are to
provide bases for control through variance accounting. It may be used for valuation
of stock and WIP(work In progress) and in some cases, for fixing selling prices.
Under standard costing system, a variance report, which reconciles the budget
profit with actual profit, is placed before the management with explanations for
variances. Variance reporting is a mechanism to provide feedback to managers on
variances from target results.
WHAT IS STANDARD COSTING?
Standard cost is a pre-determined calculation of how much costs should be under specified
working conditions. It is built up from standard quantity and estimates of prices and/or wage rates
expected to apply during the period in which the standard cost is intended to be used.
Basically there are two groups of standards- quantity standards and price standards. Quantity
standards are determined on the basis of engineering and technical specifications while price
standards are set on the basis of forecast of market trends. To be meaningful, while quantity
standards should not be revised frequently, price standards essentially require periodic revision.
MEANING AND DEFINITION
 Standard cost is a pre-determined calculation of how much costs should be under specified
working conditions. It is built up from standard quantity and estimates of prices and/or
wage rates expected to apply during the period in which the standard cost is intended to be
used. Basically there are two groups of standards- quantity standards and price standards.
Quantity standards are determined on the basis of engineering and technical specifications
while price standards are set on the basis of forecast of market trends. To be meaningful,
while quantity standards should not be revised frequently, price standards essentially
require periodic revision.
 ICMA, London defines “Standard Costing is the preparation and use of Standard costs,
their comparison with actual costs and analysing of variances to their causes and points of
incidence.”
 Wheldon says “Standard costing is a method of ascertaining the costs whereby statistics
are prepared to show (a) the standard cost (b) the actual cost (c) the difference between
these costs, which is termed the variance.”
OBJECTIVE OF STUDY
 To institute a control mechanism on all the elements of costs that affect production and
sales
 To measure different operational efficiencies and check the wastages
 To improve the delegation of authority and generate a sense of responsibility among the
employees
 To develop a cost consciousness in the employees
 To presume the production costs, sales and profit
 To avail the benefits of 'Management by exception.
 To bring about a vivid progressive vision and sagacious decision making at each
managerial level.
FORMULA(STANDARD COSTING)
WITH EXAMPLE
IMPORTANCE
 Increase in Efficiency: The standard costing is mostly used in companies which involve in
manufacturing processes, and have a high value of direct labor, direct material, and
overheads costs. Using predetermined or standard rates for production and raw material,
can help management in forecasting their costs for the future period and compare the
standard costs with actual costs after completion of the job
 Important While Making Budgets: Standard cost is all about budgets and estimations. The
standards are used to forecast any type of future cost
 Improved Cost Control: Standard costing plays a very vital role in controlling the cost of
material, labor, and overheads. As the standards are mostly taken from the industry best
practices. Improvement in labor efficiency and wastage control will always help the
management to control their product cost
 Provide Information For Decision Making: Decision making is involved in all type of
organizations ranges from small to large. In small organizations where all the control lies
with one person, did not require much information to take decisions. But in large
organizations where a lot of financial data originated on a daily basis, managers require
some calculations to come up with a decision.
ADVANTAGES
 Effective cost control
 Helps in planning
 It provide incentives
 Fixing price and formulation policies
 Facility delegation of authority

DISADVANTEGES
 Standard costing is expensive and unsuitable in job order industries
 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 result.
 Operation of the standard costing system costing is a costly affair and small firms can not
afford it.
CONCLUSION
In the conclusion, based on the purposes, advantages and disadvantages, it is important that a
company uses a standard costing system. Because the standard costing system can provide
standard performance information which they can easily compare to the actual performance.
Standard cost accounting can be a highly beneficial tool for managers who are attempting to
plan a more accurate budget. Accurate budgets could lead to a more profitable and efficient
business at the end of the day. This is because a standard costing system provides managers
with a projected idea of spending costs. Once these managers can compare standard costs to
actual costs, they will be able to determine if new business practices need to be utilized.
Thank you !

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STANDARD COSTING

 Effective cost control

 Fixing price and formulation policies

 Facility delegation of authority

 Standard costing is expensive and unsuitable in job order industries

 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 result.

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