Standard costs are part
of cost accounting system whereby standard cost is incorporated directly and
formally into the manufacturing accounts. It is divided into two major parts
(1) Historical Costs (2) Pre‐determined
Costs. Historical cost means the actual cost or past cost and historical
costing is a system in which actual costs incurred in the past are determined.
Standard costing aims
at eliminating waste and increasing efficiency in operation through setting up
standards for production costs and production performance. In short, standard
costing is a control device and not a separate method of product costing. It
can be used with any method of product costing, job costing or process costing.
DEFINITION
Standard cost 'The
planned unit cost of the product, component or service produced in a period.
The standard cost may be determined on a number of bases. The main use of
standard costs is in performance measurement, control, stock valuation and in
the establishment of selling prices.’ CIMA Official Terminology, 2005.
A standard costing
system is a method of cost accounting in which standard costs are used in
recording certain transaction and the actual costs are compared with the standard
cost to learn the amount and reason for variations from the standard. ‐ W.B.
Lawrence
Standard costing
involves the preparation of cost based on pre‐
determined standards and continuous comparison of actual with them for the
purpose of guidance and control. ‐ D.
Joseph
It is a cost accounting
technique for cost control where standard costs are determined and compared
with actual costs, to initiate corrective action.
·
It is a control method involving the
preparation of detailed cost and sales budgets.
·
A management tool used to facilitate
management by exception.
OBJECTIVES OF STANDARD COSTING
The objectives of Standard Costing for which it is
implemented are:
1.
It
helps to implement budgetary control system in operation.
2.
It helps to ascertain performance
evaluation.
3.
It supplies the ways to utilise properly
material, labour and also overhead which will be economic in character.
4.
It also helps the management to supply
necessary data relating to cost element to submit quotations or to fix up the
selling price of a firm.
5.
It also helps the management to take
various corrective decisions viz., fixation of price, make-or-buy decisions
etc. which will be more beneficial to the firm.
TYPES OF STANDARDS
Basically, there are two types of standard:
A. Current
Standard
B. Basic
Standard
A. Current
Standard:
It is established for
the use over a diminutive period of time and is related to current circumstances.
Such a standard remains in operation for a limited period and belongs to the
current conditions. These standards are revised at regular intervals. Current
standard are of three types like
1. Ideal
standards,
2. Expected
standards, and
3. Normal
standards.
1. Ideal
Standards
Under these standards, upon perfection, attention is focused.
The aim of these standards is on absolutely minimum cost which only in perfect
operating conditions can be attained. No scraps, idle time, break down &
rest period is provided by these standards. These standards become impossible
to be attained in the long run. In practice idle standards are rarely attained
& have been referred to as theoretical standards. Unfavorable variances are
being revealed by the accounts as regular feature where ideal standards are
used. As a result of this among the staff members depressing feeling occurs.
Idle standards can be used without change or adjustment for a long time. Unless
radical changes are being made in the product or in the manufacturing
processes, these standards once set are rarely being changed. These standards
can also be used in highly mechanized industry as engineering standards.
2. Expected or practical
standards: Such standards are likely to be expected or utilized in the future
period. Such standards are based on expected performance after making a
reasonable allowance for unavoidable losses and other inevitable lapses from
perfect efficiency. So it is most generally used standard and is best suited
for cost control. This standard can be anticipated as well as attained in
future in sync with the specified budget.
3. Normal Standards: Upon the past averages which are adjusted to anticipate future changes,
these standards are based. For relatively longer period covering a trade cycle,
the preparation of these standards is done. For the formation of these
standards, allowance is given to normal fatigues & breaks, normal mistakes
in production, normal waste & scrap & normal machine breakdown &
maintenance. The cost performance is represented by theses standards which
should normally be attained. Because of the probable errors in the prediction
of the extent & duration of the cyclical effects, these standards are very
likely attainable but they are very difficult to compute. A standard should not
be very high so that frustration is caused but it should be high enough so that
reasonably diligent effort needed for its accomplishment can be expected. For
long term planning & decision making purpose, the normal standard may be good
but their utility is limited in appraisal of efficiency.
A. Basic
standards:
This is a standard which is established for use
unaltered for an indefinite time. It is similar to an index number against
which all results are measured. Variances from basic standards show trends of
deviations of the actual cost. However, basic standards are of no practical
utility from the point of view of cost control and cost ascertainment. This
standard is set on a long‐term basis and seldom
revised. It is an underlying standard from which current
standard can be developed.
ESTABLISHING A SYSTEM OF STANDARD
COSTING
Ø
Setting up cost centers
Ø
Classification of accounts
Ø
Determination of size of the standard
· Current
§ Ideal
§ Expected
§ Normal
· Basic
Ø
Setting up of standard
Ø
Standard cost card
ADVANTAGES OF
STANDARD COSTING
1. More effective cost control is
possible under standard costing if the same is reviewed and analyzed at regular
intervals for improvements and immediate action can be taken if deviations from
standards are found out which, ultimately, leads to cost reduction.
2. Analysis of variance and its measurement helps
to detect inefficiencies and mistakes which enable the management to
investigate the reasons.
3. Since standard costs are predetermined costs
they are very useful for planning and budgeting. It also helps to estimate the
effect of changes in Cost-Price-Volume relationship which also helps the
management for decision-making in future.
4.
Standard Costing serves as a
guide to the management in several management functions while formulating
prices and production policies etc.
5. As standard is fixed for each
product, its components, materials, process operation etc. it improves the
overall production efficiency which also ultimately reduces cost and thereby
increases profit.
6.
Once the Standard Costing System
is implemented it will lead to saving cost since most of the costing work can
be eliminated.
7.
Delegation of authority and
responsibility becomes effective by setting up standards for each cost center
as the supervisors or executives of each cost center will know the standard
which they have to maintain.
DISADVANTAGES OF
STANDARD COSTING
1. Costly
System: Because the Standard Costing requires highly skillful and competent
personnel, it becomes a costly system too. For the same experts are paid high
remuneration.
2. Difficulties
in Fixation of Standard: It is always difficult to determine precise standard
costs in a given situation which will coincide with actual cost when operations
are over. Standard cost are determined partly by the past experience and partly
by the cost projections based on advanced statistical techniques. Thus,
uncertainties revolve around standards.
3. Constraint
for Service Industry: Standard costing is applied for planning and controlling
manufacturing costs. Thus, it cannot be applied in a service industry.
4. Consistency
of Standard: because the standards of marginal costing fluctuate and vary time
to time, it is difficult to always sustain and continue the same
standards.
5. Unsuitable
for Non‐standardized Products: Standard costing
is expensive and unsuitable for job manufacturing industries as they
manufacture non standardized products such as catering, tailoring, printing,
etc.
6. Relatively
Fixed Standards: A business may not be able to keep standards up‐to‐date.
In other words, a business may not revise standards to keep pace with the
frequent changes in manufacturing conditions. Firms may avoid revising
standards as it is a costly affair.