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Friday, March 14, 2008

Standard Costing

Standard cost and standard costing

Standard cost:

Standard cost is a predetermined cost. It is a determination in advance of production of what should be the cost. When Standard costs are used for the purpose of cost-control, the technique is known as Standard Costing.

Eric L. Kohler has defined Standard cost as follows:

“Standard cost is a forecast or predetermination of what actual cost should be under projected conditions, serving as a cost control and as a measure of production efficiency or standard of comparison when ultimately aligned against

Actual cost. It furnishes a medium by which the effectiveness of current results can be measured and the responsibility for deviations can be placed.

Standard costing:

It is the preparation of standard costs and applying them to measure the variations from actual costs and analyzing the causes of variations with a view to

maintain maximum efficiency in production. It is a technique, which use standards for costs and revenue for the purpose of control through variance analysis.

Standard costing is a technique which is complimentary to the actual costing or historical costing system. The system of standard costing can be useful in all types of industries, but it is more commonly used in industries producing standardized products.

(ii) Standard costing Vs. Budgetary control:

Both Standard costing and Budgetary control achieve the same objective of maximum efficiency and cost reduction by establishing predetermined standards, comparing actual performance with the predetermined standards and taking corrective measures, where necessary.

Though both are useful tools to the management in controlling costs, they defer in following respects:

1. To be able to establish standard costs, some form of budgeting is essential as there is the need to forecast the level of output and prescribed set of working conditions in the periods in which the standard costs are to be used.

2. Standards are based on technical assessments whereas budgets are leased on past actual adjusted to future trends.

3. Budgetary control deals with the operations of a department of business as a whole while standard costing is applied to manufacturing of a product, process or processes or providing a service.

4. Standards are set mainly for production and production expenses where as budgets are compiled for all items of income and expenditure.

5. Budgets set up maximum limits of expenses above which the actual expenditure should not normally exceed.

6. Budgets are projection of financial accounts, standard costs are projection of cost accounts because budgetary control adopts a more general approach of giving service to the management than does standard costing.

7. Budgets are anticipated or expected costs meant to be used for forecasting requirements of material, labour, cash, etc.

8. In budgetary control, variances are not revealed through the accounts but are revealed in total.

Both standard costing and budgetary control are complimentary to each other and for maximum efficiency both should be used simultaneously.

Standard costing Vs. Estimated cost

Standard costs and estimated costs are predetermined costs, but their objectives are different.

1. The object of estimated cost is to have a reasonable assessment of what a cost ‘will be’ whereas standard cost aims at what a cost ‘should be’.

2. Estimated costs are calculated on the basis of past performance adjusted in the light of anticipated changes in the future standard costs, on the other hand, are determined on a scientific basis keeping in view certain factors and conditions of efficiency.

3. Estimated costs are used by the concerns for fixing selling prices of products, for taking a decision to manufacture or to buy, for quoting the selling price of a job, etc.

4. Estimated costs are used by the concerns which adopt historical costing system of ascertaining cost where as standard costs are used by the concern, which follow standard costing system.

5. Standard costs are used as a regular system of accounts from which variances are found out. Whereas use of estimated cost as a statistical data only.

6. Standard costs are to be fixed for each element of cost where as estimated cost can be for a part of the business and also for a particular purpose.

(iv) Standard costing and Marginal costing.

Standard costing is a system of accounting in which all expenses (fixed and variable) are considered for the determination of standard cost for a prescribed set of working conditions on the other hand, Marginal costing is a technique in which only variable expenses are taken to ascertain the marginal cost. Both standard costing and marginal costing are completely independent of each other and may be installed jointly. This system of joint installation may be named as marginal standard costing or standard marginal costing system.


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