(7) The recording process of standard costs should be easy and clear. (3) Setting of standards for each element of cost such as material, labour and overheads. It does not, however, mean by this that standard costing is intended to control costs, and beyond this, it does not achieve anything else. Before one can clearly understand the concept of standard costing, the term “standard” needs to be understood. According to Webster’s New International Dictionary, standards are bases for measurement or comparison.
- To use the Standard Costing Variance Analysis template (and others we are constantly adding), you need a Magnimetrics account.
- It also helps in analysing the profitability of different product lines, and in some cases, the management can use standard costing as a pricing tool.
- The standard must be set to enable variances to be identified easily and quickly.
- The object of standard costing is to plan operations systematically in advance to improve processes, methods and procedures.
- Therefore, this standard is not suitable for cost ascertainment and control.
Standard costing is the most effective way to control costs. It provides criteria that can be used to evaluate and compare the operating performance of executives. Production is usually articulated in physical units such as tons, pounds, gallons, numbers, kilograms, liters, etc.
Advantages and Disadvantages of using Standard Cost Accounting
Aids in product pricing – Standard costs are an important aid in pricing the products of the concern. Measurement of profits – Concept absorption of fixed overheads and measurement of profits is possible. (8) The standard costing system variance reports should be prepared in such a way that progress could be known at all levels of management. (1) The standard should be fixed in such a manner, so that managers and workers should rely on them.
Timely, frequent reports that are approximately correct are better than infrequent reports that are very precise but outdated by the time they are released. Join our Sage City community to speak with business people like you. Get our latest business advice delivered directly to your inbox.
Practical Standards
“Standard” has been defined in the accounting literature, as “a yardstick”, “a benchmark”, “a gauge”, and “a sea level from which to measure altitudes”. Standard costs must be established properly, thereby promoting confidence between management and operations. The system design must give the cost of operation rather than products, and the standard should be simple. Reporting problematic variances to top management for corrective action. Price of material in the past, current prices and fluctuating trends are the base for determining standard of price.
The success of standard costing system depends on the reliability, accuracy and acceptance of the standards. Difficulties for Small Industries’ establishment of standards and their implementation involve initial high costs. Standards have to be revised and new standards be fixed involving larger costs.
The role of AI in SaaS finance and accounting
It makes the employees to recognise the importance of efficient operations so that costs can be reduced by joint efforts. This is the best available method for https://www.bookstime.com/ organisations to adopt as the goals set are challenging but realistic. Owing to the normal work conditions, the employees feel motivated to attain the goal.
Nobody should be made to feel that system is being imposed upon him. (d) Type of Standard – It is also necessary to determine the type of standard to be used, whether current, basic or normal standard. The choice of the type of standard depends upon its effectiveness for control of costs. (b) Expected Standard – It reflects a level of attainment based on a high level of efficiency.