A standard cost is a planned cost for a unit of product or service rendered. Subsequently, variances are recorded to show the difference between the expected and actual costs. Advantages and disadvantages of using standard costs. Let us make an indepth study of the meaning, objectives, development, advantages and disadvantages of standard costing. Hence, there is a need of incurring heavy expenses for fixing above mentioned standards since the. Pdf budgeting and standard costing practices in new zealand. It is a method of costing by which standard costs are employed. It appears to be generally accepted in textbooks and articles on bud geting and. Advantages of standard costing amidst many advantages, an effective standard costing system essentially provides following. This approach represents a simplified alternative to cost layering systems, such as the fifo and lifo methods, where large amounts of historical cost. Pdf the study investigated the effect of standard costing on profitability of selected manufacturing companies in edo state nigeria. The essence of standard costing is to set objectives and targets to achieve them, to compare the actual costs with these targets. If you continue browsing the site, you agree to the use of cookies on this website.
More useful information for managerial planning and decision making. Standard costing is most suited to an organisation where there are common. Unit 6 module 10 standard costing inflibnet centre. Standard costing in a standard costing system, costs are entered into the materials, work in process, and finished goods inventory accounts and the cost of goods sold account at standard cost. A standard cost is described as a predetermined cost, an estimated future cost, an expected cost, a budgeted unit cost, a forecast cost, or as the should be cost. Differences between standard costs and actual costs are recorded as variances.
Moreover, standard is fixed for fixed overhead and variable overhead. Standard costs provides a yardstick against the actual cost. Setting standards involves determining the best materials and methods which leads to efficiency and effectiveness. Standard costing and variance analysis topic gateway. Standard costing, on the other hand, uses estimates for the materials and labor hours it should take to produce a finished product, along with the same budgeted overhead rate as in normal costing. The standard costing method in managerial accounting is part of modern. Standard costing is a control system that enables any variances from standard cost or budget to be. Standard costing by rosemarie kelly, examiner f2 management accounting. Standard costing is a technique which establishes predetermined estimates of the costs of products and services, compares them with actual cost incurred in order. The international journal of accounting budgeting and standard costing.
The cost management by applying the standard costing method in. Standard costing and variance analysis topic gateway series 8 however, standard cost variances often do not appear as part of profit and loss information. Standard overhead actual hours x standard rate for fixed overhead 33,000 x 1. Standard costing is an accounting system used by some manufacturers to identify the differences or variances between. Standard costing is used to ascertain the standard cost under each element of cost, i. Standard costing is a technique of cost accounting which compares the standard cost of each product or service with actual cost to determine the efficiency of the operation so that any remedial action may be taken immediately.
Standard costing is the practice of substituting an expected cost for an actual cost in the accounting records. There are some problems associated with the use of standard costs in an advanced manufacturing setting, jit production methods, global competitive environment, quality driven demand and continuous process improvement. Given the prominent role that standard costing plays in the manufacturing environment. Standard costing and variance analysis topic gateway cima. Pdf effect of standard costing on profitability of manufacturing. Overview of standard costing oracle cost management. Over half of companies using standard costing based their reports on actual costs.
Standard costing is a traditional cost accounting method and still an important aid to management for cost control purpose. The costs that should have occurred for the actual good output are known as standard costs, which are likely integrated with a manufacturers budgets, profit plan, master budget, etc. Standard costing can also simplifying cost bookkeeping see chapter 11. Some companies added back variances, while others updated material standards so that they approximated. Standard costs, standard costing and the introduction of scientific. According to icma, london, standard costing is the preparation and use of standard costs, their comparison with actual cost and the. Standard costs are often an integral part of a manufacturers annual profit plan and. Dm and dl disaggregating variances into price and volume. Budget preparation ensures that all functions of a business are properly coordinated. Many companies are moving away from using standard costing as their primary tool for pricing or global supply chain sourcing decisions. Where standard costing is used its limitations are not always fully understood with users often treating it as a science rather than an art.
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. The results suggest that some commentators predictions of a demise in standard costing and variance analysis are overstated. In this manner, the current research focuses on the postsecond world war development of standard costs and standard costing in sunderland, a. It goes on to further set out that a standard cost is a carefully predetermined unit cost which is prepared for each cost unit. Overview of standard costing under standard costing, predetermined costs are used for valuing inventory and for charging material, resource, overhead, period close, and job close and schedule complete transactions. In the words of backer and jacobsen, standard cost is the amount the firm thinks a product or the operation of the process for a period of time should cost, based upon certain assumed conditions of efficiency, economic conditions and other factors.
This means that the employees took less time than budgeted to produce the,300 sets of bases. Advantages of standard costing over actual and normal costing useful in the budgeting process. Budgets jan indicate possible future shortages of resources so that remedial measures jan be taken in good time, or other. The aim of this article is to study the use of standard costing in the. Five of the benefits that result from a business using a standard cost system are.
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