Definition of Standard Costing

Transcription

1 Standard Costing Cost control leads to cost reduction which is the objective of every firm that is in business. The essence of standard costing is to Set target of costs Try to achieve these targets Compare the actual costs with the targets Ascertain reasons and record the reasons in the books of account Bring the monetary effects of various factors that have operated in the organization to the notice of the management

2 Definition of Standard Costing It is the scientifically pre determined cost of manufacturing a single unit or a number of units of a product or of rendering a service during a specified future period. It is the planned cost of a product under current or anticipated operating conditions. The management evaluates the performance of a company by comparing it with some predetermined measures Therefore, it can be used as a process of measuring and correcting actual performance to ensure that the plans are properly set and implemented

3 Procedure of Standard Costing Set the predetermined standards for sales margin and production costs Collect the information about the actual performance Compare the actual performance with the standards to arrive at the variance Analyze the variances and ascertaining the causes of variance Take corrective action to avoid adverse variance Adjust the budget in order to make the standards more realistic

4 Functions of Standard Costing Valuation Assigning the standard cost to the actual output Planning Use the current standards to estimate future sales volume and future costs Controlling Evaluating performance by determining how efficiently the current operations are being carried out Motivation Notify the staff of the management s expectations Setting of selling price

5 Standard Costing Standard Costing is based on technical assessment. It controls expenses and hence more intensive To establish Standard Cost, some form of budgeting is essential It is mainly set for production and related expenses It is for protection of cost accounts It sets up targets which are to be attained by actual performance Differences Budgetary Control Budgets are based on past actuals adjusted to future trends. It is concerned with operation of the business and is mote extensive Budgetary controls can be applied without help from standard costing It is compiled doe all items of income and expenses It is a projection of financial accounts It sets up maximum limits of expenses above the actual expenses

6 Differences (contd) Standard Costing Variance is analyzed in detail according to its original causes It tells what the cost should be under specific production conditions Budgetary Control Variance is not related through the associated accounts but revealed in total It is the expected cost meant to be used for forecasting requirements It is used for various management decisions for price fixing but cannot be used for forecasting It helps in policy determination, activity co-ordination and delegation of authority

7 Variance Analysis A variance is the difference between the standards and the actual performance When the actual results are better than the expected results, there will be a favourable variance (F) If the actual results are worse than the expected results, there will be an adverse variance (A)

8 Types of Variances Material cost variance Labor cost variance

9 Materials cost variance Material Price variance Material Usage variance Labour cost variance Labour rate variance Labour Efficiency variance 9

10 Material Cost Variance Cost variance = Price variance + Quantity variance Cost variance is the difference between the standard cost and the Actual cost Price variance = (standard price actual price)*actual quantity A price variance reflects the extent of the profit change resulting from the change in activity level Usage = (standard quantity actual quantity)* standard cost or Quantity variance A quantity variance reflects the extent of the profit change resulting from the change in activity level

11 Labour cost variance Labour rate variance or Labor Rate Variance = (standard price actual price)*actual quantity Labour efficiency variance = (standard quantity actual quantity)*standard price = Standard quantity for actual production actual quantity used) * standard price