Standard Costing: Definition, Features, Advantages, Disadvantages, Process

This rigidity can lead to inaccurate benchmarks, causing poor decision-making as the data no longer reflects current circumstances. Variance analysis highlights areas where actual performance deviates from standards, prompting investigations into inefficiencies and process Car Dealership Accounting improvements. It drives continuous process improvements and operational efficiency by identifying and addressing underlying issues. It encourages Kaizen Costing initiatives and operational efficiencies by identifying and addressing inefficiencies.

What is Standard Costing – 3 Important Steps: Establishing Cost Centres, Types of Standard Used and Setting of Standard

A suitable analysis will reveal that some of the variances are controllable, while others are uncontrollable. By analyzing variances, origin and the causes of variances can be traced so that steps can be taken to reduce them. The conventional variance analysis is a postmortem exercise. Historical cost accounting is not considered sufficient to supply required information for taking managerial decisions. The emphasis of management on using cost as control device has brought the emergence of Standard costing. The technique of standard costing has been developed because of change in standard costing emphasis from cost ascertainment to cost control.

Material Quantities

Instead, it is determined on the imagination that everything within the organization is being run seamlessly in its order.

Analysis of Variances in Standard Cost and Actual Cost:

• The three important methods of accounting are- partial plan or output plan, single plan or input plan and dual plan.
• Thereafter each standard cost figure is to be deducted from the actual cost of inputs of materials or cost of labour or cost of overheads respectively, and the result is called cost variances.
• If the standard costing system has not been properly designed, many problems are likely to crop up.
• Cost accounting mainly involves determining different costs of a business and classifying them using different methods.
• Though standard costing system will be useful for all types of commercial and industrial undertakings but it will be more useful in those undertaking where production is standardized.
• Same format can be used in case of labour cost variances, overhead variances and also sales, sales margin variances.

This is because of the fact that the standard does not represent what should be bookkeeping attained in the present period. Hence, not being useful for cost control, basic standard is rarely used except as a basis for preparing current standard. The existing costing system should be reviewed with special reference to the existing records and forms. For clear definitions of standard costs, the existing costs in general and the methods of allocation and apportionment of overheads in particular should be studied.

• Introducing standard costing brings new work challenges and tasks to the organization.
• Industries where standardised and uniform work of repetitive nature is done are suitable for introduction of standard costing.
• (c) To enable the principle of ‘management by exception’ to be practised at the detailed, operational level.
• Companies that deal with adverse conditions may opt for applying standard costing.
• Setting up right standards requires cooperation of various line managers in the organisation.

• Users believe that the resulting unfavourable variances will remind management of the need for improvement in all phases of operations.
• (i) Basic Standard – This standard is fixed for the base year.
• These standard costs could be based on historical data, past experiences, market averages, and other relevant bases.
• Standards should be set up for each element of cost, viz., direct material, direct labour and overhead, However this is a complex task.
• One cannot have perfect and effective system of budgetary control without standard costing, and standard costing cannot be implemented without proper budgetary control system.
• Total variable cost increases or decreases with change in unit like direct material cost or direct labour cost.

The system may not be suitable for small concerns since in their case careful scheduling of production may not be possible. Moreover the system of standard costing requires specialisation of jobs and processes which may not be possible in a small concern. Aids to inventory costing – Inventories of raw materials, work-in-progress and finished goods may be carried at standard costs.