Standard Costing: Definition, Advantages, Disadvantages

standard costing

Essentially, standard costing is a technique of cost calculation and control. Standard costs are prepared and used to clarify the final results of a business. Since the company’s external financial statements must reflect the historical cost principle, the standard costs in the inventories and the cost of goods sold will need to be adjusted for the variances. Since most of the goods manufactured will have been sold, most of the variances will end up as part of the cost of goods sold.

It can be used as a yardstick against which actual costs can be compared to measure efficiency. Aids to inventory costing – Inventories of raw materials, work-in-progress and finished goods may be carried at standard costs. The differences of actuals and standards may be taken to variance accounts.

Assumes Little Change to the Estimated Costs

Low morale for some
workers The management by exception approach focuses on
the unusual variances. Management often focuses on unfavorable
variances while ignoring favorable variances. Workers might believe
that poor performance gets attention while good performance is

  • Imagine these types of problems happening all the time, making it very difficult to keep track of the actuals.
  • However, output in many companies is no longer determined by how fast labor works; rather, it is determined by the processing speed of machines.
  • For example, a policy decision to increase inventory can harm a manufacturing manager’s performance evaluation.
  • Standard costing system is of little use or no use where works vary from job to job or contract to contract.
  • Knowing that variable manufacturing costs were $181,500 over budget is helpful, but it doesn’t isolate the production issue or issues.

Employees who do not have the expected experience level may save money in the wage rate but may require more hours to be worked and more material to be used because of their inexperience. When undertaking standard costing variance analysis, it is important to understand that the costs and therefore the variances are all interrelated. Whatever the cause the business should decide what action it needs to take to correct the situation. The total variances can be calculated in the last line of the top section of the template by subtracting the actual amounts from the standard amounts.

What are the objectives of using a standard costing system?

The existing problems must be taken due case of while introducing the system. The rigid marshalling of effort within a factory is a fact of like which must be accepted. Without the attention to details, there would be great difficulty in achieving a high level of efficiency. However, any effective planning and control system must have a foundation on which to operate. For solving this problem, an optimum period for keeping standards without revision should be selected.

standard costing

A variance is the difference between the actual cost incurred and the standard cost against which it is measured. A variance can also be used to measure the difference between actual and expected sales. Thus, variance analysis can be used to review the performance of both revenue and expenses. involves the creation of estimated (i.e., standard) costs for some or all activities within a company.

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