8 1 Explain How and Why a Standard Cost Is Developed Principles of Accounting, Volume 2: Managerial Accounting

standard costing

It should be fixed for each grade of labour and for each operation involved. The standard hours are fixed for all categories of labour i.e., for skilled and unskilled labour. In these standards, number of hours and workers are established.

Standard costing system requires proper delegation of authority and responsibility at different levels. This is possible by drawing an organisation chart clearly laying down the authority and responsibility of different executives in the organisation. Engineering and textile industries where large range of products are manufactured. Service industries where operation costing is also applicable like transport, gas and water, electricity etc.

Features of Standard Costing System

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(c) The difference between these costs which is termed as variance. The standard must be set to enable variances to be identified easily and quickly. Standard costing is a technical process of operation that must be coordinated, enabling acceptance from other employees in the organization. These articles and related content is the property of The Sage Group plc or its contractors or its licensors (“Sage”).

How to calculate standard costs

Standards can be fixed only with the co­operation of managerial personnel. Nobody should be made to feel that system is being imposed upon him. (iii) Current Standard – This standard is fixed on the basis of current conditions and remains in force for a short period of time.

standard costing

This variance would need to be accounted for, and possible operational changes would occur as a result. Cost accounting systems become more useful to management when they include budgeted amounts to serve as a point of comparison with actual results. Often favorable variances are not noted at all, and unfavorable variances are scrutinized. A Guide to Nonprofit Accounting for Non-Accountants This can lead to some problems with staff, as often the production process, including how labor is used, is reassessed when unfavorable variances arise. Staff may feel their performance is being questioned, when it’s possible that the estimates may have been too low in the first place, and that the line already runs efficiently.

Problems in Setting Standard Costs

These standards are, however, difficult to set because they require a degree of forecasting. The variances thrown out under this system are deviations from normal efficiency, normal sales volume, or normal production volume. This technique is a valuable aid to the management in determining prices and formulating production policies. equips cost estimates while planning the production of new products. In the areas of Accounting, Cost Accounting and Management Accounting, Standard Costing enjoys a significant place in acting as a cost controlling and cost reducing managerial tool.

  • It includes (1) Determination of standard quantity of material required, and (2) Determination of standard price per unit of material.
  • Kailey Hagen has been writing about small businesses and finance for almost 10 years, with her work appearing on USA Today, CNN Money, Fox Business, and MSN Money.
  • When a company is manufacturing different types of products, it is almost impossible to increase the production, which cannot be expressed in the same unit.
  • Through fixing standards, certain waste such as material wastage, idle time, lost machine-hours, etc. is reduced.



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