Standard Costing

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AN IDEAL APPROACH TO STANDARD COSTING
By Jitesh Chandak

INTRODUCTION

Before you start your study on standard costing you must be clear in your mind that you are going to study a chapter which wants more practice and hard work to develop a strong and sound concept. Costing can be defined as “The technique and process of ascertaining costs.” Standard costing is a technique, which uses standards for cost and revenue for the purpose of control through variance analysis. We can say standard costing is a technique of costing, which also established control over costing. Standard cost can be defined “As a pre-determined cost which is calculated from management’s standard of efficient operation and relevant necessary expenditure. It may be used as a basis for price fixing and for control through variance analysis.” Hence we can say standard costs are pre-determined estimates of cost of a single unit or a number of units of a product service.

Uses of Standard Cost: -

1. Use of standard cost is an effective way for planning and controlling costs.

2. Pricing decisions and decisions involving submission of quotations, answering tenders etc are also facilitated by the use of standard costs.

3. Identification and measurement of variances from standards have been made possible with the use of standard cost, with a view to improve performance or to correct loose standards, if any.

4. Facilitates management by exceptions.

DEFINITION OF STANDARD COSTING
Standard costing is defined by the I.C.M.A. London “As the preparation and uses of standard costs, their comparison with actual costs and the analysis of variance to their causes and point of incidence.” Hence we can say standard costing is a method of preparation of standards and their uses for comparison with actual costs by variance analysis. It involves following steps:-

1. Setting up of standard.
2. Ascertainment of actual costs.
3. Comparison of actual cost with standard cost to determine the variance, and 4. Investigation of variance and taking appropriate action thereon wherever necessary.

Type of Standards
1. Current standard :- Current standard is a standard established for use over a short period of time, related to current conditions. The problem with this type of standard is that it does not try to improve on current level of efficiency. 2. Basic Standard :- Basic standard is a standard established for use over a long period, from which a current standard can be developed. The main disadvantage of this type of standard is that, if it has remained unaltered over a long period of time, it may be outdated. The main advantage is that it is showing the change in trend of price and efficiency from year to year. 3. Ideal Standard :- Ideal standard is a standard, which can be attained under the most favourable conditions. No provision is made e.g. for shrinkage, spoilage or machine breakdowns. Users of this type of standard believes that the resulting unfavourable variance will remind management of the need for improvement in all phases of operations. Ideal standard are not widely used in practice because they may influence employee motivation adversely. 4. Normal Standard :- These standards are based on past average, adjusted with anticipated future changes. We can say these are the standard that may be achieved under normal operating conditions. These standard are however difficult to set because they require a degree of forecasting. The variances thrown out under this system are deviation from normal efficiency, normal sales volume or normal productive volume. If the actual performance is found to be abnormal, large variances may result and it is necessary to revise standard to find out actual result. 5. Expected Attainable Standard :- It is a comparison between extreme of ideal standard and normal standard. These standards :- a) are set for providing operating inefficiencies which...
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