Cost figures, in general, can be divided into two broad categories. They are Historical Costs and Standard Costs. Historical costs are available, after they are incurred. Such cost figures may have some value, once they are analysed. By analysis, the inefficiencies and deficiencies in production may be detected. However, the damage would have occurred, by the time the analysis under Historical costs is made. Analysis can be done only after the completion of the period and so the exercise would not be effective to correct the past course of action, though it would be of value to learn lessons for not repeating the same mistakes, in future.
Standard Cost is a predetermined cost. Under standard costing, cost of production is determined, in advance. From the Management’s point of view “What a product should have costed” is more important than “What did it cost?” Standard costs are compared with the actual costs to find out the differences between the two. The differences or variances so obtained are analysed to determine the efficiency of operations, so that necessary remedial action may be taken, immediately.
To plan what should be the cost, before production is made, is the Underlying idea of Standard Costing.
Management is always concerned to plan the costs, before they are actually incurred, to exercise the required control. The important techniques for exercising cost control are Standard Costing and Budgetary Control. Standard costing is superior compared to historical costing or actual costing. Historical costing is just post-mortem of the expenditure, which has been incurred. So, this is not, indeed, an effective tool for cost control.
Meaning and Defination
Standard: The word ‘Standard’ means criterion. Standard is a predetermined measurable quantity, under defined set conditions. Standard Cost: Standard cost is a scientifically pre-determined cost, which is arrived at assuming a particular level of efficiency in utilization of material, labour and indirect services. When the actual figure is compared against standard, one can measure the level of efficiency achieved by seeing how much actual differs from the standard. When costing is used for the purpose of cost control, the technique is known as standard costing.
Through the standard costing system, management is able to control the variances in materials, labour and controllable expenses on quantity, efficiency and cost basis (in terms of money).Standard costs are, widely, used as they serve as an effective management tool for control. Standard costing is a managerial device to determine efficiency and effectiveness of cost performance.
Definition: The costing terminology of the institute of cost and management accounts, London defines Standard costing as “Standard costing is the preparation of standard costs and applying them to measure the variances from actual costs and analyzing the causes of variations, with a view to maintain maximum efficiency in production”.
Standard cost has also been referred to a cost plan for a single unit. This thinking is not merely an estimate or guess work. It is based on certain assumed conditions of efficiency, economic and other factors.
When we break the definition, the technique of Standard costing can be broken into the following: 1. Determination of standard costs under each element of cost-material, labour and overheads. In other words, preparation of standard cost sheet is the first step. 2. Finding out the actual costs.
3. Comparison of the actual costs with standard costs to ascertain and measure variances. 4. Analyse the variances.
5. Presentation of information to the appropriate levels of management for remedial action to control costs for achieving improved or better performance.
Industries where standard costing is applied: Standard costing can be applied in industries producing standardised products, which are repetitive in character. Examples are...