Standard Costing

Topics: Cost accounting, Costs, Cost Pages: 34 (10455 words) Published: June 20, 2013
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Learning Objectives:
← To understand the meaning of standard costing, its meaning and definition ← To learn its advantages and limitations
← To learn how to set of standards and determinations
← To learn how to revise standards
Introduction:
Standard costing is a very practical and therefore widely used costing system, in businesses that make a range of products which, although different, pass through standard and repetitive processes and machinery. Standard cost is the estimated cost of material, labor, overheads and other costs for each unit of production or purchase in a given accounting period. It is used as the benchmark against which cost variances and financial performance are measured, the valuation for inventory and a basis for pricing. It's best suited to businesses that manufacture, but can be used by any business where there is measurable repetition. It is a technique which helps you to control costs and business operations. It aims at eliminating wastes and increasing efficiency in performance through setting up standards or formulating cost plans. Rather than the actual costs of production being attributed to products, the expected (standard) costs of production are attributed to the products produced. History of Standard Costing:

Standard costing has been used for over a 100 years. Early last century financial accountants were interested in finding a better way of valuing stocks and work-in progress, important elements the calculation of profit and the concept of standard costing was born. Some historians say the origins of standard costing go back even further and have found evidence it was used in the American Civil War by quarter masters as a means of controlling costs. It doesn’t really matter when the technique was invented what is more relevant is that it is still in use today. A survey conducted in 1989 reported that standard costing was being used by more than75% of British industrial companies and in a range of different industries e.g. brewing, textiles, electronics and pharmaceuticals. The survey was conducted because many articles and books had started to criticize the technique as being inappropriate as capital-intensive industries with high levels of fixed overheads. The survey in fact reported that only a handful of respondents had abandoned their standard costing systems whereas the majority had either introduced or enhanced their systems in the previous ten years. Another survey of Australian and Japanese firms conducted in 1997 reported that 56% of large firms use if for production costing. Unfortunately there appear to be no more recent surveys but journal articles from the US in the last couple of years indicate that the technique is still very much in use and although a 100 years old has definitely survived the test of time. Meaning of Standard:

When you want to measure some thing, you must take some parameter or yardstick for measuring. We can call this as standard. What are your daily expenses? An average of $50! If you have been spending this much for so many days, then this is your daily standard expense. The word standard means a benchmark or yardstick. The standard cost is a predetermined cost which determines in advance what each product or service should cost under given circumstances. In the words of Backer and Jacobsen, “Standard cost is the amount the firm thinks a product or the operation of the process for a period of time should cost, based upon certain assumed conditions of efficiency, economic conditions and other factors.” Definition:

Standard costing is a system of accounting based on standard costs. Standard costs are prepared, actual costs are recorded and the differences (i.e. variances) between actual and standard are analyzed in order to help management control operations. A standard cost is the predetermined cost of manufacturing a single unit or a number of product units during a specific period in the immediate future. It is the...
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