{"id":3852,"date":"2020-03-06T12:16:39","date_gmt":"2020-03-06T12:16:39","guid":{"rendered":"https:\/\/commerceiets.com\/?p=3852"},"modified":"2020-03-06T12:16:39","modified_gmt":"2020-03-06T12:16:39","slug":"standard-costing","status":"publish","type":"post","link":"https:\/\/commerceiets.com\/standard-costing\/","title":{"rendered":"STANDARD COSTING"},"content":{"rendered":"\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_65 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/commerceiets.com\/standard-costing\/#STANDARD_COSTING\" title=\"STANDARD\nCOSTING\">STANDARD\nCOSTING<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/commerceiets.com\/standard-costing\/#TYPES_OF_STANDARDS\" title=\"TYPES OF STANDARDS\">TYPES OF STANDARDS<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/commerceiets.com\/standard-costing\/#NEED_FOR_STANDARD_COSTING\" title=\"NEED FOR STANDARD COSTING\">NEED FOR STANDARD COSTING<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/commerceiets.com\/standard-costing\/#i_Compilation_of_Historical_Cost_is_very_expensive_and_difficult\" title=\"(i) Compilation of Historical Cost is very expensive and difficult:\">(i) Compilation of Historical Cost is very expensive and difficult:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/commerceiets.com\/standard-costing\/#ii_Historical_Costs_are_inadequate\" title=\"(ii) Historical Costs are inadequate:\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 \">(ii) Historical Costs are inadequate:\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/commerceiets.com\/standard-costing\/#iii_Historical_Costs_are_too_old\" title=\"(iii) Historical Costs are too old:\">(iii) Historical Costs are too old:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/commerceiets.com\/standard-costing\/#iv_Historical_Costs_are_not_typical\" title=\"(iv) Historical Costs are not typical:\">(iv) Historical Costs are not typical:<\/a><\/li><\/ul><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/commerceiets.com\/standard-costing\/#OBJECTIVES_OF_STANDARD_COSTING\" title=\"OBJECTIVES\nOF STANDARD COSTING\">OBJECTIVES\nOF STANDARD COSTING<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/commerceiets.com\/standard-costing\/#PROCESS_OF_STANDARD_COSTING\" title=\"PROCESS\nOF STANDARD COSTING\">PROCESS\nOF STANDARD COSTING<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/commerceiets.com\/standard-costing\/#ADVANTAGES\" title=\"ADVANTAGES\">ADVANTAGES<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/commerceiets.com\/standard-costing\/#LIMITATIONSDISADVANTAGES\" title=\" LIMITATIONS\/DISADVANTAGES \"> LIMITATIONS\/DISADVANTAGES <\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-12\" href=\"https:\/\/commerceiets.com\/standard-costing\/#STANDARD_COSTING-_TOOL_IN_HANDS_OF_MANAGEMENT_FOR_DECISION_MAKING\" title=\"STANDARD\nCOSTING- TOOL IN HANDS OF MANAGEMENT FOR DECISION MAKING\">STANDARD\nCOSTING- TOOL IN HANDS OF MANAGEMENT FOR DECISION MAKING<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-13\" href=\"https:\/\/commerceiets.com\/standard-costing\/#PRE-REQUISUITES_FOR_STANDARD_COSTING\" title=\"PRE-REQUISUITES FOR STANDARD COSTING\">PRE-REQUISUITES FOR STANDARD COSTING<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-14\" href=\"https:\/\/commerceiets.com\/standard-costing\/#Acceptance_of_the_System\" title=\"Acceptance of the System\">Acceptance of the System<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-15\" href=\"https:\/\/commerceiets.com\/standard-costing\/#Judicious_Setting_of_Standards\" title=\"Judicious Setting of Standards\">Judicious Setting of Standards<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-16\" href=\"https:\/\/commerceiets.com\/standard-costing\/#Reasonable_Size\" title=\"Reasonable Size\">Reasonable Size<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-17\" href=\"https:\/\/commerceiets.com\/standard-costing\/#Competent_Staff\" title=\"Competent Staff\">Competent Staff<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-18\" href=\"https:\/\/commerceiets.com\/standard-costing\/#Existence_of_Budgetary_Control_System\" title=\"Existence of Budgetary Control System\">Existence of Budgetary Control System<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-19\" href=\"https:\/\/commerceiets.com\/standard-costing\/#Proper_Delegation_of_Authority_and_Responsibility\" title=\"Proper Delegation of Authority and Responsibility\">Proper Delegation of Authority and Responsibility<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-20\" href=\"https:\/\/commerceiets.com\/standard-costing\/#Efficient_Accounting_System\" title=\"Efficient Accounting System\">Efficient Accounting System<\/a><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2 class=\"has-text-align-center wp-block-heading\"><span class=\"ez-toc-section\" id=\"STANDARD_COSTING\"><\/span><strong>STANDARD\nCOSTING<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Standard\ncosting is a cost accounting technique which compares the results of actual\nproduction with the basic standard, as anticipated, in terms of costs so as to\ndetermine the reasons for discrepancies between the anticipated and actual\ncosts.<\/p>\n\n\n\n<p><strong>ACCORDING TO\nW W BIGG<\/strong><\/p>\n\n\n\n<p>\u201cStandard\ncosting discloses the cost deviations from standard and classifies these as to\ntheir causes, so the managements are immediately informed of the spheres of\noperations in which remedial action is necessary.\u201d<\/p>\n\n\n\n<p><strong>ACCORDING TO\nICMA, LONDON <\/strong><\/p>\n\n\n\n<p>\u201cThe\npreparation and use of standard costs, their comparison with actual costs and\nthe analysis of variances to their causes and points of incidence.\u201d <\/p>\n\n\n\n<p><strong>ACCORDING TO WHELDON\n<\/strong><\/p>\n\n\n\n<p>\u201cA\nmethod of ascertaining the cost whereby statistics are prepared to show <\/p>\n\n\n\n<ul><li>standard cost, <\/li><li>the actual cost and <\/li><li>the difference between these costs which is termed the\nvariance.\u201d<\/li><\/ul>\n\n\n\n<p><strong>ACCORDING TO\nJ. BATTY<\/strong><\/p>\n\n\n\n<p>\u201cStandard\ncosting is the system of cost accounting which makes use of predetermined\nstandard cost relating to each element of cost-materials, labour and expenses,\nfor each line of product manufactured of service applied.\u201d<\/p>\n\n\n\n<p><strong>ACCORDING TO BLOKER AND WELTMER<\/strong>&nbsp;<\/p>\n\n\n\n<p>\u201cPredetermined costs, based upon engineering\nspecifications and representing highly efficient productions for quantity\nstandard and forecast of future market trends and price standards, With a fixed\namount expressed in dollars for material, labor and for an estimate quantity of\nproduction.\u201d<\/p>\n\n\n\n<p><strong>ACCORDING TO W. B. LAWRENCE <\/strong><\/p>\n\n\n\n<p>\u201cA standard cost system is a\nmethod of cost accounting in which standard costs are used in recording certain\ntransactions and the actual costs are compared with the standard costs, to\nlearn the amount and reason for any variations from the standard.\u201d<\/p>\n\n\n\n<p><strong>ACCORDING TO BROWN AND HOWARD <\/strong><\/p>\n\n\n\n<p>\u201cStandard costing may be defined as a technique of cost\naccounting which compares the standard cost of each product of service with the\nactual cost to determine the efficiency of the operation, so that any remedial\naction may be taken immediately.\u201d<a href=\"https:\/\/www.playaccounting.com\/qa\/mqa\/sc-qa\/q-7-what-are-the-similarities-and-differences-between-budgeting-and-standard-costing\/\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><br \/>\n<\/strong><\/a><\/p>\n\n\n\n<p>Thus,\nstandard costing is a technique that uses standard costs which are\npredetermined and controls through detection of variances. It is an effective\ntool for evaluation of performances and for enforcing control over performances\nand costs as well involved in connection with such performances.<\/p>\n\n\n\n<p>The\ntechnique of standard costing can be useful in all types of industries, but it\nis more commonly used in industries producing standardized products which are\nrepetitive in nature.<\/p>\n\n\n\n<h4 class=\"has-text-align-center wp-block-heading\"><span class=\"ez-toc-section\" id=\"TYPES_OF_STANDARDS\"><\/span><strong>TYPES OF STANDARDS<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>The following are the various standards used in standard costing:<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"627\" height=\"279\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-26.png\" alt=\"types of standards\" class=\"wp-image-3854\" srcset=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-26.png 627w, https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/image-26-300x133.png 300w\" sizes=\"(max-width: 627px) 100vw, 627px\" \/><\/figure>\n\n\n\n<p><strong>Current\nStandard<\/strong><\/p>\n\n\n\n<p>Current standard is a standard\nestablished for use over a short period of time, related to current conditions.\nThe problem with this type of standard is that it does not try to improve on\ncurrent levels of efficiency.<\/p>\n\n\n\n<p><strong>Basic\nStandard<\/strong><\/p>\n\n\n\n<p>Basic standard is standard\nestablished for use over a long period from which a current standard can be\ndeveloped. The main disadvantage of this type of standard is that because it\nhas remained unaltered over a long period of time, it may be out of date. The\nmain advantage is in showing the changes in trend of price and efficiency from\nyear to year.<\/p>\n\n\n\n<p><strong>Ideal\nStandard<\/strong><\/p>\n\n\n\n<p>Ideal standard is a standard\nwhich can be attained under the most favourable conditions. No provision is\nmade, e.g., for shrinkage, spoilage or machine breakdowns. Users believe that\nthe resulting unfavourable variances will remind management of the need for\nimprovement in all phases of operations. Ideal standards are not widely used in\npractice because they may influence employee motivation adversely.<\/p>\n\n\n\n<p><strong>Attainable\nStandard<\/strong><\/p>\n\n\n\n<p>Attainable standard is a standard\nwhich can be attained if a standard unit of work is carried out efficiently, on\na machine properly utilized or material properly used. Allowances are made for\nnormal shrinkage, waste and machine breakdowns. The standard represents future\nperformance and objectives which are reasonably attainable.<\/p>\n\n\n\n<h3 class=\"has-text-align-center wp-block-heading\"><span class=\"ez-toc-section\" id=\"NEED_FOR_STANDARD_COSTING\"><\/span><strong>NEED FOR STANDARD COSTING<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Importance of\nStandard Costing cannot be ignored for the following and that is why the same\nis well-developed in the present-day world:<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"i_Compilation_of_Historical_Cost_is_very_expensive_and_difficult\"><\/span><strong>(i) Compilation of Historical Cost is very expensive and difficult:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>A manufacturing firm making large number of parts\nrequires too much clerical work which is required in order to compile the\nmaterials, labour and overhead charges to each and every cost of parts produced\nfor ascertaining the average cost of the product.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"ii_Historical_Costs_are_inadequate\"><\/span><strong>(ii) Historical Costs are inadequate:\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>In order to measure the manufacturing efficiency,\nhistorical costs are not practically adequate. It fails to explain the reasons\nof increased cost or any change in cost structure.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"iii_Historical_Costs_are_too_old\"><\/span><strong>(iii) Historical Costs are too old:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>In many firms, costs are determined and selling prices\nare ascertained even before the production starts\u2014which is not desirable.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"iv_Historical_Costs_are_not_typical\"><\/span><strong>(iv) Historical Costs are not typical:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>This is due to the wide fluctuation in market for which\nthere is no relation between the selling price per unit and cost price per\nunit.<\/p>\n\n\n\n<h2 class=\"has-text-align-center wp-block-heading\"><span class=\"ez-toc-section\" id=\"OBJECTIVES_OF_STANDARD_COSTING\"><\/span><strong>OBJECTIVES\nOF STANDARD COSTING<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ol><li><strong>Cost Control:\n<\/strong><\/li><\/ol>\n\n\n\n<p>The most important objective of standard cost is to help the management in cost control. It can be used as a yardstick against which actual costs can be compared to measure efficiency. The management can make comparison of actual costs with the standard costs at periodic intervals and take corrective action to maintain control over costs. <\/p>\n\n\n\n<ul><li><strong>Management by\nException: <\/strong><\/li><\/ul>\n\n\n\n<p>The\nsecond objective of standard cost is to help the management in exercising\ncontrol over the costs through the principle of exception. Standard cost helps\nto prescribe standards and the attention of the management is drawn only when\nthe actual performance is deviated from the prescribed standards. It concentrates\nits attention on variations only. <\/p>\n\n\n\n<ul><li><strong>Develops Cost\nConscious Attitude: <\/strong><\/li><\/ul>\n\n\n\n<p>Another\nobjective of standard cost is to make the entire organisation cost conscious.\nIt makes the employees to recognise the importance of efficient operations so\nthat costs can be reduced by joint efforts. <\/p>\n\n\n\n<ul><li><strong>Fixation of\nPrices: <\/strong><\/li><\/ul>\n\n\n\n<p>To\nhelp the management in formulating production policy and helps in fixing the\nprice quotations as well as in submitting tenders of various products. This can\nbe done with accuracy with standard cost than the actual costs. It also helps\nin formulating production policies. Standard costs removes the reflection of\nabnormal price fluctuations in production planning. <\/p>\n\n\n\n<ul><li><strong>Management\nPlanning: <\/strong><\/li><\/ul>\n\n\n\n<p>Budget\nplanning is undertaken by the management at different levels at periodic\nintervals to maximize the profit through different product mixes. For this\npurpose it is more convenient using standard costing than actual costs because\nit is done on scientific and rational manner by taking into account all\ntechnical aspects. <\/p>\n\n\n\n<h2 class=\"has-text-align-center wp-block-heading\"><span class=\"ez-toc-section\" id=\"PROCESS_OF_STANDARD_COSTING\"><\/span><strong>PROCESS\nOF STANDARD COSTING<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The steps\ninvolved in standard costing are as follows:<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"550\" height=\"175\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/process-of-standard-costing.jpg\" alt=\"process-of-standard-costing.jpg\" class=\"wp-image-3855\" srcset=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/process-of-standard-costing.jpg 550w, https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/03\/process-of-standard-costing-300x95.jpg 300w\" sizes=\"(max-width: 550px) 100vw, 550px\" \/><\/figure>\n\n\n\n<ol><li><strong>Establishing\nStandards<\/strong>: <\/li><\/ol>\n\n\n\n<p>First and foremost, the standards are to be\nset on the basis of management\u2019s estimation, wherein the production engineer\nanticipates the cost. In general, while fixing the standard cost, more weight\nis given to the past data, the current plan of production and future trends.\nFurther, the standard is fixed in both quantity and costs.<\/p>\n\n\n\n<ul><li><strong>Determination\nof Actual Cost<\/strong>: <\/li><\/ul>\n\n\n\n<p>After standards are set, the actual cost for\neach element, i.e. material, labour and overheads is determined, from invoices,\nwage sheets, account books and so forth.<\/p>\n\n\n\n<ul><li><strong>Comparison\nof Actual Costs and Standard Cost<\/strong>: <\/li><\/ul>\n\n\n\n<p>Next step to the process, is to compare the\nstandard cost with the actual figures, so as to ascertain the variance.<\/p>\n\n\n\n<ul><li><strong>Determination\nof Causes<\/strong>: <\/li><\/ul>\n\n\n\n<p>Once the comparison is done, the next step is\nto find out the reason for the variances, to take corrective actions and also\nto evaluate the overall performance.<\/p>\n\n\n\n<ul><li><strong>Disposition\nof Variances<\/strong>: <\/li><\/ul>\n\n\n\n<p>The last step to this process, is the\ndisposition of variances by transferring it to the costing profit and loss\naccount.<\/p>\n\n\n\n<p>Standard\ncosting can be helpful in ascertaining the profitability of the business at any\nlevel of production. Further, it is also useful in practical management\nfunctions, i.e. planning and controlling.<\/p>\n\n\n\n<h2 class=\"has-text-align-center wp-block-heading\"><span class=\"ez-toc-section\" id=\"ADVANTAGES\"><\/span><strong>ADVANTAGES<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The\u00a0advantages\u00a0of standard costing are given below:<\/p>\n\n\n\n<ul><li><strong>Measuring efficiency:<\/strong>\u00a0Standard costing provides yardsticks against which actual costs are compared to ascertain efficiency of actual performance. Thus, standard costing helps in exercising cost control and provides information, which is helpful in cost reduction.<\/li><li><strong>Determination of variance:<\/strong>\u00a0By comparing actual cost with standard costs variances are determined. Analysis of variance will assist to single out inefficiency and locate person who are possible to take corrective measures at the earliest.<\/li><li><strong>Facilitates cost control:<\/strong>\u00a0Every costing system aims to cost control and cost reduction. Standard costing helps in exercising cost control and provide information, which is helpful in cost reduction.<\/li><li><strong>Eliminating inefficiency:<\/strong>\u00a0Standard costing will make possible to eliminate inefficiency at different steps of activities relating to materials, labour and overheads. Because setting standard require detailed study of various operations so that they may be made efficiency.<\/li><li><strong>Helpful in taking important decisions:<\/strong>\u00a0Standard costs being predetermined costs and useful in planning and budgeting, it provides a valuable guidance to the management in taking important decision. The problem created by inflection, rising prices can be effectively taken with help of standard costing.<\/li><li><strong>Fixing Responsibility:<\/strong>\u00a0Variance analysis can determine the persons responsible for each variance. Shifting or evading responsibility is not easy under this system.<\/li><li><strong>Management by Exception:\u00a0<\/strong>The principle of \u2018management by exception can be easily followed because problem areas are highlighted by negative variances.<\/li><li><strong>Improvement in Methods and Operations:\u00a0<\/strong>Standards are set on the basis of systematic study of the methods and operations. As a consequence, cost reduction is possible through improved methods and operations.<\/li><li><strong>Guidance for Production and Pricing Policies:\u00a0<\/strong>Standards are valuable guides to the management in the formulation of pricing policies and production decisions.<\/li><li><strong>Planning and Budgeting:\u00a0<\/strong><a href=\"https:\/\/commerceiets.com\/budgetary-control\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"Budgetary control (opens in a new tab)\">Budgetary control<\/a> is far more effective in conjunction with standard costing. Being predetermined costs on scientific basis, standard costs are also useful in planning the operations.<\/li><li><strong>Inventory Valuation:\u00a0<\/strong>Valuation of stocks becomes a simple process by valuing them at standard cost.<\/li><\/ul>\n\n\n\n<h2 class=\"has-text-align-center wp-block-heading\"><span class=\"ez-toc-section\" id=\"LIMITATIONSDISADVANTAGES\"><\/span> <strong>LIMITATIONS\/DISADVANTAGES <\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The disadvantages of standard costing are given below.<br \/><\/p>\n\n\n\n<p><strong>Difficulty in establishing standards:<\/strong>\u00a0<\/p>\n\n\n\n<p>It is very difficult to establish standard costs of materials, labor and overheads. So, sometimes in accurate and out of date standards are set which do more harmful than any benefit as they provides wrong yardsticks.<\/p>\n\n\n\n<p><strong>Expensive:<\/strong>\u00a0<\/p>\n\n\n\n<p>This system is expensive so small concerns may not afford to bear the costs. Establishment of standard costing requires high degree of technical skill.<br \/><\/p>\n\n\n\n<p><strong>Ignorance to qualitative aspects:<\/strong>\u00a0<\/p>\n\n\n\n<p>Standard costing system controls the operating part of an organization only as it ignores the other aspects like quality, lead time, service, customer&#8217;s scarification and so on.<br \/><\/p>\n\n\n\n<p><strong>Assumption of constant condition:\u00a0<\/strong><\/p>\n\n\n\n<p>Conditions of the business are changing. Hence, standard must\nbe revised form time but it us very difficultly bringing changes in standard\nand is also expensive. Non-flexible standard loose their importance.<\/p>\n\n\n\n<p><strong>Variation in Price:&nbsp;<\/strong><\/p>\n\n\n\n<p>One of the\nchief problems faced in the operation of the standard costing system is the\nprecise estimation of likely prices or rate to be paid.<\/p>\n\n\n\n<p><strong>Varying Levels of Output:&nbsp;<\/strong><\/p>\n\n\n\n<p>If the\nstandard level of output set for pre-determination of standard costs is not\nachieved, the standard costs are said to be not realised.<\/p>\n\n\n\n<p><strong>Changing Standard of Technology:\u00a0<\/strong><\/p>\n\n\n\n<p>In case of industries that have frequent technological changes affecting the conditions of production, standard costing may not be suitable.<\/p>\n\n\n\n<p><strong>Problem in fixing Responsibility:\u00a0<\/strong><\/p>\n\n\n\n<p>The fixing of responsibility is not an easy task. The variances are to be classified into controllable and uncontrollable variances. Standard costing is applicable only for controllable variances.<\/p>\n\n\n\n<h4 class=\"has-text-align-center wp-block-heading\"><span class=\"ez-toc-section\" id=\"STANDARD_COSTING-_TOOL_IN_HANDS_OF_MANAGEMENT_FOR_DECISION_MAKING\"><\/span><strong>STANDARD\nCOSTING- TOOL IN HANDS OF MANAGEMENT FOR DECISION MAKING<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>Standard costing technique as a\nmanagement tool is an aid in making predictions and providing Standards for\nmeasuring business performance.<\/p>\n\n\n\n<p>It\nhelps the management in the following ways:<\/p>\n\n\n\n<p><strong>1) Formulation of Pricing and Production\nPolicies <\/strong><\/p>\n\n\n\n<p>Standard Costing helps the\nmanagement to formulate pricing and production policies on the basis of\nestimated costs to be incurred. Estimated production and its cost provide the\nbase for pricing policy and profit planning.<\/p>\n\n\n\n<p><strong>2) Facilitates Delegation of Authority <\/strong><\/p>\n\n\n\n<p>With standard costing, Delegation\nof Authority can be successfully implemented as top managers can delegate\nresponsibility according to the standards fixed.<\/p>\n\n\n\n<p><strong>3) Facilitation of Principle of Management by\nException <\/strong><\/p>\n\n\n\n<p>Standard Cost System works on the\nbasis of principle of management by exception. Management needs to give\nconcentration only on those areas where deviations occur, i.e., Actual\nperformance is more or less than standards.<\/p>\n\n\n\n<p><strong>4) Yardstick for Comparison <\/strong><\/p>\n\n\n\n<p>Standard Costing gives a suitable\nbase for comparison of actual performance with predetermined standards.\nStandards can be fixed for any element of cost e.g., material, labour,\noverheads etc.<\/p>\n\n\n\n<p><strong>5) Optimum Use of Resources <\/strong><\/p>\n\n\n\n<p>Standard Cost also helps in\noptimum use of resources. Different resources like raw material, plant and\nmachinery and current assets are used according to the standards fixed in\nadvance.<\/p>\n\n\n\n<p><strong>6) Uniform Valuation of Stock <\/strong><\/p>\n\n\n\n<p>Under Standard Cost System,\nvaluation of stock is done at standard cost. The variance account is opened for\ntransferring the deviations between standards and actual performance. This\nbrings uniformity in valuation of stock.<\/p>\n\n\n\n<p><strong>7) Facilitate Co-ordination <\/strong><\/p>\n\n\n\n<p>When standards are fixed, the\nperformance of various departments e.g., production, sales, purchase etc., is\nconsidered. In this way, standard costing enables coordination among all\ndepartments.<\/p>\n\n\n\n<p><strong>8) Effective Cost Control <\/strong><\/p>\n\n\n\n<p>Standard Costing is an effective\ntool in controlling cost because actual performance is compared with standards\nand in case of deviations, corrective action is taken.<\/p>\n\n\n\n<p><strong>9) Economy <\/strong><\/p>\n\n\n\n<p>In standard costing, standards\nare fixed in advance. Once standards are fixed development of cost, most of the\nclerical work is reduced. Thus it is an economical method of costing and brings\nefficiency in production.<\/p>\n\n\n\n<p><strong>10) Motivates Employees <\/strong><\/p>\n\n\n\n<p>When standards are fixed\nIncentive schemes to motivate employees can be introduced. Employees try to\nachieve the standards and they are remained different monetary and non-monetary\nincentives.<br \/>\n<br \/>\n<strong><\/strong><\/p>\n\n\n\n<h3 class=\"has-text-align-center wp-block-heading\"><span class=\"ez-toc-section\" id=\"PRE-REQUISUITES_FOR_STANDARD_COSTING\"><\/span><strong>PRE-REQUISUITES FOR STANDARD COSTING<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Installation of standard costing\nsystem for accomplishing the desired objectives require existence of certain\npre-requisites.<\/p>\n\n\n\n<p>These\nprerequisites can be put as follows:<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Acceptance_of_the_System\"><\/span><strong>Acceptance of the System<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>The standard costing system can\nhave the desired effects only when the system is acceptable both to the\nmanagement as well as to the workers. The management should take sufficient\ninterest in the system to make it effective. Similarly the workers should also\nbelieve that in the long run, the system would be beneficial to all of them.\nThis is possible by fixing the standards in a way that they are capable of\nbeing achieved by an average worker.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Judicious_Setting_of_Standards\"><\/span><strong>Judicious Setting of Standards<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>The standards should be fixed\nafter a careful study of all technical processes and operations of the\nbusiness. They should be fixed judiciously and should not be ideal but capable\nof being achieved. Setting of standards at too high a level will create\nresentment among the workers and depress their performance while setting of\nstandards at too low a level will have adverse effects on personal initiative\nand costs. It will be appropriate to fix the responsibility of setting\nstandards on a committee consisting of important persons such as Production\nController, Purchase Manager, Personnel Manager, Cost Accountant etc.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Reasonable_Size\"><\/span><strong>Reasonable Size<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>The system of standard costing\ncan be introduced with advantage in concerns which are of a reasonable size.\nThe system may not be suitable for small concerns since in their case careful\nscheduling of production may not be possible. For example, in a small concern a\nworker may be handling different machines and at times he may be called to\nhandle different jobs and therefore, it may not be possible to correctly fix\nthe standard time for different jobs or different operations handled by him.\nMoreover the system of standard costing requires specialisation of jobs and\nprocesses which may not be possible in a small concern.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Competent_Staff\"><\/span><strong>Competent Staff<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>The successful operation of\nstandard costing system requires existence of well qualified and trained staff\nfor fixing the standards, measuring performance and reporting variances to\ndifferent levels of management. The reports submitted help the management in\napplying the principle of \u201cmanagement by exception\u201d which means that the\nmanagement pays attention only to those cases where performance is below or\nabove the standard.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Existence_of_Budgetary_Control_System\"><\/span><strong>Existence of Budgetary Control System<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>Existence of budgetary control\nsystem is a pre-requisite for the standard costing system. Budgets fix the\ntargets which the executives have to achieve. They create a sense of\ndiscipline, financial or otherwise, among employees at different levels. Budgets\nare projections for the future and therefore they are of great use to the\neffective functioning of the standard costing system.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Proper_Delegation_of_Authority_and_Responsibility\"><\/span><strong>Proper Delegation of Authority and Responsibility<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>Standard costing system requires\nproper delegation of authority and responsibility at different levels. This is\npossible by drawing an organisation chart clearly laying down the authority and\nresponsibility of different executives in the organisation.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Efficient_Accounting_System\"><\/span><strong>Efficient Accounting System<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>An efficient accounting system is\nalso an essential requisite for successful operation of the standard costing\nsystem. The accounting information supplied should not only be accurate but\nalso be complete and up to date. The system of coding may be used for speedy\nrecording and analysing the accounting information. Appropriate cost centres\nshould also be set up in the organisation.<\/p>\n\n\n\n<p><strong>JOIN THE CHANNEL ON TELEGRAM<\/strong><\/p>\n\n\n\n<p><a href=\"https:\/\/t.me\/commerceiets\" target=\"_blank\">https:\/\/t.me\/commerceiets<\/a><\/p>\n\n\n\n<p><strong>CONNECT ON LINKEDIN<\/strong><\/p>\n\n\n\n<p><a href=\"https:\/\/www.linkedin.com\/in\/kajal-mahajan-7549b2197\/\" target=\"_blank\" rel=\"noopener\">https:\/\/www.linkedin.com\/in\/kajal-mahajan-7549b2197\/<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>STANDARD COSTING Standard costing is a cost accounting technique which compares the results of actual production with the basic standard, as anticipated, in terms of costs so as to determine the reasons for discrepancies between the anticipated and actual costs. ACCORDING TO W W BIGG \u201cStandard costing discloses the cost deviations from standard and classifies&#8230;<\/p>\n<p class=\"more-link-wrap\"><a href=\"https:\/\/commerceiets.com\/standard-costing\/\" class=\"more-link\">Read More<span class=\"screen-reader-text\"> &ldquo;STANDARD COSTING&rdquo;<\/span> &raquo;<\/a><\/p>\n","protected":false},"author":2,"featured_media":3856,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[187],"tags":[],"_links":{"self":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts\/3852"}],"collection":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/comments?post=3852"}],"version-history":[{"count":0,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts\/3852\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/media\/3856"}],"wp:attachment":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/media?parent=3852"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/categories?post=3852"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/tags?post=3852"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}