STANDARD COSTING Dr Ruchika khandelwal School of studies

STANDARD COSTING Dr. Ruchika khandelwal School of studies in commerce Vikram university ujjain

WHAT IS STANDARD COSTING ?

ADVANTAGES

PURPOSE OF STANDARD COSTING Standard cost systems aid in planning operations and gaining insights into, the probable impact of managerial decisions on cost levels and profits. Standard costs are used for: Establishing budgets. Controlling costs, directing and motivating employees and measuring efficiencies. Promoting possible cost reduction. Simplifying costing procedures and expediting cost reports. Assigning costs to materials, work in process, and finished goods inventories. Forming the basis for establishing bids and contracts and for setting sales prices

SIMILARITIES OF BUDGETARY CONTROL AND STANDARD COSTING v. Both systems deploy predetermined figures v. Both systems are useful accounting tools to management in controlling costs v. Both systems require proper administration. The actual results must be compared with budgets or standards and any variances should be investigated. There should be a continuous study of the cost control problems and corrective actions are taken where necessary. Where appropriate the budgets or standards need to be revised so that they are realistic v. It is interesting to note that both systems can operate independently but since both systems involve the estimation of costs, most firms often operate both systems together. v. Budgets set can be used as guides in setting standard costs. Vice versa, the standard costs already determined can be used as aids in the preparation of budgets. v

DIFFERENCE BETWEEN STANDARD COST AND BUDGETARY CONTROL Budgetary Control 1. It is used as statistical data and leads to a lot of guesswork. Standard Cost 1. It is a predetermined cost. It is an ideal cost. 2. It is extensive in its application, as it 2. It is intensive, as it is applied to the deals with the operation of the manufacturing of a product or providing department or business as a whole. a service. It is determined by classifying Budgets are prepared for sales, recording and allocating expenses to production, cash, etc. the cost unit. 3. It is a part of a financial account, a projection of all financial accounts. 3. It is a part of the cost account, a projection of all cost accounts. Variances are revealed through different accounts. 4. Budgeting can be applied in parts 4. It cannot be applied in parts. 5. It is more expensive and broad, as it 5. It is not expensive because it relates to production, sales, finance, to only elements of cost. etc. 6. Budgets can be operated without standards. 6. This system cannot be operated without budgets.

Variance Analysis Variance analysis is usually associated with explaining the difference (or variance) between actual costs and the standard costs allowed for the good output. For example, the difference in materials costs can be divided into a materials price variance and a materials usage variance. The difference between the actual direct labor costs and the standard direct labor costs can be divided into a rate variance and an efficiency variance. The difference in manufacturing overhead can be divided into spending, efficiency, and volume variances. Mix and yield variances can also be calculated. Variance analysis helps management to understand the present costs and then to control future costs. Variance analysis is also used to explain the difference between the actual sales dollars and the budgeted sales dollars. Examples include sales price variance, sales quantity (or volume) variance, and sales mix