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However, output in many companies is no longer determined by how fast labor works; rather, it is determined by the processing speed of machines. If variances are used as a club, subordinates may be tempted to cover up unfavorable variances or take actions that are not in the company’s best interest to ensure the variances are favorable. Standards that are viewed as reasonable by employees can promote economy and efficiency. They provide benchmarks that individuals can use to judge their performance. In a professional setting, the concept of management by exception entails assigning specific targets to individuals, thereby eliminating the need for constant supervision by management.
- Hence, variable overhead standard is expressed in terms of per unit or per hour.
- They are expressed in primary levels, e.g., material quantity in kilograms or liters, hours in units of time, hours of plant capacity, units of output, etc.
- Cost centers are departments or areas of the business where costs are incurred.
- A study should be conducted to determine the type of standard to be used i.e. whether current, basic or normal standard.
Cost data obtained from costing enable managers to strive toward efficiency for the whole organization. Cost data provide organizational guidelines for various managerial decisions. Significantly, costing not only enables managers to ascertain costs, but it also provides a basis for ascertaining the profitability standard costing system of the product being produced or any services rendered. To elaborate on this, costing can also be defined as a systematic process for determining the unit cost of output produced or service rendered. Standard costs may not reflect changes in the cost of raw materials, labor, or overhead.
What is Standard Costing?
If management has proper plans directed toward the organization’s goals, then standard costing will provide better cost estimates. It is the difference between capacity utilised and planned capacity. The difference between budgeted fixed overhead for the hours available at standard rate and the fixed overhead for actual hours worked at standard https://www.bookstime.com/ rate. Capacity variance arises when the budgeted capacity differs from capacity available. This represents the difference between standard variable overhead for actual production and the cost of Actual hours worked at standard rate. As in the case of material cost variances, labour cost variance is analysed into two separate variances, viz.
(h) are not revised unless the products or the manufacturing operations or processes are changed. (a) These standards provide definite goals for short periods, which employees can usually be expected to reach. They also appear to be fair bases with which the current performance is measured. Standard costing is most suitable for industries producing standardised products which are repetitive in nature, i.e., industries using process costing method, e.g., cement, sugar, fertilisers, etc. Standard costing can be used by any industry irrespective of whether it has job costing, process costing or any other method of costing. However, it can be used more effectively in industries which have standardised repetitive nature of operations i.e. process industry.
Standard Costing: Meaning, Objectives, Advantages and Disadvantages
Therefore, standard cost plus a profit margin considered reasonable in a given situation, is a far superior basis for price fixation. The committee collects data on the cost components of Widget A. This includes direct materials, direct
labor, and manufacturing overhead. For direct materials, the committee determines that the product
requires 4 pounds of steel at $6 per pound and 2 pounds of aluminum at $10 per pound.
In the case of manufacturing organisations, physical standards are set by the engineering department. In fact, it is the industrial engineering department which is the responsibility center with regard to setting physical standards. Current standard may be based either on ideal standard or expected standard. While ideal standard is that which can be attained under the most favourable conditions, expected standard is that which is expected to be attained during a specified budget period. Thus, current standard, which is related to current conditions, reflects the performance that should be attained during the period for which the standard is used.
What is the definition of costing?
Ideal standards, also known as perfection standards, are standards set with the assumption of maximum efficiency and no wastages within the processes for which costs are being determined. They represent an ideal point that can be reached if all the variables that affect the costs within a process go perfectly without any interruptions. Ideal standards are difficult to achieve in most work environments as interruptions within a process are bound to happen.
