A study on standard costing

Chapter.No.1

Introduction of standard costing :-

Standard costing is an important subtopic of manufacturing cost accounting. Standard costs are
associated with manufacturing companies and are utilized to manage the costs of direct material, direct
labor, and manufacturing overhead. In lieu of assigning actual or average costs of direct material, direct
labor, and manufacturing overhead and rolling these costs into their products, most manufacturers
assign a standard cost to their systems. This means that their inventories and cost of goods sold are
valued using the standard costs, and not the actual or average costs, of a product. The Manufacturers
pays their vendors at actual costs which can differences 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 whichcost variances and financial performance are measured, the
valuation for inventory and a basisfor pricing.Standard costing is a technique whichcosts and business
operations. It aimsat eliminating wastes and increasing efficiency in performance through setting up
standards or formulating cost plans.The Institute of Cost and Works Accountants defines standard costs
as ³Standard costs are prepared and used to clarify the final results of a business, particularly by
measurement of variations of actual costs from standard costs and the analysis of the causes of
variations..Standard costing is a technique which helps you to control costs and business operations. It
aim sat eliminating wastes and increasing efficiency in performance through setting up standards or
formulating cost plans. The Institute of Cost and Works Accountants defines standard costs as ³Standard
costs are prepared and used to clarify the final results of a business, particularly by measurement of
variations of actual costs from standard costs and the analysis of the causes of variations for the purpose
of maintaining efficiency of executive action.

‘Standard costing is an important area of cost accounting. Standard costs are usually associated With a
manufacturing company’s costs of direct material, direct labor, and manufacturing Overhead. Rather
than assigning the actual costs of direct material, direct labor, and Manufacturing overhead to a
product, many manufacturers assign the expected or standard Cost. This means that a manufacturer’s
inventories and cost of goods sold will begin with Amounts reflecting the standard costs, not the actual
costs, of a product. Manufacturers, of Course, still have to pay the actual costs. As a result there are
almost always differences between The actual costs and the standard costs, and those differences are
known as variances. Standard costing and the related variances is a valuable management tool for
control purpose. If A variance arises, management becomes aware that manufacturing costs have
differed from the Standard (planned, expected) costs that warrant careful attention. This standard
covers standard Costing and resulting variance analysis mechanisms as applied in firms.

Concept of standard costing :-

 Costing is a technique used for the purpose of determining standard cost and their comparison with
the actual costs to find out the causes of difference between the two so thatremedial action may be
taken immediately. The Charted Institute of Management Accountants,London, defines standard costing
as ³the preparation of standard costs and applying them tomeasure the variations from actual costs and
analysing the causes of variations with a view tomaintain maximum efficiency in production´.

Thus, standard costing is a technique of cost accounting which compares the µstandard cost of each
product or service, with the actual cost, to determine the efficiency of the operation. Whenactual costs
differ from standards the difference is called variance and when the size of thevariance is significant a
detailed investigation will be made to determine the causes of variance,so that remedial action will be
taken immediately.Thus,

Standard costing involves the following steps

1.Setting standard costs for different elements of costs

2.Recording of actual costs

3.Comparing between standard costs and actual costs to determine the variances

4.Analyzing the variances to know the causes there