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Standard Costing

A standard cost is a carefully predetermined estimated unit cost.

Usually a standard cost per unit of production, per unit of service rendered, per routine task completed or standard cost per Rs 1/= of sale.

Standard costing is defined basically as a technique of cost accounting, which compares the ‘standard cost’ of each product or service with the actual cost, to determine the efficiency of the operation, so that any remedial action may be taken immediately.

Standard costing involves:

o

Setting of standards

o

Ascertaining actual results

o

Comparing standard and actual costs to determine the variances

o

Investigating the variances and taking appropriate actions where necessary

Standard cost may be used in both marginal and absorption costing systems.

Difference between Budgeted and standard costing methods

Budgeted Cost

Standard Cost

Total Cost

Unit cost

Possible to have budgeting without standard cost

Not possible to have standard cost system without total cost budgeting system

Full note set with Examples and Questions: http://www.executioncycle.lkblog.com/2012/06/my- business-economics-and-financial.html

Standard Cost Card

Standard Cost Card

Rs.

Rs.

Product: Prizma, No 3304

 

Direct Materials

   

A 6 Kg at Rs.20/= per Kg

120

 

B 2 Kg at Rs. 30/= per Kg

60

 

C 1 liter at Rs. 40/= per liter

40

 

Other

20

240

Direct Labor

   

Grade I: 3 hours at Rs. 40/= per hour

120

 

Grade II: 5 hours at Rs. 54/= per hour

270

390

Variable production overhead: 8 hours at Rs. 10/=

 

80

Fixed production overhead: 8 hours at Rs. 30/= per hour

 

240

Standard Full Cost

 

950

Full note set with Examples and Questions: http://www.executioncycle.lkblog.com/2012/06/my- business-economics-and-financial.html

Setting Standards

Revised once a year

People concern with setting standards,

The production controller : Production requirements in term of material, labor and overhead

The buyer : schedules of prices and details of market price trends

The personnel Manager : labor rates of pay and possible forecasts of any changes in rates

The time study engineer : standard times for operations

The cost accountant: labor requirements, overhead recovery rates, etc.

Advantages of standard costing

Yardstick against the actual costs

Involves determining best materials and methods, which may lead to economies.

Costing procedures are often simplified

Stock evaluation is easy

The operation of cost centers defines responsibilities

A target efficiency is set for employees to reach

The standard Hours

Production is frequently expressed in terms of units, kilos, liters etc.

Nevertheless, in standard costing system production can be expressed in terms of a measure common to all products, as “standard hour”.

Example: ABC Jam Co.Ltd produces and markets three types of Jam: Orange, Marmalade and Mixed Fruits. It is estimated that the following number of jars could be filed within one hour. Orange 2000 jars, Marmalade 6000 jars, Mixed Fruit 4000 jars. The production in February 2003 is 300,000 jars of orange 1,000,000 jars of Marmalade and 600,000 jars of Mixed Fruit.

Type of Jam

Production

Standards units per hour

Production in standard hours

Orange

300,000 jars

2000

150

Marmalade

1,000,000 jars

6000

166

Mixed Fruit

600,000 jars

4000

150

     

466

Full note set with Examples and Questions: http://www.executioncycle.lkblog.com/2012/06/my- business-economics-and-financial.html

Full note set with Examples and Questions: http://www.executioncycle.lkblog.com/2012/06/my- business-economics-and-financial.html