Standard Costing

Topics: Cost accounting, Management accounting, Costs Pages: 14 (4515 words) Published: November 14, 2012



Srinidhi Rangarajan
3rd SEM M.B.A

In recent years, numerous tools such as activity-based costing, the balanced score card and target costing have gained prominence in the business community. Nonetheless, traditional management accounting continues to be prevalent in practice. One example is standard costing, which has been used on a wide front during the last century.

Standard costing is used by Customers who employ predetermined costs for valuing inventory and for charging material, resource, overhead, period close, and job close and schedule complete transactions. Differences between standard costs and actual costs are recorded as variances. Manufacturing industries typically use standard costing. Costs of items can be shared across organizations using standard costing. A note on the same has been provided in this paper. An attempt has been made to understand the way in which costs are built up for a manufactured item through this paper.

The objectives of the paper are:

* To understand the meaning of standard costing, its meaning and definition  * To learn its advantages and limitations                                                                 * To learn how to set of standards and determinations                               * To learn how to revise standards

i. Standard cost
ii. Standard time
iii. Actual time


It is a known fact that management accounting is managing a business through accounting information. In this process, management accounting is facilitating managerial control. It can also be applied to one’s own daily/monthly expenses, if necessary. These measures should be applied correctly so that performance takes place according to plans. Planning is the first tool for making the control effective. The vital aspect of managerial control is cost control. Hence, it is very important to plan and control costs. Standard costing is a technique which helps to control costs and business operations. It aims at eliminating wastes and increasing efficiency in performance through setting up standards or formulating cost plans.                                                                                                   Meaning of Standard                                                    When you want to measure something, you must take some parameter or yardstick for measuring. This can be called as standard. The word standard means a benchmark or yardstick. The standard cost is a predetermined cost which determines in advance what each product or service should cost under given circumstances.                                                                                                                          Standard Costing and Variance Analysis

A standard costing system consists of the following four elements: 1. Setting standards for each operation.
2. Comparing actual with standard performance.
3. Analysing and reporting variances arising from the difference between actual and standard performance. 4. Investigating significant variances and taking appropriate competitive action.

Standard costing application
Standard costing
This is generally best suited to organisations with repetitive activities. It is probably most relevant to manufacturing organisations with repetitive production processes. Standard costing cannot be applied easily to non-repetitive activities because there is no clear basis for observing and recording operations. It is difficult to determine a clear standard.

Two commonly used approaches are used to set standard costs. 1. Past historical records can be used to estimate labour and material usage. 2. Engineering studies can be used. This may involve a detailed study or observation of operations...

References: 1.
3. Standard costing by Jain and Narang
4. Management accounting by Reddy Appanaiah
5. Website of SKP company
6. Financial dictionary
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