Standard Costs

Topics: Cost accounting, Cost, Budget Pages: 2 (458 words) Published: June 25, 2013
STANDARD COSTS

Setting a budget is never easy as it involves predicting the future and therefore uncertainty. The process is not about getting the budget absolutely right; it is about not getting it too wrong. This budget process may be applied to most revenue budgets that deal with income and costs, but there is also a requirement to produce a capital budget that covers the purchase, sale and replacement of fixed assets. There is normally an investment limit dictated by funding availability and depreciation costs. The actual expenditures will be decided on the submission of business cases. Capital items usually involve sizeable cash outflows so their timing is an important element of the cash flow budget. In many organizations the budget process commences with the timetable, templates and guidance notes being issued by the finance department. Those in the finance department may be the stewards of the process, but they will often be too detached from the operations to be able to construct a valid budget themselves. Hence operational managers have to complete most of the templates. Headline budget values may be agreed for the whole business, and then parts of this will be allocated to divisions, departments and individual budget-holders. The budgets of central departments such as finance, information technology and human resources can be drawn up in parallel to the operational budgets so that all departmental budgets can be completed within a short time frame.

In setting budgets it can be helpful to break down cost areas into component building blocks. For example, in a manufacturing environment the budget for cost of sales is wholly dependent upon sales volumes and the mix of products. Therefore knowing the budget cost (or standard cost) per unit will speed up the process. If, for example, the manufactured product is easy chairs, a typical process will start by setting standard quantities for the component parts such as wood, fabric and consumables. Using...
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