Page 217 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes 12.1.2 Standard Costing

Standard costing is a cost accounting technique which compares the results of actual production
with the basic standard, as anticipated, in terms of costs so as to determine the reasons for
discrepancies between the anticipated and actual costs.
According to W W Bigg, “Standard costing discloses the cost deviations from standard and
classifies these as to their causes, so the managements are immediately informed of the spheres
of operations in which remedial action is necessary.”
Standard costing is defined by ICMA, London terminology as, “the preparation and use of
standard costs, their comparison with actual costs and the analysis of variances to their causes
and points of incidence.” Wheldon defines standard costing as, “a method of ascertaining the
cost whereby statistics are prepared to show (a) standard cost, (b) the actual cost and (c) the
difference between these costs which is termed the variance.”

According to J. Batty, “Standard costing is the system of cost accounting which makes use of
predetermined standard cost relating to each element of cost-materials, labour and expenses, for
each line of product manufactured of service applied.”

In other words, “Standard costing is a technique that uses standard costs which are predetermined
and controls through detection of variances. It is an effective tool for evaluation of performances
and for enforcing control over performances and costs as well involved in connection with such
performances.”

The technique of standard costing can be useful in all types of industries, but it is more commonly
used in industries producing standardised products which are repetitive in nature.

Note Standard costing is more widely applied in process and engineering industries and
is not suitable for job order industries.

Salient Features of Standard Costing

The salient features of standard costing are as follows:
(i) Ascertainment of standard costs under each element of cost, i.e., material, labour and
expenses,

(ii) Comparison of actual cost with standard cost and finding out the variance of actual from
standard,
(iii) Recording of standard cost for various elements of total cost,

(iv) Recording simultaneously actual cost,
(v) Locating the factors responsible for such variances, and
(vi) Reporting to management for taking proper action to maximise the efficiency.

Objectives of Standard Costing

The important objectives of standard costing are as follows:
(i) The primary objective of standard costing is setting standards and requiring the personnel
to achieve the predetermined aims,

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