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Unit 12: Standard Costing
(ii) To provide a formal basis for assessing performance and efficiency, Notes
(iii) To exercise control over all the items of costs pertaining to production, administration,
selling and distribution,
(iv) To create cost-consciousness among the employees of the industry,
(v) To develop team spirit among the human resources of the industry or organisation,
(vi) To final and submit the various reports promptly to the managerial personnel regularly
about the progress and also how the costs to-date compare with the corresponding
standards. This is done with the objective of enabling the top management to take efficient
and necessary decisions,
(vii) To provide a basis for estimating, and
(viii) To assists in setting budgets.
Self Assessment
Fill in the blanks:
1. …………………… denotes a predetermined rate or amount against which actual
performance in activity is compared as a measure to evaluate.
2. Standard cost is a predetermined cost and refers to that amount which ought to be
…………………….
3. …………………… 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.
12.2 Advantages and Disadvantages of Standard Costing
Standard costing is basically a tool of control in the hands of management. It helps management
in many ways but it mainly helps in cost control and cost reduction. It also aids in evaluating the
performance, measuring the efficiency and making correct predications.
In order to reap the full advantages or benefits of standard costing, the business organisation
should also keep some points in their mind. These can be considered as precautions to be taken
while adopting standard costing technique. If a business organisation fails to take note of these,
the same will act as limitations or disadvantages.
12.2.1 Advantages of Standard Costing
The following are the advantages of standard costing:
(i) Standard costing provides a valuable guidance to management in several managerial
functions, such as in formulating policies, in determining prices, etc.,
(ii) Standard costing helps to pinpoint the responsibility of variation in the cost. The system
also identifies the specific reason therefore so that prompt remedial action could be taken,
(iii) Standard costing, due to the stress of the standard cost and variance analysis, makes the
whole industry or business organisation cost conscious, workers and foremen are
encouraged to realise the importance of efficient operations,
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