Page 220 - DCOM206_COST_ACCOUNTING_II

Unit 12: Standard Costing

(v) Standard costing is not suitable for all types of business organisation. If the organisations Notes
deal with non-standardised products and jobs, they may find the system of standard
costing unsuitable, and
(vi) There may be an increase in the non-productive activities, e.g., measuring work, compiling
forms, reporting of variances etc.

Self Assessment

Fill in the blanks:

4. Standard costing dose not helps in pinpointing the responsibility of …………………… in
the cost.
5. Standard costing is applied for …………………… and controlling manufacturing costs.

12.3 Determination of Standard Costs

Setting up a standard costing system in an organisation, the following preliminary steps should
be carefully considered on the basis of technical and operational aspects of the organisation,
manufacturing industry and organisation process etc.
1. Establishment of Cost Centre,
2. Classification and Codification of Accounts,
3. Types of Standards, and
4. Setting the Standards.

1. Establishment of Cost Centre: Cost centre has been defined as “A location, person or item
of equipment (or group of these) in respect of which costs may be ascertained and related
to cost units.” The organisation or industry should be divided into cost centres so that
responsibilities may be fixed and line of authority may be defined. An officer acting as in
charge of a cost centre should be conversant with his responsibility and the cost to be
controlled by him.
2. Classification and Codification of Accounts: Accounts are to be classified in order to
facilitate collection and analysis. With this end in view, codes may be used. A code is a
symbolic representation of any particular item of information. For example,

Direct materials 01 – 10
Direct labour 11 – 19
Direct expenses 20 – 29
Indirect materials 30 – 39
Indirect labour 40 – 49
Indirect expenses 50 – 59

3. Types of Standards: Usually, the following standards are often found to be operative in
the standard costing technique. Such standards are:
(i) Basic Standard: The terminology of ICMA defines basic standard as “A standard
established for use over a long period from which a current standard can be
developed.”

Basic standard is standard established for use over a long period from which a
current standard can be developed. The main disadvantage of basic standard is that

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