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Cost Accounting – II
Notes Standard overheads forthebudgetperiod
Standard Fixed Overhead Rate =
Budgetedproductionunitsorbudgetedhours
forthebudgetedperiod
Standardisation of overhead costs can be done with reference to a particular level of
activity.
12.3.2 Standard Hour
Standard hour is the quantity of output, or an amount of work, performed in one hour. The
ICMA defines standard hour as, “The quantity of work achievable at standard performance
expressed in term of a standard unit of work in a standard period of time.”
The standard hour is a convenient measure of production. Whatever may be the type of product
or their unit of measurement (e.g., units, tonne, kilogram, gallon, dozen, litres etc.) the standard
hour is capable of measuring them. It is also useful in ascertaining overhead variances.
12.3.3 Revision of Standards
Standard cost is the resultant effect of a number of factors that vary from time to time in different
situations, both internal and external. Standard cost may be established for a period—indefinite
period. There are no definite rules fixed for the selection of a particular period. If the standard
are fixed for a short period, it is expensive and frequent revision of standards will impair the
utility and purpose for which standard is set. At the same, if the standard is set for a longer
period or time, it may not be useful particularly in the days of high inflation and large
fluctuations of rates in case of materials and labour. Standard may become unrealistic with the
changing conditions, needs revision. Without revision, the standards become outmoded. If the
changes are of an ad-hoc or temporary or minor nature, it is not advisable to revise the standards.
Current standards are reviewed every year at the beginning of the accounting period under the
following circumstances:
1. Changes in price level of materials, labour and overheads,
2. Change in specifications or designs of product,
3. Change in method or technique of production,
4. Errors in setting the standards, and
5. Technological advancement etc.
Apart from the above, basic standards are revised in the course of time under the following
circumstances, when:
(a) Plant capacity is changed,
(b) There are permanent changes in the method or technique of production, and
(c) There is a large variation between the standard and the actual.
12.3.4 Standard Cost Card or Standard Cost Sheet
On standard being established for each element of cost for a product, it is recorded in a card or
sheet. This card or sheet is known as standard cost card or standard cost sheet. Thus, a standard
cost card is a record of the standard material, labour, overhead costs. Standard card reveals the
specified production or units, the quantity and price of each type of material consumed, the time
and rate of labour to be employed, the overheads to be absorbed and the total costs.
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