Page 161 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes 9. Why the given standards are tuned to actual?
(a) To equate both of them

(b) To convert the standards at par with the actual performance
(c) To know the difference
(d) None of the above

8.3 Estimated Costing

Standard costs and estimated costs are predetermined costs, but their objectives are different.
Important points of difference between the two are as follows:
Table 8.2: Difference between Standard Cost and Estimated Cost

Standard Cost Estimated Cost
(i) Standard cost can be applied in a business Estimated costs can be used in any business
operating under standard costing system. which is running under historical costing
system.
(ii) Standards are meant for controlling future Estimates are prepared mainly for price
performances. fixing purposes.
(iii) Standard costs are determined on a scientific Estimated costs are calculated on the basis
basis keeping in view certain factors and of past performance adjusted in the light of
conditions of efficiency. anticipated changes in the future.
(iv) Standard costs are used as a regular system The use of estimated cost is as statistical data
of accounts from which variances are found only.
out.
(v) Standard costs are to be fixed in respect of Estimated costs can be ascertained for a
every element of cost and therefore, they part of the business and also for a particular
incorporate whole of the manufacturing purpose.
process.

Self Assessment

Fill in the blanks:
10. Estimated costs are calculated on the basis of .................................... adjusted in the light of
anticipated changes in the future.
11. Standard costs are used as a regular system of accounts from which ....................................
are found out.

8.4 Standard Costing as a Management Tool

Standard costing is a very useful managerial tool for cost control and cost reduction. The following
are the main advantages of standard costing:
1. Standard costing is a valuable aid to management in formulating price and production
policies and in performing managerial functions.

2. Human beings often work hard to achieve standards that are within their reach; therefore,
setting up of such standards will almost automatically mean greater efficiency in operations.
Further, almost everyone will think in terms of setting the targets and of achieving them.
This will be specially so if the system of rewards and punishment is also geared to the
results.

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