Page 216 - DMGT403_ACCOUNTING_FOR_MANAGERS

Unit 10: Standard Costing

To replace the bottleneck associated with the historical costing as well to control the cost, Notes
the planned standards are usually developed under the head of standard costing technique
to compare the actuals to identify the deviations. The standard plans should be developed
on the following basis viz:
1. Cost of materials

2. Cost of labour
3. Other cost of manufacturing
4. Overall cost of a product.

10.1 Meaning of Standard Costing

Standard is nothing but an expected or anticipated performance in normal situations. The standards
are quantitative in phenomenon which are in connection with one activity and differs from the
another.

Examples: 1. Kg of raw materials expected to produce one unit of product.
2. Hours are expected/anticipated to consume for production of a single
unit of product.
Standards are classified into two categories, viz. Revenue standards and Cost standards.
Standard cost is a predetermined cost, which is estimated from management’s standard of efficient
operation and the relevant necessary expenditure, according to ICWA (London).
The standard cost is related to variable portion of the cost of a product. The variable portion of
cost of product depends on the following:
1. Material consumption
2. Hours taken/consumed
3. Incurring of miscellaneous expenditures - Overheads.

Standard costing is a system, which involves the various steps:
The first step in implementing the standard costing system is to develop the pre-determined
standards i.e., standard costs.

The second step is to record the actual costs through the ascertainment.
The third step involves with the comparison between the standards and actual costs; which is the
origin of the variance analysis. Standard costing starts with the preparation of standards and
ends with the comparison in between them. The preparation of standard costs is meaningful
only through the completion of variance analysis.
The fourth step is the stage at which the reasons for variances are probed and analysed to
incorporate the cost effectiveness not only to reduce cost but also to enhance the levels of profit.

The final step is the most important in the organization to take managerial decisions through an
appropriate reporting. The figure 10.2 explains the standard costing system:

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