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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.
Unit 10: Standard Costing
(iii) Standard costs are determined on a Estimated costs are calculated on the basis of
scientific basis keeping in view certain past performance adjusted in the light of
factors and conditions of efficiency. anticipated changes in the future.
Notes
(iv) Standard costs are used as a regular system The use of estimated cost is as statistical
of accounts from which variances are data only.
found out.
(v) Standard costs are to be fixed in respect of Estimated costs can be ascertained for a part of
every element of cost and therefore, they the business and also for a particular purpose.
incorporate whole of the manufacturing
process.

10.4 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.
3. Even for valuation of inventory, standard cost should be the proper basis. If actual costs
are high only because there has been a wastage of resources, it is not proper to capitalise
those losses by including them in the value of inventory. Nothing becomes more valuable
simply because of wastage and, therefore, inventory values should better be determined
on the basis of standard costs.
4. In short, one can say that if a firm practices standard costing on proper lines, i.e., standards
are themselves determined in a way that will not impose too great a burden on the worker
or other employees or the firm, it may infuse in the minds of the staff a desire to achieve
the standards and thus show greater efficiency.
5. At every stage of setting the standards, simplification and standardisation of productions,
methods and operations are effected and waste of time and material is eliminated. This
assists in managerial planning for efficient operation and benefits all the divisions of the
concern.
6. Costing procedure is simplified. There is a reduction in paperwork in accounting and less
number of forms and records are required. There is considerable saving in clerical time
and expenditure, leading to reduction in the cost of the costing system.
7. This system facilitates delegation of authority and fixation of responsibility for each
department or individual.

8. Where constantly reviewed, the standards provides means for achieving cost reduction.
This is attained through improved quality of products, better materials and men, effective
selection and use of capital resources, etc.
9. Standard costs assist in performance analysis by providing ready means for preparation
and interpretation of information.
10. This facilitates the integration of accounts so that reconciliation between cost accounts and
financial accounts may be eliminated.
11. Standards serve as yardsticks against which actual costs are compared. Whenever variances
occur, reasons are studied and immediate corrective measures are undertaken. Thus, it
facilitates effective cost control and provides necessary information for cost reduction.

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