To achieve the above objectives the following steps are adopted in standard costing:
Of Standard Costing
The objectives of standard costing technique are as
To provide a formal basis for assessing performance
To control costs by establishing standards and
analyzing of variances.
To enable the principle of ‘management
by exception’ to be practiced at the detailed operational level.
To assist in setting budgets
To achieve the above objectives the following steps are adopted in
ՖՖ Determining the standard for direct material,
direct labour and different overheads
Ascertaining the actual cost of production
Ascertaining the variances by
comparing actual costs with standard costs
Analyse the variances to know the reason for
Adopting corrective measures to control the
variances in futures.
standard costing system results in the following advantages:
The setting of standards should
result in the best resources and methods being used and thereby increase
Budgets are compiled from standards.
Actual costs can be compared with
standard costs in order to evaluate performance
Areas of strengths and weakness are highlighted
It acts as a form of feed forward
control that allows an organization to plan the manufacturing inputs required
for different levels of output.
It acts as a form of feedback
control by highlighting performance that did not achieve the standard set.
It operates via the management by
exception principle where only those variances (i.e. Differences between actual
and expected results) which are outside certain tolerance limits are
investigated, thereby saving managerial time and maximizing managerial
The process of setting, revising
and monitoring standards encourages reappraised of methods, materials and
techniques thus leading to cost control as an immediate effect and to cost
reduction as a long term effect.
Limitations Of Standard
costing suffers from the following limitations:
A lot of input data is required which can be
Unless standards are accurately
set any performance evaluation will be meaningless.
Uncertainty in standard costing can be caused by
inflation, technological change, economic and political factors, etc.
therefore need to be continually updated and revised.
The maintenance of the cost data base is expensive.
Setting of standards involves
forecasting and subjective judgments with inherent possibilities of error and
Standard costing cannot be
adopted in the firms which do not have uniform and standard production
It is very difficult to predict controllable and
Tags : Accounting For Managers - Cost Estimation And Control-Standard Costing And Variance Analysis
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