STANDARD COSTING

Historical costing is one of the technique of ascertain cost of production. It is based on accumulation of actual or historical cost. The National Association has defined historical cost as ‘the cost which is accumulated during the process of production by the usual historical costing technique as opposed to the cost which has been determined in advance of the production process. The term actual is not intended to convey any implication as to the accuracy with which costs are measured. Historical costing is not a very popular technique as it suffers from the following limitations:

1. It provides cost information only after the completion of production.So cost of production cannot be ascertained until production is completed. The fixation of selling price becomes difficult under such situation.

2. It is not possible to exercise control over the costs which are actually incurred.3. It becomes difficult to take decisions based on actual costs.4. Actual cost may vary from period to period and fixation of selling price on the basis of

actual cost will led to differences in selling price which may not be accepted by customers.

5. It is an expensive and time-consuming technique. For example in a larger sized business, to ascertain the cost of production of say 1 lakh units involving different materials and various expenses will involve more time and clerical work.

In order to overcome the above limitations, standard costing was developed.

STANDARD COST AND STANDARD COSTING

A standard cost has been defined as a “predetermined calculations of how much costs should be under specified working conditions”.

The objects of standard costs are as follows:

1. Promoting and measuring efficiencies2. Controlling and reducing costs.3. Simplifying costing procedure.4. Valuing inventories.5. Fixing selling price.

Standard costing has been defined as a “technique of cost accounting which compares the ‘standard cost’ of each product or service with the actual cost to determine the efficiency of the operation, so that any remedial action may be taken immediately”.

Standard costing involves the following steps:

(a) Setting of standards.(b) Measurement of results.(c) Comparison of actual with standards to determine the variance.(d) Investigation of variance.(e) Taking remedial action to set right adverse variance.

Differences between A Budgetary Control and standard costing

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Budgetary control Standard Costing1. It is prepared to cover various

functions of a business such as purchases, sales, production, and finance. Etc. In other words it has a macro approach.

2. It is more extensive as it covers all the operations of the business.

3. It is a projection of financial accounts.4. It can be implemented even in parts,

i.e., to cover one or more than one area of business.

5. It can be operated without standards.6. It is more management oriented.7. It can be implemented in all

industries.8. It does not involve any accounting

after computing variances.9. Its objects are formulation of policy,

coordination of activities and delegation of authority.

1. It is prepared in respect of a cost unit. In other words it has a micro-approach.

2. It is more intensive technique of controlling costs.

3. It is projection of cost accounts.

4. It covers all items of expenses without leaving any item. So, it cannot be operated in part.

5. It cannot exist without budget.6. It is more engineering oriented.7. It is not possible in certain industries.8. Variances are accounted for under

standard costing.9. Its aim is to enable management in

making decisions, in price-fixing and valuation of closing stock.

ADVANTAGES AND LIMITATIONS OF STANDARD COSTING

The advantages of standard costing are as follows:

1. It provides a yardstick against which actual are measured.2. Standard costing helps in standardizing the various activities of a business. Thus, it

enables use of standard materials and better method of production.3. It increases the cost consciousness among all concerned by fixing targets and to

achieve them.4. This technique follows the principles of management by exception.5. It simplifies the accounting procedure which involves less clerical work and time.6. It helps in valuing the closing stock.7. It pinpoints the responsibility of everybody concerned in the organization.8. It facilitates cost control by analyzing the causes of inefficiency and by taking remedial

measures. This will result in reduced cost of production.9. It enables in periodic preparation of profit and loss account which helps management in

knowing the trends of the business.10. It helps in introducing incentives to employees and provides a basis for motivating

them.11. It helps in fixing selling price in advance of production. Thus, quotations can be sent and

orders secured.

The limitations of standard costing are as follows:

1. It is difficult to establish standards in practice.

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2. Standards established may have to be revised owing to changing conditions. But frequent revision of standards, is costly and may create problems.

3. Standards which are inaccurate, unreliable and outdated may do more harm than good.4. If the standards set are not attained it will lead to psychological effects resulting in

frustration.5. It may not be suitable for small concerns.

PRELIMINARIES IN ESTABLISHING SYSTEM OF STANDARD COSTING

Before establishing a system of standard costing the following preliminary factors are to be considered:

1. Establishment of cost centre.2. Classification of accounts.3. Determination of duration.4. Determination of capacity.5. Types of standard.

(a) Basic or fixed or static standard.(b) Ideal standard(c) Attainable or expected or practical standard(d) Current standard(e) Normal standard

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