Standard Costing: Definition, Uses, Advantages ( Part 1 )

Definition of Standard Costs

Firstly, standard costs are predetermined costs namely they are calculated in advance of actual production based on a specification of all relevant factors. They are also target costs which should be achieved under efficient conditions of operations.

Secondly, the standard cost is PER UNIT basis.

Difference Between Standard Cost and Budget

Apart from both uses predetermined costs:

A standard provides cost expectation PER UNIT OF ACTIVITY whilst

A Budget provides the cost expectation for the TOTAL ACTIVITY.

Standard Costing:

Is the system of using standard costs. Standard costing involves using the predetermined costs/standard costs to compare with the actual to find the difference or variance. Variance can be adverse (actual result is worse than standard) or favourable ( actual result is better than standard)

Uses Of Standard Costing:

Standard costing is for improving cost /cost control, simplify stock valuation and improving costing and pricing of products.

Can be applied to jobs, operations, processes and department and are used in manufacturing, engineering, processing and service industries.

The Advantages/Purposes of Standard Costing:

    ·  It provides the best basis for estimating future cost and contribute to the planning/budgeting function;

    ·  it assist in the comparison of the actual with the planned to evaluate managerial performance;

   ·  by focusing on the variance whether adverse and favorable, it enable the management to identify and take action to correct or improve present and future planning and control;

   ·  the setting of standards will require the looking at the methods and operations which will lead to improvement in efficiency by eliminating inefficiencies;

   ·  it is a means of management by exception whereby management can focus on the more important variances;

   ·  as standard costing is a target cost so it forces management to look ahead;

   ·  it assists management to develop cost awareness/consciousness and

   ·  when standard costing system is adjusted to changing conditions, it provides a basis for estimating prices, costs and the effect of prices fluctuation on costs.