Standard Costing
Standard costing is a method of accounting that uses predetermined standards to estimate the costs of products or services. Standard costs are set in advance of production and are used to compare actual costs to budgeted costs. Standard costing can be used to help businesses control costs, set prices, and make decisions about production.
Definition
Standard costing is a method of accounting that uses predetermined standards to estimate the costs of products or services. Standard costs are set in advance of production and are used to compare actual costs to budgeted costs. Standard costing can be used to help businesses control costs, set prices, and make decisions about production.
Significance and Applications
Standard costing is significant because it can help businesses in a number of ways, including:
- Controlling costs: Standard costing can help businesses control costs by providing a benchmark against which actual costs can be compared. This can help businesses identify areas where costs are too high and take corrective action.
- Setting prices: Standard costing can help businesses set prices by providing an estimate of the cost of producing a product or service. This can help businesses ensure that they are not underpricing or overpricing their products or services.
- Making decisions about production: Standard costing can help businesses make decisions about production by providing an estimate of the cost of producing a product or service. This can help businesses decide whether to produce a product or service, how much to produce, and when to produce it.
Various Types of Standards
There are two main types of standards used in standard costing:
- Ideal standards: Ideal standards are the best possible standards that can be achieved under perfect conditions. Ideal standards are not realistic, but they can be used as a benchmark to strive for.
- Normal standards: Normal standards are achievable standards that are set based on historical data and current operating conditions. Normal standards are more realistic than ideal standards and are typically used for budgeting and performance evaluation.
Installation of Standards
The installation of standard costing involves a number of steps, including:
- Identifying the costs to be standarized: The first step is to identify the costs that will be standarized. This includes direct materials, direct labor, and overhead costs.
- Setting standards: The next step is to set standards for the costs that have been identified. Standards should be set based on historical data and current operating conditions.
- Collecting actual costs: The third step is to collect actual costs for the costs that have been standarized. Actual costs are collected on a regular basis, such as monthly or quarterly.
- Comparing actual costs to standards: The fourth step is to compare actual costs to standards. This comparison is used to identify variances, which are differences between actual costs and standards.
- Analyzing variances: The fifth step is to analyze variances to identify the causes of the variances. Variances can be caused by a number of factors, such as changes in prices, efficiency, or volume.
- Taking corrective action: The final step is to take corrective action to address the causes of the variances. Corrective action may involve changing standards, improving efficiency, or changing production methods.