Concepts Behind Standard Costing
Standard refers to the level or grade to measure or check the quality of goods. Standards are usually set up in the manufacturing units to check the quality of the products. Various standards are setup by different companies for different things. Costing as the name suggests it refers to the cost and is related to monetary aspect. Costing refers to the cost or amount which is being estimated by an approx idea of the expenditure which will be used on the production of goods and services.
Standard costing refers to the cost which is been approximately decided by the top level management where the work on finding out the cost under normal conditions. It is used as a based cost where a firm has to work within this cost. This cost is worked out for usually one time before the formation or starting of the product.
It is an important part of the cost accounting. Standard costing is usually practiced in the manufacturing units. It is calculated by putting the cost of land, labour and capital to work out the cost. People or the members of the top level management usually put up the expected amount as a standard cost for labour or other things and drives out the standard costing by the expected costing rather than the actual cost of the goods.
It shows that there will be a difference in the actual cost and standard cost, a manufacturing concern have to pay the actual cost irrespective of the fact that whether it is higher than the standard cost or lesser. This cost is term as variance. Variance act as an important tool to the management to take all the monetary decisions. As it is necessary to maintain a standard, the management take actions accordingly.
Variance is an important aspect it helps in improving the efficiency of the business and to maximize the profit share. If actual cost exceeds the standard cost it is termed to be unfavourable variance as it is giving immense losses to the company. Where as if the actual cost is lower or lesser as compared to the standard cost it is termed as favourable variance as it helps to maximise the share of profit.
For instance, A Company launches a new product and estimated that labour will cost 2 bugs per unit. It is been assumed as per the present goods, it will be termed as a standard cost. After few months of the launch of the product, it was been analysed by the engineers and other heads that the cost of labour is actually costing 3 bugs per unit, then the actual cost is compared with the standard cost and the difference is presented in front of top level management. The remaining decision is up to the management. What to add and what to reduce in the variance amount.
The difficulties faced by various concerns are on different levels, some encounter small issues which can be overcome internally. Such issues include basic difference in the standard cost and average cost. There are issues like time related problem if report is made on monthly or weekly and did not presented on time is not beneficial.
There are point when standard cost is been reviewed and there are points when they are not. It also influences employees to keep unfavourable variances. As standard cost are calculated using traditional approaches or methods. Standard costing is only for money matters it does not include the non- monetary facts. There are cases where the life of the product is for very short spam and the cost is calculated on the same basics. These are some common problems encountered by people at different levels of the production of goods.
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