Test: Standard Costing - UGC NET MCQ

Standard costing differs from historical costing in that historical costs are incurred before cost records are available for management control, while standard costing involves setting performance expectations through predetermined standards for costs and revenues. This method allows for a comparison between predetermined costs and actual costs, enabling organizations to analyze variances and take corrective actions.

The primary purpose of standard costs in a cost accounting system is to control costs through variance analysis. By comparing predetermined standard costs with actual costs, organizations can identify variations and take necessary actions to improve efficiency and reduce waste.

The primary objective of using Standard Costing in a company is to set objectives and targets for cost comparison. This technique enables the comparison of actual costs with predetermined standards, helping to identify variances and areas for improvement in cost control. By setting these targets, management can assess performance and make informed decisions to enhance efficiency and productivity.

• Assertion: The assertion that standard costing is unsuitable for non-standardized products is true.
• Reason: The reason provided regarding the difficulty in determining precise standard costs for non-standardized products is also true.
• Explanation: While the Assertion is true, the Reason is also true but doesn't directly explain why standard costing is unsuitable for non-standardized products. It highlights a challenge in cost determination but doesn't clarify the broader unsuitability of standard costing for such products.

• Assertion Correctness: The assertion is true. Setting up cost centers is indeed a fundamental step in implementing a standard cost system in a business. It helps in segregating costs, establishing accountability, and facilitating efficient cost control.
• Reason Correctness: The reason is false. Cost centers are not only crucial for cost control but also for identifying responsibilities clearly within an organization.
• Explanation of Reason and Assertion Relationship: While the assertion is true, the reason provided doesn't directly explain why setting up cost centers is important. It's essential to establish cost centers for various reasons beyond just cost control, including accountability and performance evaluation.

The primary purpose of setting standard costs in a business organization is to establish pre-determined costs using historical data and various factors. These factors are carefully considered before determining the standards to ensure that they reflect a realistic and achievable cost structure. Standard costs are not arbitrary averages but are set after a thorough analysis of past and present production activities. By setting standard costs, businesses can create benchmarks for performance evaluation, cost control, and decision-making processes.

The correct option is 
(A) Number of units produced and sold are equal
(C) Sales price and sales mix remain constant
(E) Total fixed costs and variable cost per unit are constant

Key Points
CVP analysis

• CVP analysis is also known as Break-even analysis
• it is a technique to study the interrelationship between cost, sales, profit
• A higher volume of output will lower the cost of production 
• Fixed overhead cost reminds the same even the changes in the volume of output.

• Assertion: The assertion that small industries find it expensive to operate a standard costing system due to high initial costs is accurate.
• Reason: The reason that small firms struggle with the costs of setting and revising standards aligns with the challenges.
• Explanation: Both the Assertion and the Reason are true, and the Reason correctly explains why small industries find it expensive to operate standard costing systems. The initial high costs associated with establishing and revising standards make it financially burdensome for small firms to implement this system effectively.

• Assertion Correctness: The assertion is true. Standard costing systems do indeed involve various types of standards, including current standards and basic standards, each serving different purposes.
• Reason Correctness: The reason is also correct. Current standards are periodically updated to reflect current conditions, while basic standards remain constant over an extended period, acting as benchmarks for performance evaluation.
• Explanation of Reason and Assertion Relationship: The reason explains why standard costing systems incorporate both current and basic standards, highlighting the distinct purposes and characteristics of each type within the system.

Standard costing is the practice of substituting an expected cost for an actual cost in the accounting records.

Standard costs are assigned to production units rather than actual costs; after total costs are accumulated using standard cost, these total are compared to actual accumulated costs, and the difference is charged to a variance account.

Key Points

Process of Standard Costing:

1) Establishing standard costs:

• The first step is to set the standards on the basis of management's expectations and the production engineer would anticipate the costs.
• While establishing the standard cost, more weightage is given to past records, the current plan of production, and future trends.
• Finally, the standard will be fixed in both quantity and costs.

2) Measurement/Determination of actual costs:

• After standards are set, the actual costs are determined for each element i.e. material, labor, and overheads.
• The actual costs can be measured using the invoices, accounts book, wage sheets, etc.

3) Comparison of actual and standard costs:

• The next step is to compare the actual costs that occurred with the standard costs determined earlier.
• The difference between them is known as a variance.

4) Identifying variances and causes of variance:

• If the variance is positive it is known as favorable variance, and if the variance is negative it is known as an unfavorable/adverse variance.
• After the comparison is complete, the next step is to find out the causes for favorable or adverse variance.
• Corrective measures must be taken to evaluate the overall performance.

5) Disposing the variances to cost and profit centers:

• The last step in the process is to dispose of the variance by transferring it to the costing profit and loss account.
• Another method is to carry forward the variances to the next financial year by crediting the same to a reserve account to be set off in a subsequent year.
• The favorable or adverse variance may cancel each other in the course of time and thus be disposed of.

Standard costing can be helpful in ascertaining the profitability of the business at any level of production.

Therefore, Option 1) is correct in the process of standard costing.