The word standard simply means some norm, specification or target. It gives a reference point, bench mark, model or yardstick for comparison.
Standard costs are part of cost accounting system whereby standard cost is incorporated directly and formally into the manufacturing accounts. It is divided into two major parts (1) Historical Costs (2) Pre‐determined Costs. Historical cost means the actual cost or past cost and historical costing is a system in which actual costs incurred in the past are determined.
Historical costs have some limitations:
(1) Such costs are obtained too late and cannot be used for price quotations.
(2) Historical costs do not serve the object of cost control, for the cost has already been incurred before cost records are available for management control.
(3) Historical costs do not provide any benchmark against which efficiency can be measured.
Standard costing is a technique which uses standard for costs and revenues for the purpose of control through variance analysis. Here, standards are performance expectations. Standard costing aims at eliminating waste and increasing efficiency in operation through setting up standards for production costs and production performance. In short, standard costing is a control device and not a separate method of product costing. It can be used with any method of product costing, job costing or process costing.
The objective of this chapter is to underscore the need of standard costing by highlighting its utility. Standard costing requires the historical costing for a comparative analysis which helps set the goals of standard costs. Standard costing is one of the most important tools to control costs. In this method, all costs are predetermined. Such predetermined costs are then compared with the actual costs and the difference between these costs known as variances.
The word standard means a 'norm' or a 'criterion'. Standard cost is thus a criterion cost which may be used as a yardstick to measure the efficiency with which actual cost has been incurred.
There is a constant process of development effected in business through the help of standard costing method since the standard costs set in are sensible, capable of being attained and are revised from time to time in accord with needs and requirements of the business enterprise.
1) Standard cost:
2) Standard Costing:
3) Historical Costing:
Standard costs are called pre‐determined costs. The different standards regarding all the elements of costs, i.e., material, labor and overheads, are determined on the basis of historical cost and many other factors. These factors are cautiously studied before determining the standards. The standard committee will generally consist of production manager, purchase manager, personal manager, and other functional heads. It is possible that the standard cost decided by the manager could be idle, normal or expected. The idle standard cost may refer to an estimate of the cost under perfect competition. It is competed on the basis that there is no scrap, no idling of machinery or breakdown and so on. On the other hand, expected standard cost is based upon the attainable result. Standard Costs are not simple average but they are set with due care after careful study and observation of production activity in the past and the present.
Standard costing is a perfect system of controlling the costs and measuring efficiency and its development. It is a technique of cost reduction and cost control. It helps to provide valuable guidance in several management functions such as formulating policies, determining price level, etc. The essence of standard costing is to set objectives and targets to achieve them, to compare the actual costs with these targets. Standard Costing is used to ascertain the standard cost under each element of cost, i.e., materials, labours, overhead. It can eliminate all kinds of waste. Through the application of this costing it can be ascertained whether or not the activities of production are going on according as the pre‐determined plan.