Standard costs are extensively recognized in all countries of world. It is an effectual procedure to control cost and assist to accomplish organizational goal. Standard costs are realistic estimates of cost based on analyses of both past and projected operating costs and conditions. In this procedure, standard cost of the product and services is determined in advance and comparing it with actual cost variance to ascertain and analyse. Huge accounting literature has stated that standard costing is the preparation and use of standard costs, their comparison with actual cost and the analysis of variance to their causes and points of incidence (ICMA, London). According Wheldon, standard costing is the method of ascertaining the costs whereby statistics are prepared to show standard cost, actual cost, and the difference between these costs which is termed as variance. Other theorists like Brown and Howard described that standard costing is a technique of accounting which compares the standard cost of product and services with actual cost to determine the efficiency of operations so that remedial actions can be taken immediately (Gupta, et, al., 2006).
The three components of standard costing:
Standard costing uses estimated costs completely to calculate all three elements of product costs: direct materials, direct labour, and overhead. Managers use standard costs for planning and control in the management process such as planning for budget development; product costing, pricing, and distribution.
The main difference between standard costing in a service organization and standard costing in a manufacturing organization is that a service organization has no direct materials costs. In a standard costing system, costs are entered into the Materials, Work in Process, and Finished Goods Inventory accounts and the Cost of Goods Sold account at standard cost; actual costs are recorded separately.
The following elements are used to verify a standard cost per unit:
Determination of Standard Costs
The following initial steps must be taken before determination of standard cost:
I. Ideal Standard
II. Basic Standard
III. Current Standard
IV. Expected Standard
V. Normal Standard
4. Organization for Standard Costing: The achievement of the standard costing system depends upon the consistency of standards, therefore the responsibility for setting standard is vested with the Standard Committee. It consists of following team:
5. Setting of Standards: The Standard Committee is responsible for developing standards for each component of costs such as Direct Material, Direct Labour, Overheads ( Fixed overheads and Variable Overheads).
Features of Standard Costing
Standard costing is a technique of cost accounting.
The cost or service or product is predetermined.
The predetermined cost is known as standard cost.
Actual cost of product and service is ascertained.
The comparison is made between standard cost and actual cost and variances are noted.
Variances are analysed to find out the reason.
Variances are reported to management in order to take corrective action.
Ways of Developing Standards
The direct materials price standard is based on a vigilant estimate of all possible price increases, changes in available quantities, and new sources of supply in the next accounting period.
The direct materials quantity standard is based on product engineering specifications, the quality of direct materials, the age and productivity of machines, and the quality and experience of the work force.
The direct labour rate standard is defined by labour union contracts and company personnel policies.
The direct labour time standard is based on current time and motion studies of workers and machines and records of their past performance.
The standard variable overhead rate and standard fixed overhead rate are found by dividing total budgeted variable and fixed overhead costs by an appropriate application base.
Merits of standard costing: It is a very useful tool to control the cost. It is the analysis of variances which reduces the cost and increase profitability. It is also beneficial for management because it assists in fixation of selling price, ascertaining the value of closing stocks of work in progress, determining idle capacity, and performs various management functions. The standards provide incentives and motivation to work and help in increasing efficiency and productivity. This technique is helpful in optimal use of resources. Standard costing helps in budgetary control and in decision making. This technique is economical for users (Gupta, et, al., 2006).
Demerits of Standard costing: In this technique, establishing standards is difficult. Standards are determined by keeping in view the marketing condition, availability, and efficiency of labour, machine and plant. All these factors are not static. Standard costing requires specialists and expert staff. This involves heavy expenditure for the concern. This technique is impractical for small scale industries (Gupta, et, al., 2006).
It can be established that Standard Costing is a notion of accounting to determine of standard for each constituent of costs. These fixed costs are compared with actual costs to realize the deviations known as "Variances". Recognition and analysis of causes for such variances and corrective measures should be taken in order to beat the reasons for Variances.
Top 7 Problems on Standard Costing with Solutions
Standard Costing Problem 1:
Normal number of workers 100
Number of hours paid for in a week 80
Standard Rate of wages per hour Rs.1.60
Standard Output of the department
per hour taking into account normal idle time 40 units
In the first week of January 2003 it was ascertained that 2,000 units were produced despite 20% idle time due to power failure and actual rate of wages was Rs.1.80 per hour. Calculate Labour Variances.
Standard Costing Problem 2:
From the following data prepare a unit cost statement showing the prime cost of product A and B together with analysis of variances:
Standard Costing Problem 3:
A gang of workers normally consists of 30 men, 15 women and 10 boys. They are paid at standard hourly rates as under:
In a normal working week of 40 hours, the gang is expected to produce 2,000 units of output. During the week ending 31st December, 2002, the gang consisted of 40 men, 10 women and 5 boys. The actual wages paid were @ Re 0.70, Re 0.65 and Re 0.30 respectively. 4 hours were lost due to abnormal idle time and 1,600 units were produced.
(i) Wage Variance;
(ii) Wage Rate Variance;
(iii) Labour Efficiency Variance;
(iv) Labour Mix Variance; and
(v) Labour Idle Time Variance.
Standard Costing Problem 4:
Calculate labour variances from the following data:
Gross direct wages Rs.36,000
Standard hours produced 2,000
Standard rate per hour Rs.15
Actual hours paid – 1,800 hours out of which hours not worked (abnormal idle time) are 50 hours.
Standard Costing Problem 5:
From the following particulars calculate variable overhead expenditure variance:
Standard Costing Problem 6:
The standard cost card of a manufacturing concern includes the following particulars:
Variable overhead per unit – 2 hours @ 0-30 p. per hour = 0-60 p.
Actual operating hours 8,000 hours
Actual variable overhead expenses Rs.2,600
Actual units produced 4,850
Calculate necessary cost variances.
Standard Costing Problem 7:
From the following particulars compute: