STANDARD COSTING 1
STANDARD COST • Is a predertermined estimated unit cost, used for inventory valuation and control. • It is calculated in advance based on a specification on all relevant factors • The standard are compiled from various cost elements which are incurred to make one product 2
STANDARD COST • Examples: specification of materials in terms of quantity and cost of materials needed to produce one unit of product, standard time for labour to complete a unit, assessment of fixed and variable overhead • Used for controlling whereby actual cost is compared with the standard cost which result to a variance (favourable or adverse) 3
OBJECTIVES AND USEFULNESS OF STANDARD COSTING • Provide a prediction of future costs that can be used for decision making purpose
• Provide a challenging target which individuals are motivated to achieve • Assist in budget setting and evaluate manager’s performance
• Act as a control device by highlighting those situations that may be ‘out of control’ and in need of corrective action • Simplify the task of tracing costs to products for profit measurement and inventory valuation purposes 4
ADVANTAGES AND DISADVANTAGES OF STANDARD COSTING Advantages of Standard Costing • • • • •
Assist to prepare more accurate budgeting Provide a performance measurement of an individual manager Involves in determining the best material and method which lead to economies Set a target of efficiency to employees thus cost consciousness is stimulated Enables principle of ‘management of exception’ to operate i.e. only significant variances (exceed tolerance limit) will be investigated by management for controlling action
Problems of Standard Costing • •
• • • •
Error in forecasting External influence beyond management control, hence making estimation difficult Materials prices difficult to set because external forces (depends on suppliers) Quality of material is difficult to decide as it relates to material wastage Setting labour efficiency often rise to disagreement or dispute by employees Effect of price increase to standard
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DIFFERENCES BETWEEN STANDARD AND BUDGET STANDARD
BUDGET
• A unit concept applicable to • Concern with total particular product, individual operations or process • Apply to departments or firm as a whole • Only revise standards when they are inappropriate for • Revised on periodic or annual current operation basis • Standard and variances have entries in the accounting system
• Memorandum figures and not form part of double entry in the accounting system
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TYPES OF COST STANDARD IDEAL STANDARD
ATTAINABLE STANDARD
Based on perfect/most favourable condition with no allowance of wastage, breakdown, idle It is unattainable in practice and has unfavourable motivational impact
Advantages: variance use for pinpointing areas for improvement may result in cost saving Disadvantages: Negative behavioral impact on employees Demotivated as standard perceive as unattainable
CURRENT STANDARD
Based on normal capacity with allowance of waste and inefficiencies It provide a realistic target and motivation to employees and management
Advantage: useful psychological incentive to employees
BASIC STANDARD
Based on current working condition with current wastage and inefficiencies Use over short period by taking into account current changes
Advantage: use current situation as basis
Standard kept for a long period of time and maybe outdated (least use) Used to track and highlight efficiency level for a period of time (trend analysis)
Advantage: ability to show trend of price and efficiency changes from year to year
Disadvantage: Disadvantage: no attempt to changes is not improve current level capture in the of efficiency standard make standard meaningless 7
THANK YOU
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