Types Of Standards In Standard Costing

Standard costing is a managerial control technique that facilitates the comparison of standard cost and revenue with actual results to obtain variances that are used to stimulate improved performance

when choosing a standard, the enterprise is faced with the choice of which performance level to select.

there are three main types of standard or performance level to choose from as described

Standard costing standards that is ideal standard, basic standard, attainable standard and current standard
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ideal standards

these standards are based on perfect operating conditions.

if such standards were to apply there would not be any inefficiencies,wastage and forth.

As employees would rarely achieve such a standard the performance variance would continuously be adverse.

such a situation would have unfavourable impact on employees motivation.

Employees would not view the standards as legitimate and would cease to attain the standard required

current standards

these standards are based on current operating conditions and may be used over a short period of time.

management, however, would hope to improve efficiency level on the current operating conditions

attainable standards

these standards are based on normal operating conditions.

allowance is made for normal wastage and inefficiencies.

standards set on this basis should provide encouragement to employees to improve on existing efficiency.

the standard must be realistic and attainable; otherwise, it will have the same pitfall as ideal standards.

standards are normally reviewed annually to see if any changes are required, for example changes of prices and efficiency

basic standards

these standards are set from past experience such that they have been used over for a long period of time and do not reflect current conditions.

these standards are not useful from the cost of the control point of view as they only consider fixed costs

advantages of standard costing

  • It provides yard stick against which actual are measured.
  • It helps in valuing the closing stock.
  • It helps in fixing selling prices in advance of production thus quotation can be sent and orders secured.
  • It helps in introducing incentives to employees and provide the basis of motivating them.
  • It simplifies accounting procedures which involves less clerical works and time.
  • It enables periodic preparation of profit and loss account which helps management in knowing the trend of the business.
  • It pinpoints the responsibility of everybody concerned in the organization.
  • It facilitates cost control by analysing the causes of inefficiency and by taking remedial measures. This will result in the reduced cost of production.
  • Standard costing helps in standardizing the various activities of the business. Thus, it enables use of standard materials and better method of production.
  • Standard costing increase cost consciousness among all concerned by fixing target and how to achieve them.

  • Standard costing follow the principle of management by exception. Management by exception means that everybody is given a target to be achieved and management need not supervise each and everything. The responsibilities are fixed and every body tries to achieve his targets. If the things are going as per targets then the management needs not to bother. Management devotes its time to other important things. So, management by exception is possible only when targets of work can be fixed. Standard costing enables the determination of targets.
  • Reduction of Work: In this system, management is supplied with useful information and necessary information is recorded and redundant data are avoided. The report presentation is simplified and only required information is presented in such a form that management is able to interpret the information easily and usefully. Therefore, standard costing reduces clerical work to a considerable extent
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