Standard Costing
Standard costing is an accounting method that uses predetermined costs to calculate cost of goods sold. It uses a set standard cost to measure any variances that could hurt operating performance. This type of cost system is most commonly used when manufacturing goods and is a critical part of cost accounting.
Standard costs are predetermined costs of materials, labour and overhead for each unit or process. A standard cost for a particular product is determined by taking into account both fixed and variable costs. For instance, a car manufacturer would determine the standard cost of producing a car by taking into account the cost of labour, materials and overhead. Every process in the car manufacturing process must be assessed and its standard cost determined. Once these standard costs are determined, they become the basis against which all accounting measurements are made.
The main goal of standard costing is to help companies to control costs and compare the actual costs of the goods or services produced with the expected costs. Standard costs can also be used for budgeting. When the standard cost for a particular budget period has been set, the measurements of actual performance can be compared to the budget and variation determined. Significant variations can be investigated and corrective action taken if required.
Standard costing is particularly useful in industries that operate in highly competitive and volatile markets. Companies can quickly identify if costs are out of line and take corrective action to remain competitive.
Standard costing can be used in any situation where goods and services are produced. Complex multi-level standard costing systems can be used for budgeting and evaluation purposes in any situation where goods or services are produced in a repetitive manner.
Standard costing is a traditional approach but it continues to be popular in some sectors today. It is closely related to materials and labour variances, which measure the difference between a standard cost and an actual cost. The benefits of standard costing over more modern systems include the fact that they are relatively easy to understand and can be adapted to different types of manufacturing and service delivery.
Standard costing has several advantages. It can provide significant cost savings by establishing budgets that provide a point of control and comparison. Variations between actual and expected performances can be identified and corrective action taken on an ongoing basis. Furthermore, standard costing is a more flexible system than more modern approaches and can be adapted to changing markets and production systems.
Standard costing, however, can also have some drawbacks. For instance, if there is a high degree of complexity or variety in the production process, standard costing may not be suitable. In addition, if labour is non-standard then costs cannot be predicted accurately and variances cannot be easily recorded and quantified. Finally, standard costing can sometimes lead to complacency if it is not regularly reviewed and up-dated.
In summary, Standard Costing is a useful system for controlling costs, budgeting and evaluating performance. It can be adapted to different types of manufacturing and service delivery and provides a solid basis for measuring performance. However, it must regularly reviewed and up-dated and should not be used in all circumstances.
