Better economy, efficiency and productivity – Managerial review of costs is more effective as the operations are scrutinised carefully and inefficiencies are disclosed. Men, machines and materials are more effectively utilised and thus economies can be effected in business together with increased productivity. Where the work is not repetitive, e.g., construction work, contract work, ship-building and erection work etc., it is difficult to set standards and therefore, standard costing would not be suitable. But in certain cases, it can be applied partially though not fully, at least to some advantage of the concerns. (iii) Current Standard – This standard is fixed on the basis of current conditions and remains in force for a short period of time. (7) The recording process of standard costs should be easy and clear.
Objectives of Standard Costing
The management should strive for the attainment of standard costs because they are attainable ideal costs and are practical from the point of view of business. Thus the basic characteristics is of the ability to compare in a valid manner against an established baseline. Cost standards are predetermined targets, usually based http://intersell.ru/catalog/soft/10953/136992/ on desired performance. They provide a means of comparison that serves to evaluate actual performance. Likewise, another objective of this costing technique is to motivate employees.
Basic Standards
Another objective of standard cost is to make the entire organisation cost conscious. It makes the employees to recognise the importance of efficient operations so that costs can be reduced by joint efforts. The second objective of standard cost is to help the management in exercising control over the costs through the principle of exception. If $2,000 is an insignificant amount relative to a company’s net income, the entire $2,000 unfavorable variance can be added to the cost of goods sold. (4) Co-operation of Executives and Staff – For the successful working of a standard costing system, it is necessary to enlist the co-operation of executives and the https://teenslang.su/id/8000 staff operating the system.
Management Planning
We will pursue the interdependence of variances in the following examples. For the remainder of our explanation, we will use a common format for calculating variances. The amounts for each column are computed in the order indicated in the headings. When we make the journal entries for completed aprons, we’ll use an account called Inventory-FG which means Finished Goods Inventory. We’ll also be using the account Direct Materials Inventory or Raw Materials Inventory or Stores.
- By receiving timely reports which compare actual with standard costs, management is able to locate areas of production inefficiency.
- Existence of budgetary control system is a pre-requisite for the standard costing system.
- It is also used to determine unit costs of items processed in service businesses, such as a bank’s cost to process a check or deposit.
- Since a manufacturer must pay its suppliers and employees the actual costs, there are almost always differences between the actual costs and the standard costs, and the differences are noted as variances.
- The amounts for each column are computed in the order indicated in the headings.
If the $2,000 balance is a credit balance, the variance is favorable. This means that the actual direct materials used were less than the standard quantity of materials called for by the good output. We should allocate this $2,000 to wherever those direct materials are physically located. However, if $2,000 is an insignificant amount, the materiality guideline allows for the entire $2,000 to be deducted from the cost of goods sold on the income statement.
- Measured at the originally estimated rate of $2 per direct labor hour, this amounts to $16 (8 hours x $2).
- The standard costing system can have the desired effects only when the system is acceptable both to the management as well as to the workers.
- The variance account is opened for transferring the deviations between standards and actual performance.
- For this purpose, it is more convenient using standard costing than actual costs because it is done on a scientific and rational manner by taking into account all technical aspects.
- Insurance Expense, Wages Expense, Advertising Expense, Interest Expense are expenses matched with the period of time in the heading of the income statement.
- It also helps the management in the areas of profit planning, product-pricing and inventory pricing etc.
The system of coding may be used for speedy recording and analysing the accounting information. Appropriate cost centres should also be set up in the organisation. The system of standard costing can be introduced with advantage in concerns which are of a reasonable size. The system may not be suitable for small concerns since in their case careful scheduling of production may not be possible. Moreover the system of standard costing requires specialisation of jobs and processes which may not be possible in a small concern. (2) Comparison of actual costs with the pre-determined standards is made, in order to determine variances.
As Crowningshield says, “What should have happened is more important than what did happen”. Cost standards are scientifically predetermined costs of products, components of products, processes, or operations. They are used as statistical bases for the evaluation of actual performance.
Efficient Cost Control
Inaccurate and unreliable standards cause misleading results and thus may not enjoy the confidence of the users of this system. Labour efficiency is promoted and they are destined to be cost conscious. Standards provide incentives and motivation to work with greater effort. Standard Costing helps to apply the principle of “Management by exception”. That is, the management need not worry over those activities which proceed in tandem plans. It https://oboi7.com/oboi/blondinki-devushki-aktrisy-znamenitosti-29108 is only on the issues of exceptions that they have to concentrate.
