Meaning,types of standard costing, standard establish best 1

What are different types of standards? How standards can be established?

It is a technique of cost control under which cost data is predetermined for each activity on the basis of normal operations of business. Thus, actual costs incurred are compared with the predetermined standards, then variance and deviation are ascertained. Then their causes are found with a view to fix the responsibility of the particular executive. Then such a report is submitted to the management to enable it to take corrective action.

What is the meaning of standard costing?

Meaning of standard costing:- It is a cost control technique of cost accounting. In this cost a systematic standard is used in recording the transactions and the actual costs are compared with the standard costs and then analyse the deviation to their causes so as to achieve appropriate action.

Definition of Standard Costing

According to Brown & Howard, “Standard Costing is a technique of cost accounting under which standard cost is predetermined for each product or service and then it is compared with the actual costs for measuring the efficiency of the operations, so remedial action can be taken immediately by the management.

FEATURES OF STANDARD COSTING

These features are as follows on the basis of the above meaning and definitions.

• It is a technique of cost accounting concerned with cost control.
• Each element for total cost is determined as material, labour and overhead for product or service.
• These standards are determined in advance under standard costing.
• It also recorded the actual cost for the purpose of comparison.
• Then actual cost is compared with the standard cost for finding the deviations in these costs.
• A systematic analysis is made for the purpose of finding reasons responsible for them.
• Any variance, if found, is reposted to the management for the purpose of taking remedial actions.

Meaning of Standard Cost

Standard cost is determined in advance which is used periodically as a basis for comparisons with the actual costs. So it is a pre planned cost which is calculated from the efficient management\’s standard in the organisation and concerned with the transaction expenditure. Because it is useful for the price fixation and cost control throughout variance analysis.

Definition of Standard Cost

According to Brown and Howard– “The standard cost is a predetermined cost for each product and service should cost under the given circumstances”.

With the analysis of the difference between the actual and standard costs, the management is in a position to know the factors leading to such difference in costs. So standard cost is helpful in deciding the pricing matters.

How can a standard be established?

There are some techniques which are followed by management. Because these essential tools are to be taken into consideration before the established standard costing.

• Establishment of Costs Centres
• Classification and Codification of Accounts
• Setting the Standards
• Direct Labour Costs
• Direct Material costs
• Standard cost card

(1). First of all Establishment of Cost Centres in organisation:- A cost centre is a location or place, department, person and item of equipment for which costs are found and it is used for the purpose of cost control. These are two types of cost centres as personal and impersonal cost centres. Personal cost centres are those which are concerned with the persons and impersonal cost centres are those which are related to the place and item of equipment.

Because throughout the cost centres, responsibilities are determined for the particular executives as well as defined their lines of authority. These executives may be held responsible under these centere if any variance and deviation are arised in their cost centres.

(2). Classification and Codification of accounts:- Classification of accounts is classified in the standard Costing. Accounts are classified in such a way that cost elements for each cost are clearly reflected. In such systems, codes and symbols are assigned to different accounts for the purpose of making analysis of costs more convenient and identifiable. For example – Indirect costs and indirect costs.

(3). Setting The Standards:- It is a complex task for setting standards for each element as, material, labour and overhead. So it is required a collaboTstandardheseration of a number of executives to make a successful standard setting. A standard committee is set up. Thus, the standard committee involves the following executives who collaborate to establish a standard setting.  executive are as following :-

• Production Manager
• Purchase Manager
• Personnel Manager
• Production Engineer
• Sales Manager
• The Cost Accountant

After the committee of these executives, the Budget committee is also combined into one committee. Then, this committee is responsible for fixing standards. This committee also assists in the application of standards. They can also make necessary changes in the  when it is required as per the essential circumstances. However, a detailed study is involved in the fixing standard on the manufacturing process of products.

Because such set standards are attainable as these are treated as yardsticks for measuring the efficiency of actual performance. Thus, during the established standard costs some elements are considered as price, rates, qualities, quantity and grades for each element of cost entering into a product. Besides it set up standard costs considered as material cost, labour cost and overhead.

(4).Direct Labour Cost:- While the committee is setting up standard they consider the determination of

• Standard quantity of materials
• Standard price of material

While they determined the quantity of material is to serve the economies in material usage. The planning of the material grades and quality also considered during the determination of material quantity. During the fixing standard yield and loss factors are also considered. So the cost accountants will be helped by the production engineer in fixing the standard quantity.

Standard price is also considered by the committee for the material ordered. The objective of fixing the standard price is to increase efficiency in purchasing and storekeeping. Thus this price standard will be done by the cost Accountant with the collaboration of the purchase manager.

(5). Direct Labor Cost Time and Rate:-In the process of setting up standard direct labour cost is also considered by the standard committee. In which following considered as:-

• Standard time
• Standard rate

Standard time is that which is required to perform the given task. This is fixed for achieving efficiency. This standard is fixed on the basis of past performance.

Whereas, standard labour rate indicates the wage rate which must be paid to the workers. Thus, the standard wage rate shall be determined by the cost accountant with the help of personnel manager by keeping in view the minimum wages.

(6). Overheads:- Overheads refers to costs which tend to vary directly with variation of output and volume. It is also considered while the standards are being set up by the committee.

• Variable overhead:- It is necessary to calculate standard variables per hours and per unit.
• Fixed Overhead:- Fixed overhead refers to the overhead cost which tends to be unaffected by variation of volume and output. Such fixed overheads are set up with the help of fixed budgets for a period as the output in units or standard hours.

(7). Standard Cost Card:- When standard costs are being fixed for material, labour and overhead, these are properly recorded on a card known as “Standard Cost Card”. This card is prepared for each component of the product made. Which represents the quantity and price of each type of material required. So it is an important part of the standard costing system. This card is used by the management in formulating the price and cost policies. 

Conclusion, standards are established from the cost centre. Then these standards are codified. Then standards are established as per quantity, grades, quantity, labour rate and labour hours. Under these processes direct labour, direct wages and overhead are also considered while standards are fixed. standard costing

TYPES OF STANDARD

A standard is a predetermined measurement for the labour, material and overheads. It is the normal monetary standard for quantity and price. These are two types of standards which are considered. standard costing

• Basic Standard
• Current Standard
• Normal Standard
• Ideal Standard 

(1). Basic Standard:- It is an established standard which is used for long term without altering. It normally resembles the index numbers. so it is not revised with the change of current conditions. Thus it is used for a long period of time. In the basic standard, a base year is used for the purpose of fixing standard. Which has not changed over the many years.

(2). Current Standard:- It is an established standard which is used for the short period. So it is concerned with the current conditions. So it prevailed in the current period. So it is more usable and capable of attaining fixed targets. However, current standard involves two types of standard as following

• Ideal Standard
• Expected Standard

• Ideal Standard:- It is an ideal standard which can be attained under the most favourable conditions. So it is made on the basis of perfect performance and theoretical. With the help of ideal standard impossible results can be attained. When actual costs are compared with such standard, large variances are shown which don\’t represent true and fair position.
• Expected Standard:- This type of standard is anticipated to be attained during a future budget period. This is a practical standard. In such a standard a reasonable allowance is made for unavoidable waste and inefficiency before setting the expected standards. As such expected standards are more realistic and are best suited from the point of view of cost control.

(3). Normally Standard:- It is an average standard that is anticipated can be achieved over a future period of time preferably for one business cycle. Normal standard does not require adjustment but it is not useful for the purpose of cost control. During the setting standard trade cycles are considered as in which direction they tend. So in the same direction such normal standards are fixed up.

(4). Ideal Standard:- This standard is established under the running ideal circumstances of the business. Thus is established for the long term goals of business rather than short run goals. So with the help of advanced technology and optimum level of material such ideals standard can be achieved within the determined time. Therefore, the ideal standard is considered best for the business where operations are running without interruption. 

Conclusion:- Thus, there are three types of standard which are used in the process of setting up standard cost. As Basic standard, Current standard and normal standard costing.

FAQ

Which standard must be selected?

After reading this question you will think about which standard must be selected. There is no doubt that all standards have the same importance for the business. But however, the selection of standards depends upon the circumstances of business. Example:- If any organisation deals with the deficiency of finance then such organisation has to select current standard rather than basic standard costing.

Suggestion for students

Essential question which might be learned by the students. standard costing

These are following:

Avenues of Investments

Risk determination of investments

Suggestion:- When you feel tired on the way to study, you can read love stunning poetry as per your desire for the purpose of refreshing your mind from the given category. standard costing

standard costing