Standard Costing - Uses & Limitations

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Information about Standard Costing - Uses & Limitations

Published on December 13, 2016

Author: RavishMalgi


1. Standard Costing – Uses & Limitations

2. Presented By M Ravish Malgi – 208

3. Objectives  To understand the concept of Standard Costing.  To review the literature.  To identify the uses of Standard Costing in organization.  To explore the limitation of Standard Costing.

4. What is Standard, Standard Cost & Standard Costing?  Standard – It is used to refer to the predetermined rate e.g. Rs 10 per unit  Standard costs – They are predetermined cost which may be used as a yardstick to measure the efficiency with which actual costs has been incurred under given circumstance.  Standard Costing – This is a technique which uses standards for cost and revenues for the purpose of control through variance analysis.

5. Steps involved in Standard Costing  Setting standard costs for different elements of costs  Recording of actual costs  Comparing between standard costs and actual costs to determine the variances  Analyzing the variances to know the causes  Reporting the analysis of variances to management for taking appropriate actions wherever necessary

6. Variance  The deviation of actual cost from standard cost is called variance.  Variance is very important to evaluate the performance of company for increasing its efficiency.  We compare actual and standard cost to know whether it is favourable or unfavourable.

7. Types of Variance  Direct Material Variance: Shows the difference between the actual cost of material of actual units and standard cost of material of standard units.  Labor Variance: It is the difference between standard cost of labour for actual production and the actual cost of labour for actual production.  Overhead Variance: It shows the variance of all indirect cost. It is the difference between standard cost of overhead for actual output and actual cost of overhead for actual output.  Sales Variance: It is the variance which shows the difference between actual sales and standard sales.

8. Case Study Problem: Effect of Assumed Standard Levels  Harden Company has experienced increased production costs.  The primary area of concern identified by management is direct labor.  The company is considering adopting a standard cost system to help control labor and other costs.

9. Solution:  Harden consulted an engineering company who suggested a Labor standard of 1 unit of production every 30 mins or 16 units/day.  The management thought such standards would have a negative impact & workforce wont be able to achieve the target. Management decided to set actual standard as 12 units/day.  Thus management decided to deploy dual standard method in which the workforce was told they were achieving 16 units/day but actual standard was set at 12 units/day or 40 mins/unit. January February March April May June Production (units) 5,100 5,000 4,700 4,500 4,300 4,400 Direct labor $3,000 $2,900 $2,900 $3,000 $3,000 $3,100 Quantity Variances: Variance based on labor standard (one unit each 30 minutes) $2900 U $2,800 U $2,633 U $5,250U $2,700 U $2,800 U Variance based on cost standard (one unit each 40 minutes) $3100 F $3,033 F $3,200 F -0- $933U $3300 F

10. Uses of Standard Costing  To provide a formal basis for assessing performance and efficiency.  To Control Costs by establishing standards and analysis of variance.  To enable the principle of “Management by Exception” to be practiced at detailed operational level.  To assist in setting budgets in an organization.  To motivate staff and management.  To provide a basis for estimating.  To provide guidance on possible ways of improving performance.

11. Limitations of Standard Costing  Setting of standard is difficult task and it involves a high degree of technical skill.  Standard must be revised from time to time otherwise they lose importance.  It cannot be implemented in those industries which do not produce any standard product.  Sometimes it creates adverse psychological effects. If it is set at a high level its non-achievement results in frustration & it acts as a discouragement.  Too much care and attention are required to introduce as well as to keep up-to- date the system otherwise the very purpose of the system will be frustrated.

12. Limitations (contd.)  Every organization has different set of parameters to set standards for themselves. Thus, it may not be suitable in all types of organizations.  Management’s lack of interest in the standard costing makes it inefficient means of cost control.  Standard costing tends to measure performances in terms of difference between the actual and standards. But other non-financial measures such as maintaining and improving quality, on time delivery, customer satisfaction and the like are equally important in performance evaluation.  It does not give any motivation to improve their performance beyond the standards. Ex, sales person has already achieved his/her target to be entitled for bonus than he/she may not do further effort to increase sales.

13. "In the beginning God created man...and the costs followed afterwards." Thank You

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