Meaning & Definition of Standard Costing
Standard Costing is defined as “the preparation and use of standard costs, their comparison with actual costs, and the analysis of variances to their causes, and points of incidence”. ___According to ICMA, London.
Objectives of Standard Costing
- Promoting and measuring efficiency.
- Controlling and reducing costs.
- Simplifying costing procedure.
- Valuing inventories.
- Fixing selling price.
Advantages of Standard Costing
1. Measuring Efficiency: Standard cost may be used as a measuring tool for the management to measure efficiency. The difference between the actual costs and standard costs reflects the level of performance of different cost centres.
2. Formulation of production and price policy: Creation of production policies is facilitated by the standard cost. On the basis of prevailing conditions, the standards are fixed. Standard costs are helpful in deciding production plans and in determining prices of different production.
3. Determination of variance: Variances are determined by comparing actual cost and standard cost. Such variations brings core areas of incompetence,which in turn enable the management to fix staff accountability for inefficiencies and initiate remedial steps promptly and ensure better performance in future.
4. Facilitates cost control: The twin objective of any costing system is cost control and cost reduction. Both the objectives are achieved in the system of standard cost.
Disadvantage of Standard Costing
1. Fixation of standards: Fixation of realistic standards during the introduction of standard costing system is an extremely significant and challenging job.
2. frequent technology alterations: Some of the industries are known for frequent technological alterations. Introduction of standard costing system in such industries may prove to be a costly affair, as the standards would need a frequent revision.
3. Expensive technique: Expenses involved in setting up and continuing the system of standard costing are quite heavy. It is difficult for small-sized business organizations to afford such a costly system.
4. Analysis of historical events: Variance analysis involves analysis of historical events,which cannot be changed. As such it is of limited use for the management.