Question

What kinds of companies use standard costing and what is the purpose for its use.

- Who are some companies that use standard costing?

- When and why would this be useful?

Answer 1

Standard Costing: Standard costing is one of the important topics in cost accounting. Standard costing is based on the historical estimated cost and management experience. Standard costing refers to the accounting method in which the difference between the actual cost of produced goods and the cost that should be incurred to produce the same goods under specific conditions is calculated.

It is basically calculated the variance between standard cost and the actual cost to produce the same kind of goods. It is a traditional costing method that was introduced in 1920. Standard costing is useful in cost estimation for the future project, performance evaluation, and budgeting control.

Standard costing is used in the below-mentioned industries or companies due to its specific use in cost accounting,

a. Process or manufacturing industries - for Example Refineries, Product Manufacturing Firms,

b. Agriculture and food processing companies.

c. Service Industries - Water/Electricity supply companies, transportation companies.

d. Textile Industries.

e. Extraction industries.

Basically almost all manufacturing companies that are in the process of producing companies use the Standard costing method.

Advantages of using Standard costing: Standard costing is a very important accounting method in the manufacturing industry and each and every process uses standard costing method. The purpose of using standard costing is listed below,

a. Helpful in budget planning: Budget planning is also one of the main purposes of standard costing. A budget will always have a standard cost because including actual cost will not be possible to include in budget. So better planning for the standard costs will help in better budget planning.

b. Cost control: Cost control is one of the main advantage of standard costing. In this system, the company set up a standard for each type of cost and use variance where the planned things did not go properly.

c. Better decision-making: Standard cost is useful in the better decision-making process by the top management as standard costing can help in production cost control and control the future actual cost that helps in better budget control.

d. Inventory costing management: Standard costing is very helpful in better inventory valuation as compared to actual cost system. Under the standard costing method, unusual costs are not included in inventory management but the company will charge this unusual cost in the variance account.

e. Reduction in production cost: Standard costing is very important in a reduction in production cost as it helps in cost saving in the production process. Standard costing enables employees to find alternative methods for cost-saving if actual costing increased from the standard cost projected before starting the project.

f. Price calculation: Standard costing help in better price calculation as actual cost and cost variance can be calculated by this system. The management can use this data to calculate the best price for the product or service.