Question

What are the purposes of standard costing?   

Answer 1

PURPOSES OF STANDARD COSTNG

A standard costing system involves estimating the required costs of a production process. But before the start of the accounting period, determine the standards and set regarding the amount and cost of direct materials required for the production process and the amount and pay rate of direct labor required for the production process. In addition, these standards are used to plan a budget for the production process. The core reason for using standard costs is that there are a number of applications where it is too time-consuming to collect actual costs, so standard costs are used as a close approximation to actual costs.

Since standard costs are usually slightly different from actual costs, the cost accountant periodically calculates variances that break out differences caused by such factors as labor rate changes and the cost of materials. The cost accountant may periodically change the standard costs to bring them into closer alignment with actual costs.

Standard costing systems help in planning operations and gaining insights into the probable impact of managerial decisions on cost levels and profits. Standard costs helps in;

1.Controlling costs and motivation and measuring efficiencies.

2.Promoting possible cost reduction.

3.Simplifying costing procedures and expediting cost reports.

4.Assigning costs to materials, work in process, and finished goods inventories.

5.Forming the basis for establishing bids and contracts and for setting sales prices

6.The effectiveness of controlling costs depends greatly upon a knowledge of expected costs. Standards serve as measurements which call attention to cost variations. Executives and supervisors become cost conscious as they become aware of results. This cost consciousness tends to reduce costs and encourages economies in all phases of the business.

7.Standard cost is used for accounting purposes, simplifies costing procedures through the reduction of clerical labor and expenses. A complete standard cost system is usually accompanied by standardization of productive operations. Standard production or manufacturing orders, calling for standard quantities of product and specific labor operations, can be prepared in advance of actual production. Materials requisitions, labor time tickets, and operation cards can be prepared in advance of production, and standard costs can be compiled. As orders for a part of placed in the shop, previously established requirements, processes, and costs will apply. The more standardized the production, the simpler the clerical effort. Reports can be systematized to present complete information regarding standards, actual costs, and variances.

8. The standard cost System may be used in connection with either the process or job order cost accumulation method. However, it is more often used in process costing because of the greater practicality of setting standards for a continuous flow of like units than for unique job orders.

If the actual costs are more than the standard costs, management must take action or it will not achieve the planned profit. The standard cost variances direct management's attention to the area where the problems are occurring. If the problems cannot be solved easily, management may need to explore alternate materials or processes, attempt to increase selling prices, etc. Again, without reacting to the variances the company's planned profit for the year will not be met. All theses makes standard costing, as a method of costing, the industry favorite.