In: Accounting
In 200 words or more, What is standard cost accounting, how does it work and what are some examples? Original work please
Answer)
The standard costing is the method that is used for finding the variance between actual costs as compared with estimated costs made by entity for some activities.When the estimations are more than actual then it is termed as favorable variance as the company is able to work more efficiently than expected and vice versa is unfavorable variance.It helps evaluate financial performance of the entity as when there is an unfavorable variance the entity can achieve it's targeted netincome and when there is favorable variance the company could achieve it.Moreover it helps the entity in finding the areas where the estimations exceed actuals and preparing new standards if necessary.
For example,the standard labour hour that company estimate to produce an unit of output is 30 minutes and the entity produces 10 units after using 4.5 hours.The standard rate per labour hour $1 and actual is the paid is$5.625 labour time variance:
(Standard hour-actual hours)×standard rate
=((10units×0.5 hours)-4.5 hours)×$1
=$0.5 favorable as it is done in less time than estimated.
Now,rate variance:
(Standard rate-actual rate)×actual hours
($1-($5.625/4.5hours)×4.5hours
=$1.125 unfavorable as it costs more than estimated and the company needs to revise it's estimation or find how it's costs more and take some remedial steps to revise it.