Question

Explain how a standard costing system operates.

Answer 1

A standard cost is described as a predetermined cost, an estimated future cost, an expected cost, a budgeted unit cost, a forecast cost, or as the "should be" cost

the standard costing go through the following steps

Establishing Standards: First and foremost, the standards are to be set on the basis of management’s estimation, wherein the production engineer anticipates the cost. In general, while fixing the standard cost, more weight is given to the past data, the current plan of production and future trends. Further, the standard is fixed in both quantity and costs.

Determination of Actual Cost: After standards are set, the actual cost for each element, i.e. material, labour and overheads is determined, from invoices, wage sheets, account books and so forth.

Comparison of Actual Costs and Standard Cost: Next step to the process, is to compare the standard cost with the actual figures, so as to ascertain the variance

Determination of Causes: Once the comparison is done, the next step is to find out the reason for the variances, to take corrective actions and also to evaluate the overall performance.

Disposition of Variances: The last step to this process, is the disposition of variances by transferring it to the costing profit and loss account.

Standard costing can be helpful in ascertaining the profitability of the business at any level of production