Question

While talking to your friend about your week, you mentioned that you had just learned about standard costing which plays a vital role in variance analysis. This topic interested your friend, who runs a bakery and wants to learn what he or she would need to do to set up a standard costing system for the bakery. This gives you an opportunity to share your new knowledge with your friend. What would you tell your friend about standard costing?

Answer 1

Standard Costing:-

Standard costing is the practice of estimating the expense of a production process. It is a branch of cost accounting that is used by a manufacturer, for exapmle:- to plan their costs for the coming year on various expenses such as direct materual, direct labour or overhead. The managers will also be able to compare the standard cost with the actual costs. The difference between standard cost and actual cost is known as variance. The presence of a variance imdicates a deviation from what was recorded in the profit plan. If actual costs are greater than standard costs, it is likely that management can anticipate a lower profit than expected. If actual costs are less than standard costs, however, management can anticipate a higher profit than they originally planned for.

Advantages of Standard Costing:-

Standard costing provides managers with several advantages that can help their businesses operate more effectively. Some of the advantages are as under:-

1. Efficiency:- A standard costing method provides a quick estimate of projected costs. Though accurate reports are nice to have,they are not timely. A good estimate of costs provided in a timely manner is highly preferable.
2. Allows for Cost Control:- In the effect of variances, the managers are given an opportunity to rectify any discrepencies. This will then allow them to improve costs. They can be more aware of spending habits in the future and strive for little to no variance.
3. Helps Management to Make Decisions:- Standard costing can also affect the way a business operates as a whole. Once managers have determined variances, this gives them the opportunity to act and improve an current business practices and spending.
4. Accurate Budgets:- When managers have controlled costs through the use of standard costing system, the actual costs in future should be close to the standard costs. The outcome is highly favourable because this means that the profit plan went as projected. This can leadto more accurate budgets in the future.
5. Lower Production Costs:- A lower amountof production costs could be possibe advantage because standard costing allows others to visualize spending habits, employees could end up being more cost conscious, efficient and work on their performance.

Disadvantages of Standard Costing:-

Though standard costing can be beneficial for business operations, it also has some drawbacks as under:-

1. Slow Feedback
2. Low Morale
3. Employee Backlash

Creating Standard Costing:-

• Determine the cost of Direct Materials, Direct Labour and Overhead:- In order to determine these costs, you will need to multiply the rate of each by the quantity (in units or hours)

For Example:- If the direct materials price is $10 and the standard quantity is 20 pounds per unit, you would multiply $10 by 20 to get $200. This would be the cost for direct materials only.

Let's say the direct labor rate is $15 and the direct labor standard hours per unit is 10 hours. This would simply mean the standard cost for direct labor is $150.

Now, let say the overhead is $10 and the number of hours is 5. It means standard cost for the overhead rate is $50 because $10 multiplied by 5 is $50.

• Calculate the Standard Cost:- Once you have determined the standard cost of each of these, add them together to get overall standard cost.

Following the example above,the standard cost for this production is $400 because $200 (direct material standard cost) + $150 (direct labor standard cost) + $50 (overhead standard cost) = $400 (total standard cost)

These costs are calculated to compare them with the actual ones.

Examples of Standard Costs in Case of Bakery:-

Standard costs are the expenses a company incurs to make the product that it sells. For a bakery, examples of standard costs would include flour, eggs, butter,and other ingredients used to produce breads, cookies,and cakes the bakery sell. These are different from operating costs, which include labor costs for the baker's salaries, energy costs to run the ovens, and advertising costs to promote the bakery to consumers.