Question

What role do standard costs play in controlling the operations of a business? How are standard costs developed for direct materials, direct labor, and manufacturing overhead? Are there ever costs that we cannot develop standards for related to manufacturing the goods?

Answer 1

Ans:-

Standard cost plays major role in controlling the operations of business. Every business have major risk of controlling budgeted cost. Standard costing help in monioring whether business is incurring excess cost and finding reasons. Before start of year company prepares budget and after a period compares budget vs actual to find out position of business. In case there is extra cost incurred corrective measures are taken to curve them. According problems are solved in timely basis. hence standard cost plays major role in controlling the operations of business.

For developing standard cost for direct materials, first raw materials required for manufacturing is listed and then according to quality managers, quality of materails are decided. After that estimation of volumn, rate and ratio of consumption is made. After availibilty of all informations, quanity and rate multiplied to decide standard materials cost.

For developing standard cost for direct labour, first type of labour required is decided after that labour is categorised according to skill and unskill. Than no. of labour required is estimated and salary amount is estimated. After availibilty of all informations, No. of labour and salary multiplied to decide standard labour cost. Labour idle time and efficiency also estimated.

For developing standard cost for manufacturing overheads, first all types of overheads is listed and after review past trend and data overheads cost are estimated. Generally all overheads are based on some logic and have relations with sale or purchase or volumn.

Cost which can not be estimated and non recurring costs are the costs for which we can not develop standards.