STANDARD COSTING

STANDARD COSTING

• Principles & procedures• Uses pre- determined standard

costs• Relates to each element of cost &

each line of product manufactured or service rendered.

• “standard” “benchmark”

ASSOCIATED WITH …

COMPANY’S COSTS OF …

• DIRECT MATERIAL• DIRECT LABOR• MANUFACTURING OVERHEAD

VARIANCES

• Difference between the actual cost and standard costs.

• Actual costs > Standard costs • Variance is unfavorable.• Tells management that company's

profit will be less than planned.

Continued…

• Actual costs < Standard costs • Variance is favorable.• Tells management that the actual profit will likely exceed the planned profit.

ADVANTAGES

• Serves as Yardstick to measure Efficiency of operations.

• Deviations can be analysed & Responsibilities can be fixed.

• Saves time & can be easily interpreted.

ADVANTAGES

• Method of manufacturing can be improved .

• Manufacturing cost can be reduced.

• Aid for formulating production & price

policies under competetive conditions.

MCDONALD’S

*World's largest chain of hamburger fast

food restaurants.*Difficult to apply standard costing * Each dish – different & has high level

of human InterventionSOLUTION ? ? ?

SOLUTION …

• Making each type of product produced identical.

• Each Big Mac pre-measured amount of sauce and two gherkins - standard in all restaurants.

• Reducing the amount of human intervention.

• Staff do not pour the drinks - use machines which dispense the same volume of drink each time.

TYPES OF STANDARDS

• IDEAL STANDARDS• ATTAINABLE STANDARDS• CURRENT STANDARDS• BASIC STANDARDS• NORMAL STANDARDS

IDEAL STANDARDS

• Costs fixed on basis of ideal conditions.

• Representative for long term goals with maximum efficiency.

• Unrealistic• Seldom exists in reality.

ATTAINABLE STANDARDS

• What can be attained through the current conditions & setup in place.

• Ex Machinery - expected to run – 4000 hrs

• But Capacity – 5000 hrs.• Current standard – 4000 hrs.• Attainable standard -5000 hrs.• Helps to use unused potential at right time.

CURRENT STANDARDS

• Ideal & attainable standards are fixes based on Current Business Conditions

• Short term in nature & widely used for control purposes.

• These standards represent the state that business is currently achieving or must achieve.

BASIC STANDARDS

• Standard cost – established for a fixed time.

• Unchanged over a long period of time.

• Altered only when there is a significant change in the operations of the Business.

• Not used often.• Ex – bus fare for loborers.

NORMAL STANDARDS

• Standards which are expected in Normal conditions.

• “Normal” either favorable / unfavorable conditions.

• The expected controllable factors may not be controlled.

• Used in simple environment that does not prone to great fluctuations.

Conclusion

• Management tool for cost control.• Effective only if planned.• Tools used to Plan Costs. * Standard costing * Budgeting Another tool