Standard Costing

Presented By: Gita Bhatia 2Amruta Deshmukh 17Jackie Kajwalkar 40Parin Sanghavi 97Hitasha Sharma 100Amit Rawool 161

What is Costing ?

Costing (or cost-benefit analysis) is the process of analyzing the costs and benefits of different options to determine what approach should be taken to a

particular conflict. what solution or resolution should be

chosen once various options are being considered.

Historical Cost & it’s Limitations

Historical cost systems are associated with recording of historical or actual cost. Historical costing is the ascertainment of costs after they have been incurred.Ineffective in cost control.No standards or goals so

cost reduction isn’t an option.

Not reliable for management tasks.

What is Standard ?

A Standard may be a norm or a measure of comparison in terms of specific items such as Pounds or kilos for material. Labour hours required. Plant capacity used in hours.

Real Life Examples :ISO – International Standards for Business, Government & Society.CMMI – Process improvement approach from Carnegie Mellon University, USA.NBA – an AICTE program for institution evaluation.

A Standard Cost is a planned cost for a unit of product or service rendered.

In the words of Backer and Jacobsen, “Standard cost is the amount the firm thinks a product or the operation of the process for a period of time should cost, based upon certain assumed conditions of efficiency, economic conditions and other factors.”

Standard Costing

Classification of Standards

Theoretic Normal

BasicCurrently Attainabl

e

The two principal considerations for classification of standards are :

†Attainability of standards.

†Frequency with which the standards are revised.

This is the standard which represents a high level of efficiency. Ideal standard is fixed on the assumption that favourable conditions will prevail and management will be at its best. The price paid for materials will be lowest and wastes etc. will be minimum possible. The labour time for making the production will be minimum and rates of wages will also be low. The overhead expenses are also set with maximum efficiency in mind. All the conditions, both internal and external, should be favourable and only then ideal standard will be achieved.

Ideal standard is fixed on the assumption of those conditions which may rarely exist. This standard is not practicable and may not be achieved.

Basic standard is established for a long period and is not adjusted to the preset conations. The same standard remains in force for a long period. These standards are revised only on the changes in specification of material and technology productions. It is indeed just like a number against which subsequent process changes can be measured. Basic standard enables the measurement of changes in costs.

BasicThe changes in manufacturing costs can be measured by taking basic standard, as a base standard cannot serve as a tool for cost control purpose because the standard is not revised for a long time.

Normal standard has been defined as a standard which, it is anticipated, can be attained over a future period of time, preferably long enough to cover one trade cycle. The standard attempts to cover variance in the production from one time to another time. An average is taken from the periods of recession and depression.

Normal

The normal standard concept is theoretical and cannot be used for cost control purpose. Normal standard can be properly applied for absorption of overhead cost over a long period of time.

It is presumed that conditions of production will remain unchanged. In case there is any change in price or manufacturing condition, the standards are also revised. Current standard may be ideal standard and expected standard.

A current standard is a standard which is established for use over a short period of time and is related to current condition. It reflects the performance that should be attained during the current period. The period for current standard is normally one year.

Current

Determination of Standard Costs

The following preliminary steps must be taken before determination of standard cost

The responsibility for setting standard is vested with the Standard Committee. It consists of (a) Purchase Manager (b) Production Manager (c) Personnel Manager (d) Time and Motion Study Engineers (e) Marketing Manager and Cost Accountant (4)

Organization for Standard Costing

5) Setting of Standard

The Standard Committee is responsible for setting standards for each element of costs as given below :

I. Direct Material II. Direct Labour III. Overheads (a) Fixed Overheads (b) Variable Overheads

I. Standard for Direct Material Cost

• The following are the standard involved in direct materials cost: 0) Material Quantity or Usage Standard.

• (ii) Material Price Standard.

(i) Material Usage Standard: Material Usage Standard is prepared on the basis of material specifications and quality of materials required to manufacture a product.

(ii) While setting of standards proper allowance should be provided for normal losses due to unavoidable occurrence of evaporation, breakage etc.

• (iii) Material Price Standard:. • When this type of standard is used, it is essential to

consider the important factors such as market conditions, forecasting relating to the trends of prices, discount etc.

II. Standard for Direct Labour Cost

• II. Standard for Direct Labour Cost

• The following standards are established: • (i) Fixation of Standard Labour Time • (ii) Fixation of Standard Rate

(i) Fixation of Standard Labour Time:(ii) It depends upon the nature of cost unit,

nature of operations performed, Time and Motion Study etc. While determining the standard time normal ideal time is allowed for fatigue and other contingencies.

• (iii) Fixation of Standard Rates: The standard rate fixed for each job will be determined on the basis of methods of wage payment such as Time Wage System, Piece Wage System, Differential Piece Rate System and Premium Plan etc.

• (1) Determination of standard overhead cost

• (2) Estimating the production level of activity to be measured in terms of common base like machine hours, units of production and labour hours.

• Setting of overhead standards is divided into fixed overhead. variable overhead and semi-variable overhead

• The determination of overhead rate may be

calculated as follows : • (a) Standard Overhead and variable overhead

Rate = Standard Overhead for the budget period Standard production for the budget period.

Labour Costing

Introduction

Labour cost represents the human contribution to production.

Labour cost is a amount which is paid to worker or employee.

Labour cost consist of Basic Pay and Fringe Benefits

Basic PayThe pay according to worked performed by workers.

Fringe BenefitsIt is substantial element of labour cost. It consist of employer share of FICA Tex, Overtime Premium Pay, Insurance Benefits and pension Cost, that should be added in labour cost.

Why labour cost is important?

• For getting the maximum productivity• For better output by the use of

minimum resources• It is useful for minimum waste of

time, material and resources• Increase the ability, efficiency and

skill of workers.• It is useful to increase the company

competiveness & profitability.

How to improve labour productivity

• To provide employees handsome wages/incentive

• Offer to employees bonus and better workplace

• Encourage to employees to meet standard in production and get earn more and higher

• Give to employees basic needs like safety, education, family protection etc

The remuneration for labour is wages. The workers put effort & get wages in exchange of that. On the basis of pay scale & other allowances which are prescribed in the terms of employment, calculation of wages paid to direct or indirect workers is done. By terms of agreement between the employees & the employer, this may be modified from time to time. On the basis of job evaluation, merit rating, incentive plans, profit sharing & labour contract, the wages for the workers are determined.

Labour Remuneration:

Remuneration is payment or compensation received for services or employment. This includes the base salary and any bonuses or other economic benefits that an employee or executive receives during employment.Reward for employmentt in the formm of pay, salary, or wage, including allowances, benefits (such as company car, medical plan, pension plan), bonuses, cash incentives, and monetary value of the noncash incentives

Methods of Remuneration (systems of wage payment)

• There are two basic methods of labour remuneration:

• (a) Time Rate System; and (b) Piece Rate System(a) Time Rate System• Under the time rate system, workers are paid

according to the time for which they work. Payment may be on hourly basis, daily basis or monthly basis. In this system, no consideration is given to the quantity or quality of work done. When payment is made on hourly basis, total wages payable are calculated as follows:

• Wages = No. of hours worked x Rate per hour• for example,if the worker is paid at 25 per hour,his

wages for a day of 8 hours will be : 8 hours *25=200.

(b) Piece Rate System• Wages under this system are paid according

to the quantity of work done. A rate is fixed per unit of production and wages are calculated by the following formula:

• Wages = Rate per unit x No. of units produced.

• for example,if the rate per unit is 17 and during a day of worker has completed 10 units,then his wages will be 17*10 units =170.

Methods of Remuneration (systems of wage payment)(Contd)

Advantages Of Time Rate System

The following are some of the important advantages of time rate system of wage payment:

* Time rate system is simple to understand and easy to calculate.* Time rate system is quite useful for organizations that use costly inputs for quality outputs.* Time rate system is beneficial for average and below workers.* Time rate system does not discriminate the workers and is preferred by trade unions

Disadvantages Of Time Rate System

The following are some notable disadvantages of time rate system of wage payment.

* Time rate system does not help in increasing output and improving efficiency as there is no correlation between effort and reward.* Time rate system is not justifiable between efficient and inefficient workers and skilled and unskilled workers.* Time rate system pays for idle time, which increases the cost of production.* It is difficult to estimate exact labor cost in advance.* It requires strict supervision to get the required quantity of output.

Advantages Of Piece Rate SystemThe following are some important advantages of piece rate system of wage payment.

• Piece rate system pays wages according to the output produced by the workers. It encourages efficient workers.

• Piece rate system helps to reduce idle time.• Piece rate system helps the management to

determine the exact labor cost per unit for submitting quotation.

• Piece rate system reduces per unit cost of production due to increased volume of production.

• Piece rate system requires less supervision cost.

Disadvantages Of Piece Rate System

The following are the notable disadvantages of piece rate system

• Piece rate system does not help for a uniform flow of production and makes difficult to regulate the production schedule.

• It is very difficult to fix an acceptable and reasonable piece rate for each item of output or job.

• Piece rate system adversely affect the workers' health as well.

• It requires extra supervision cost for quality output and effective use of materials, tools and equipment.