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4.4 Concept of Standard Costing
Standard costing is a technique used for the purpose of determining standard cost and their comparison with the actual costs to find out the causes of difference between the two so that remedial action may be taken immediately. The Charted Institute of Management Accountants, London, defines standard costing as “the preparation of standard costs and applying them to measure the variations from actual costs and analysing the causes of variations with a view to maintain maximum efficiency in production”.
Thus, standard costing is a technique of cost accounting which compares the ‘standard cost’ of each product or service, with the actual cost, to determine the efficiency of the operation. When actual costs differ from standards the difference is called variance and when the size of the variance is significant a detailed investigation will be made to determine the causes of variance, so that remedial action will be taken immediately.
Thus, standard costing involves the following steps:
1. Setting standard costs for different elements of costs
2. Recording of actual costs
3. Comparing between standard costs and actual costs to determine the variances
4. Analysing the variances to know the causes thereof, and
5. Reporting the analysis of variances to management for taking appropriate actions wherever necessary.
The system of standard costing can be used effectively to those industries which are producing standardised products and are repetitive in nature. Examples are cement industry, steel industry, sugar industry etc. The standard costing may not be suitable to jobbing industries because every job has different specifications and it will be difficult and expensive to set standard costs for every job. Thus, standard costing is not suitable in situations where a variety of different kinds of tasks are being done.
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