Standard Costing

Question 1

What is standard costing

Answer 1

Standard costing is a technique which establishes predetermined estimates of the costs of products and services then compares these predetermined costs with actual costs as they are incurred.

The predetermined costs are known as standard costs and the difference between the standard cost and actual cost is known as a variance.

Question 2

What are the four main types of standard

Answer 2

Attainable standards

• They are based on efficient (but not perfect) operating conditions.
• The standard will include allowances for normal material losses, realistic allowances for fatigue, machine breakdowns, etc.
• These are the most frequently encouraged type of standard.
• These standards may motivate employees to work harder since they provide a realistic but challenging target.

Basic standards

• These are long-term standards which remain unchanged over a period of years.
• Their sole use is to show trends over time for such items as material prices, labour rates and efficiency and the effect of changing methods.
• They cannot be used to highlight current efficiency.
• These standards may demotivate employees if, over time, they become too easy to achieve and, as a result, employees may feel bored and unchallenged.

Current standards

• These are standards based on current working conditions.
• They are useful when current conditions are abnormal and another standard would provide meaningless information.
• The disadvantage is that they do not attempt to motivate employees to improve upon the current working conditions and, as a result, employees may feel unchallenged.

Ideal Standards

• These are based upon perfect operating conditions.
• This means that there is no wastage or scrap, no breakdowns, no stoppages or idle time; in short, no inefficiencies.
• In their search for perfect quality, Japanese companies use ideal standards for pinpointing areas where close examination may result in large cost savings.
• Idea standards may have an adverse motivational impact since employees may feel that the standard is impossible to achieve.