Standard Costing Flashcards
What is standard costing
Standard costing is the practice of substituting an unexpected cost for an actual
Cost in the accounting records. Variances are recorded to show the difference between the expected and actual costs. This approach represents a simplified alternative to cost layering systems like FIFO, where large amount of historical cost information must be maintained for inventory items held in stock
What does standard costing involve?
Standard costing involves the creation of estimated (I.e standard) costs for some or all activities within a company. The core reason for using standard costs is that there are a number of applications where it is too time consuming to collect actual costs, so standard costs are used as a close approximation to actual costs
More info on standard costs
Since standard costs are usually different from actual costs, the cost accountant periodically calculates the variances that break out differences caused by such factors as labour rate changes and the cost of materials. The cost accountant may periodically change the standard costs to bring them into closer alignment with actual costs.
Ads of standard costing
A budget is always composed of standard costs, since it would be impossible to include in the exact actual cost of an item on the day the budget is finalised. Also since a key application of budgets is to compare it to actual results, in subsequent periods the standard used within it continue to appear in financial reports through the budget period.
Also it is easy to use within inventory valuation as it can easily find inventory balances which multiplied with standard costs generate an inventory valuation
Dis of standard costs
If you have a contract with a customer under which he pays you actual costs then you cannot
use standard costing
It also drives inappropriate activities as the number of variances reported under a standard costing system will drive management to take incorrect actions to create favourable variances. E.g purchase of raw mats in large quantities to improve purchase price variance even though this increases the investment in inventory and can actually be worse off with the extra “deal”. Similarly managemtn may schedule longer production runs in order to improve the labour efficiency variance, even though it’s better to produce In smaller quantities and accept less labour efficiently in exchange
A standard costing system assumes that costs do not change much in the near term, so that you can rely on standards for a number of months or years, before updating the costs. However in an environment where product lives are short or continuous improvement is driving down costs, a standard cost may become out of date within a month or two
Standard costing relation to manufacturing environment
It’s not useful for customised goods as can’t tell what the standard is.
Shorter product life cycles means standard costs needs to be reviewed frequently
4 types of standard
Attainable - realistic goals
Basic - long term standards which remain unchanged over years
Current standards - standards based on working conditions
Ideal - based upon perfect operating conditions
