Standard Costing

In standard costing, the estimated cost of an expense is determined before manufacturing activity. For example, at the start of the year a company estimates that its direct material cost or labour cost for manufacturing of a particular product should be $3 per unit. Forecast about standard of cost is usually made either by past historical standard or by estimation of management accountant or cost accountant.

Advantages of Using Standard Costing

  1. Budgets are composed of standard cost because it is imposible to idenify exact cost before manufacturing process.
  2. It helps to improve decision making process and answers question like how we price our product? etc.
  3. Management use these preset costs to find innovative ways to save cost by identifying repitative process and the unproductive cost centers in planned production to increase efficiency and effectivness.
  4. If company uses perpetual inventory costing then cost of closing inventory is easy to calculate by multiply closing units with standard cost of each of them.
  5. Management performance is measured by actual and standard variences.

Limitation of Using Standard Costing

  1. In standard costing, we assume that cost do not change much, so we can rely on standards for a specific period even a year, before updating cost. However, in continious changing environment standard cost may become obsolete.
  2. Setting of standard requires high degree of technical skills.
  3. It can only be used in repititive manufacturing activities to deliver stardard product.
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