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
- Budgets are composed of standard cost because it is imposible to idenify exact cost before manufacturing process.
- It helps to improve decision making process and answers question like how we price our product? etc.
- 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.
- 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.
- Management performance is measured by actual and standard variences.
Limitation of Using Standard Costing
- 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.
- Setting of standard requires high degree of technical skills.
- It can only be used in repititive manufacturing activities to deliver stardard product.