Slide 1 : Standard Costing Presented By: AshutoshMishra.
Slide 2 : Flow of Presentation Meaning
Types of Standard & Revision
Procedure of setting standard cost :
Material
Labour
Overhead
Advantages
Limitations
References
Slide 3 : What is Standard ? A Standard may be a norm or a measure of comparison in terms of specific items such as
Pounds or kilos for material.
Labour hours required.
Plant capacity used in hours.
Real Life Examples :
ISO – International Standards for Business, Government & Society.
CMMI – Process improvement approach from Carnegie Mellon University, USA.
NBA – an AICTE program for institution evaluation.
ISI – Indian Standards Institution that checks hygiene for all eatables. (Now known as Bureau of Indian Standards)
Slide 4 : What is Costing ? Costing (or cost-benefit analysis) is the process of analyzing the costs and benefits of different options to determine
what approach should be taken to a particular conflict.
what solution or resolution should be chosen once various options are being considered.
Slide 5 : The Need for Standards Standards
Are common in business.
Are often imposed by government agencies (and called regulations).
Standard costs
Are predetermined unit costs.
Used as measures of performance.
Slide 6 : Historical Cost & it’s Limitations Historical cost systems are associated with recording of historical or actual cost. Historical costing is the ascertainment of costs after they have been incurred.
Ineffective in cost control.
No standards or goals so cost reduction isn’t an option.
Not reliable for management tasks.
Slide 7 : A Standard Cost is a planned cost for a unit of product or service rendered.
In the words of Backer and Jacobsen, “Standard cost is the amount the firm thinks a product or the operation of the process for a period of time should cost, based upon certain assumed conditions of efficiency, economic conditions and other factors.” Standard Costing
Slide 8 : Classification of Standards The two principal considerations for classification of standards are : Attainability of standards.
Frequency with which the standards are revised.
Slide 9 : This is the standard which represents a high level of efficiency. Ideal standard is fixed on the assumption that favourable conditions will prevail and management will be at its best. The price paid for materials will be lowest and wastes etc. will be minimum possible. The labour time for making the production will be minimum and rates of wages will also be low. The overhead expenses are also set with maximum efficiency in mind. All the conditions, both internal and external, should be favourable and only then ideal standard will be achieved. Ideal standard is fixed on the assumption of those conditions which may rarely exist. This standard is not practicable and may not be achieved.
Slide 10 : Basic standard is established for a long period and is not adjusted to the preset conations. The same standard remains in force for a long period. These standards are revised only on the changes in specification of material and technology productions. It is indeed just like a number against which subsequent process changes can be measured. Basic standard enables the measurement of changes in costs. Basic The changes in manufacturing costs can be measured by taking basic standard, as a base standard cannot serve as a tool for cost control purpose because the standard is not revised for a long time.
Slide 11 : Normal standard has been defined as a standard which, it is anticipated, can be attained over a future period of time, preferably long enough to cover one trade cycle.
The standard attempts to cover variance in the production from one time to another time. An average is taken from the periods of recession and depression. Normal The normal standard concept is theoretical and cannot be used for cost control purpose. Normal standard can be properly applied for absorption of overhead cost over a long period of time.
Slide 12 : It is presumed that conditions of production will remain unchanged. In case there is any change in price or manufacturing condition, the standards are also revised. Current standard may be ideal standard and expected standard. A current standard is a standard which is established for use over a short period of time and is related to current condition. It reflects the performance that should be attained during the current period. The period for current standard is normally one year. Current
Slide 13 : Revision of Standards We need to revise the standards which follow for better control. Even standards are also subjected to change like the production method, environment, raw material, and technology. Standards may need to be changed to accommodate changes in the organization or its environment. When there is a sudden change in economic circumstances, technology or production methods, the standard cost will no longer be accurate.
Slide 14 : The difference between the actual costs and the standard costs are known as variances.
Standard costing and the related variances is a valuable management tool. If a variance arises, management becomes aware that manufacturing costs have differed from the standard (planned, expected) costs. If actual costs are greater than standard costs the variance is unfavourable.
If actual costs are less than standard costs the variance is favourable. Variance analysis involves two phases :
Computation of individual variances.
Determination of the cause of each variance.
Slide 15 : Developing or Setting Standards Setting up standards is based on the past experience. The total standard cost includes direct materials, direct labour and overheads. Normally, all these are fixed to some extent. The standards should be set up in a systematic way so that they are used as a tool for cost control.
Slide 16 : When we want to purchase some material what are the factors we consider. If material is used for a product, it is known as direct material. On the other hand, if the material cost cannot be assigned to the manufacturing of the product, it will be called indirect material.
Therefore, it involves two things:
Quality of material
Price of the material The procedure for purchase of materials, minimum and maximum levels for various materials, discount policy and means of transport are the other factors which have bearing on the materials cost price.
It includes:
Cost of materials
Ordering cost
Carrying cost
Slide 17 : Direct Materials Price Standard Cost per unit which should be incurred.
Based on the purchasing department’s best estimate of the cost of raw materials.
Includes related costs such as receiving, storing, and handling.
Slide 18 : Direct Materials Quantity Standard Quantity of direct materials used per unit of finished goods
Based on physical measure such as pounds, barrels, etc.
Considers both the quantity and quality of materials required
Includes allowances for unavoidable waste and normal storage
Slide 19 : Direct Labor Price Standard Rate per hour incurred for direct labour.
Based on current wage rates adjusted for anticipated changes, such as cost of living adjustments.
Includes employer payroll taxes & fringe benefits.
Slide 20 : Direct Labor Quantity Standard Time required to make one unit of the product.
Critical in labor-intensive companies.
Allowances should be made for rest periods, cleanup, machine setup & machine downtime.
Slide 21 : Manufacturing Overhead Standard For manufacturing overhead, a standard predetermined overhead rate is used
The predetermined rate is computed by dividing budgeted overhead costs by an expected standard activity index
The standard manufacturing overhead rate per unit is the predetermined overhead rate times the activity index quantity standard (for example, direct labor hours)
Slide 22 : Advantages
Finding of variance
Cost control
Right decisions
Eliminating inefficiencies
Efficiency measurement
Slide 23 : Limitations
It cannot be used in those organizations where non-standard products are produced.
The process of setting standard is a difficult task, as it requires technical skills.
There are no inset circumstances to be considered for fixing standards.
The fixing of responsibility is not an easy task.
Slide 24 : References The Internet. Management Accounting – James Martin
Management Accounting – D Westra, M Kane & Srikanth
Accounting for management – Dr.Jawahar Lal
Slide 25 :