Standard costing and its types

what is standard costing-variances-types of standard costing with example

1. STANDARD COSTING

2. STANDARD COSTING Principles & procedures Uses pre- determined standard costs Relates to each element of cost & each line of product manufactured or service rendered. “standard”  “benchmark”

3. ASSOCIATED WITH … COMPANY’S COSTS OF … DIRECT MATERIAL DIRECT LABOR MANUFACTURING OVERHEAD

4. VARIANCES Difference between the actual cost and standard costs. A ctual costs > Standard costs Variance is unfavorable . T ells management that company's profit will be less than planned.

5. Continued… A ctual costs < Standard costs V ariance is favorable . Tells management that the actual profit will likely exceed the planned profit.

6. ADVANTAGES Serves as Yardstick to measure Efficiency of operations. Deviations can be analysed & Responsibilities can be fixed. Saves time & can be easily interpreted.

7. ADVANTAGES Method of manufacturing can be improved . Manufacturing cost can be reduced. Aid for formulating production & price policies under competetive conditions.

8. MCDONALD’S *World's largest chain of hamburger fast food restaurants. *Difficult to apply standard costing * Each dish – different & has high level of human Intervention SOLUTION ? ? ?

9. SOLUTION … Making each type of product produced identical. Each Big Mac  pre-measured amount of sauce and two gherkins - standard in all restaurants. Reducing the amount of human intervention. Staff do not pour the drinks - use machines which dispense the same volume of drink each time.

10. TYPES OF STANDARDS IDEAL STANDARDS ATTAINABLE STANDARDS CURRENT STANDARDS BASIC STANDARDS NORMAL STANDARDS

11. IDEAL STANDARDS Costs fixed on basis of ideal conditions. Representative for long term goals with maximum efficiency. Unrealistic Seldom exists in reality.

12. ATTAINABLE STANDARDS What can be attained through the current conditions & setup in place. Ex Machinery - expected to run – 4000 hrs But Capacity – 5000 hrs. Current standard – 4000 hrs. Attainable standard -5000 hrs. Helps to use unused potential at right time.

13. CURRENT STANDARDS Ideal & attainable standards are fixes based on Current Business Conditions Short term in nature & widely used for control purposes. These standards represent the state that business is currently achieving or must achieve.

14. BASIC STANDARDS Standard cost – established for a fixed time. Unchanged over a long period of time. Altered only when there is a significant change in the operations of the Business. Not used often. Ex – bus fare for loborers .

15. NORMAL STANDARDS Standards which are expected in Normal conditions. “Normal”  either favorable / unfavorable conditions. The expected controllable factors may not be controlled. Used in simple environment that does not prone to great fluctuations.

16. Conclusion Management tool for cost control. Effective only if planned. Tools used to Plan Costs. * Standard costing * Budgeting  Another tool