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  Features of Standard Cost and Costing

Features of Standard Cost and Standard Costing

The following are the features of standard cost:

Ø   Standard cost is a pre-determined or pre planned cost. The meaning of this is, standard cost is decided even before the commencement of production. For instance, if a firm is planning to launch a product in 2009, the standard cost of similar will be determined in 2008.

Ø   Standard cost is not an estimated cost. There is a variation among saying what would be the cost and what should be the cost. Standard cost is a planned cost and it is a cost that should be the actual cost of production.

Ø   It is computed after taking into consideration the management's standard of efficient operation. So standard cost fixed on the supposition of 80% efficiency will be not similar from what it will be if the assumption is of 90% efficiency.

Ø   Standard cost can be employed as a basis for price fixation and for exercising control over the cost. Standard Costing is a method of costing rather than a technique and has the following features:

Ø   Standard costing includes setting of standards for several elements of cost. So standards are set for labour costs, material costs, and overhead costs. Setting of standard is the heart of standard costing and so this work is completed very carefully. Setting of incorrect standards will defeat the very aim of standard costing. Standards are not only set for costs, but also for sales and profits. The aim behind setting of standards is to contain a basis for comparison among the standard performance and the actual performance.

Ø   Other feature of standard costing is to incessantly record the actual performance against the standards so that comparison among the two can be completed easily.

Ø   Standard costing make sure that there is a constant comparison among the standards and actual and the dissimilarity between the two is worked out. The dissimilarity is termed as 'variance' and it is to be analysed additional to find out the reasons behind the same.

Ø   After the determining of the variances, analyzing them to observe the reasons for the variances and taking corrective action in order to make sure that the variances are not repeated are the two significant actions of management. So standard costing assists immensely in evaluation of performance of the organization.

Estimated costs should not be perplexed with standard costs. Even though both of them are future costs, there is a fundamental variation among the two. Estimated cost is more or less a reasonable assessment of what the cost will be in future when alternatively, standard cost is a pre planned cost in the sense it indicates what the cost ought to be. Estimated costs are gets developed on the base of projections based on past performance and supposed future trends. Standard costs are pre determined in a technical manner by technical analysis concerning the material consumption and time and motion study for deciding labour needs. Estimated costs might not assist management in decision making because they are not scientifically pre determined costs but standard costs are determined after a complete study and analysis of all applicable factors and therefore provide reliable measures for product pricing, planning, product costing, co-ordination and cost control and reduction purposes. Within estimated costing, the cost is estimated in advance and is relies on the assumption that costs are more or less free to move and that what is made is the good estimate of the cost. Within standard costing, a cost is established that is based on the assumption that cost will not be permitted to move freely but will be controlled as much as probable so that the actual cost will be very close to the standard cost as much as possible and any variation among the standard and actual cost will be able of reasonable explanation.

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