Establishing a System of Standard Costing

 

Establishing a system of Standard Costing

1.    Determination of cost centres: A cost centre is a department or a part of department in respect of which costs are accumulated and one where control can be exercised. Cost centres enable the determination of costs and fixation of responsibility.

2.    Classification of Accounts: Different costs are incurred at different stages of production. These costs should be recorded properly and classified such as direct material, indirect material, direct labour, factory overhead, etc.

3.    Setting of standards/Types of standards: Three types of standards:

a.    Current standard: Established for use over a short period of time, related to current conditions. Period usually one year. In case of change, standards are also revised. Can be of two types:

i.     Ideal standard: Represent high level of efficiency. Assumption that favourable conditions will prevail. Rarely exist, not practicable and may not be achieved.

ii.     Expected standard: Based on expected conditions. Target which can be achieved if expected conditions prevail.

b.    Basic standard: Standard which is established for use for an indefinite period. Not adjusted to the present conditions. Revised only on the changes in specification of material and technology production. Cannot serve as a tool for cost control as it is not revised for a long time.

c.     Normal standard: A standard which it is anticipated can be attained over a future period of time, one trade cycle usually. Based on conditions which will cover a future period.

4.    Organisation for Standard Costing: For the purpose of setting standards, a person or committee should be given this job. In a big concern, Cost Accountant acts as a co- ordinator of this committee. He supplies all information for determining the standard, informs the committee about the change in price level, etc.

5.    Setting of Standards: The standard for direct material, direct labour and overhead expenses are fixed.

a.    Standard cost for direct material: Quality, Quantity, Price, Wastage, Purchasing and store-keeping cost,etc.

b.    Standard cost for direct labour: Labour time, labour rate.

c.     Standard cost of Overheads: Determination of overheads, labour hours or units manufactured.