Standard Costing: Need for Standard Costing, Steps involved in Standard Costing, Merits and Limitations

Standard Costing

·       The standard cost is a predetermined cost which determines in advance what each product or service should cost under given circumstances.

·       The technique of using standard cost for the purpose of cost control is known as Standard Costing.

 

Need for Standard Costing

·       To facilitate the setting of budgets and evaluating managerial performance.

·       To act as a control device by stressing those activities which do not match to plan and thus alerting decision-makers to those situations that may be out of control and in need of remedial action.

·       To provide a forecast of future costs that can be used for decision making purposes.

·       To provide a challenging target which individuals are motivated to achieve.

 

Steps involved in Standard Costing

1.    Determination of standard cost

2.    Recording of actual cost

3.    Comparison between standard cost and actual cost

4.    Finding out of variance

5.    Reporting of variance so as to find out inefficiency and take necessary corrective measures.

Merits

·       Measurement of efficiency, fixing prices & formulating policies, eliminating wastages, inventory valuation, creates cost conciousness, economical and simple.

 

Limitations

·       Difficult to establish, conditions change, morale and motivation may be affected, expensive, unsuitable for job order.