Theory Of Standard Costing

Standard Costing

What is Standard Costing ?

Standard costing can be defined as a technique of cost accounting which comprises the standard cost of each product or services with the actual cost to determine efficiency of operation so that any technical action may be taken immediately.  

Q. What is Standard Cost ?

Ans. Standard cost is the estimated or predetermined cost which is computed in advance with the output to be produced in future.

Q. What is Variance Analysis ?
Ans. The difference between standard cost or profit & sale or actual cost/profit/sale is known as Variance and the process by which the total difference between standard cost or sale and actual cost or sale is broken down in different parts is known as Variance analysis.

Q. What is Material Variance ?
Ans. It refers to material cost variance. It is the difference between the standard cost of material allowed for the output and actual cost of material used.

Advantage of Standard Costing:

1. It helps the management in fixation of price.
2. It helps the management in laying down the production policy.
3. It highlight the management strengtheners and weakness.
4. It enable objective judgement of people.
5. Budget are compiled from standard costing.
6. It facilitates delegation of authority and fixation of authority for each department.
7. It can be used to value and provide a basis for setting wages intensive scheme.
8. The setting of standard should must be invest resources and method being used

Disadvantages of Standard Costing:

1. Standard may either be too strict or too liberal.
2. Inaccurate, unreliable and out of date standard do more harm than good.
3. Establishment of standard is very difficult in practice.
4. Small concern cannot afford this technique.
5. Standard create adverse psychological effect and might result in frustration.

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