Standard Costing
Standard costing is defined by the ICMA, London, “as the preparation and use of standard costs, their comparison with actual costs and the analysis of variances to their causes and points of incidence.†Standard costing, thus, is a system of costing which can be used in conjunction with any method of costing, like job costing, process costing, etc.
Standard cost is defined “as a pre-determined cost which is calculated from management’s standards of efficient operation and the relevant necessary expenditure. It may be used as a basis for price fixing and for cost control through variance analysis.†The standard cost is a measure in quantities, hours and the value of factors of production. There are three main parts of standard costs which are:
(a) Direct material
(b) Direct labour
(c) Overhead expenses
Material quantity standards: The following procedure is usually followed for setting material quantity standards:
(i)Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Standardisation of products
(ii)Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Product classification
(iii)Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Standardisation of material
(iv)Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Preparation of bill of materials
(v)Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Test runs
Labour quantity standards: The following are the steps involved in setting labour quantity standards:
(a)Â Â Â Â Â Â Â Â Â Â Â Â Â Standardisation of product
(b)Â Â Â Â Â Â Â Â Â Â Â Â Â Product classification
(c)Â Â Â Â Â Â Â Â Â Â Â Â Â Standardisation of methods
(d)Â Â Â Â Â Â Â Â Â Â Â Â Â Manufacturing layout
(e)Â Â Â Â Â Â Â Â Â Â Â Â Â Time and motion study
(f)Â Â Â Â Â Â Â Â Â Â Â Â Â Â Training of the operator
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