Friday, June 6, 2008

What is standard costing

Q:-What is standard costing?

Ans Introduction to Standard Costing
Standard costing is an important subtopic of cost accountng. Standard costs are usually associated with a manufacturing company's costs of direct material, direct labor, and manufacturing overhead.
Rather than assigning the actual costs of direct material, direct labor, and manufacturing overhead to a product, many manufacturers assign the expected or standard cost. This means that a manufacturer's inventories and cost of goods sold will begin with amounts reflecting the standard costs, not the actual costs, of a product. Manufacturers, of course, still have to pay the actual costs. As a result there are almost always differences between the actual costs and the standard costs, and those differences are known as
Standard costing and the related variances is a valuable management tool. If a variance arises, management becomes aware that manufacturing costs have differed from the standard (planned, expected) costs.
If actual costs are greater than standard costs the variance is unfavorable. An unfavorable variance tells management that if everything else stays constant the company's actual profit will be less than planned.
If actual costs are less than standard costs the variance is favorable. A favorable variance tells management that if everything else stays constant the actual profit will likely exceed the planned profit.
The sooner that the accounting system reports a variance, the sooner that management can direct its attention to the difference from the planned amounts.
If we assume that a company uses the
perpetual inventory system and that it carries all of its inventory accounts at standard cost (including Direct Materials Inventory or Stores), then the standard cost of a finished product is the sum of the standard costs of the inputs:
1. Direct material 2. Direct labor 3. Manufacturing overhead a. Variable manufacturing overhead b. Fixed manufacturing overhead

About Accounting Education

An educational site with 2,000+ articles, solutions, video-guides and tutorials on all topics related to accounting and finance.

Get Update on Mobile

Type in your mobile phone web browser for free access anytime, from any place.The content is designed specifically for cell phones and mobile devices.

Contact Us

Contact us Send an Email Phone number and vCard LinkedIn profile Follow us on twitter