What is standard costing
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What is standard costing?
Standard costing is a cost accounting system that uses predetermined standard costs to track and control costs. Standard costs are set in advance and are based on expected levels of efficiency and productivity. Actual costs are compared to standard costs to identify variances, which are differences between actual and standard costs. Variances can be analyzed to identify areas where costs can be improved.
The benefits of standard costing
There are several benefits to using standard costing, including:
Improved cost control: Standard costing can help companies to identify and control costs more effectively. By setting standard costs in advance, companies can track their actual costs against the standard and identify areas where costs are out of control.
Improved pricing: Standard costing can help companies to set accurate prices for their products. By knowing their standard costs, companies can calculate the cost of producing a product and then add a profit margin to determine the selling price.
Improved decision-making: Standard costing can provide management with valuable information that can be used to make better decisions. For example, variance analysis can help management to identify areas where costs can be improved or where prices may need to be adjusted.
The disadvantages of standard costing
There are also some disadvantages to using standard costing, including:
It can be time-consuming and expensive to set up and maintain a standard costing system.
Standard costs may not always be accurate, as they are based on expected levels of efficiency and productivity.
Standard costing can be difficult to implement in companies with complex production processes.
How to set standard costs
Standard costs are set by first determining the costs of direct materials, direct labor, and factory overhead. Direct materials costs are the costs of the raw materials that are used to produce a product. Direct labor costs are the costs of the labor that is used to produce a product. Factory overhead costs are the costs of all other manufacturing costs, such as utilities, rent, and maintenance.
Once the costs of direct materials, direct labor, and factory overhead have been determined, standard costs are set by multiplying the unit quantity of each input by the standard price per unit. For example, if the standard quantity of direct materials per unit is 10 pounds and the standard price per pound is $1, then the standard cost of direct materials is $10.
How to analyze variances
Once standard costs have been set, actual costs are compared to standard costs to identify variances. Variances can be favorable or unfavorable. Favorable variances indicate that actual costs are less than standard costs, while unfavorable variances indicate that actual costs are more than standard costs.
Variances can be analyzed to identify areas where costs can be improved. For example, if there is an unfavorable variance for direct materials, management may need to investigate whether the company is using more or more expensive raw materials than expected.
Standard costing is a valuable tool that can help companies to improve cost control, pricing, and decision-making. However, it is important to note that standard costing can be time-consuming and expensive to set up and maintain. Additionally, standard costs may not always be accurate, as they are based on expected levels of efficiency and productivity.
Despite these limitations, standard costing can be a valuable tool for companies that are looking to improve their profitability.
What is standard costing
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