Planned cost is a key for effective cost control which is not provided by historical cost concepts. The standard costing system was developed to overcome the drawbacks of the historical costing system. Since historical costing deals only with the actual costs incurred, it is not an effective device of cost control.
Standard costing tells us what should be the cost of the product and if the actual cost exceeds the projected cost, the standard costing system can point to the reason of deviation.
Points Related to Standard Costing
- Standard costing includes pre-determination of costs under specific working conditions.
- In this process, the standard quantity of machine time, labor time, and material is calculated and the future market trend for price standards is analyzed.
- Standard costing helps in variance analysis.
- Along with fixation of sale price, it also provides valuation of stock and work in progress.
- Material, labor, and overheads cost are ascertained.
- Actual cost is measured.
Standard Cost Card
|Standard Cost CardNo … … … …
Product… … … … Date of setting Standard… … … …
|Element of Cost||Quantity of Hours||Rate Rs.||Standard Cost|
|1. Direct Material
|Less: Normal Loss 5%||25 units||Scrap Value||400|
|Normal Output||475 units||2,000|
|2. Direct Labour||100 hrs||20||200|