Importance of Standard Costing

Standard Costing one of the advance technique of cost accounting . With this manager calculates the standard cost and compare it with actual cost and after calculating variance , improvement is done in area of production . So Standard costing is so important for every type of business organisation . We can explain its importance under following points

Increase the efficiency

Account manager fixes the standard cost of direct material , labour and overheads and pre-determined standard cost increases the efficiency of production , every worker produce goods according to standard cost . After this actual cost is also compare with standard cost . With this comparison , manager will succeed to increase the efficiency of worker for reducing cost .

Effective utilization of resources

Standard costing is also helpful for effective utilization of resources . We can explain this with small example
Suppose , A company purchase following raw material without setting any standard cost .

Name of Item                Actual Cost

x - material                          $ 40000
y - material                          $ 30000
z - material                          $ 20000

Because A company can not set the standard of quantity and rate of raw material cost . It may possible .

• Company has purchased raw material more than current production and extra raw material is the waste of working capital .
• Company does not research the market , it may possible that one supplier can supply same raw material with following cost
  
  
  

  
  Name of Item                Actual Cost
  
  x - material                          $ 35000
  y - material                          $ 20000
  z - material                          $ 15000
  

  
  
  
  

  Now company will face the total loss due to not utilization his resources effectively and standard costing is only way to effective utilization for reducing cost .

  Use in Budgetary Control

  Standard costing can also use in budgetary control . We know that budgetary control is the part of management and in controlling , it can be used . In budgetary control , not only standard cost is calculated but after comparing relative actions of improvement are taken . With standard costing , effective control of cost can be possible .

  Proper decisions

  Standard costing is also helpful for taking proper decisions for deciding cost. There are large number of expenses and there are many alternatives of these expenses . When standard cost is decided at that time , best alternative from different expenses is chosen and it will reduce extra cost burden .