Purpose of Standard Costing

What are the purpose of standard costing?

Leni from Philippines

Leni! Standard costing is one of important technique of controlling the cost of company in which standard cost is determined for each department and each element of cost. After this, we use variance analysis for seeing whether  our cost is less than our standard cost. If our actual cost is less than our standard cost, we have successful in our mission. So, all these things include in standard costing. Following points will explain the purposes of standard costing more deeply:

1. For Fixing the Responsibility

If there is unfavorable variance after variance analysis in standard costing, we will fix the responsible of our employees. Suppose, if the standard cost of labor is less and actual cost of labor is  more. It means, we have paid more to employees. This is our big loss. Who is responsible to pay salary to employees. That person has to give answer for this.

2. Management by Exceptions

We can use management by exceptions easily with standard costing. Management by exception means to concentrate big projects of company instead of doing small and small supervision. In standard costing, we have made standard of our cost. Now, feel relax and happen what is happening and only check and compare results relating to material, labor and overhead cost.

3. Study of Time and Speed

For calculating standard cost, we have to study of time and speed. When we study, we get knowledge of new  ways to increase our speed at lowest time. So, standard costing promotes innovation.

4. Helpful in Production Policy

Standard costing's one purpose is to help in production policy. We make only good standards if we know complete report of variance. That report can be available in standard costing technique.

5. Helpful in Planning Budget

Planning budget may be also easy in standard costing.

6. Increase in Efficiency

In standard costing technique, every employee will become alert. Because he know that if he will not bring performance, company may demote him. With this, efficiency of employee will increase.

7. Easy to Evaluate Stock

To evaluate stock is very very easy in this technique.

8. Easy to Delegate Powers 

Delegation of powers is very easy in this technique because I will promote to that employee whose performance will be the best. How can I measure his performance. Just check the variance. Suppose, his duty  is to buy material. If material cost variance shows positive variance and after investigation, we found that our actual material cost is very less due to the good buying strategy of that employee. We will make him the manager of purchase department by delegate our powers.

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Accounting Education: Purpose of Standard Costing
Purpose of Standard Costing
Accounting Education
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