An ideal approach to standard costing

It may be due to management attempting to shift the blame for poor results or due to a poor planning process. Therefore, adverse variances with an ideal standard have a different meaning from adverse variances calculated with a current standard. The extra work involved in maintaining up-to-date standards might limit the usefulness and relevance of a standard costing system.

Standard Costing

Most of the companies using standard costing system set practical standards rather than ideal standards. Variances are more relevant, especially in a turbulent environment.

Their sole use is to show trends over time for such items as material prices, labour rates and efficiency and the effect of changing methods. Since the target is not achievable, they might not even try to get near it. However, some employees may prefer standards to be set at a low level of performance, in order to avoid the need to work harder.

However, if employees are offered a bonus for achieving standard costs, this could increase their incentive to set low standards of performance, i. Emphasis on continuous improvement Standard costing and adherence to a preset standard is inconsistent with the concept of continuous improvement, which is applied within TQM and JIT environments.

Some employees will be motivated by this challenge and will work harder to achieve it. These standards may demotivate employees if, over time, they become too easy to achieve and, as a result, employees may feel bored and unchallenged.

Attainable standards They are based upon efficient but not perfect operating conditions. Discuss the advantages and disadvantages of the approach. Frequent demands for budget revisions may result in bias.

Therefore, the variances from practical standards reflect abnormal conditions that really need immediate attention towards remedial actions. Non-standard products Standard product costs apply to manufacturing environments in which quantities of an identical product are output from the production process.

A good reason for a change in the standard might be: Practical standards take into account all normal wastage and inefficiencies and can therefore be used for inventory planning and forecasting cash flows.

These are the most frequently encountered type of standard. Types of standard There are four main types of standard: These types of situations do not occur frequently.

For example, staff do not pour the drinks themselves but use machines which dispense the same volume of drink each time. If this attainable standard is realistic, it might provide a target that they try to achieve.

Managers are, theoretically, more likely to accept and be motivated by the variances reported which provide a better measure of their performance.

The type of standard set Individuals might respond to standards in different ways, according to the difficulty of achieving the standard level of performance. Monitoring performance is important Variance analysis control reports tend to be made available to managers at the end of a reporting period.

When a standard level of performance is high, e. Direct labour efficiency standards are seen as a key to management control. Current standards These are standards based on current working conditions. Disadvantages of ideal standards Ideal standards has the following disadvantages: Dublin, Edinburgh, Lisbon, London Rating:Standard Costing.

Standard costing is Discuss the advantages and disadvantages of the approach. Solution. Advantages may include: Ideal standard: When a standard level of performance is high, e.g.

an ideal standard, employees and their managers will recognise that they cannot achieve it. Since the target is not achievable, they might. Standard Costing Overview Standard costing is the practice of substituting an expected cost for an actual cost in the accounting records, and then periodically recording variances showing the difference between the expected and actual costs.

This approach represents a simplified alternative to cos. Standard Costing •In a standard costing system, costs are entered into the Materials, Work in Process, and Finished Standard Costing •Standard direct materials cost is the product of the Approach to Controlling Costs.

Variance Analysis. • Distinguish between standard variable costing and standard absorption costing or at ideal levels that make no allowance for the above losses, and are only attainable under the most favourable Why Standard Costing: Standard Costing main purpose is to • Investigate the reasons.

Types of standards in standard costing

AN IDEAL APPROACH TO STANDARD COSTING By Jitesh Chandak INTRODUCTION Before you start your study on standard costing you must be clear in your mind that you are going to study a chapter which wants more practice and hard work to develop a strong and sound concept. Ideal standards in standard costing, are standards that can be achieved only with the highest efficiency and performance (usually under.

An ideal approach to standard costing
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