Standard Costing: Control Costs and Improve Efficiency with

Standard Costing: A Functional-Based Control Approach●In an actual cost system, product costs are only recordedwhen they are incurred. This is usually used to record the direct materials and direct labor since their costs can easily be traced. ●Under normal costing, direct materials and direct labor costs are accumulated as they are incurred. On the other hand, FOH is applied to production on the basis of actual input (hours, units, costs, etc. multipliedby a predetermined FOH application rate). ●Under standard costing, all costs attached to products are based on standard or predetermined accounts. Comparison of actual, normal, and standard costing ●Standard costs are usually determined for a period of one year and are revised annually. ●However, if cost analyses during the year indicate that a standard is incorrect, or if a significant change has occurred in costs or other related factors, management should not hesitate to adjust the standard accordingly. ●Standard costs(planned costs, predicted costs, scheduled costs, and specification costs)represent the "planned" costs ofa production and are generally established well beforeproduction begins. ●The establishment of standards thus provide managementwith goals to attain (planning) and bases for comparison withactual results (control).Standard costs vs budget●Standard costing is concerned with cost per unit and servesbasically the same purpose as a budget.●Budgets, however, quantify management expectations in terms of total costs rather than in terms of per unit costs. ●Standard costs do not replace actual costs in a costing accumulation system. Instead, standard costs and actual costsare both accumulated.Standard costs vs estimated costs ●Estimated costs have historically been used as a projections of what per unit costs will be for a period, while standard costs are what a unit cost of a product should be. Purpose of standard cost accounting ●To control costs and promote efficiency. ●This is used with either job order or process costing to manufacture a product and the subsequent comparison of the actual costs with the established standard. ●Any deviation for the standard can be quickly detected and responsibility pinpointed so that appropriate action can be taken to eliminate inefficiencies or to take advantage of efficiencies. Uses of standard costs 1. Cost control ●Refers to identifying a cost with its related benefits and making sure that the cost is justified given the benefits derived. ●Actual costs can be compared with standard costs as frequently as necessary (monthly, weekly, daily or for a single work shift). ●With timely performance reporting, management can take action quickly to control problems as they arise. 2. Pricing decisions ●While actual costs reflect accurately the costs involved in producing goods and services, they do not always provide consistent and timely information for pricing. ●Standard costs provide a measure of consistency by eliminating fluctuations in actual costs, such as seasonal costs for some raw materials or random fluctuations such as unexpected cost changes in world markets. ●Since companies now are operating in competitive markets, it becomes vital to generate consistent and timely cost information in pricing its products or services. Standard costs provide timely information. 3. Performance appraisal ●Standard costs provide measurements that can be applied uniformly to all personnel being evaluated. ●For the standards to work well, they must be understood by the people being evaluated. The employee should also know how the standards are used in employee evaluation and reward system.