Determination of Standard Costing

For any business unit, Standard Costing acts as a corrective measure. However, framing a detailed analysis is not an easy feat! There are certain steps based on which this process can be determined.

Preliminary steps for carrying out Standard Costing procedure:

1. Creating a specific cost centre:

According to The Chartered Institute of Management Accountants, London, cost centre can be depicted as a person, location or equipment or even a combination of all these products that are suitable for controlling the cost of a particular business unit. With creation of a cost centre, standards are determined as well as analysis of variance can be done. Thus, this is a bold step in regards to management of a specific organisation.

2. Classification of accounts and coding them separately:

Though a business organisation has a number of expenses, however, only actual expenses are classified under specific heads and provided with certain codes. With the help of these codes, analysis and speedy collection can be achieved.

3. Operating period:

Different standards have different operating periods, hence, it is important to determine the periods of operation.

• Practical or Expected standard is that standard which a company wishes to attend in a budget that is specified in distant future.
• Basic standard is that base that is required for setting up higher standards that are to be used by a company for future projects. This is fixed.
• A current standard is one that is established for a short time period and is to be modified at regular intervals.
• An ideal standard is set up under idyllic conditions that can be achieved under most favourable conditions and offers highest level of productivity.
• It is very important that for having a standard costing system in place, there be a proper committee with managerial heads who provide required information to different departments and therefore enhance this production process.
• For any company, there is a specific quantum of activity that is pre-determined. So, it needs to be divided in a correct manner since sales and production are based on this. However, in this case, unutilised and idle capacity is also to be taken into consideration.

4. Setting up standard framework:

The committee that is framed with head honchos of the production process and hence, standard cost for every material of production is taken into account. It is the cost accountant who acts as a coordinator of such activities.

When all these steps are carried out in a perfect manner, can it be said that a particular standard costing framework is formed.