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Standard Costing Introduction

Standard Costing:

Going by the general mode, Standard Costing is that practice that in accounting records substitutes expected costs for an actual cost and therefore it is used periodically to record variances between expected and actual costs.

A standard cost is that predetermined cost which shows what each product or concerned service should cost under certain operational criteria. This cost can be simply termed as something that is expected at a certain point of time.

For any business organization, it is of utmost importance that there be a proper accounts statement that depicts the profit and loss associated with that business, and check out risk factor. The efficiency of a company specifically depends on how it controls its cost factor, since a lack of this, results in huge loss amount. In this regard, standard costing is used for ensuring that costs of a company are controlled and maintained in a proper manner.

Defining this form of costing in a detailed manner:

When it comes to setting a standard, the best way to depict is provided by Prof. Eric. L. Kohler, who states it to be a desired model or objective that has to be attained. Also, as per The Institute of Cost and Management Accountants, England, standard cost is a mode of pre-determined cost that is calculated from management’s point of view for required performance of certain operations and required expenditure.

Related to this is standard costing that is preparation of standard costs for usage, as well as analysis of variance causes and their incidence points.

Historical Costing:

This is another form of costing that can be taken to be accumulation of actual costs in a systematic mode. As per statement made by The Institute of Cost and Management Accountants, England, historical cost is associated with actual cost that is incurred in buying of goods, services and assets. While on an extension, historical costing refers to specifically that accounting system that is strictly associated with historical costs that are incurred by any company.

However, there are certain limits placed on historical costing:

  • Due to its inaccuracy, it is not suitable for comparison of costs
  • It can be said to be a post analysis of actual cost that is incurred by a company.

Thus, it is important for a student to understand details associated with this topic to get into details of standard costing.

 

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