Standard cost means the expected cost that happens when a product is manufactured. Standard cost accounting is a tool that helps the management in controlling the costs.Â The analysis and the reasons for the variance, if any, is evaluated by the administration and concerned department. For it, corrective measures are taken.Â Standard cost analysis helps the company to prosper and help the industry and nation grow as an industrial hub.
Standard cost variance is divided as controllable and uncontrollable. If inflation increases and if prices increase of raw materials then the variance is termed as uncontrollable. If the price increases over the standard prescribed due to faulty management policies, then that variance is termed as controllable variance.
Standard costing system has many other advantages also. Management gets unbiased information on what all changes should be made to the manufacturing process when standard cost is applied and would help the business prosper.
Advantages of standard costing
Managers do set a standard target cost at the beginning of the financial year. During the financial year concerned, if the cost falls below the standard cost or is equal to the standard set, then the managers can focus on other jobs. If the cost rises above the standard cost set, then the managers should take remedial measures.
The advantage of the standard cost is that manufacturing cost is always kept at bay and that in turn increases the profit.
The bookkeeping and accounting process is made simple, and recording of financial transactions becomes easier with standard costing. There is a concept of responsibility accounting that takes place with standard costing. The standards are set, and it is then decided which all departments should monitor. This is to ensure that the standard costs are met well.
The improved cost control means the business can focus on other core areas and they can also think of expanding their business. The production cost is reduced without compromising on the quality of the manufactured product.
Some costs are incurred when manufacturing happens but gets added to the finished product. We can understand this with the help of an example. If a company is into refrigerator manufacturing, there is a cost of electricity that is involved. The expenses incurred for electricity is added to the refrigeration price fixed for selling. There are occasions when the electricity standard costs derail due to power hike, and this power expense cannot be transferred to refrigerator due to intense competition.
Depreciation of computer software producing company is another delicate issue that is used in standard cost, and these types of high technicalities can make the student confused in standard cost accounting homework answers.
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