Standard costing

Standard costing is a cost accounting method that assigns expected (or standard) costs to products and
services, rather than tracking actual costs. These standards are predetermined estimates of how much
resources should be consumed under efficient operating conditions.

Role in Management

Cost Control

Helps in identifying variances between actual and expected performance.

Performance Evaluation

Assists in evaluating managerial performance based on efficiency.

Budgetary Control

Standard costing provides a benchmark, facilitating comparison with the actual budget
performance.Forexample A company sets a standard cost of $5 per unit for material. If actual cost is $6
per unit, this $1 variance highlights inefficiency or price fluctuation.

Techniques of Standard Costing and Its Objectives

Techniques of Standard Costing

These are the steps or methods used to implement standard costing in an organization

Setting Standards

Predetermined costs are established forDirect materials (quantity & price per unit),Direct labor (time
per unit & wage rate) and Overhead costs (rates per labor or machine hour) and also this Standards are
set using past data, expert input, and time/motion studies.

Recording Actual Costs

Refers to the Actual costs for materials, labor, and overheads are recorded as production
occurs.Accurate records are needed for proper comparison.

Comparing Actual with Standard (Variance Analysis)

Refers to the Actual costs are compared with standard costs to identify the differences (variances).And
whichVariances may beFavorable (actual cost is less than standard) Or Unfavorable (actual cost is more
than standard)
Analyzing Variance

Refers to the Variances are analyzed to determine their causes.For example High material cost variance
could be due to price increase or waste. Where Labor efficiency variance might result from poor training
or equipment failure.

Taking Corrective Action

Is the process where Management uses variance analysis to Fix problems, Improve efficiency and adjust
future standards or operations.

Reporting and Feedback

Is the process where by reports on variances and performance are prepared for management.To see
Feedback loops which help departments adjust and align with goals.

Objectives of Standard Costing

Cost Control

It helps keep costs within limits by comparing actual vs standard costs and identifying wastage or
inefficiencies.

Budgeting

To standards form a basis for creating accurate and realistic budgets.

Performance Measurement

Variance analysis helps measure how well departments or employees are performing compared to the
expected standards.

Decision Making

Provides reliable cost data for pricing, outsourcing, and production decisions.

Efficiency Improvement

By analyzing variances, organizations can improve processes, reduce waste, and boost productivity.
Types of Standards

1. Ideal Standards (Theoretical Standards)

Is the process of represent the perfect performance under ideal conditions — no machine breakdowns,
no waste, no delays, and maximum efficiency. Where it set the highest possible performance target.
And it Motivates employees to aim high also it Often unrealistic and can demotivate staff because they
are nearly impossible to achieve in practice.forexample Expecting a worker to assemble 100 units per
day with zero errors or breaks.

2. Attainable Standards (Practical Standards)

Refers to the process that are based on efficient performance under normal working conditions,
allowing for some waste, delays, or machine downtime.as it usedto set a realistic and motivating goal
that is challenging but achievable. And also it encourages efficiency and is widely used in practice.And
also it requires or May need regular updates to stay relevant.For example Setting a target of 90 units per
day, accounting for brief rest periods or minor delays.

3. Basic Standards

These are long-term standards that are not changed frequently. They serve as a base for comparison
over several periods.are uses to measure trends and long-term performance changes. And areUseful for
analyzing performance over time and it Can become outdated and irrelevant if not reviewed
regularly.forexample A material cost standard set five years ago to track price inflation trends.

4. Current Standards

These standards reflect current conditions and are updated regularly to reflect changes in technology,
prices, or processes.It aim to provide accurate and up-to-date performance benchmarks.Also it's More
relevant for short-term planning and control and it's Frequent updates can be time-consuming and
costly.forexample A labor cost standard updated monthly to reflect wage changes.

How Standards Are Developed

1. Determine the Types of Standards Needed

Which can be Material standards (quantity and price), Labor standards (time and wage rate), Overhead
standards (allocation rates based on activity levels) and which each of these requires its own set of
procedures and inputs.

2. Gather Historical Data

It Analyze past performance data such as previous costs, usage rates, and productivity levels.
And Historical data helps in setting realistic and attainable standards based on actual experience.

3. Consultation with Experts

It Work with engineers, production managers, cost accountants, and HR personnel.

For example Engineers may define material and time requirements where HR may provide labor rate
information and Accountants help with cost estimation and analysis.

4. Conduct Time and Motion Studies (for labor standards)

These studies observe and measure the time required to complete tasks under normal working
conditions.Helps in setting standard labor time for each activity.

5. Establish Material Standards

It determine the standard quantity of materials needed per unit of product. And Set the standard price
per unit of material (often based on market prices or supplier quotes).

6. Determine Overhead Standards

It Identify fixed and variable overhead costs also it allocate overhead to products using standard activity
levels (like machine hours or labor hours).

7. Consider Expected Changes

The Factor in changes such as inflation, new technology, or changes in labor agreements that might
affect costs.

8. Review and Approve Standards

Once drafted, the standards are reviewed by management for realism, alignment with strategic goals,
and feasibility.Also May go through revision before final approval.

9. Communicate Standards

It Share the finalized standards with all departments and employees and Clear communication ensures
understanding and commitment to meeting the standards.

10. Regular Review and Update

Standards should be reviewed periodically to ensure they remain accurate and relevant. And Updates
may be needed due to economic conditions, process changes, or productivity

improvements.

Importance of the Behavioral Aspects of Standard Costing

It enhance employee Motivation

Encourage Participation and Ownership

When employees are involved in setting the standards, they are more likely to accept and strive to meet
them. Where Participation promotes a sense of ownership and accountability.

Enhance Performance Evaluation

The Standard costing is often used to evaluate employee and departmental performance.And If
employees perceive the evaluation as fair, it builds trust and enhances performance. Where unfair or
poorly communicated standards may lead to conflict or resistance.

Encourage Communication and Feedback

The Variance analysis (comparing actual performance with standards) provides feedback. In which can
be Positive or negative variances can guide managers and employees in adjusting behaviors.Regular
feedback helps in continuous improvement and goal alignment.

Promote Resistance to Change

The mployees might resist new or revised standards, especially if they feel those standards threaten
their job security or comfort zones. And Managing change and clearly explaining the reasons behind
new standards can reduce resistance.

Promotes . Incentives and Rewards

The Standard performance can be tied to bonuses or promotions. And Well-designed incentives aligned
with standards can encourage desirable behaviors and goal achievement.

Conclusion

The standard costing is not just a technical but also it's ahuman tool. For it to be truly effective, it must
consider how people think, feel, and respond. A well-designed system that respects human behavior
leads to better performance, higher morale, and more accurate cost control.

References

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orientated organisa. In Sustainability accounting and reporting (pp. 153-180). Dordrecht: Springer
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McFarland, W. B. (1950). How standard costs are being used today for control, budgeting, pricing: A
survey. Journal of Accountancy (pre-1986), 89(000002), 125.

Hallbauer, R. C. (1978). Standard costing and sclentlflc management. Accounting Historians Journal, 5(2),
37-49.

Spronck, L. H. (1956). Today's costing methods and their objectives. New York Certified Public
Accountant (pre-1986), 26(000005), 285.

Al-Shattarat, B., Al-Shattarat, H., & Dannoun, Z. (2021). The impact of the standard costing system on the
performance of industrial companies in Jordan. Academy of Strategic Management Journal, 20(1), 1-10.