PERSONAL INTRODUCTION
NAME (GROUP MEMBERS) HUSSAIN AHMAD ( ROLL NO,24)
MUHAMMAD HUSNAIN ( ROLL NO,26)
HAMZA IBRAHIM ( ROLL NO,65)
PROGRAMME BS COMMERCE (7TH SEMESTER )
SUBJECT COST MANAGEMENT
QUAID-E-AZAM COLLEGE OF COMMERCE
UNIVERSITY OF PESHAWAR
STANDARD COSTING
AGENDA
Standard costing
Types of Standards
Objective of standard costing
ESTABLISHMENT OF STANDARDS
Direct material
Direct labor cost
Direct Expenses
Standards for Overheads
VARIANCES
Advantages of Standard Costing
Limitations of Standard Costing
STANDARD COSTING
Basically standard mean predetermined, estimates
Standard costing is a techniques which uses standard for cost
and revenues for the purpose of control through variance
analysis
Standard is a predetermined measurable quantity set in defined
condition against which actual performance can be compared,
usually for an element of work, operation or activity
Ideal Standard
This is based on perfect operating conditions (no wastage, no inefficiencies, no idle
time, no breakdowns).
Ideal Standards are not generally used because it may influence employee motivation
adversely.
Attainable Standard
It is a standard which can be attained if a standard unit of work is carried out
efficiently, on a machine properly utilised or material properly used.
Allowances are made for shrinkage, spoilage or machine breakdown etc.
TYPES OF STANDARDS
Current Standard
Current Standard is a Standard established for use over a short period of time, related
to current conditions.
Standards based on current performance levels (current wastage, current inefficiencies) are
known as current standards.
Basic Standard
Basic Standard is a Standard established for use over a long period of time from which a
Current Standard can be developed.
They are used to show changes in efficiency or performance over a long period of time.
OBJECTIVE OF STANDARD COSTING
To provide a formal basis for assessing performance and
efficiency
To control Costs by establishing standards and analysis of
variances
To enable the principle of “Management by Exception” to be
practised at the detailed operational level
To assist in setting budgets
OBJECTIVE OF STANDARD COSTING (CONTINUE..)
To assist in assigning responsibility for non-standard
performance in order to correct deficiencies or to capitalise on
benefits.
To motivate staff and management
To provide a basis for estimating
To provide guidance on possible ways of improving
performance
ESTABLISHMENT OF STANDARDS
Analysis, experiment and training are fundamental prerequisites for establishing
standards
Standard should be set for each element of cost as follows
Direct material
Standard direct material cost for each product should be established. This will involve
1. Determination of standard quantity of materials
2. Determination of standard price per unit of materials
Direct labor cost
Determination of standard DLC will involve determination of
: 1. Standard time
2. Standard rate
Direct Expenses
Standards for these may be based on past performance records subject to anticipatory
changes therein.
Standards for Overheads
- The overheads are classified into fixed, variable and semi-variable overheads. Standard
overhead rate is determined for these on the basis of past records and future trend of
prices. It will be calculated per unit or per hour. Setting standard for overhead cost
involves the following two steps:
1. Determination of the standard overhead costs, and
2. Determination of the estimates of production
VARIANCES
The deviation of actual from standard is called variance.
The two types variance are:
1. Favourable – actual cost < standard cost
2. Unfavourable – standard cost < actual cost
Variance may be divided into two groups: 1. Price variance e.g. material price variance,
sales price variance. 2.Volume variance e.g. material usage variance, sales volume variance
VARIANCE MAY BE DIVIDED INTO TWO GROUPS:
1. Price variance e.g. material price variance, sales price variance.
2. Volume variance e.g. material usage variance, sales volume variance
ANALYSIS OF VARIANCE Variances are analysed in respect of:
1. Direct material
2. Direct labor
3. Overheads:- a. Variable overheads b. Fixed overheads
ADVANTAGES OF STANDARD COSTING
1. To measure efficiency
2. To fix prices and formulate policies
3. For Effective cost control
4. Management by exception
5.Valuation of stocks 6. Cost consciousness
7. Provides incentives
LIMITATIONS OF STANDARD COSTING
1. Difficulty in setting standards
2. Not suitable to small business
3. Not suitable to all industries
4. Difficult to fix responsibility
5. Technological changes
