Purposes and Advantages of Standard
Costing System:
Standard costing systems help in planning
operations and gaining insights into the probable
impact of managerial decisions on cost levels and
profits. Standard costs are used for:
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Establishing budgets.
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Controlling costs and motivation and measuring
efficiencies.
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Promoting possible cost reduction.
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Simplifying costing procedures and expediting cost
reports.
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Assigning
costs to materials, work in process, and finished goods
inventories.
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Forming the
basis for establishing bids and contracts and for setting
sales prices.
The effectiveness
of controlling costs depends greatly upon a knowledge of
expected costs. Standards serve as measurements which call
attention to cost variations. Executives and supervisors become
cost conscious as they become aware of results. This cost
consciousness tends to reduce costs and encourages economies in
all phases of the business.
The use of
standard costing for accounting purposes simplifies costing
procedures through the reduction of clerical labor and expenses.
A complete standard cost system is usually accompanied by
standardization of productive operations. Standard production or
manufacturing orders, calling for standard quantities of product
and specific labor operations, can be prepared in advance of
actual production. Materials requisitions, labor time tickets,
and operation cards can be prepared in advance of production,
and standard costs can be compiled. As orders for a part of
placed in the shop, previously established requirements,
processes, and costs will apply. The more standardized the
production, the simpler the clerical effort. Reports can be
systematized to present complete information regarding
standards, actual costs, and variances.
A complete
standard cost file by parts and operations simplifies assigning
costs to materials, work in process, and finished goods
inventories. The use of standard costs stabilizes the influence
of materials costs. placing bids, securing contracts, and
establishing sales prices are greatly enhanced by the
availability of reliable standards and the continuous review of
standard costs.
The standard cost
system may be used in connection with either the process or job
order cost accumulation method. However, it is more often used
in process costing because because of the greater practicality
of setting standards for a continuous flow of like units than
for unique job orders. Relevant Articles:
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