Standard Costing Definition

Standard cost accounting can be a very useful tool for managers trying to plan more accurate budgets.

Accurate budgets can lead to a more profitable and efficient business at the end of the day when you create financial reports. This is because the standard costing system gives managers a projected idea of ​​the cost of expenses. Once these managers can compare standard costs with actual costs, they will be able to determine whether new business practices need to be used.

In this article, we’ll define standard costing, outline its benefits and drawbacks, and give you the steps for calculating standard costing.

Contents

1 What is the Standard Fee?
2 Advantages of Standard Costing
2.1 Efisiensi
2.2 Allows for cost control
2.3 Helping management make decisions
2.4 Accurate budget
2.5 Lower production cost
3 Disadvantages of Standard Costing
3.1 Slow feedback
3.2 Decreased morale
3.3 Employee reactions
4 Ways to Create a Standard Fee
4.1 1. Determine the costs of direct materials, direct labor, and overhead
4.2 2. Calculate standard costing

What is Standard Fee?

Standard costing is the practice of estimating the cost of the production process. This is the branch of cost accounting used by manufacturers, for example, to plan their costs for the coming year on various expenses such as direct materials, direct labor or overhead. This manufacturer can also compare the standard costing ar with the actual cost.

The difference between standard cost and the actual cost is known as a variance. The existence of variance indicates a deviation from what is recorded in the profit plan.

If actual costs are greater than standard costing, management may anticipate lower than expected profits. However, if actual costs are less than standard costing, management may anticipate higher profits than originally planned.

Advantages of Standard Costing

Standard costing provides managers with several advantages that can help their businesses operate more efficiently. Here are some examples:

Efficiency

The standard costing system provides a quick estimate of projected costs. While accurate reports are nice to have, they are not timely. A good cost estimate given immediately is highly preferred.

Allows for cost control

If a variance occurs, the manager is allowed to correct any discrepancies. This will then allow them to improve cost control. This means they can be more aware of future spending habits and strive for little or no difference.

Help management make decisions

Setting standard costing can also affect the way the business operates as a whole. Once managers determine any variance, it allows them to act and improve current business practices and expenses.

For example, if the actual cost of raw materials is $50,000 and exceeds the standard cost of $10,000, this will result in a difference of $40,000.

Managers can then begin to investigate why the variable occurred and how to prevent it from happening in the future. This large variation in circumstances can be due to several reasons such as inflation or inefficient use of purchased products.

Accurate budget

Once managers have controlled costs through the use of a standard costing system, actual future costs should approximate standard costing. This result is very favorable because it means the profit plan is running as projected. This can lead to more accurate budgets in the future.

Lower production cost

Lower production costs can be a possible advantage when implementing a standard costing system. Because standard costing allows others to visualize spending habits, employees can become more cost-conscious, efficient, and work on their performance. This can result in lower overall production costs.

Disadvantages of Standard Costing

While standard costing can be beneficial for business operations, it also has some drawbacks. Following are some of the disadvantages of implementing this costing system:

Slow feedback

Since variance reports are only prepared monthly and this information takes time to be released, by the time it is finally released it may no longer be useful. This can be avoided by making timely and frequent reports.

Mood drop

Most managers tend to focus on problem areas rather than success. With regard to standard costing, they can spend more time correcting any variance than congratulating employees for a job well done.

Employees need positive reinforcement to enjoy their work and know that they are an integral part of the business. Using a standard costing system can increase the potential for low employee morale.

Employee reaction

Due to low morale, employees have the potential to hide unfavorable variance reports to avoid future repercussions. This will give managers the wrong understanding of their profit plans.

Knowing the results of past variance reports can also lead employees to take actions that will affect the business. This could include employees making output increases at the end of the month to avoid an unfavorable report. This can then lead to a lower quality product.

How to Create a Standard Fee

Creating standard costs starts with knowing how to calculate them correctly. Consider the following steps when creating standard costs:

1. Determine the costs of direct materials, direct labor, and overhead

To determine these costs, you must multiply each rate by the quantity (in units or hours).

For example, if the direct materials price is $10 and the standard quantity is 20 pounds per unit, you would multiply $10 by 20 to get $200.

This will be the standard costing for direct materials only. Say the direct labor rate is $15 and the standard direct labor hour per unit is 10 hours.

This means the standard cost for direct labor is $150. Now, let’s say the overhead is $10 and the number of hours is 5. This means the standard costing for overhead is $50 because $10 multiplied by 5 is $50.

2. Calculate standard cost

After you determine the standard costing of each expense item, add them all up to get the overall standard costing.

Following the example above, the standard cost for this production is $400 because $200 ( standard costing direct materials) + $150 (v direct labor) + $50 ( standard costing overhead) = $400 ( standard costing ).