STANDARD COSTING

STANDARD COSTING

Standard costing are target cost that should be incurred under efficient operating conditions. According to Vafeas (2005) standard costing are predetermined costs.

A standard costing system can be applied to organizations that produce many different products as long as production consists of a series of common operations.

For example, if the output from a factory is the result of a given common operations, it is therefore possible that a large product range may result from a small number of common operation. This standard costs should be developed for respective operations and product.

Standard costs are simply derived by combining the standard cost from operations which are necessary to make the product. Standard costing is a system of accounting which is used in determining the standard cost relating to each element of costs material, labour and overhead for each line of product manufactured or service supplied.

According to Brown (2006) a standard is a predicted measurement of what amount of input should be and what that input should be and what that input should cost per unit of that input. A standard should be reasonable be reasonable in that it should be attainable by skilled and motivated workers and should also enable the company to produce a product that is high enough in quality and low enough in cost so as to meet the demands of the competitive market.

It is a tool used by management for cost planning and cost control purpose. When a company uses standard cost, all costs affecting the investor accounts and the cost of goods sold accounts are stated in terms of practice, five standards are usually predetermined for the product of a manufacturing company.

They are as follows:

1. Material quantity standard: This is the amount of material that should be used from a unit of product. In some cases more than one type of material is used, as a standard is set for each material.
2. Material price standard: This is the cost per unit of material.
3. Labour Quantity Standard: is the amount of labour usually expressed in direct labour hours that should be used per unit of product.
4. Labour Price Standard: is the cost of direct labour per direct labour hours. The common name for this type of standard is wage rate standard.
5. Overhead Standard: This is the amount of overhead cost that should be per direct labour hour.

From the definition above, it will be seen that the following process are involved:
1. Predetermination of standard cost.
2. Recording of actual cost.
3. Comparing actual cost with standard cost.
4. Obtaining the cost with standard cost.

Establishment of Standard Cost

The success of any system is assured if cost control depends to some extent on getting the standard cost guaranteed. If the target costs are unattainable, most of the subsequent work of cost control system may be wasted. The first stage warrants constant consideration and setting of suitable standards is not difficult provided that certain rules are observed and certain pitfalls are avoided.

Whether dealing with materials labour or overhead labour, the basic principle of setting standards are similar. The target cost should be estimated in terms of two distinct fact quality expressed in physical terms and the price to be paid for each physical unit. For example, in estimating material cost, the amount of material needed to make the product should be per unit of material.

There are reasons for recommending that target cost be considered in terms of both factors. First, prices may change especially in times of inflation but the physical quality which is required for production is not affected by change in price. This is because the same quantity has to be used and at the same time be maintained.

The second ad more important reason for distinguishing these two factors is that it is essential for analysing the causes of variances if the actual material cost is said to be N300, 000 more than the standard estimated cost, the question that will arise because too much material were used or because the actual price paid was higher than the material allowed for the machine? Without this fundamental knowledge, it may be impossible to identify that proper standard which is extremely important because management will evaluate past performance.

References

Ezeamama, M. C. (2002). Fundamental of financial management (A practical guide). Enugu: Ema Press Publishing Ltd.

Seal, W. (2006). Management accounting and corporate governance. An institutional interpretation of the agency problem. Management Accounting Journal, Vol. 15.