Standard costing is one of the tools of cost control. It is an extension of budgetary control. It is not a substitute to cost control but regarded as complementary to the ordinary costing system. Standard costs form the basis of the system of standard costing. The technique of standing costing involves:
1) The ascertainment of standard costs
2) The use of standard costs
3) Their completion of it with the actual costs and the measurement of variances.
4) The location of responsibility for the variances and the corrective action to be taken.
5) The analysis of variances for ascertaining the reason for the same.
Objectives of standard costing:
1) The control of all factors affecting production.
2) The disclosure of the effect of temporary increase or decrease in the volume and sales on revenues.
3) The supply of prompt reports to the management showing the progress of production and low expenditure to date. This will be followed by a comparison with the estimated figures so that corrective actions may be taken in the right time.
Establishment of a Standard costing system
The establishment of a standard costing system in a manufacturing concern involves the following steps:
1) Setting of standard costs
2) Setting up of standards
3) Classification of accounts
4) Establishment of cost centers
5) Standardization of functions.
Determination of standards
For any given product or unit the following standards must be determined:
1) Standard material costs
2) Standard labor costs
3) Standard direct costs
4) Standard variable overhead costs
5) Standard fixed overhead costs and
6) Standard selling price and profit.
Example: Calculation of Standard Labor
time for Machine part no.1200 from the following data given:
Standard batch size
100 pieces
Set up time
64 minutes
Operating time
64 minutes
Operating time(for each piece)
Fixing job on machine
2 minutes
Cutting time
10 minutes
Removing the job from machine 3 minutes
Allow 10% on total operation time for inspection during
process and allow further 5% on total time for fatigue.
Solution:
Total operating time for each piece(2+10+3)
=
15 minutes
Therefore, operating time for 100 pieces(15x100) 1500 minutes
Time for inspection (10% on 1500 minutes)
150 minutes
Set up time
64 minutes
Sub-total
1714 minutes
Fatigue time (5% on total time)
86 minutes
So, standard time for 100 pieces
1800 minutes
Therefore, standard time for 1 piece
è 1800/100 = 18 minutes.
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