What is costing
Costing (or cost-benefits analysis) is the process of analyzing the costs and benefits of different options to determine-
- What approach should be taken to a particular conflict.
- What solution or resolution should be chosen once various options are being considered.
Historical cost & it’s limitations
Historical cost systems are associates with recording of historical or actual cost. Historical costing is the ascertainment of costs after they have been incurred.
- Ineffective in cost control.
- No standards or goals so cost reduction isn’t an option.
- Not reliable for management tasks.
A standard cost is a planned cost for a unit of product or service rendered.
In the words of Backer and Jacobsen, “Standard cost is the amount the firm thinks a product or the operation of the process for a period of time should cost, based upon certain assumed conditions of efficiency, economic conditions and other factors.”
Basic standard is established for a long period and is not adjusted to the present conations. The same standard remains in force for a long period. These standards are revised only on the changes in specifications. It is indeed just like a number against which subsequent process changes can be measured. Basic standard enables the measurement of changes in costs.
The normal standard concept is theoretical and cannot be used for cost control purpose. Normal standard can be properly applied for absorption of overhead cost over a long period of time.
It is presumed that conditions of production will remain unchanged. In case there is any change in price or manufacturing conditions, the standards are also revised. Current standard may be ideal standard and expected standard.
Revision of standards
We need to revise the standards which follow for better control. Even standards are also subjected to change like the production method, environment, raw material, and technology.
Developing or setting standards
Setting up standards is based on the past experience. The total standard cost includes direct materials, direct labour and overheads. Normally, all these are fixed to some extent. The standards should be set up in a systematic way so that they are used as a tool for cost control.
When we want to purchase some material what are the factors we consider. If material is used for a product, it is known as direct material. On the other hand, if the material cost cannot be assigned to the manufacturing of the product, it will be called indirect material. Therefore, it involves two things-
- Quality of material
- Price of the material
Materials cost variance
Material cost variance is the difference between actual cost of direct materials used & standard cost of direct materials specified for the output achieved.
- AQ= Actual Quantity
- AP= Actual Price
- SQ= Standard quantity for actual output
- SP= Standard Price
- Finding of variance
- Cost control
- Right Decisions
- Eliminating inefficiencies
- Efficiency Measurement
- It cannot be used in those organizations where non-standard products are produced.
- The process of setting standard is a difficult task, as it requires technical skills.
- There are no inset circumstances to be considered for fixing standards.
- The fixing of responsibility is not an easy task.