5 Questions
What is the primary purpose of standard costing?
To report variances by comparing actual costs to pre-set standards
What are the components of standards for each cost element in standard costing?
Monetary component and resources requirement component
What principle does standard costing enable to be practiced?
Management by exception
When should standard costs be revised for control purposes?
Whenever there are changes in required resource inputs or in the price of resources
What does standard costing involve for control purposes?
The establishment of predetermined estimates of the costs of products or services, the collection of actual costs, and the comparison of the actual costs with the predetermined
Study Notes
Standard Costing
- The primary purpose of standard costing is to provide a benchmark against which actual costs can be compared, facilitating cost control and performance evaluation.
Components of Standards
- Standards for each cost element in standard costing comprise:
- Physical standards (quantity of materials, labor hours, etc.)
- Price standards (cost per unit of material, labor rate, etc.)
- Efficiency standards (output per labor hour, etc.)
Principle of Management by Exception
- Standard costing enables the principle of management by exception to be practiced, where attention is focused on deviations from standard costs.
Revising Standard Costs
- Standard costs should be revised for control purposes when there are significant changes in the production process, technology, or market conditions.
Control Purposes
- Standard costing involves establishing standards, recording and reporting actual costs, and analyzing and investigating variances from standard costs for control purposes.
Test your knowledge of standard costing and standard costs with this quiz. Explore the preparation of standard costs, their use in variance analysis, and the principles of management by exception. Challenge yourself with questions on monetary and resource requirement components of standards for cost elements.
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