Standard Costing Overview

Study Notes

Standard Costing

Standard costing is a method of predetermining costs for a product or service based on efficient operating conditions.
Standard costs are used as a benchmark to measure actual costs.
The difference between standard costs and actual costs is known as variance.
Variance analysis helps identify and analyze the reasons for cost differences.

CIMA Definition of Standard Costing

Standard costing involves pre-determining cost standards and their application to measure variances from actual costs for efficient production.

Steps in Standard Costing

Establishment of cost centers: defining areas of responsibility based on cost incurrence.
Classification and coding of accounts: organizing accounts for efficient tracking and analysis.
Determination of standard types: choosing the appropriate standard based on the needs of the organization.
Setting standard costs: establishing target costs for materials, labor, and overheads, based on efficient operating conditions.

Cost Centers

Cost centers refer to units within an organization that incur expenses but do not directly generate revenue.
These centers are responsible for controlling expenses.

Examples of Cost Centers

Research and development (R&D) department: develops new products and technologies for the organization.
Production cost centers: directly involved in the manufacturing process.
Service cost centers: support the organization's primary operations, such as human resources or accounting.

Types of Standards

Basic standards: long-term standards that remain unchanged.
Current standards: standards developed for the current period and subject to revision.

Types of Current Standards

Ideal standards: theoretical standards reflecting perfect efficiency and unattainable conditions. These standards assume no losses or waste.
Expected/Practical standards: realistic and attainable standards, accounting for reasonable losses and inefficiencies. They are the most commonly used type of standard in practice.
Normal standards: based on a period's average performance to mitigate cyclical cost variations. This type of standard helps manage cost fluctuations.

Description

This quiz covers the fundamentals of standard costing, including its definition, purpose, and the importance of variance analysis. Learn about the steps involved in establishing standard costs and how they serve as benchmarks for measuring efficiency in production. Test your understanding of cost centers and the classification of accounts.