In small concerns, production cannot be properly scheduled since frequent changes in production conditions take place. Detailed analysis may be meaningless and superfluous for them. This is the Standard which is anticipated to be attained during a future specific period (budget period). While setting this type of standard, actual conditions and circumstances prevailing are considered.
- Traditional approaches limit themselves by defining cost behavior only in terms of production or sales volume.
- Thus it helps the management in formulating price and production policy.
- Interest cost is treated as another period cost, whereas it may contribute significantly towards bringing the product (or customer) to its current status.
- The use of standard costs and knowledge of relationship gained through establishment of standards are useful in budgetary planning and control.
Difference between Basic Standard and Current Standard
(iv) Taking appropriate action on the basis of the nature of variances, i.e. controllable and non-controllable. As pointed out above, historical costs are made available after the occurrence of an event and also, after the lapse of a particular period time. Forwarding variance analysis reports to management for appropriate action, where needed. Assigning cost recording transactions to materials, work-in-process and finished goods inventories. Past records can be used only to assess ‘normal’ wastes, machine breakdown, level of efficiency, etc. Attainable standard includes wastes, machine breakdown, etc., which cannot be prevented.
Pre-Requisite # 2. Judicious Setting of Standards:
Causes for this variance are- inefficiencies, inexperienced labour, change in operations, new tools, different types of material etc. This variance and its causes reflect the effect of labour efficiency variance on factory overheads. There may be various ways in which the materials can be processed into finished output. Each of these methods of work has different material requirements, labour processing time, machine operating time, etc. Standards set on this basis, make allowance for waste, spoilage, time lost, etc. to the extent that management considers them necessary while setting the standards.
Types of Standards:
Process industries where the method of production and nature of output are the same. The examples Airbnb Accounting and Bookkeeping of such industries are chemical industries, distilleries, paper-making and metal processing etc. It is very essential to ascertain the type of standard used in setting up of the standards.
Based on Tightness and Looseness:
Losses, both normal and abnormal, in each process should be gone into for a considerable period of time. By receiving timely reports which compare actual with standard costs, management is able to locate areas of production inefficiency. Corrective action could then be taken before too many inefficiencies occur.
It is an average expected unit cost that a business established. Because it is the expected average cost, the actual cost may vary. Actual cost may standard costing be above or below the predetermined estimate cost; however, only significant differences between the actual cost and standard should be reported.
(2) Predetermination of standard costs in full details under each element of cost i.e., Labour, Material and Overhead. (1) Predetermination of technical data related to production i.e., details of materials and labour operations required for each product, the quantum of inevitable losses, level of activity etc. Hence, variable overhead standard is expressed in terms of per unit or per hour.
Now these element-wise cost variances are analysed critically to find out the exact causes or circumstances leading to it, so that the management can exercise proper control. A suitable analysis will reveal that some of the variances are controllable while others are not so. (b) To control cost by introducing standards and analysis of variances. Normal standard is the average standard which can be attained over a future period of time covering one trade cycle. This average standard takes into consideration both booms and depressions.