Introduction And Meaning Of Standard Costing
Standard costing is a management technique of setting standard costs (estimated costs) and comparing them with actual costs to find out the variance (difference between standard and actual costs). Companies set standard cost in advance and make comparison with actual cost to analyze the variance. The main objective of standard costing is to identify the cause of variance and to assist the management to take corrective actions quickly to improve the operational efficiency of the firm.
Objectives Of Standard Costing
The main objectives of standard costing system can be pointed out as follows:
1. To Measure The Operational Efficiency
As we know that standard costing is used to compare the actual costs with estimated costs, it helps to measure the operational efficiency of the firm, So, management can take corrective actions in case of unfavorable variances.
2. To Control Costs And Wastage
Standard costing provides cost related data and information that helps to make comparison between standards and actual costs. It helps the management to find out the difference and take appropriate action to control unnecessary costs and to minimize wastage (if required).
3. To Facilitate Inventory Valuation
Another notable objective of standard costing is to facilitate stock valuation. Inventory or stock valuation and controlling process becomes easy if they are valued on the basis of standard cost.
4. To Motivate Employees
Standard costing is very useful to motivate employees. Employees get challenging targets that may help to boost workers' performance and efficiency.
Also Read:
Meaning and importance of variance analysis
5. To Fix Selling Price
Generally companies fix the selling price of their products or services on the basis of standard costs because these costs are more stable than actual cost. Therefore, this technique is suitable for determining the price of the products.
6. To Formulate Production Policy
This costing technique facilitates the management to formulate production policy. It helps to make future plans and policies regarding production and pricing. It also provides guidance for budgeting, forecasting, controlling, decision making etc.
