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Lecture Notes

Standard costing is a cost accounting method that sets predetermined costs for materials, labor, and overhead to measure performance and control costs, primarily in manufacturing. It involves establishing various types of standards and conducting variance analysis to identify discrepancies between actual and standard costs. While it offers advantages in cost control and decision-making, it has limitations in dynamic environments and service industries.

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4 views2 pages

Lecture Notes

Standard costing is a cost accounting method that sets predetermined costs for materials, labor, and overhead to measure performance and control costs, primarily in manufacturing. It involves establishing various types of standards and conducting variance analysis to identify discrepancies between actual and standard costs. While it offers advantages in cost control and decision-making, it has limitations in dynamic environments and service industries.

Uploaded by

memo85536
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Lecture Notes: Standard Costing

1. Introduction to Standard Costing

 Standard costing is a cost accounting technique used to set predetermined costs for materials,
labor, and overhead.

 It helps businesses measure performance by comparing actual costs with standard costs.

 This system is widely used in manufacturing and production companies to control costs and
improve efficiency.

2. Objectives of Standard Costing

 Establish cost control by setting benchmarks.

 Improve budgeting and planning.

 Help in performance evaluation by identifying variances.

 Assist in decision-making related to cost reduction and pricing strategies.

3. Components of Standard Costing

 Standard Material Cost: Predetermined cost of raw materials required for production.

 Standard Labor Cost: Estimated labor cost based on expected time and wage rates.

 Standard Overhead Cost: Expected cost of fixed and variable overheads per unit of production.

4. Setting Standards

 Ideal Standards: Assumes perfect efficiency with no wastage or idle time.

 Attainable Standards: Based on realistic working conditions, considering normal wastage and
efficiency levels.

 Basic Standards: Long-term standards that remain unchanged over time.

 Current Standards: Frequently updated standards reflecting current production conditions.

5. Variance Analysis in Standard Costing

 Variance analysis helps identify the difference between standard and actual costs.

 Common variances:

o Material Variances:

 Material Price Variance (MPV) = (Standard Price - Actual Price) x Actual Quantity

 Material Usage Variance (MUV) = (Standard Quantity - Actual Quantity) x


Standard Price

o Labor Variances:
 Labor Rate Variance (LRV) = (Standard Rate - Actual Rate) x Actual Hours

 Labor Efficiency Variance (LEV) = (Standard Hours - Actual Hours) x Standard


Rate

o Factory Overhead Variances:

 Spending Variance, Efficiency Variance, and Volume Variance

6. Advantages of Standard Costing

 Helps in cost control and reduction.

 Provides a basis for performance evaluation.

 Aids in pricing decisions and profit planning.

 Enhances management decision-making.

7. Limitations of Standard Costing

 May not be effective in dynamic environments with frequent cost changes.

 Setting and maintaining standards can be time-consuming.

 Variance analysis may not always provide useful insights if not properly interpreted.

 Not suitable for service industries where costs are variable and unpredictable.

8. Conclusion

 Standard costing is an essential tool in cost accounting that helps businesses monitor and control
costs.

 It allows management to take corrective actions by analyzing variances and improving


operational efficiency.

 Despite its limitations, it remains a valuable technique in cost management and decision-making.

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