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Home Standard Costing and Variance Analysis Purposes and Advantages of Standard Costing System

Purposes and Advantages of Standard Costing System:

Standard costing systems help in planning operations and gaining insights into the probable impact of managerial decisions on cost levels and profits. Standard costs are used for:

  1. Establishing budgets.

  2. Controlling costs and motivation and measuring efficiencies.

  3. Promoting possible cost reduction.

  4. Simplifying costing procedures and expediting cost reports.

  5. Assigning costs to materials, work in process, and finished goods inventories.

  6. Forming the basis for establishing bids and contracts and for setting sales prices.

The effectiveness of controlling costs depends greatly upon a knowledge of expected costs. Standards serve as measurements which call attention to cost variations. Executives and supervisors become cost conscious as they become aware of results. This cost consciousness tends to reduce costs and encourages economies in all phases of the business.

The use of standard costing for accounting purposes simplifies costing procedures through the reduction of clerical labor and expenses. A complete standard cost system is usually accompanied by standardization of productive operations. Standard production or manufacturing orders, calling for standard quantities of product and specific labor operations, can be prepared in advance of actual production. Materials requisitions, labor time tickets, and operation cards can be prepared in advance of production, and standard costs can be compiled. As orders for a part of placed in the shop, previously established requirements, processes, and costs will apply. The more standardized the production, the simpler the clerical effort. Reports can be systematized to present complete information regarding standards, actual costs, and variances.

A complete standard cost file by parts and operations simplifies assigning costs to materials, work in process, and finished goods inventories. The use of standard costs stabilizes the influence of materials costs. placing bids, securing contracts, and establishing sales prices are greatly enhanced by the availability of reliable standards and the continuous review of standard costs.

The standard cost system may be used in connection with either the process or job order cost accumulation method. However, it is more often used in process costing because because of the greater practicality of setting standards for a continuous flow of like units than for unique job orders.

Relevant Articles:

Definition and Explanation of Standard Cost
Purposes and Advantages of Standard Costing System
Setting Standards
Materials Price Standard
Materials Price Variance
Materials Quantity Standard
Materials Quantity Variance
Direct Labor Rate Standard
Direct Labor Rate Variance
Direct Labor Efficiency Standard
Direct Labor Efficiency Variance
Factory Overhead Cost Standards
Overall or Net Factory Overhead Variance
Overhead Controllable Variance
Overhead Volume Variance
Overhead Spending Variance
Overhead Idle Capacity Variance
Overhead Efficiency Variance
Variable Overhead Efficiency Variance

Fixed Overhead Efficiency Variance

Mix and Yield Variance
Variance Analysis Example
Standard Costing and Variance Analysis Formulas
Management by Exception and Variance Analysis
International Uses of Standard Costing System
Advantages, Disadvantages, and Limitations of Standard Costing




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