Comprehensive Guide on Cost Control Through Standard Costing Techniques Variance Analysis Insights

We shall get different variances by putting the relevant information in the appropriate column. Same format can be used in case of labour cost variances, overhead variances and also sales, sales margin variances. The efficiency variance consists of fixed and variable expenses and results because actual hours used are more or less than the standard hours.

Computation of Standard Cost and Actual Cost:

• This technique, if implemented in conjunction with the system of budgetary control, provides better and more successful functions of the business.
• For example, if the standard set is not specific, then the management and the employees of the business will not realize what is expected of them.
• A standard which is practically useful should be established.
• In establishing these standards allowance is given to normal waste and scrap.
• Historical costs, which are accumulated after the completion of an activity, vary from period to period.
• The standard cost provides one of the many factors that should be considered in pricing.

Under standard costing system, a variance report, which reconciles the budget profit with actual profit, is placed before the management with explanations for variances. Vari­ance reporting is a mechanism to provide feedback to managers on variances from target results. The labour rate standard refers to the expected wage rates to be paid for different categories of workers.

Inventory Control Techniques

• The use of standard costing provides media to specify these objectives of effectiveness and efficiency.
• The objective of this technique may include setting standards for different costs within a business and acting as a monitor and control tool.
• This rigidity can lead to inaccurate benchmarks, causing poor decision-making as the data no longer reflects current circumstances.
• It helps in straightforward performance evaluation and drives accountability among managers and staff.

(2) Comparison of actual costs with the pre-determined standards is made, in order to determine variances. The standard costs are organised to uncover and report off-standard conditions. The management should strive for the attainment of standard costs because they are attainable ideal costs and are practical from the point of view of business. Standard costing also supports the formulation of operational policies. For instance, it can guide decisions related to inventory management, production schedules, unearned revenue and procurement practices.

• While setting standard prices, the past experiences, existing prices and anticipations should closely examine.
• Standard cost can also be defined as the management’s desired cost.
• The knowledge gained in setting standard cost provides the entire cost picture of the product ranging from its out-of-pocket cost to full costs.
• The current cost is also similarly expressed and the two percentages are compared to find out how much the actual cost has deviated from the current standard.
• (e) It will help prompt preparation of profit and loss account for short period.
• Sales variances are presented either in terms of variances in margin or in terms of vari­ances in turnover.

Help to Provide Guidance for Improving Efficiency

Standards provide incentives and motivation to work with greater effort. Standard Costing helps to apply the principle of “Management by exception”. That is, the management need not worry over those activities which proceed in tandem plans. It is only on the issues of exceptions that they have to concentrate. Once cost management members know the difference in results, they’ll analyze things to determine what measures can be taken to maximize their revenue by reducing costs. These objectives play a vital role in driving efficiency to the organization by providing better estimates to products and scaling their revenue estimates.

Serve as the central control point to provide inputs and feedbacks.

(2) The standard costing should be in consistent with the technical process of production of enterprise. (3) Setting of standards for each element Insurance Accounting of cost such as material, labour and overheads. Before one can clearly understand the concept of standard costing, the term “standard” needs to be understood. According to Webster’s New International Dictionary, standards are bases for measurement or comparison. They are established by authority, custom or general consent as a model or example of that which is proper and adequate for a given purpose.

• Managers are constantly comparing their product cost with “What it should have costed”.
• It is the difference between actual hours worked multiplied by standard overhead rate and the standard hours multiplied by the standard overhead rate.
• Supports management by objectives and management by exception.
• This standard is not in common use, because in the face of rapid changes in operating conditions, such a standard cannot be of any real help in developing current standards.
• Under this method all cost ledgers are maintained at actual cost.

Supports management by objectives and management by exception. Management by objective is an approach where a manager and his or her subordinates are evaluated based on achievement of set goals. Management by exception is another managerial approach in which management gives attention to matters that materially deviate from established standards. The difference between debit side total and credit side total of WIP control account before adjustment for variances represents cost variance. Cost variance is analysed separately with the help standard costing of additional information not recorded in the accounts and is transferred to respective variance accounts.