Standard Costing- Establishment of Standards

Preliminaries to Standard’s Establishment:

Before determination of standard cost for different elements of cost, decision must be taken by the management regarding the following:

1. Length of period of use: First of all, decision relating to the period for which the use of standards will be made, needs to be arrived at. On the basis of this decision, decision will be taken by the management whether to use current standard, basic standard or normal standard. For the establishment of standard, this decision is the starting point.

2. Types of standards to be used: Decision should be taken by the management regarding how tight or loose standards should be. For taking this decision, help will be taken from the policy of the management. The management will choose a tight standard, if the aim of the management is to get cost reduction. On the other hand, management will choose standards which correspond to the current conditions, if the aim of the management is to take decision regarding pricing & planning of the expenditure.

3. Existing procedure’s review: Review should be made of the existing procedure as some of the activities may need to be scrutinized & wastages, losses & rejections may need to be standardized. A complete study of technical & operational aspects of organization will result from this review.

4. Accounts Classification: For the purpose of complying with the requirements of cost collection, cost analysis & variance reporting, the existing accounts manual in an organization may not be sufficient. Thus for the purpose of meeting the requirements, existing accounts manual may have to be suitably adapted.

5.  Existing coding system’s review: The existing coding system, so that the same can be adapted to the introduction of standard costing, needs to be reviewed. Orientation of existing coding system may be demanded by this change.

Constitution of standard committee:

Constitution should be made of an apex standards committee. This committee should be represented by different functional managers, like Production manager, Personnel manager, Marketing manager & Planning manager. The functions of standard committee are coordinated by the cost accountant. Preparation of detailed plan dealing with: (a) standard’s introduction; (b) variances computation; (c) linking of responsibilities with deviations; (d) delivering reports to the management, i.e. taking decisions regarding how various reports which deals with variances will be sent to various management levels; & (e) developing a follow up system etc. will be the job of this committee.

Decisions to be taken at various levels:

Certain important decisions will have to be taken at various managerial levels for the purpose of introduction of standard costing:

(a) Decisions of Top Management:-

            (i) Decision regarding the operating hours of plant.
            (ii) Decision regarding to the volume & kinds of goods which are to be produced & sold.        

(b) Decisions of Engineering Management:-

            (i) Decision regarding designs of the product.
            (ii) Decision regarding specifications of the product.

(c) Decisions of Manufacturing Management:-

            (i) Decisions regarding requirements of personnel.
            (ii) Decisions regarding requirements of indirect services.

(d) Decisions of Sales Management:-

            (i) Decision regarding prices at which goods can be sold.
            (ii) Decisions regarding requirements of personnel.
            (iii) Decision regarding other distribution requirements.

(e) Decisions of Cost Accounting:

            (i) Decision regarding operating budgets by which several management decisions are reflected.
            (ii) Decision regarding standard costs for all products on which these decisions are based.

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Other topics under Standard costs:

• Establishment of Standards
• Fixed Overhead Variances
• Labour Mix Variance, Revised Efficiency Variance
• Labour Variances, Direct Labour Cost Variance
• Material Mix Variance, Material Yield Variance
• Material Variances
• Sales Variances
• Setting of Standards
• Standard Costing- Introduction
• Standard Time Determination, Standard Rate Determination
• Types of Standards
• Variances based on Profit Margin, Total Sales Margin Variance
• Variable Overhead Variances