Standard Costing- Setting of Standards
Standard’s determination for different elements of cost is an exercise which needed skill, experience & imagination. For setting of standards, routines & process of working conditions are needed to be studied thoroughly, motion studies are required to be conducted & it becomes necessary to carry out different tests for the purpose of ensuring that standards are realistic & confirming the view of the management regarding relevant expenditure & efficient operations. A group represented by purchase department, production department, cost accounts department, personnel department & engineering department does the job of setting the standards. Into two categories, setting of standards can be divided:
(i) Quantity standard’s determination;(ii) Price standard’s determination.
Quantity standards are those pre-determined
measures by which the relationship existing between a unit which has been produced & resources
which has been consumed is expressed in physical terms. On the other hand, price standards
those pre-determined measures by which the cost per unit of resources which has been
consumed is expresses in monetary terns. Representatives of Engineering department
in liaison with representatives of Purchase department develops the quantity standards.
Personnel department develops the wage rate standards. Information which is based on
historical costing is supplied by Accounts department working in advisory capacity.
For various elements of cost, standards are set up in the following manner:
(1) Direct Material cost standards:
The establishment of standard cost of material involves the following:
(i) Standard quantity of materials determination.(ii) Standard price of materials determination.
Standard quantity of materials determination:
The following information per unit of output is obtained for the determination of standard quantity of materials:
(a) For a product; the materials content;(b) Standard mix composition; &
(c) Wastage quantity.
Ascertainment of the quantity of material which is to be used in the manufacture of a product is comparatively simple. From the records of past experience, mathematical or scientific computations or from the test run or through the standard bills of material use, establishment of these quantity standards are done. On the estimates of the engineers, by whom the product is designed & the process through which the material passes, is determined; the material quantity standards are primarily based. In the form known as standard bills of materials, the type & standard quantity of each materials is specified after thorough study of processes are done & analysis of working conditions are satisfactorily made. For the purpose of ensuring whether the materials used will suit design of the product & quality, various mechanical & chemical tests are carried out. For ascertaining normal spoilage which includes wastage, shrinkage & scrap, many trial runs are carried out. In the process of determination of standard quantity of materials this is the most important but exclusive area. Too often, in the standard quantity of material determination, this factor is either overlooked or is included partially as it cannot be seen.
The prime thieves of profits are wastage, shrinkage & scraps. Because of disinclination of management towards the recognition of presence of waste, for determining the standards for waste, the difficulty arises. Too often, it is considered that waste does not constitute an important factor. Thus, for the purpose of (a) guidance of management; & (b) determination of adequate & fairly stated cost of product; setting of realistic standards for waste, scrap, etc. is necessary.
Representatives of Engineering department in liaison with representatives of Purchase department develops the material quantity standards for ensuring that the standards are truly realistic & representative.
Standard price of materials determination:
Price standards determination presents lots of difficulties because of the reason that the prices are susceptible to wide range of fluctuations. For the development of these standards, Purchase department is ultimately responsible. Before the determination of price standards, for each material, a detailed study of market conditions is undertaken.
Decision as to whether price standards will be based on current prices of expected prices or on recent averages is taken on the basis of policy of the management. For the ascertainment of the market trends which, according to the anticipated changes in future are adjusted, use of statistical method can be done. Discounts & rebates which are available for different kinds of materials are also considered. In different organizations, the method of treatment of related costs likes handling of material, freight, receiving & storing, inspection etc. are different. These costs are included in standard cost of material if these costs form part of direct material. By multiplying standard material cost of a product by standard price per unit of material, standard material cost of a product is computed.
(2) Direct Wages standards:
Determination of standard labour cost becomes a difficult job due to human element. Between the workers & management these standards often remain sources of conflict. For this reason, before the determination of standard labour cost, the following points should be complied with:
- Study of working conditions should be done. Thorough study of handling of material, setting of material & flow of material, lay-out of plant & method of production should be made.
- For all workers preparation of standard specifications should be done. Adherence to these specifications should be instructed to the workers. Complete description of work, operations which are need to be performed & the time that has been allowed for each operation will be shown by these specifications.
- The efficiency with which each workers work is not the same. On the basis of the skill & effort of the workers, preferably a specialized time observer should grade the workers. It is a highly technical job & the time study specialist needs to do exceptional judgement,
The standard cost for labour is established after the preliminaries have been complied with. In the following two categories, this has been divided:
(a) Standard time determination, &(b) Standard rate determination.
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- 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
- Standard Costing- Introduction
- Standard Time Determination, Standard Rate Determination
- Types of Standards
- Variances based on Profit Margin, Total Sales Margin Variance
- Variable Overhead Variances
