A PROJECT REPORT ON

COMPREHENSIVE STUDY ON STANDARD

COSTING - LIMITATION AND
USES

A Project Submitted to
University of Mumbai for partial completion of the
Degree of Master in Commerce ( Advance Accountancy)Under
the faculty of Commerce
By
Varma Karishma Brijesh

Under the Guidance of

Mr.Rajiv Mishra
N.E.S RATNAM COLLEGE OF ARTS , SCIENCE AND COMMERCE
NES COMPLEX,NES MARG ,BHANDUP (W), MUMBAI -400078
ACADEMIC YEAR 2023-24

1
 A PROJECT REPORT ON

COMPREHENSIVE STUDY ON STANDARD

COSTING – LIMITATION AND
USES

A Project Submitted to
University of Mumbai for partial completion of the
degree of Master in Commerce ( Advance Accountancy)
under the faculty of Commerce
By
Varma Karishma Brijesh

Under the Guidance of

Mr.Rajiv Mishra
N.E.S RATNAM COLLEGE OF ARTS , SCIENCE AND COMMERCE
NES COMPLEX,NES MARG ,BHANDUP (W), MUMBAI -400078
ACADEMIC YEAR 2023-24

2
 Declaration by learner

I the undersigned Mr./Mrs.VARMA KARISHMA BRIJESH here by,

declare that the work embodied in this project work titled
“COMPREHENSIVE STUDY ON STANDARD COSTING – LIMITATION AND
USES “ , forms my own contribution to the research work carried out
under the guidance of Mr.Rajiv Mishra is a result of my own research
work and has not been previously submitted to any other University for
any other Degree/ Diploma to this or any other University.
Wherever reference has been made to previous works of others, it has
been clearly indicated as such and included in the bibliography.
I, here by further declare that all information of this document has
been obtained and presented in accordance with academic rules and
ethical conduct.

Name and Signature of the learner

Certified by
Mr.Rajiv Mishra

3
NES RATNAM COLLEGE OF ARTS, SCIENCE
& COMMERCE
BHANDUP (W) , MUMBAI – 400078

CERTIFICATE

This is to certify that MR/MRS.VARMA KARISHMA

BRIJESH Of M.COM ( Advance accountancy) Semester III
(2023-24)has successfully completed the Project on
COMPREHENSHIVE STUDY ON STANDARD
COSTING – LIMITATIONS AND USES under the
guidance of Mr. Rajiv Mishra

COURSE COORDINATOR PRINCIPAL

Mr. Rajiv Mishra Mrs. Vinita Dhulia

PROJECT GUIDE / INTERNAL EXAMINER

Mr. Rajiv Mishra

4
External examiner Date
 Acknowledgement

To list who all have helped me is difficult because they are so numerous
and the depth is so enormous.
I would like to acknowledge the following as being idealistic channels
and fresh dimensions in the completion of this project.
I take this opportunity to thank the University of Mumbai for giving me
chance to do this project.
I would like to thank my Principal, Dr. ( Mrs.) VINITA DHULIAfor
providing the necessary facilities required for completion of this
project.
I take this opportunity to thank our Coordinator Mr.RAJIV MISHRA for
her moral support and guidance.
I would also like to express my sincere gratitude towards my project
guide Mr.RAJIV MISHRA whose guidance and care made the project
successful.
I would like to thank my College Library. For having provided various
reference books and magazines related to my project.
Lastly, I would like to thank each and every person who directly or
indirectly helped me in the completion of the project especially my
Parents and Peers who supported me throughout my project.

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 Index
SR NO. PARTICULARS PAGE
NO

1 INTRODUCTION 21

2 LITERATURE REVIEW 15

3 OBJECTIVES OF STANDARD COSTING 4

4 USES OF STANDARD COSTING 1

5 HYPOTHESIS OF STANDARD COSTING 4

6 SIGNIFICANCE OF STANDARD COSTING 2

7 LIMITATIONS OF STANDARD COSTING 3

8 RESEARCH METHODOLOGY 20

9 CONCLUSION OF STANDARD COSTING 2

10 SUGGESTION OF STANDARD COSTING 2

11 REFERENCE 1

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 Introduction
A predetermined cost which is calculated from management standards of efficient
operational and the relevant necessary expenditure.

Cost control is the one of the objectives of cost management. Management of an

organization setups predetermined cost to compare the actual cost with the
predetermined costs are standard cost used for cost control and performance
evaluation. Standard costing is a method of cost and management accounting which
starts with setting of standards to reporting of variances to management for taking
corrective actions. In CIMA, London defines standard costing as “Control
technique that reports variances by comparing actual costs to pre-set standards so
facilitating action through management by exception.

A standard costing system is a method of cost accounting in which standard costs

are used in recording certain transaction and the actual costs are compared with the
standard cost to learn the amount and reason for variations from the standard.

Standard costs are called pre‐determined costs. The different standards regarding all
the elements of costs, i.e., material, labor and overheads, are determined on the
basis of historical cost and many other factors. These factors are cautiously studied
before determining the standards. The standard committee will generally consist of
production manager, purchase manager, personal manager, and other functional
heads. It is possible that the standard cost decided by the manager could be idle,
normal or expected.

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 MEANING OF STANDARD

Standard cost is a predetermined cost which determines in advance what each

product or service should, cost under given circumstances.

Standard costing is the amount the firm thinks a product or the operation of the
process for period of time should cost based upon certain assumed conditions of
efficiency, economic conditions and other factors. The technique of using standard
costs for the purpose of cost control is a known as standard costing.

The idle standard cost may refer to an estimate of the cost under perfect
competition. It is competed on the basis that there is no scrap, no idling of
machinery or breakdown and so on. On the other hand, expected standard cost is
based upon the attainable result.

Standard costing is a perfect system of controlling the costs and measuring

efficiency and its development. It is a technique of cost reduction and cost control.
It helps to provide valuable guidance in several management functions such as
formulating policies, determining price level, etc. The essence of standard costing is
to set objectives and targets to achieve them, to compare the actual costs with these
targets. Standard Costing is used to ascertain the standard cost under each element
of cost, i.e., materials, labour, overhead. Variance means the deviation of the actual
cost or actual sales from the standard cost or profit or sales. Calculation of variances
is the main object of standard costing.

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 What is a Standard or Standard Cost?

Standard cost is defined in the CIMA London as “'the planned unit cost of the
product, component or service produced in a period. The standard cost may be
determined on a number of bases. The main use of standard costs is in performance
measurement, control, and stock valuation and in the establishment of selling
prices. Standards or Standard costs are established to evaluate performance of a
responsibility center. Apart from performance evaluation and cost control, standard
costs are also used to value inventory where actual figures are not reliably available
and to determine selling prices particularly while preparing quotations. Standard
costing system is widely accepted as it serves different needs of an organization.

Variances are broadly of two types, controllable and uncontrollable. Controllable

variances are those which can be controlled by the departmental heads whereas
uncontrollable variances are those which are beyond control. For example, price
variance is normally regarded as uncontrollable if the price increase is due to market
fluctuations. It becomes controllable if the production controller has failed to place
orders in time and urgent purchase was made at extra cost.

Standard costing is the practice of estimating expenses in the production process

since manufacturers cannot predict actual costs in advance. Manufacturers use this
methodology to plan upcoming costs of various expenses, such as labour, materials,
production and overhead. Standard costs are part of cost accounting system
whereby standard cost is incorporated directly and formally into the manufacturing
accounts. Standard costing is a technique which uses standard for costs and
revenues for the purpose of control through variance analysis. Here, standards are
performance expectations. Standard costing aims at eliminating waste and
increasing efficiency in operation through setting up standards for production costs
and production performance.

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 Standard cost is thus a criterion cost which may be used as a yardstick to measure
the efficiency with which actual cost has been incurred.

Standard cost is a figure which represents an amount that can be taken as a typical
of the cost of an article or other cost factor. It is established on the basis of planed
operations, planed cost efficiency levels, and expected capacity utilization.
Standard cost is a predetermined calculation of the presumed cost under the
specified conditions. It is built up from an assessment of the value of cost elements.
It correlates technical specification of material, labour and other cost to the price or
wage rate which have occurred during the period in which the standard cost is to be
determined. The standard cost is a predetermined cost which determines what each
product or service should cost under given circumstances defines by Brown and
Howard Standard costing is the practice of substituting an expected cost for an
actual cost in the accounting records .

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 Types of Standards:

❖ Ideal Standards:
These represent the level of performance attainable when prices for material
and labour are most favorable, when the highest output is achieved with the best
equipment and layout and when the maximum efficiency in utilization of resources
results in maximum output with minimum cost.

❖ Normal Standards:
These are standards that may be achieved under normal operating conditions.
The normal activity has been defined as the number of standard hours which will
produce at normal efficiency sufficient good to meet the average sales demand over
a term of years.

❖ Basic Standards:
These standards are used only when they are likely to remain constant or
unaltered over a long period.

❖ Current Standards:
These standards reflect the management’s anticipation of what actual costs
will be for the current period.

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 THE PROCESS OF STANDARD COSTING
❖ Setting of Standards:
The first step is to set standards which are to be achieved, the process of
standard setting is explained below.
❖ Ascertainment of actual costs:
Actual cost for each component of cost is ascertained. Actual costs are
ascertained from books of account, material invoices, wage sheet, charge slip
etc.
❖ Comparison of actual cost with standard cost:
Actual costs are compared with the standards costs and variances are
determined.
❖ Investigate the reasons for variances:
Variances arises are investigated for further action. Based on this,
performance is evaluated and appropriate actions are taken.
❖ Disposition of variances:
Variances arise are disposed-off by transferring it the relevant accounts
(costing profit and loss account) as per the accounting method.

In accounting, a standard costing system is a tool for planning budgets, managing

and controlling costs, and evaluating cost management performance. A standard
costing system involves estimating the required costs of a production process
These standards are used to plan a budget for the production process. At the end of
the accounting period, the actual amounts and costs of direct material used and the
actual amounts and pay rates of direct labor utilized are compared to the previously
set standards.
Standard cost is set on the basis of management’s estimation. Cost is estimated on
the basis of technical specification provided by the engineering department or other
expert such as production engineer. Generally, while setting standards,
consideration is given to historical data, current production plan and expected
conditions of future. For the sake of detailed analysis and control standard cost is set
for each element of cost i.e. material, labour, variable overheads and fixed
overheads. Standard are also set for the sales quantity and sales value; this is
generally known as budgeted sales. Standards are set in both quantity (units or

12
hours) and in cost (price or rate). It is thus measure in quantities, hours and value of
the factors of production.

Standard costs are divided into three main cost components, such
(a) Direct Material Cost It is derived by multiplying the quantity of each material
with per unit of material cost
(b) Direct Employee (Labour) Cost it is derived by the multiply the quantity of
each Labour with the per hour Labour cost.
(c) Overheads including fixed over court head cost and variable overhead
calculated by multiplying standard quantity the standard rate of variable overhead.

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 PROCEDURE OF SETTING MATERIAL QUANTITY
STANDARDS
(a) Standardization of products: At this phase, products to be produced are
decided based on production plan and customer’s order. Generally following
questions are answered at this stage: (i) what to be produced? (ii) Which type to be
produced and (iii) How much to be produced?

(b) Product study: Product to be produced is analyses and studied for

developments and production. Product study is carried out by the engineering
department or product consultants. At this phase answers to the following questions
are satisfied: (I) how can it be produced? (ii) What are the pre-requisites? (iii) Which
type of materials to be used? (iv) How products can be accepted in the market? Etc.

(c) Preparation of specification list: After the product study a list of material is
prepared. It specifies types (quality) and quantity of materials to be used, substitute
of the materials, quantity and proportion of materials to be used, process to be
followed, pre-requisites and condition required etc. While preparing specification
list consideration to expected amount of wastage is given. It must be customized to
adopt changes in the product.

(d) Test runs: Sample or test runs under specified conditions are carried out and
sample products are tested for the desired quality and quantity.

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 PROCEDURE OF SETTING LABOUR TIME
STANDARDS
Labour specification: Types of labour and labour time is specified. Labour time
specification is based on past records and it takes into account normal wastage of
time.

I. Standardization of methods: Selection of proper machines to use proper

sequence and method of operations.
II. Manufacturing layout: A plan of operation for each product listing the
operations to be performed is prepared.
III. Time and motion study: It is conducted for selecting the best way of
completing the job or motions to be performed by workers and the standard
time which an average worker will take for each job. This also takes into
account the learning efficiency and learning effect.
a. Training and trial: Workers are trained to do the work and time spent
at the time of trial run is noted down.

PROCEDURE OF SETTING OVERHEADS TIME/

STANDARDS
Variable overhead time/ quantity is estimated based on specification made by the
engineering departments. Variable overheads may either be based on direct material
quantity or labour hour. Generally, it is based on labour time worked. Fixed
overhead time is based on budgeted production volume.

Standard the type of labour required for performing a specific job would
be the most important factor for deciding the rate of wage to be paid to
workers.

15
 ❖ Time taken by the workers to complete a unit of production.
❖ Time or piece rate prevailing in the industry. It can be known from the peers.
❖ Wage agreement entered into between the management and workers’ union.
❖ Law prevailing in the area of operation, law like Payment of minimum
wages Act, Payment of bonus Act.

PROCEDURES OF SETTING OVERHEAD EXPENSE STANDARDS

❖ A budgeted output is fixed considering practical manufacturing capacity and

anticipated sales demand. The overhead expense standards are set by
computing the optimum level of output for a production departments
followed by budgets for fixed and variable overheads
❖ If production is seasonal or it fluctuates during the year, a flexible budget
may be prepared to facilitate comparison between the set target and actual
expenditure for the period.

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 Favourable and Adverse variance
❖ When actual cost is less than standard cost or profit is better than the
standard profit, it is known as ‘Favourable Variance’.
❖ Where the actual cost is more than standard cost or profit is better than the
standard profit, it is known as 'Unfavourable Variance' or 'Adverse'.
❖ Standard costing, also known as standard cost accounting, is used to set
budgets and plan for future expenses. It is a type of cost accounting mainly
used in the manufacturing sector because it is easier to allocate costs directly
to products being produced.

Price or Rate Standards

The price or rate standards can be set on either of the following bases:

(a) Actual average or mean price expected to prevail during the coming
period, say one year

(b) Normal prices expected to prevail during a cycle of seasons which may be of a
number of years.

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 Variances in Standard Costing
Variances in standard costing refer to the differences between actual costs and the
predetermined or “standard” costs. There are two main variances in standard
costing: the material cost variance and the labour cost variance

Material cost variance:

Material cost variance refers to the difference between actual and budgeted raw
material costs. If the actual cost of raw materials is higher than the budgeted cost,
this results in an unfavourable material cost variance. On the contrary, when the
actual cost is lower than the budgeted cost, this results in a favourable material cost
variance.

Labour cost variance:

The labour cost variance is the difference between the actual cost of labour and the
standard cost budgeted for a specific product. If the actual cost of labour is higher
than the budgeted cost, this results in an unfavourable labour cost variance. If the
actual cost of labour is lower than the budgeted cost, this results in a favourable
labour cost variance.

Variances are important performance indicators, as they allow organizations to

track their progress against budgeted costs and identify areas for improvement. By
analyzing variances, organizations can make informed decisions about how to
optimize their operations and improve efficiency.

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 Material Variances (MV):
These variances include Material Cost Variances, Material Price Variances,
Material Usage Variances, Material Mix Variances and Material Yield Variance.

❖ Material Cost Variance:

Material cost variance is the difference between standard cost of materials used and
the actual cost of materials.

Material Cost Variance = [Standard Cost – Actual Cost]

❖ Material Usage Variance:

It measures variance in material cost due to usage/ consumption of materials.

Standard Price (SP) × {Standard Quantity (SQ) - Actual Quantity (AQ)

Or

[(SQ × SP) – (AQ × SP)]

❖ Material Mix Variance:

Variance in material consumption may arise due to difference in proportion actually

used from the standard mix/ proportions.

Std. Price (SP) × {Revised Std. Quantity (RSQ) – Actual Quantity (AQ)

(RSQ × SP) – (AQ × SP)

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 ❖ Material Yield Variance:

Variance in material consumption which arises due to yield or productivity of the

inputs.

Std. Price (SP) × {Std. Quantity (SQ) – Revised Standard Quantity (RSQ)
or

[(SQ × SP) – (RSQ × SP)]

Material Cost Variance = Material Usage Variance + Material Price

Variance

Or

Material Cost Variance = (Material Mix Variance + Material

Revised usage Variance) + Material price variance.

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 Labour Variances (LV):
Labour variances occur because of the difference in actual rates and standard rates
of labour and the variation in actual time taken by labour and the standard time
allotted to them for doing a job. These variances include Labour Cost Variances,
Labour Rate Variances, Labour Time or Efficiency Variances, Labour Idle Time
Variances, Labour Mix Variances.

❖ Labour Cost Variance :

Amount paid to employees for their labour is generally known as employee or
labour cost.
Labour Cost Variance = [Standard Cost – Actual Cost]
Or
[(SH × SR) – (AH × AR)]

❖ Labour Rate Variance:

Labour rate variance arises due to difference in actual rate paid from
standard rate.
Labour Rate Variance = [Standard Cost of Actual Time – Actual Cost]
Or
[(SR × AH) – (AR × AH)]

❖ Labour Efficiency Variance:

Labour efficiency variance arises due to deviation in the working hours from the
standard working hours.
Std. Rate (SR) × {Std. Hours (SH) – Actual Hours (AH)}
Or
[(SH × SR) – (AH × SR)]

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 ❖ Labour Mix Variance:
Labour efficiency variance which arises due to change in the mix or combination of
different skill set.
Std. Rate (SR) × {Revised Std. Hours (RSH) – Actual Hours Worked (AH)}
Or
[(RSH × SR) – (AH × SR)]

❖ Labour Yield Variance:

Labour efficiency variance which arises due to productivity of workers.
Std. Rate (SR) × {Std. Hours (SH) – Revised Std. Hours (RSH)}
Or
[(SH × SR) – (RSH × SR)]

❖Idle Time Variance:

It is calculated for the idle hours. It is difference between paid and
worked hours.
Std. Rate (SR) {Actual Hours Paid – Actual Hours Worked}
Or
[(AH × SR) – (AH × SR)]
Labour Cost Variance = Labour Rate Variance + Labour Efficiency Variance
(if hours paid and hours worked is same)
OR
Labour Cost Variance = Labour Rate Variance + Idle Time Variance + Labour
Efficiency Variance

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Standard cost concept accounting is also known as standard costing. It is a type of
costing that employ fixed cost of overhead materials and labour to calculate the
price of goods and service .the cost of products is often calculated using establish of
rate for materials
labour and overhead in the manufacturing industries
Standard costing is a method of business to define production target cost and then
the contracts actual production cost with their targets company might find
variations they need to address improve their production process .
❖ There are 3 fundamental aspects of manufacturing system which compromise
the following
❖ Direct resource it is calculated by multiplying the amount of each material by
the material cost per unit
❖ Dedicated work it is calculated by multiplying the total number of hours work
by Harley labour cost
❖ Overhead it contains both variable and fixed overhead cost which are
determined by multiplying the standard amount of by the standard variable
overhead rate

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 Purpose of standard costing
The technique of using standard cost for the purpose of cost control is know as
standard costing.
❖ It is a system of performance measurement

❖ It is a alternative system of cost accounting.

❖ It eliminates wastage increasing.

❖ It is efficiency in performance through settings up standard or formulating

cost .

❖ It is establishing budget .

❖ It is also a system of control reporting.

❖ promoting possible calls reduction

❖ simplifying costing procedure and expediting cost reports

❖ It is assigning calls to material work in process and finished good inventories

❖ Forming the basis of establishing and contract for setting sale price

❖ Providing a production of future cost that can be used for decision making
purpose

❖ providing a challenging target

❖ Simplifying the task of tracing calls to product for profit measurement

inventory valuation.

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 Applicability of standard costing
there should be an output for the production for service volume of a standard
product
❖ methods operates and process of production should be capable for
standardising
❖ The cost should be controllable
Standard costing techniques have been applied successfully in our industry that
produce standardised products for follow process costing methods examples of
search industries including sugar fertilizer cement footwear barriers and other

Overhead Variances
The actual overheads can be known only at the end of the accounting period, when
the Expense accounts are finalised. The absorbed overheads are the overheads
charged to each Unit of production on the basis of a pre-determined overhead rate.
This pre-determined rate is Also known as standard overhead recovery rate,
standard overhead absorption rate or standard Burden rate. To calculate the standard
overhead recovery rate, we have to first make an Estimate of the likely overhead
expenses for each department for the next year. The estimate Of budget of the
overheads is to be divided into fixed and variable elements. An Estimate of the level
of normal capacity utilisation is then made either in terms of Production or machine
hours or direct Labour hours. The estimated overheads are divided by the Estimated
capacity level to calculate the pre-determined overhead absorption rate as shown
Below:
Std Fixed Overhead Rate = Budgeted Fixed Overheads
Normal Volume
Std Variable Overhead Rate = Budgeted Variable Overheads
Normal Volume
Overhead variances can be classified in the following two major categories:
Variable Overhead Variances
a) Fixed Overhead Variances
b) Variable Overhead Variances
These variances arises due to the difference between the standard variable overhead
for Actual output and the actual variable overhead.
Variable overhead variance = Standard variable overhead —actual variable
overhead

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Variable overhead are usually measured in relation to output if the details of input
qualities on which this variables overhead have been incurred are not readily
available .In such cases only variable overhead variances is calculated
In case detail of import and quantity of variable overheads are variable or variable
overheads are ready to hours of production the variable overhead variances can be
analyzed further as
❖ Variable overhead budget variances ( expenditure variances)
It is that part of variable overhead variances which arise due to difference between
the budget variable overhead and the actual variable overhead incurred.
Variable overhead budget variances =( budget variable overhead for actual hours -
actual variances overhead)
❖ Variable overhead efficiency variances
Is that the part of variable overhead variances which is arise due to difference
between standard heart required for actual output and actual hours work. It can
be completed by multiplying the differences Punjab and actual house by the
standard variable overhead . If standard hours exceed the actual house work the
variances will be Favourable and vice versa
Variable overhead efficiency variances = standard variable overhead per hour X
(standard house for actual output -actual hours).

26
 Variable overhead cost variance
Variable overhead consists of expense other than dark materials and direct labour
which vary with the level of production. Neither variable overhead consists of
indirect materials then in case of it varies with direct material use. On the other hand
if the variable overhead is depending on number of hours work done in case it will
vary with Labour hour of machine hours if nothing is mentioned especially when
take Labour hour as basis variable overhead cost variance calculation is similar to
Labour cost variances variable overhead cost variances is divided into 2 parts
variable overhead expenditure alliances and variable overhead efficiency Variance
Switch overhead variances may be broadly classified into
1. Expenditure expenses:
It represents difference between the fixed overhead as per the budget The
and the actual Fixed overhead incurred
2. Volume variances
This variances represent on absorb portion of the fixed cost because
and utilisation of capacity. In case of firm exit capacity the variances
Favourable in nature

27
 LITERATURE REVIEW:
Standard costing is a procedure of establishing a cost standard that may
be used to compare the actual and standard costs incurred throughout
manufacturing.
Standard costing is most suitable in operations, where activities consist
of a series of common or repetitive operations. In manufacturing
organization’s the processes often are of a repetitive nature and
therefore standard costing is relevant in these kinds of organisations.
Standard costing procedures can be applied to non-manufacturing
activities where operations are of a repetitive nature. In organisations that
produce many different products and the production consist of series of common
operations it is possible to apply a standard costing system. In a standard
costing system the standard costs for the actual output for a particular
period are traced to the managers of responsibility center who are
responsible for the various operations. When it comes to the actual costs
for the same period they are also charged to the responsibility centers.
The two costs, the standard and the actual. Standard cost for decision-
making purposes requires estimates. When it comes to pricing the decisions
manager requires estimates of future costs
Standard costs represent future costs and thus provide a valuable source
of information for decision-making purposes. A firm that can predict its
product costs can focus on the most profitable product mix and avoid
potential loss-making activities. Standard costs stand for predetermined
costs; they are target costs, which should be incurred under well-
organized operating conditions. Where there is a lack of an
implemented standard costing system it is necessary to maintain records
of actual costs for each individual item of materials in stock. Actual
costs must also be maintained in order to determine the valuation of
finished goods and work in progress inventory. A well working
standard costing system does not call an organisations to keep store
records and product costs at actual costs. Instead, records are
maintained at standard costs, conversion to actual cost is made by
writing off all variances as a period cost. In a standard costing system a
considerable amount of data processing time is saved since records can
be kept in terms of quantities only. To implement standards center on
the function of raw material ordering and inventory levels, which give
information about the effectiveness of suppliers. Since the goal is to
have orders delivered as placed, any variances are undesired. Price
variances can be combined with a quality variance, which prevents

28
 purchasing managers from just focusing on price ignoring quality. Raw
materials inventory variances indicate an inventory build-up, due to
more material purchased than used or an inventory decrease resulted, by
reverted conditions. The reporting system of the standard costing
system has to be revised. In the traditional way internal competition
often arises. Costs are divided into variable and fixed. Variable costs
will be the same on item level independent of produced volume but it
will change on aggregated level. Fixed costs, on the other hand, will be
the same on aggregated level independent of produced volume but it
will change on item level. Cost distribution implies that there is a direct
link between the cost and the activities, a cost driver can be used. Cost
allocation used to share common costs between responsibility centers
without a direct link, no clear cost driver is identified. Cost distribution
implies that there is a direct link between the cost and the activities in a
responsibility center. In this case a cost driver can be used. The basic
principle is to keep all costs on the level from which they are controlled.
When distributing costs or charges from common responsibility centers
to channel responsibility centers, a base called cost driver is used.
Output is measured when the finished pieces are delivered to the final
inventory and is evaluated at standard cost, i.e. number of delivered
pieces multiplied by the standard cost per piece. Cost variance is the
process of evaluating the financial performance of your project. Cost
variance compares your budget that
was set before the project started and what was spent.

29
 The setting up of standard costs requires the consideration of quantities,
price or rates, and qualities or grades for each element of cost that enters
a product (i.e., materials, labor, and overheads.

Standards for manufacturing costs include both a quantity and a price

standard. The quantity standard establishes how much of an input is
needed to make a product or provide a service. The price
standard establishes how much each quantity of input should cost. As
mentioned prior, these standards can be used to make financial
projections as seen in the module on budgeting. These standards can also
be used to evaluate performance by comparing the standards to actual
performance at the end of the period as demonstrated in the flexible
budgeting module. Any discrepancy is known as a variance between the
standard and actual costs. Standard costs are established for all direct
materials used in the manufacturing process. Direct materials include all
materials that can be easily and economically traced to the production of
a product. For example, the direct materials necessary to produce a wood
desk might include wood and hardware. Indirect materials are materials
that are not easily and economically traced to a particular product.
Examples of indirect materials are items such as nails, screws, sandpaper,
and glue. Indirect materials are included in the manufacturing overhead
category and not the direct material category. Equipment age. If a
machine is nearing the end of its productive life, it may produce a
higher proportion of scrap than was previously the case.
Equipment setup speeds. If it takes a long time to setup equipment
for a production run, the cost of the setup, as spread over the units in
the production run, is expensive. If a setup reduction plan is
contemplated, this can yield significantly lower overhead costs.
Labour efficiency changes. If there are production process changes,
such as the installation of new, automated equipment, then these
impacts the amount of labor required to manufacture a product.
Labour rate changes. If you know that employees are about to receive
pay raises, either through a scheduled raise or as mandated by a labor
union contract, then incorporate it into the new standard. This may
mean setting an effective date for the new standard that matches the
date when the cost increase is supposed to go into effect.
Learning curve: As the production staff creates an increasing volume
of a product, it becomes more efficient at doing so. Thus, the

30
 standard labor cost should decrease (though at a declining rate) as
production volumes increase.

Purchasing terms: The purchasing department may be able to

significantly alter the price of a purchased component by switching
suppliers, altering contract terms, or by buying in different
quantities.
Standard costs and quantities are established for variable manufacturing
overhead. These standards are then compared to the actual quantities
used and the actual price paid for variable manufacturing overhead. Any
variance between the standard and the actual is caused by a difference in
quantity or a difference in price. When discussing variable overhead,
price is referred to as rate instead of price and quantity is referred to as
efficiency instead of quantity. Therefore, the total variance for variable
manufacturing overhead is broken down into the variable manufacturing
overhead efficiency variance and the variable manufacturing overhead
rate variance.

Luca Pacioli is regarded as the father of accounting after the publication

of "Summa de Arithmetic, Geometric, Proportion et Proportionality"
(Review of Arithmetic, Geometry, Ratio and Proportion") in Venice in
1494. In this book, Pacioli noticed the idea of double entry bookkeeping
system. However, Pacioli also discussed some issues of today's cost
accounting such as cash budgeting and variance accounting in that book
for which he can also be credited with the origins of cost accounting.

John Whitmore provided the first detailed description of a standard cost

system in 1906. G. Charter Harrison designed the first complete
standard cost systems in the early 1910s (Chatfield and Whitmore, 1996)

In business, the standard cost system was really introduced from 1920s
(Richard, 1996). Standard costing was initially promulgated in the late
1910s in the U.S and the U.K. and continued to develop in evolutionary
fashion into the late 1940s and 1950s. Britain was not as far behind
America in terms of the standard costing practices as has been
commonly believed (Fleischman, Boyne, and Tyson, 2008).
Standard costing is applicable both in manufacturing and service
industries. Williamson, 1996 reported that standard costing is applied in
Petroleum refinery industries, pharmaceuticals and chemical industries,

31
automotive industries, canned vegetables and fruit, and fast food
restaurant industries.
Most studies revealed that the primary purpose of applying standard
costing is to control cost. However, some other uses of standard costing
such as evaluating performance, preparing budgets, setting prices, and
making decisions are also revealed by various studies.
Bujumbura, 2003 reported that standard costing has been widely used in
developed countries in controlling costs, preparing budgets and pricing
products.
Keeping costs within the predetermined level is a major challenge faced
by most undertakings in today's highly competitive business
environment. With the technological development and globalization,
product life cycle becomes shorter. A number of advanced management
accounting techniques such as JIT, TOC, TQM, ABC, balanced
scorecard, target costing etc., have emerged to control costs, to evaluate
performance, and to set price.
In such a circumstance, a number of scholars raised a question whether
standard costing is still useful in this advanced manufacturing
environment (Kaygusuz, 2006).
During 1980-2000, several academicians such as Kaplan & Johnson (1987),
Ferrara (1995) stated that standard costing and variance analysis become
less important for cost control and performance evaluation purpose due
to the severe competitive environment.
Hilton (2001) noticed that the highly competitive environment and
improved production technologies leads to development of new
management accounting techniques such as JIT, ABC, TQM, Target
costing. He further noticed the decreasing role of labor in the production
process and shortened product life cycle also decrease the importance of
standard costing.
At the extreme, Lucas (1997) opined that standard costing has become
obsolete, and the teaching of this costing system should be discontinued.
In response to this question, several studies have been undertaken in
various countries by several authors to justify whether standard costing
becomes obsolete or is still a useful tool in the hand of management.
At the extreme, Lucas (1997) opined that standard costing has become
obsolete, and the teaching of this costing system should be discontinued.

32
In response to this question, several studies have been undertaken in
various countries by several authors to justify whether standard costing
becomes obsolete or is still a useful tool in the hand of management.
Marie, Cheffi, Louis, and Rao (2010) conducted a survey among 100
companies doing business in Dubai (UAE) to justify whether standard
costing is still relevant. Their sample contains 57 companies from
industrial sector and 43 from service and trading sector. They found that
77% of companies in industrial sector and 39% of companies in service
sector are still using standard costing. They found that standard costing
remains a favorite cost accounting method among accounting and finance
professionals in both industrial and service sectors in this rapidly
expanding part of the globe due to its simplicity, flexibility, and
affordability.
Badem, Ergon & Drury (2013) conducted a study in the Turkish
automotive industry as to whether they still use standard costing or not.
The study was conducted among all the 13 primary and 300 supplier
companies in the automotive industry in Turkey. The findings showed
that on an average 77 percent of the companies still use standard costing.
The above citations prove that standard costing is still an important tool
in the hand of management. The next question is that for what purposes
standard costing is still used in both manufacturing and service industries
throughout the world. Marie, Cheffi, Louis, and Rao (2010) studied five
reasons for using standard costing in Dubai.
Their study showed that 90%of the companies in industrial sector and
71% of companies in service sectors in Dubai use standard costing for
cost control and performance evaluation purpose. Whereas these figures
were 94% and 40% for costing inventories; 88% and 46% for computing
product costs for decision making; 78% and 83% as an aid to budgeting;
42% and 33% for data processing economies in companies in industrial
and service sector respectively. Setting standards of direct materials
several basic to be appreciated in setting standard materials generally we
want to purchase some material what are the factors you consider if
material it is used product it is known as direct material .on the other
hand if the material cost cannot be assigned to the manufacturer of the
product will be called as indirect materials material therefore it involves 2
things
❖ Quality of material

33
 ❖ Price of the material
when you want to purchase material the quality and the size should be
determined the standard quantity to be maintained should be decide the
quantity is determine of the product department this department makes
use historical records and Ola allowances for changing condition will
also be giving setting standards a number of test run may be undertaken
on different waves and under different situations and an average of this
results should be used setting material quantity standards.
The second step in determining direct materials cost will be decision
about standard price material cost will be decided in consultation with the
purchase department the cost of purchasing and store k
material should also be taken into consideration the procedure of
purchase for purchase of material minimum and maximum level of
various material discount policy and means of transport and the other
factors which have been on material cost bread what includes the
following
❖ Cost of material
❖ Ordering cost
❖ Carrying cost
The purchase should be increased efficiency in procuring and store
keeping of materials the type of standard use ideal standard or expected
standard also affect the choice of standard price.
❖ Standard direct labour cost
if you want to engage a labour force for manufacturing a product or a
service which you need to pay some amount this is called a wages if the
labour is engaged directly to produce the product this is known as direct
labour the second largest amount of cost is of labour the benefit derived
from the workers can be assigned to a particular product or a process if
the wages paid to the workers cannot be directly assigned to a particular
product this well known as indirect wages the time required workers will
be paid different rate of wages the time spent by different grades of
workers of manufacturing a product should be use studied for designing

34
open direct labour cost the setting of standard direct labour will return
basically of the following
❖ standard labour time for producing
❖ labour rate per hour
standard labour time indicates the time by different categories of labour
valves which are as under
❖ skilled labour
❖ semiskilled labour
❖ unskilled Labour.
Pause setting is Standard Time for labour force we normally take it into
an account previous experience past performance records testosterone
result work Study ETC. The labour rates standard refers to the expected
wage day to be paid for different category of workers. Past wages rate
demand and supplier principal may not be safe guide for determining
standard labour rate. The anticipation of expected change in labour rate
will be essential factor. In case there is an agreement with the workers for
payment of wages in the coming. This rate should be used if the premium
or the bonus scheme is in operation than anticipated extra payment
should also included where a price rate system is used standard cost will
be fixed per piece the object of fixed standard labour rate and labour time
is revised to maximum efficiency in the use of labour.

Setting Standard of overhead

the next important element comes under overhead the various purpose of
setting standard for overhead is to minimise the total cost. Standard
overheads rates are computed by dividing overhead expense by direct
labour hours or Unit produce the standard overhead is obtained by
multiply standard over the raid by the labour hours spent on number of
units produced. The determination of overhead involves the 3 things.

35
Determination of overhead
determination of labour hour unit Manufactured
calculating overhead rate by divide by a by b
the overhead are classified to into Fixed overhead semi variable
overhead.
The fixed overhead the Mahindra same irrespective off level of
production while variable overhead changes in the proportion of
production. The expenses increase or decrease with increase or decrease
in output semi variable overhead are neither fixed nor variable. This
overhead increases with the increase in production but the rate of
increase will be less than the rate of increase in Production .The division
of overhead into fixed, variable and semi variable categories will help in
determining overhead.
Business and other enterprises need to provide a large amount of
information requested by those interested in their affairs, to assist them in
making rational economic decisions. These entities include management,
current and prospective investors, creditors, government agencies and
bodies, and scientific research institutions. Without providing the
appropriate information for these entities, the percentage of their wrong
decisions increases, so researchers are developing theories that help users
of the information study the impact of these theories on various factors,
and enable them to carry out their scientific studies in general and their
economic studies in particular in the best form, and from these theories
Cost theory which will be adopted in this study. Cost measurement of a
product is one of the most important issues facing a cost accountant
because it helps in financial reporting, inventory costing, product pricing,
profit determination, profit planning, cost control, and decision making
(Wojtowicz et al., 2019).
Cost theory derives its strength from the concept of cost accounting,
where it is difficult to find a brief definition of cost accounting that
surrounds its topic, but we will try to clarify its nature and its subject
through several definitions, where cost accounting is defined as a branch
of accounting science and according to its principles it provides
information related to the elements of expenditures and works to record
and classify them and analyze it and allocate it or upload it to cost centers
or operating orders and different operations to calculate the cost of

36
products, their types, and units, and prepare lists and reports to evaluate
the performance through which the administration can exercise its
various functions with high efficiency to pressure expenses and reduce
waste and waste Conscious and damaged materials used, increase labour
productivity, reduce costs and increase profits (Rindfleisch, 2019).
The cost accounting system is considered one of the most important
subsystems of the management information system in the establishment,
as it provides cost information to the administration in a manner that
enables it to make the best use of the available resources and take
administrative action. The definitions of cost accounting varied
according to researchers and their viewpoints due to its
comprehensiveness in terms of its keeping pace with developments.
Where the definition of cost accounting by Al-Bayati (2016) as “the
science that deals with the definition and measurement and analysis of
the elements of costs in the lists and reports show the cost of this item
produced or service provided to assist management in making
administrative

Decisions and impose control over the cost elements and policy-making
and improve the level of performance by comparing actual costs with
costs in advance of planned determining and treating the causes of
deviation”. This definition dealt with the role of cost accounting in
analysing the cost elements, determining the cost of the produced
commodity, and assisting the management in tightening control and
setting policies, but it neglected the method of costing. While (Talib,
2018) defined it as “that branch of accounting, which is interested in the
estimation of the collection, recording, and distribution, analysis and
interpretation of data related to cost, and these data-related materials,
labour and manufacturing costs indirect related to the production of
goods or services to measure the cost of these activities and the
imposition of the control and rationalization of administrative decisions.

Cost accounting is considered one of the sciences whose rules and

theories have taken root in the modern era, but its roots extend to the
depths of history (Appelbaum et al., 2017). Another researcher believes
that “these are costs specified in advance of what the unit cost of the
product should be in the coming period, and these costs are usually

37
determined using scientific methods, it aims to assist the management in
the purposes of planning, control, and decision-making”. So that the
standard costs can serve their purposes, the standards must be in line with
the conditions of the establishment in the present and the future.
Otherwise, these criteria would be inappropriate as if they were about
another entity (Al-Bayati, 2016).

Standard cost accounting depends on defining the cost elements in

advance for a future period in more accurate ways than the traditional
costs (estimated), where cost standards are set scientifically and
practically that determines the cost elements, that is, what the cost should
be on, not what the cost would be expected to be.

Performance is defined by Feldstein & Coussons (2020) as “a reflection of

how an institution uses financial and human resources and exploits them
efficiently and effectively, in a manner that makes it capable of achieving
its objectives”. We note from the above that the definition is based on
two main elements: Organization, and we mean the efficiency factor, and
the results of that use, that is, the effectiveness factor. Turner et al. (2006)
define performance as: “Judging the social legitimacy of a particular
activity”. Performance in this perspective is linked to social action and
knowledge, leading to social acceptance of the organization’s activities
as well as economic legitimacy (Gopala Krishnan et al., 2015). To ensure
the so-called ‘performance balance’ within the organization, activities are
integrated with the performance process, generating a nested and
interactive chain of processes: performance planning, performance
management, performance monitoring, performance evaluation,
performance improvement, empowerment, and compensation of
performers. Performance management through which the organization
seeks to achieve the objectives for which it was established and the most
important of these goals is to bridge the performance gap, which is the
real problem of management, and to reduce this gap can be achieved in
two ways, the first positive and achieve the goal, which is the actual
performance to reach the target performance, and the second negative
and is to reduce the performance of the target to equate with actual
performance .

38
Referring to performance, we find the basis of performance management
work and is intended as a comprehensive definition: «All processes and
studies that seek to determine the level of the relationship between the
resources available and the efficiency of use by the economic unit, with
the development of the relationship study during successive periods, or a
specific period the way to make comparisons between what is achieved
and what is targeted, and the goals achieved based on a certain scale and
criteria » (Lin, 2010). The performance process is defined as: “the process
by which management at all levels provides information on the
performance of activities within the organization, through which
performance is judged by the criteria in the budgets, plans and
objectives” .

Based on the above, a firm’s performance is considered to be a major

driving force behind any wealthy nation. It is one of the indicators that
top management uses to monitor firms’ activities to keep the firms and
their strategies in the correct direction. According to this concept,
Companies worldwide continuously work to enhance their performance
through many continuous improvement techniques. Therefore, a firm’s
performance considers the indices of success, growth, prosperity, failure,
strategy implementation, and goal achievements to assist in decision
making. Performance, in particular, is a critical determinant of an
organization’s future, on the condition that the organization will use
relative, reliable, credible, and informative measurements to help in
predicting tomorrow while learning from yesterday. The same measures
were used by Zheng et al. (2014) who revealed that when companies
aligned their accounting Modern standard costing strategies
requirements, they have a greater possibility to yield better organizational
performance.

39
Several previous studies showed a positive relationship between Modern
standard costing strategies adoption and firms’ performance. According
to Jaded (2015), the study examined the standard costs system and its role
in monitoring and evaluating performance in the oil industry companies
in Syria. The study aimed at introducing the importance and objectives of
standard costs and the role of transactions and the role that can be played
in control. The study is based on the assumptions that the standard cost
system can achieve effective control over oil production costs, and that
the application of the developed standard cost system enables the
evaluation and evaluation of performance goals. The study found that the
reality of the applicable system cost company hi product does not keep
pace with environment modern manufacturing, and system cost of
standard developer company can be applied to achieve good control over
the costs of oil production, and that costs a system of standard application
that provides information to enable the evaluation of performance
through performance compared the actual outline.

The impact of standard costing on MTN’s profitability to identify the

impacts on the profitability of standard costing techniques, the
relationship between standard costs and the rent ability of
telecommunications undertakings, as well as determine if standard
costing techniques and rules are being implemented Results have been
found that accounting records are maintained and are important for the
company’s management. The fact that hat the company uses standard
costs in its product and decisions with standard information about costs
obtained in the company is taken. It prepares and submits accounting
reports to the management of the company and immediately takes action
on the information provided in the report. This efficient use of standard
costs has an impact on the company’s profitability. That the company
benefits substantially by using standard costing in particular for-profit
improvement.

40
The standard costs system and its role in controlling costs. The problem
of the study is represented in the inability of the grain mills to control
costs in light of the complex economic, environmental, and industrial
conditions in Sudan. The study aimed to identify the extent of the use of
the standard cost system in grain mills in Sudan and to shed light on the
obstacles in using this system and to study the ability of the grain
companies to set accurate standards by the scientific principles of costs,
explain the effect of using the standard costing system on the efficiency
and quality of cost control. The study is based that there is a statistically
significant relationship between the application of the standard costs
system and the efficiency of cost control in grain mills in Sudan. That
there is a statistically significant relationship Statistical significance
between the application of the standard costs system and the profitability
of the grain mills in Sudan. The study reached several results, the most
important of which is that applying the standard costing system is an
indicator of the quality of cost control and that the standard costing
system helps the management to direct its attention to deficiencies and
identify its cause.

Two techniques of cost management to evaluate the impact of lean

implementation and to monitor lean system progress. The standard costs
and activity-based costs are the two methods of costing. By simulating a
manufacturing environment following the implementation of lean
principles the product costs are evaluated through overhead costs
calculations and throughout, which leads to many organizational choices.
In this study, It was seen that the overhead cost had the most effect on the
overall product cost while other costs had an impact. The lean main
implementation controlled and changed the overall allocation. This study
has also concluded that part of the overall costs can be allocated as part of
the process cycle time. The core idea of the lean implementation is
therefore to reduce the cycle time that will reduce the cost of the system.
The lean principles are also focused on just delivery time, higher
inventory turns and the achievement of kaizen techniques can increase
the output and effectively reduce waste and cycle time within the system.

41
Kianian et al. (2019) examines the Life Cycle Assessment (LCC) and compare it with
a performance partial costing model based on in-depth analytics and cost-
sustainability assessment integration criteria. A case study was selected by a
Swedish equipment manufacturer where the company examines new production
technology. Because such a decision requires a large amount of investment. The
results demonstrated that LCC has a significant impact on a part cost of
performance. According to Ekergil & Göde (2020), the success of the hotel business
is being measured by supply chain management and standard costing techniques. A
five-star hotel has four years of information to achieve this goal. For the four-year
data of the hotel, which reflects the activity period of the hotel, the study initially
estimates and updates the total energy consumption and energy cost as well as the
fixed and varying costs. Use this data set to evaluate performance per night with
room and customer data. The second part of this study deals with electricity
consumption, total electricity costs, and fixed and variable costs. Performance
assessment can be performed at room and customer level per night. Therefore, it is
possible to analyze the extent to which the performance assessment in each part of
the hotel affects the total performance of the hotel.

There is a positive relationship between standard costing systems and performance

for industrial firms.

42
 OBJECTIVES OF SSTANDARD COSTING

1) Promoting and Measuring Efficiency factor of production:

Standard Costing, besides enhancing the competence and
performance, also acts as a tool to measure them. If the actual cost
happens to be less than the standard cost, it indicates efficiency and
competency; on the other hand, if the actual cost happens to be more than
the standard cost, it is indicative of inefficiency and competency.

2) Controlling and Reducing Costs:

While computing the Standard Cost, appropriate provisions
are made with regard to normal wastage, normal breakdown, normal idle
Capacity, normal mistakes, etc. This exercise ensures proper monitoring
as well as reduction in the cost.

3) Simplifying Costing Procedure:

The exercise of Standard Costing is invariably specific to a
product/ process / job. For every product, or process, or job a separate
exercise of standard costing is required to be undertaken. This is
generally done by the professionals (cost and management accountants)
after having thorough discussion with the management and the technical
specialists, which ensures smoothening of the entire process.
(4) Valuing Inventories:
Undertaking the valuation exercise in respect of stock and
issue of material on the basis of standard costs results in substantial
savings of time and energy in the maintenance of stores ledger.
Computation of stocks on the basis of standard cost is done by
multiplication of the quantity of stock in hand with the standard cost.

43
 (5) Fixing Selling Price:
Selling price of a product may be fixed either on the basis
of actual cost or on the basis of standard cost. It has been experienced that
due to various reasons, there are lot of fluctuations in actual cost and as
such the selling price cannot be fixed on the basis of actual cost, because
price of a product needs to be generally stable and not volatile. Thus, the
preferred basis of fixing the price of a product is standard cost, to which a
suitable margin is added.

A standard costing system may be used to control costs, which is achieved mainly
by setting standards for each type of cost incurred: material, labor, and overhead

❖ To standard costing system may be used to achieve is to help in setting

budgets

❖ To system may be used to provide useful and detailed information for

managerial planning and decision-making

❖ To standard costing system may be used to assess the performance and

efficiency of staff and management.

❖ To institute a control mechanism on all the elements of costs that affect

production and sales

❖ To measure different operational efficiencies and check the wastages

❖ To improve the delegation of authority and generate a sense of responsibility

among the employees

44
 ❖ To develop a cost consciousness in the employees

❖ To presume the production costs, sales and profit

❖ To avail the benefits of ‘Management by exception.’

❖ To develop a cost consciousness in the employees.

❖ To presume the production costs, sales and profit.

❖ To avail the benefits of management by exception.

❖ To bring about a vivid progressive vision and sagacious decision making at

each managerial level.

❖ To provide a formal basis for accessing performance and efficiency.

❖ To control cost by establishing standards and analysis of variance.

❖ To enable the principal of management by exception to be practiced at the

detailed operational level.

❖ To provide guidance on possible ways of improving performance.

45
 ❖ To provide a basic for estimating.

❖ To set standards for various elements of cost.

❖ To make budgetary control more effective.

46
 USES OF STANDARD COSTING

❖ To provide a formal basis for assessing performance and efficiency.

❖ To control costs by establishing standards and analysis of variance.

❖ To assist in setting budgets in an organization

❖ To provide a formal basis of assigning performance in efficiency
❖ To control costs by establishing standard and analysis of variances
❖ To enable principle of management exception to the practices at
detail operational level
❖ To assist in setting budget in an organization
❖ To motivate staff and management
❖ To provide guidance on possible way of in performance
❖ Define production target cost and then the contrast actual
production cost with the targets
❖ It helps the management and fixing standard
❖ Standard costing is useful in formulating production planning and
price policy
❖ It guides us a measuring road of determination of variances
❖ it facilities eliminating inefficiency by taking corrective measures

47
 HYPOTHESIS OF STANDARD COSTING
Standard costing development and implementation is a complex undertaking, and
many difficult issues need to be addressed. Some of these issues, which IHC has
considered in its development, include: How should direct costs, transfer costs, and
allocations be defined and integrated? How should overhead costs that vary with the
patient load be treated? To what level of detail should overtime, employee benefits,
shift differential, employee skill levels and other such factors be incorporated in the
standard costs? To what extent does increased detail yield improved accuracy? What
level of detail is useful for management purposes? To what extent should Medicare
Cost Report methodologies be followed in determining standard costs? How should
depreciable assets that are used only for certain procedures are allocated? Should
historical cost depreciation or replacement cost depreciation be used in developing
standard costs? How can standards be evaluated and updated, and how often should
this is done? Space constraints do not allow all of these questions to be addressed.

The goals established to be achieved in development of the standard costing system

were as follows:

❖ Provide full standard fixed and variable costs for management

purposes in dealing with DRGs, and in making pricing and marketing
decision s.

❖ Maintain a management reporting system compatible with existing

systems that will verify the ongoing integrity of the standard costs,
provide worthwhile productivity monitoring information, and provide
a consistent approach for comparing hospitals and departments.

❖ Provide high degrees of accuracy while allowing for relatively easy

and rapid implementation and maintenance.

❖ Provide maximum portability of software, methodology, and standards

among hospitals.

48
The overwhelming advantage to this detailed approach is that these individual items
may be used as building blocks in almost any combination to reflect costs of more
aggregate services. The software significantly simplified the development and
maintenance of these costs. There is a common concern that costing to the
individual procedure level is likely to be exceptionally expensive and time
consuming. In fact, with good costing software and well thought out methodology,
detailed costing is often easier than costing at some aggregate level. Experience at
IHC indicates that comprehensively costing all of the procedures in a department in
one study is more efficient than trying to individually cost out procedures in
conjunction with a specific case type. When an entire department is analyzed, all of
the overhead allocations, labor rates, and other departmental issues need to be
addressed only once.

In addition, costing at some aggregate level, such as by DRG, eliminates the

flexibility to roll up costs in any other way. Productivity monitoring is usually not
possible because the costs are not aggregated on a departmental basis. Furthermore,
if new DRGs are added, or if new levels of analysis are required, an entirely new
study is required. If costs are maintained at the basic procedural level, on the other
hand, new analysis takes minutes or hours instead of weeks or months. In much the
same way, if physician or hospital practice patterns change, the cost impact of these
changes will be reflected immediately.

High Degree of Accuracy with Minimal Effort While IHC believes that fully
detailed standard costing is of critical importance in providing accurate information
for decision making; it uses techniques that reduce the complexity of standard
setting and costing. For example, a reciprocal (simultaneous equation) allocation
method is used to allocate costs from overhead departments to revenue departments.
Not only is this technique more accurate than traditional stepdown approaches, but
it is also much easier to use because no allocation sequence must be defined.
Reciprocal allocation has not been used extensively in the past because it uses
relatively complex mathematics. Computerization, however, has eliminated this
barrier.

Reciprocal allocation is one of the few instances where accuracy can be increased
and effort decreased. In most areas, increased accuracy required increased effort.
The relationship is not proportional, however. The 80/20 rule which states that 80
percent of maximum accuracy can be obtained for 20 percent of the effort appears to
apply. The entire IHC system has been designed to provide high levels of accuracy
(90%) while requiring only a fraction of the time and effort which fully detailed
micro costing would require. It is IHC’s experience that additional “bells and
whistles” to standard costing systems adds dramatically to the work and expense

49
required in development and maintenance, but provides little useful information and
negligible increases in accuracy. The standard costing system that IHC has installed
provides the basic information to accurately perform all of the analysis described
previously, while being relatively simple to implement and maintain. The ease of
maintaining the system is especially attractive considering the ever changing nature
of the health care environment.

The Standard Costing System provides, as outputs, fully detailed standard costs for
every charge item in the hospital. These standard costs are broken down into fixed
and variable components for five categories:

❖ Labor

❖ Supplies

Other Direct Costs

❖ Depreciation

❖ Hospital Overhead

The standard costs will be aggregated by departments for a given time period to
provide a flexible budget and associated variance analysis. Key variances, such as,
the efficiency variance, rate variance, and case mix/volume variance, are presented
for management analysis. In addition, the software is capable of providing grouping
data for use in analyzing costs at various levels.

❖ Budgeted Total Expense Summary. This summary is very helpful in

checking the validity of the standards which have been set.

❖ Department Allocations. This report details the allocations to and from

each department in the hospital. This information is particularly useful
in comparing costs of internal provisions of overhead services with
external provisions of the same or similar services

50
Ho: The application of standard costing as means of management controller
planning do not have any significant impact on management objectives.

Hi: The application of standard costing as means of advent control and planning
have a significant impact on the management objects.

Ho: The application of standard costing as means of management control and

planning has not improved the productivity of industry.

Hi: The application of standard costing as means of management control and

planning have improved the productive of the industry.

In the view of the present economic condition which the industry sector is falling a
lot of constraint here been hindering it success among such constants are now level
of capacity utilization as result of big domestic demand depressions of Maria
unstable foreign exchange market high internal rate etc. it is gratifying to note that
ok.plast is one of the Nigeria leading plastic industry and has disguise itself with
high quality service and consists increasing turnover profit after tax earning per
share divide for over the year. The O.K. Plast industry started in operation in
Nigeria’s market output in the earliest 90s selling household plastics as today they
have grown into the reputed manufacturing market company with the aid of
standard constant technique test tool management planning courses in control.

The standard cost technique isn’t seen integral part of management through its
practice when condition favours and elements as a system of ,standard costing can
in the function of management tool stock the modern management must be forward
working and must be capable for converting the resource as effectively possible
again in recent year collective technique has been developed at ok.plast determine
the validity of investigation significant variances and this technique involves the
uses of probability theory standard division analysis .

51
 SIGNIFINANCE /IMPORTANCES OF STANDARD COSTING

1) Check and control of wastage is possible.

2) It improves the efficiency of the organization by the use of standard costing.

3) It exercises control over all cost centers including department, individuals

and so on.

4) Responsibility of a particular person or department can be fixed.

5) In the prediction of production cost, sales and profit, variance analysis is very
useful.

6) On the basis of variance analysis, delegation of authority could be made

effective.

7) Variance analysis is easy to introduce, apply and orient result.

8) Various operational efficiencies can be measured.

9) Reduce operating costs

10) Reduce processing time de

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 • Efficiency measurement :
The comparison of actual cost with standard cost enable the management to
evaluate performance of various costs centers. If the absence of standard
costing system actual cost of different period may be compared to measure
efficiency is difficult.

• Planning:
Standard costing is an excellent tool for management planning. Standard
costing along with budget help management in planning the future activities
of production, sales.

• Stable basis to fix selling price:

Selling price should be based on a stable prodetermine cost . Standard cost
provide such, stable basis for fixation of prices such basis tackles the problem
of absorbing fixed cost .

• Standard act as incentive:

The standard set act as powerful Incentives and motivate to work hard to
achieve them. Many incentive such as bonus in visual or group bonus Crysis
promotion vacations can be linked with standards

• Simple record keeping

Candid costing involves sample records in Since material labour are kept in
Titans of standard rate. Standard costing can be used in integrated system of
maintaining accounts which eliminate reconciliation of financial profit with
cost profit.

• Pause control
Austin system aims at cost control and cost reduction constantly analyze efforts
made to improve the efficiency

• Right decision
Enable and providing useful formation to their management in taking
important decision example the problem creating by inflating rising price EC

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 LIMITATIONS OF STANDARD COSTING

❖ Variation in price:
One of the chief problems faced in the operation of the standard costing
system is the precise estimation of likely prices or rate to be paid. The variability of
prices is so great that even actual prices are not necessarily adequately
representative of cost. But the use of sophisticated forecasting techniques should be
able to cover the price fluctuation to some extent. Besides this, the system provides
for isolating uncontrollable variances arising from variations to be dealt with
separately.

❖ Varying levels of output :

If the standard level of output set for predetermination of standard costs is
not achieved, the standard costs are said to be not realized. However, the statement
that the capacity utilisation cannot be precisely estimated for absorption of
overheads may be true only in some industries of jobbing type. In vast majority of
industries, use of forecasting techniques, market research, etc., help to estimate the
output with reasonable accuracy and thus the variation is unlikely to be very large.
Prime cost will not be affected by such variation and, moreover, variance analysis
helps to measure the effects of idle time.

❖ Changing standard of technology:

In case of industries that have frequent technological changes
affecting the conditions of production, standard costing may not be suitable. This
criticism does not affect the system of standard costing. Cost reduction and cost
control is a cardinal feature of standard costing because standards once set do not
always remain stable.

❖ Attitude of technical people

Technical people are accustomed to think of standards as physical
standards and, therefore, they will be misled by standard costs. Since
technical people can be educated to adopt themselves to the system through
orientation courses, it is not an insurmountable difficulty

❖ Mix of product:
Standard costing presupposes a pre-determined combination of
products both in variety and quantity. The mixture of materials used to manufacture
the products may vary in the long run but since standard costs are set normally for a
short period, such changes can be taken care of by revision of standard

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 ❖ Level of Performance:
Standards may be either too strict or too liberal because they may be
based on (a) theoretical maximum efficiency, (b) attainable good performance or (c)
average past performance. To overcome this difficulty, the management should give
thought to the selection of a suitable type of standard. The type of standard most
effective in the control of costs is one which represents an attainable level of good
performance

❖ Standard costs cannot possibly reflect the true value in exchange

If previous historical costs are amended roughly to arrive at
estimates for ad hoc purposes, they are not standard costs in the strict sense of
the term and hence they cannot also reflect true value in exchange. In arriving
at standard costs, however, the economic and technical factors, internal and
external, are brought together and analyzed to arrive at quantities and prices
which reflect optimum operations.

❖ Fixation of standards may be costly:

It may require high order of skill and competency. Small concerns,
therefore, feel difficulty in the operation of such system.

❖ Costly System :
Because the Standard Costing requires highly skillful and competent
personnel, it becomes a costly system too. For the same experts are paid high
remuneration.

❖ Difficulties in Fixation of Standard:

It is always difficult to determine precise standard costs in a given situation which
will coincide with actual cost when operations are over. Standard cost are
determined partly by the past experience and partly by the cost projections based on
advanced statistical techniques. Thus, uncertainties revolve around standards

❖ Constraint for Service Industry:

Standard costing is applied for planning and controlling manufacturing
costs. Thus, it cannot be applied in a service industry.

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 ❖ Unsuitable for Non‐standardised Products:
Standard costing is expensive and unsuitable for job manufacturing
industries as they manufacture non standardized products such as catering, tailoring,
printing, etc.

❖ Relatively Fixed Standards:

A business may not be able to keep standards up‐to‐date. In other

words, a business may not revise standards to keep pace with the frequent
changes in manufacturing conditions. Firms may avoid revising standards as
it is a costly affair.
❖ Cannot be used in this organization where non standard products are
produced. If the production is undertaken according to the customer
specification then each job will be involved different amount of expenditure.

❖ The process of setting standard is a is difficult task as it requires technical

skills. The time of motion study is required to be undertaken for this purpose
this study is required lot of time and money.

❖ There are no inset circumstances to be considered for fixing standards. The

condition under which standards are fixed due to not remain static. With the
changes in circumstances if the standards are not revised the same become
impracticable.

❖ The fixing of responsibility is not an easy task. The variance systems are to
be classified into controllable uncontrollable variances. Standard costing is
applicable only for the control table variances.

❖ For instant if the industry change the technology then the system will not be
suitable in that case we will have to change or revise the standard. A frequent
revision of standards will become costly.

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 Research methodology
1.) Do you know the purpose of standard costing ?

Out of 51 respondents, we observed that:

➢ 90.2 % respondents are given to simplify costing
procedure.
➢ 5.9 % respondents are given to replace budget and
budgeting.
➢ 1.95%respondents are given to controlling .
➢ 1.95% respondents are given to none of the
above.

57
 2.) Do you know it’s usage standard costs ?

Out of 51 respondents, we observed that :

➢ 78.4 % respondents are given to product costing.
➢ 17.6 % respondents are given to orders costing.
➢ 4 % respondents are given to bill of material.
➢ 0% respondents are given to none of the above.

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3.)Do you know about discard material that have zero
value ?

Out of 51 respondents , we observed that

➢ 84.3 % respondents are given to waste.
➢ 9.8 % respondents are given to scrap.
➢ 3.9 % respondents are given to spoilage .
➢ 2% respondents are given to none of the above.

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 4.)Which of the following is not a part of the cost
accounting concept ?

Out of 51 respondents, we are observed that

➢ 86.3 %respondents are given to product costing.
➢ 9.8% respondents are given to controlling.
➢ 3.9 % respondents are given to product.
➢ 0.% respondents are given to planning.

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 5.) Do u know standard costs is prepared for which
cost unit ?

Out of 51 respondents, we observed that

➢ 84.3% respondents are given to pre-determined.
➢ 9.8 % respondents are given to absorbed.
➢ 2% respondents are given to none of the above.
➢ 3.9 % respondents are given to appointment.

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6.)Do you know the basic standard costing?

Out of 51 respondents, we are observed

➢ 88.2 % respondents are given to indefinite period.
➢ 7.8% respondents are given to short period.
➢ 4% respondents are given to current period.
➢ 0% respondent are given to none of the above.

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7.)Which of the following equation can be used to
calculate a material price variance?

Out of 51 respondents, we are observed

➢ 82.4% respondents are given to (AQ×AP)- (AQ×SP).
➢ 9.8 % respondents are given to (AP×AQ)-(SP×AQ).
➢ 5.9% respondents are given to (AQ×SP)-(AP×SP .
➢ 2 % respondents are given to none of the above.

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8.)Which of the following contains the two levels that
standard may be set at ?

Out of 51 respondents, we are observed that

➢ 84.3% respondents are given to normal and fully
efficient .
➢ 11.8 % respondents are given to normal and ideal
efficient.
➢ 1.95% respondents are given to ideal and loss efficient
➢ 1.95% respondents are given to none of the above.

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9.)If standard cost is lower than the actual cost the
difference is know as ?

Out of 51 respondents, we are observed that

➢ 72.5% respondents are given to favourable.
➢ 19.6 % respondents are given to adverse.
➢ 5.9% respondents are given to positive.
➢ 2 % respondents are given to negative.

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10.)Do you know about variance analysis ?

Out of 51 respondents, we observed that

➢ 82.4 %respondent are given to difference between
actual and cost and standard cost.
➢ 9.8 % respondents are given to difference between
quantity and rate.
➢ 5.9 % respondents are given to difference between
actual and rate .
➢ 2 % respondents are given to none of the above

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11.)State the types of variance?

Out of 51 respondents we are observed that

➢ 78.4 % respondents are given to Material variance,
labour variance.
➢ 11.8 % respondents are given to Quantity variance,
material variance.
➢ 9.8% respondents are given to Actual variance,rate
variance.
➢ 0% respondents are given to None of the above.

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12.) Do you know the reason for material usage
variance ?

Out of 51 respondents , we observed that

➢ 47.1% respondents are given to Labour efficiency.
➢ 39.2% respondents are given to Material efficiency.
➢ 5.9% respondents are given to Overhead efficiency.
➢ 7.8% respondents are given to None of the above.

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13.) Do you know about the labour cost variance ?

Out of 51 respondents , we are observed that.

➢ 88.2 % respondents are given to Yes.
➢ 5.9 %respondents are given to No.
➢ 5.9% respondents are given to Maybe.

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14.) Do you know about the favourable variance?

Out of 51 respondents, we are observed that

➢ 82.4 % respondents are given to Yes.
➢ 13.7 % respondents are given to Maybe.
➢ 3.9 % respondents are given to No.

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15.) Do you know about the components of standard
costing?

Out of 51 respondents, we are observed that

➢ 86.3 % respondents are given to Yes.
➢ 11.8 % respondents are given Maybe.
➢ 2 % respondents are given to No.

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16.) Are you aware of sunk Costs ?

Out of 51 respondents , we are observed that

➢ 60.8 % respondents are given to Yes.
➢ 25.5 % respondents are given to No.
➢ 13.7 % respondents are given to Maybe.

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17.) Do you know about overhead variance ?

Out of 51 respondents, we are observed that

➢ 52.9 % respondents are given to Yes.
➢ 25.5 % respondents are given to No.
➢ 21.6 % respondents are given to Maybe.

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18.) Do you know about Ideal standard ?

Out of 51 respondents, we observed that

➢ 60.8 % respondents are given to Yes.
➢ 27.5% respondents are given to No.
➢ 11.8 % respondents are given to Maybe.

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19.) Do you know about Direct material ?

Out of 51 respondents, we are observed that

➢ 52.9 % respondents are given to Yes.
➢ 35.3 % respondents are given to No.
➢ 11.8 % respondents are given to Maybe.

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20.) Do you know the types of standard costing ?

Out of 51 respondents, we are observed that

➢ 62.7% respondents are given to Yes.
➢ 21.6% respondents are given to No.
➢ 15.7 % respondents are given to Maybe.

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 Conclusion of standard costing
Standard quantities of imports can be established based on ideal performance ,or an
expected performance but usually based on efficient and attainable performances.
Research in Physiology has determined that the most people will exert the greatest
effort of when goals are somewhat difficult to attain but not extremely difficult if
they goals are easily attained managers and employees might not work as hard they
would if goals are challenging but also if goals are appear out of reach managers
and employees might resign themselves to falling short of the goal and might not
work as hard as they otherwise would. For this reason, standards are often
established based on efficient and attainable performances.
Standard costing is an excellent method of measuring and managing cost in
business it's an efficient method of comparing actual expense to expected cost or
tracking performance its a crucial to emphasis however the standard cost is not
come without drawbacks .

❖ Standard cost ID the plant cost of particular unit of process

❖ Standard calls are usually based on what disease enable ATM bill

❖ actual cost are then compared with standard cost

❖ Correct actions taken if there any unplanned trends

❖ Variance analysis are mythical exercise that unable difference between

actual and standard calls to broke down into the limit of cost

❖ variance help in raising the main cause of difference between actual and
budget result but they do not explain what has actually happened.
Contract costing is a former specific cost of order it is a specialized system of job
costing of long term contract or different from short term job. Long term adopted
accounting procedures recognition of profit in case of running contract nearing
completion various plane with the help of by various alternative formulas.

❖ An affective system of budgetary control helps the manager to plan and

control the use of resource in systematic and logical manner

❖ planning helps coordinate the activity of the business

❖ control this achieved through the frequent monitoring of process against the
plan of manager of budget consenter and taking corrective action where
necessary
❖ it's a communication system

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 ❖ It’s a communication system financially objective and constant the
communicated to manager of a budget center and regular monitoring keeps
management form of progress towards objectives
It is the cost estimated by the company that normally occurs during the production
of the golden service that is that amount company except to spend on production
management used with to plan process of future output weight to increase efficiency
at determine the responsibility of actual cost of the period setting the standard cost
of production of difficulty as it requires high degree of technical sale and efforts of
person responsible th4 setting at the same.
Standard costing involves setting up of benchmarks that specify the expected cost of
products manufactured by a company. The standard costing system was developed
in the early 1900’s and has been used as a means of control by many companies. The
system generally works best in companies whose production functions are simple
and repetitive e.g. manufacturing companies. The world has Undergone tremendous
changes since the system was first introduced mainly in the technology sector.
Other changes that have occurred in the modern economy are globalization, shorter
product lifecycle and a change in consumer behavior. Due to these changes,
standard costing is under scrutiny on its applicability in the current economy.
The article has analyzed these market factors and the shortcomings of the standard
costing system as a control tool when considering these new changes. However,
various methods have been presented on How standard costing system can be
modified to meet all requirements of control. One major drawback of standard
costing systems was discovered to be that it neglected quality control which has
become very important as a result of competing in the global market.
For this reason new variances have been proposed that aim to cover quality control,
continuous control and control of automated activities. Apart from this, another
proposal is changing the organization culture of a company by educating the
laborers on the importance of the system and also ensuring managers collect
information more frequently than the one month usually set in the standard costing
method.
Looking at the list of problems and the proposed changes one can thus conclude that
the standard costing system cannot effective operate in the modern economy as it is
but can be modified to portray the actual market factors present in the new
economy. Standard economy is neither dead nor obsolete it is just outdated and only
requires modification to function effectively.
Hence standard is type of budget number one characteristics by certain amount of
rigor in its determination and by its ability to motive managers and employees to
work towards company objective production efficiency and cost control..

78
 Suggestion for standard costing
❖ Standard costs are determined for different elements of costs, including the
standard cost of direct materials, direct labor, and various overheads.
❖ Comparison of standard costs and actual costs of production.
❖ Finding differences (variances) between actual costs and standard costs
❖ These variances may be favorable as well as unfavorable or adverse.
❖ Analyzing variances to identify causes.

❖ Remedial steps are suggested to avoid repeating unfavorable variances in the

future.

❖ Reporting problematic variances to top management for corrective action.

❖ Standard costing of war a criticism against which actual cost incurred by the
business can measures analysis .

❖ variances is identified and carefully analyzed and it is report to manager to

inform suitable corrective actions.

❖ Establishing budget.

❖ Controlling cost direct and motivating employees and measure efficiency.

❖ promoting possible calls reduction.

❖ simplifying costing procedure and expediting cost report.

❖ assigning calls to material work in process and finished good inventories.

❖ Forming the basis of establishing and contract for setting sale price.

❖ Providing a production of future cost that can be used for decision making
purpose.

❖ providing a challenging target.

❖ Simplifying the task of tracing calls to product for profit measurement

inventory valuation.

❖ Methods operates and process of production should be capable for

standardising.

❖ The cost should be controllable.

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 ❖ The standards are set based on the past records and performances.

❖ Comparison between actual performance and standard performance is shown by way of

reports which are presented to the top management.

❖ Analysis of variances are made for taking appropriate action according to the nature of
expenses, i.e. controllable and uncontrollable.

❖ In case of controllable costs if there is adverse variance, efforts are taken to prevent its
recurrence. But in case of uncontrollable costs, the standards are revised.

❖ Standard Costing may be applied to any industry.

❖ In Standard Costing all costs are pre-determined in advance. These

predetermined costs are compared with the actual costs incurred.

❖ The difference between the standard cost and the actual cost is known as the
Variance.

❖ These variances are then analyzed and reasons found out for taking
corrective action.

❖ The standards are set based on the past records and performances.

❖ Comparison between actual performance and standard performance is shown

by way of reports which are presented to the top management.

❖ Analysis of variances are made for taking appropriate action according to the
nature of expenses, i.e. controllable and uncontrollable.

❖ In case of controllable costs if there is adverse variance, efforts are taken to

prevent its recurrence. But in case of uncontrollable costs, the standards are
revised.
❖ Standard Costing may be applied to any industry.

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 Reference
www.accountingtools.com....

The institute of chartered accountants of India….

https://www.financestrategists.com/accounting/varian
ce-analysis/standard-costing/

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