This presentation covers what standard costing is, its uses and limitations. Also included is a small case solved case study for better understanding of the topic.

1. Standard Costing – Uses & Limitations

2. Presented By
M Ravish Malgi – 208

3. Objectives
 To understand the concept of Standard Costing.
 To review the literature.
 To identify the uses of Standard Costing in organization.
 To explore the limitation of Standard Costing.

4. What is Standard, Standard Cost & Standard Costing?
 Standard – It is used to refer to the predetermined rate e.g. Rs 10 per
unit
 Standard costs – They are predetermined cost which may be used as
a yardstick to measure the efficiency with which actual costs has
been incurred under given circumstance.
 Standard Costing – This is a technique which uses standards for cost
and revenues for the purpose of control through variance analysis.

5. Steps involved in Standard Costing
 Setting standard costs for different elements of costs
 Recording of actual costs
 Comparing between standard costs and actual costs to determine the variances
 Analyzing the variances to know the causes
 Reporting the analysis of variances to management for taking appropriate actions
wherever necessary

6. Variance
 The deviation of actual cost from standard cost is called variance.
 Variance is very important to evaluate the performance of company
for increasing its efficiency.
 We compare actual and standard cost to know whether it is
favourable or unfavourable.

7. Types of Variance
 Direct Material Variance: Shows the difference between the actual cost of material
of actual units and standard cost of material of standard units.
 Labor Variance: It is the difference between standard cost of labour for actual
production and the actual cost of labour for actual production.
 Overhead Variance: It shows the variance of all indirect cost. It is the difference
between standard cost of overhead for actual output and actual cost of overhead
for actual output.
 Sales Variance: It is the variance which shows the difference between actual sales
and standard sales.

8. Case Study
Problem: Effect of Assumed Standard Levels
 Harden Company has experienced increased production costs.
 The primary area of concern identified by management is direct labor.
 The company is considering adopting a standard cost system to help
control labor and other costs.

9. Solution:
 Harden consulted an engineering company who suggested a Labor standard of 1
unit of production every 30 mins or 16 units/day.
 The management thought such standards would have a negative impact &
workforce wont be able to achieve the target. Management decided to set actual
standard as 12 units/day.
 Thus management decided to deploy dual standard method in which the workforce
was told they were achieving 16 units/day but actual standard was set at 12
units/day or 40 mins/unit.
January February March April May June
Production (units) 5,100 5,000 4,700 4,500 4,300 4,400
Direct labor $3,000 $2,900 $2,900 $3,000 $3,000 $3,100
Quantity Variances:
Variance based on labor standard (one unit each 30
minutes) $2900 U $2,800 U $2,633 U $5,250U
$2,700
U $2,800 U
Variance based on cost standard (one unit each 40 minutes)
$3100 F $3,033 F $3,200 F -0- $933U $3300 F

10. 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 enable the principle of “Management by Exception” to be
practiced at detailed operational level.
 To assist in setting budgets in an organization.
 To motivate staff and management.
 To provide a basis for estimating.
 To provide guidance on possible ways of improving performance.

11. Limitations of Standard Costing
 Setting of standard is difficult task and it involves a high degree of technical skill.
 Standard must be revised from time to time otherwise they lose importance.
 It cannot be implemented in those industries which do not produce any standard
product.
 Sometimes it creates adverse psychological effects. If it is set at a high level its
non-achievement results in frustration & it acts as a discouragement.
 Too much care and attention are required to introduce as well as to keep up-to-
date the system otherwise the very purpose of the system will be frustrated.

12. Limitations (contd.)
 Every organization has different set of parameters to set standards for
themselves. Thus, it may not be suitable in all types of organizations.
 Management’s lack of interest in the standard costing makes it inefficient means
of cost control.
 Standard costing tends to measure performances in terms of difference between
the actual and standards. But other non-financial measures such as maintaining
and improving quality, on time delivery, customer satisfaction and the like are
equally important in performance evaluation.
 It does not give any motivation to improve their performance beyond the
standards. Ex, sales person has already achieved his/her target to be entitled for
bonus than he/she may not do further effort to increase sales.

13. "In the beginning God created man...and the costs
followed afterwards."
Thank You