Standard costing involves establishing predetermined estimates of the costs of products or services, collecting actual costs, and comparing actual costs to the estimates. Standards are set for materials, labor, overhead, and selling prices/margins based on historical data, task analysis, and production process analysis. Material and labor standards consider factors like supplier prices, wage rates, and efficiency levels. Overhead standards may be based on a rate per labor hour. Comparing actuals to standards highlights variances that need management attention to control costs.

1. Standard Costing

2. Standard Cost (SC)
• A standard cost is a 'planned unit cost of a
product, component or service'.
• It is a carefully predetermined unit cost
which is prepared for each cost unit.
• It contains details of the standard amount
and price of each resource that will be
utilised in providing the service or
manufacturing the product.
• A standard cost card shows full details of
the standard cost of each product.

3. Standard Costing
• It is the preparation of standard costs.
• Control technique that reports variances by
comparing actual costs to pre-set standards
so facilitating action through management
by exception.
• Management by exception is the practice of
focusing on activities which require
attention and ignoring those which appear
to be conforming to expectations.

4. A standard
• Benchmark measurement of resource usage or
revenue or profit generation, set in defined
conditions.
• A number of bases which can be used to set the
standard. These bases include
– a prior period level of performance by the same
organisation;
– the level of performance achieved by comparable
organisations;
– the level of performance required to meet
organisational objectives.

5. When SC is used?
• Degree of repetition in the production
process.
– Mass production
– Repetitive assembly work
• It can be calculated per task if there is
a similarity of tasks.

6. The uses of standard costing
• To value inventories and cost production for
cost accounting purposes. It is an alternative
method of valuation to methods like FIFO and
LIFO.
• To act as a control device by establishing
standards (planned costs), highlighting (via
variance analysis) activities that are not
conforming to plan and thus alerting
management to areas which may be out of
control and in need of corrective action.

7. Standard Costing involves…
• The establishment of predetermined
estimates of the costs of products or
services
• The collection of actual costs
• The comparison of the actual costs with
the predetermined estimates

8. Setting Standards for
Manufacturing

9. Analysis of
Historical
Data
Task
Analysis
Setting Standards
Used in a established
production Process
Analyze the process
of manufacturing
the product
What DID
the product
cost?
What
SHOULD the
product
cost?
A Combined
Approach
Analyze the process for the step that
has changed, but use historical data
for the steps that have not changed

10. Setting standards for materials costs
• Direct material prices will be estimated by
the purchasing department from their
existing knowledge.
– Purchase contract already agreed
– Pricing discussions with regular supplies
– Quotations and estimates from potential
suppliers
– The forecast movement of prices in the market
– The availability of bulk purchase discounts
– Material quality required

11. Setting standards for labour rates
• Direct labour rate per hour will be set
– by discussions with the human resource
department
– reference to the pay role
– Any agreements with trade union(s)
• A separate average hourly rate or weekly wage
will be set for each different labour grade /
type of employee (qualification / experience).

12. Setting standards for material usage
and labour efficiency
• Technical specification must be prepared for
each product by production experts.
• Material usage and labour efficiency standards
are known as performance standards.

13. Performance Standards

14. Ideal standard
• This is based on perfect operating conditions
(no wastage, no inefficiencies, no idle time, no
breakdowns).
• Standards may be set at ideal levels, which
make no allowance for inefficiencies.
• Variances from ideal standards are useful for
pinpointing areas where a close examination
may result in large savings in order to
maximise efficiency and minimise waste.
• No allowance.

15. Attainable standard
• Standards may also be set at attainable
(possible) levels which assume efficient
levels of operation, but which include
allowances for factors such as losses,
waste and machine downtime.

16. Current standard
• Standards based on current performance
levels (current wastage, current inefficiencies)
are known as current standards.
• The disadvantage is that they do not
encourage any attempt to improve on current
levels of efficiency.

17. Basic Standard
• These are kept unaltered over a long period of
time, and may be out of date.
• They are used to show changes in efficiency or
performance over a long period of time.
• These are perhaps the least useful and least
common type of standard in use.

18. Setting standards for Variable Overheads
• Standard variable overhead costs are usually
charged to products using a standard rate per
labour hour.
• Where labour hours are to be used as the
basis for charging variable overhead cost.
• Careful analysis of overhead costs will be
necessary.

19. Setting standards for Fixed Overheads
• As per marginal costing no need to
determine a standard unit rate for fixed OH.
• In the absorption costing system the
standard overhead absorption rate is the
same as the predetermined overhead
absorption rate.
• The standard overhead absorption rate will
depend on the total value of budgeted
overheads for the forthcoming period and on
the planned activity or production volume
for the period.

20. Setting standards for Selling Price and
Margin or Contribution
• Anticipated market demand
• Manufacturing cost
• Competing products and
competitors’ action
• Inflation estimates