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Standard Costing and Variance Analysis

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Standard cost:

It is a predetermined cost based on a technical estimate for materials, labour and overhead for a selected period of time and for a prescribed set of working conditions.

According to CIM, it is a predetermined calculation of how much costs should be under specified working conditions.

A standard can be defined as a benchmark or norm for measuring performance. Standards relate to quantity and cost of inputs used in manufacturing goods or providing services. Managers for the elements of costs set quantity and cost standards.

Standard Costing:

Standard costing is a technique, which establishes predetermined estimates of the costs of products and services and then compares these predetermined costs with actual costs as they are incurred. The predetermined costs are known as standard costs and the different between the standard cost and actual cost is known as variance. The process by which the total different between actual cost and standard cost is broken down into different elements known as variance analysis.


The following are the most important types of standards:
a) Basic Standards.   These are long term standards, which would remain unchanged over the years, their sole use is to slow trends over time for such items as material prices, labour rats and efficiency and effect of changing methods.
b) Ideal Standards. These are based on the best possible operating conditions i.e. no breakdowns, no material wastage, no stoppages or idle time, in short, perfect efficiency. Ideal standards if used would be revised periodically to reflect improvements in methods, material and technology.
c) Attainable standards. This is the most frequently encountered standard. It is based on efficient (but not perfect) operating conditions the standards would include allowances for normal materials losses, realistic allowances for fatigue, machine breakdown etc.


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