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Standard Costing and Variance Analysis

What do you mean by standard costing and variance analysis?

Standard costing is basically the practice of checking the expected cost and making some deductions and then substituting it with the actual real cost of the good or service in the accounting books. This is done with the periodically examination of the books and recording the variances in the cost part which will show the differences in the actual costs and the costs which was expected. This helps long time for the firm to get on the right note in the production process as well as on the promotional front. Standard costing is a new and simplified way for the cost layering systems like the FIFO and the LIFO. These are the methods in which the historical cost information which have larger amounts should be maintained when keeping in mind for the items which are held in the stock.

Standard costing is not just a method but a process. A process to study, analyze and make final decisions which will affect some of the outcomes for the company. It majorly involves the creation of the costs which are purely estimated for the some of the activities which are under went in the company. The main reason why standard costing is used in the first place, is because of the high number of activities running in a company at a particular time. So, apart from collecting the actual costs of each and every activity, standard costing is used in place to get at least a close approximation to the actual costs.

Standard costs and actual costs are two different aspects of costs, hence the difference between them is also significant. The accountant calculates these differences from time to time and also studies and analyzes the factors which affects these changes. Cost of materials and labor rate changes are some of the examples of this. The cost accountant also changes the frequency of the standard costs to get it in more proximity of the actual costs.

Standard Costing and Variance Analysis

What are the advantages of standard costing?

Standard costing has their merits and ways, some of these are:

1. Budgeting

The main and prominent reason for the work of standard costing is budgeting. A budget is the total estimation of all types of costs and how to finely execute the work process proficiently. A budget is only a list having a majority of standard costs, as it would be nearly impossible for the inclusion of it as the exact actual cost which will be rendered. The budget once made is finalized hence not-so-sure actual costs should have no place in it. Standard costs also help the budget as a very important application of the budget, which is to compare and study the standard costs to the actual results in frequent periods, thus the standards used within it will have to continue to appear in the accounting reports through the budget making period.

2. Inventory costing

Standard costing is also very good as it is an easy task to print a report which shows the end inventory report of the balances and then it keeps up to multiply it accordingly with the standard cost of each of the item and then instantly make a valuation about the ending inventory listings. The results are close but not exactly matching the actual cost of the resources. Inventory is one such thing whose extra charges are fluctuating with time like appreciation and depreciation. As a result, it is very necessary to update the standard costs from time to time.

3. Overhead application

Actual costs usually take a bit longer to aggregate them within the cost pools for the purpose of allocation to the inventory. After this, the company will have a choice in making use of the standard overhead application rate upon it and henceforth adjust the rate as per the need for quite some time. It will take some close months to take up the standard costs near the actual costs.

4. Price formulation

If a company’s nature of goods produced and marketed is custom and different, then as a result it has to use the standard costs for the compilation of the projected cost as per the customer’s personal requirements. It adds to the margin in the end. This type of system can be very lengthy but will also account for the changes with the company’s production cost which is estimated at the different levels. It will eventually call for the longer use of production which is more of less expensive.

What do you mean by standard cost creation?

Standard cost creation is basically the creation of the standard cost for the actual cost estimation, there are factors which helps in making the standard costing, and these are:

1. Equipment age

It means when a machine is nearing its expiry date or the end of the productivity life, it may be able to produce the highest number of scrap than it used to from previous time.

2. Equipment setup speeds

This means that if a machine or an equipment takes too long to setup for the production run then the cost of the setup which is distributed with the total units present in the production run becomes expensive.

3. Labor efficiency changes

It means if there are any production process changes that occur inside the control area, such as the automated equipment or the installation of any new equipment, then as a result it impacts the total amount of designated labor which is required for the manufacturing of a product.

4. Labor rate changes

This means when the labor working for your firm are about to get paid or raises, which is either through a systematic timely raise or a sudden raise, then take the step of incorporating it into being a new standard for your firm. It will clearly mean setting up an effective date for that new standard which extensively matches the very date when the cost increase is supposed to go into effect.

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