(v) Useful in Planning – They are very useful in planning and budgetary control as they are predetermined cost. Industries, which are subject to frequent changes in technological process or the quality of material or the character of labour, need https://www.digitalconnectmag.com/a-deep-dive-into-law-firm-bookkeeping/ a constant revision of standard. It facilitates timely cost reports to management and a forward-looking mentality is encouraged at all levels of the management. It is a basis for the implementation of an incentive system for the employees.

It may have purchased the wrong grade of material or hired employees with more or less experience than required. For example, purchasing substandard materials may lead to using more time to make the product and may produce more scrap. The substandard material may have been more difficult to work with or had more defects than the proper grade material.

Classification of Cost

No more end-of-year standard to actual analysis and true-up, impacting the P&L and Balance Sheet. No more beginning of year inventory reval, impacting the P&L and Balance Sheet. Elimination of variances, particularly variances that make no logical sense and cause a loss of business trust in the system and finance function.

• Standard cost are determined partly by the past experience and partly by the cost projections based on advanced statistical techniques.
• Another problem with standard costing is that it can encourage managers to find ways to artificially lower costs rather than find ways to improve efficiency and reduce waste.
• It represents the level of performance attainable with the ‘best’ or ideal set-up, i.e., best quality materials at favourable prices, highly skilled labour and best equipment.
• (v) If the variance is controllable, take corrective action to prevent its recurrence; if non-controllable, revise future standards.

For example, if two companies have similar products, but one has a higher standard cost, its production process may be less efficient or effective. This information can help management identify areas where improvements can be made. Standard Costing can evaluate pricing strategies, product mix decisions, and process improvement opportunities. It is a powerful tool that can help managers make informed decisions that will improve the financial performance of their department or company. On the one hand, it could be argued that standard costing is the best methodology because it provides a consistent and objective way of measuring costs. On the other hand, it could be argued that we use standard costing because it is what everyone else is doing.

Difference Between Standard Costing and Historical Costing

Consequently, historical costs are computed by reference to source documents such as material requisition, job cards, time cards, etc. only after much time and clerical labour. With standard costs, however, the actual performance may be compared with the pre­determined standard of performance, law firm bookkeeping and management may be apprised of the efficiency or otherwise of an activity or operation. Standard costs are pre-determined costs computed before commencement of production. The need for standard costs arises owing to the limitations or weaknesses of historical costs.

It is also one of the most recently developed refinements of cost accounting. It also essentially enabled managers to ignore the fixed costs, and look at the results of each period in relation to the “standard cost” for any given product. The cost accountant may periodically change the standard costs to bring them into closer alignment with actual costs. 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). 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.