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  Standard Costing

Introduction to Standard Costing

Two very important functions of management of any organization are controlling and planning. When planning helps the management to create systematic efforts to achieve the well-defined aims, control enables them to reconsider the actual performance and locate the variation among the planned performance and actual performance. So for evaluating performance, it is essential to compare the actual performance along with some pre planned or pre-determined targets. One of the significant parameters of performance is the cost of production. As per to the M. Porter, for accomplishing sustainable competitive advantage it is essential to establish cost leadership. For getting this, it is of paramount significance that the several costs are monitored closely and there is a constant comparison of the actual costs along with some pre-determined targets. Standard Costing is a significant tool in the hands of management for enhancing the management control through giving parameters for comparison of actual with these parameters.

The method of standard costing is one of the basic methods of managerial control of manufacturing operations. Within this method standard costs are pre-determined, actual costs are evaluated with such type of pre-determined costs, the variations among the two are noticed and analysed as to their causes so that corrective measures might be occupied to control the factors leading to not favorable variations. To conclude the effectiveness and efficiency of performance, it is the entire time essential to have standards of comparison. Standards pre-determined regarding to costs give these comparisons, so that the significant objectives of effectiveness and efficiency can be precise and so that their degree of attainment can be measured. Effectiveness' means the achievement of a provided objective and efficiency connotes the relationship among output and input. The management strives to be effective and efficient. The method of standard costing gives a tool to the management for the said purpose.

So, the method of standard costing involves the following:

(a) Determination of suitable standard cost under each element of cost that is materials, labour and overhead.

(b) Comparison of actual cost along with the standard indicating the variation in the form of favourable or adverse variance.

(c) Analysis of variances for the reason of ascertainment of reasons.

(d) Presentation of information to suitable levels of management in order that remedial action might be taken.

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