In a standard cost system each unit of product has a

Info icon This preview shows pages 311–313. Sign up to view the full content.

View Full Document Right Arrow Icon
In a standard cost system, each unit of product has a standard material cost, a standard labour cost, a standard overhead cost for each product centre. The total standard cost for the period under consideration is obtained by multiplying these standard unit costs by the number of units flowing through the cost centre in that period. 23.2 OBJECTIVES After completing this Lesson you should be able to know The purpose and importance of Standard costing Variance analysis and its importance Different types of variances 23.3 CONTENT 23.3.1 Purpose of Standard Costing 23.3.2 Historical or Actual Cost 23.3.3 Difference between Standard Costing and Historical Cost 23.3.4 Importance of Standard Cost 23.3.5 Standard Costing 23.3.6 Standard Cost VS Budgetary Control 23.3.7 Limitation of Standard Costing
Image of page 311

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
305 23.3.8 Advantages of Standard Costing 23.3.9 Variance Analysis 23.3.10 Types of Variances 23.3.1 PURPOSES OF STANDARD COSTS Standard costs are used for: 1. Establishing budgets. 2. Controlling costs and motivating and measuring efficiencies. 3. Promoting possible cost reduction. 4. Simplifying costing procedures and expediting cost reports. 5. Assigning costs to materials, work-in-process and finished goods inventories. 6. Forming the basis for establishing bids and contracts and for setting selling prices. 23.3.2 HISTORICAL OR ACTUAL COSTS: Historical costs are actual costs. They are recorded after they have been incurred. One major responsibility of cost accounting department is to record the different types of cost and ascertainment of actual cost of production total production cost as well as production cost per unit. 23.3.3 DIFFERENCE BETWEEN STANDARD COSTS AND HISTORICAL COSTS 1. The main difference between standard cost and historical cost is of recording them. Standard cost is a pre-determined cost while actual cost is an after-production recorded cost. Thus, standard cost is of forward nature while historical costs are actual and of historical nature. 2. Historical costs are actual costs which have been actually incurred while standard costs are reasonably attainable Ideal costs. 3. Historical costs relate to past, hence not useful for control purposes. On the other hand, standard costs relate to future, hence they are very useful in controlling the costs. 23.3.4 IMPORTANCE OF STANDARD COSTS Standard costs are very useful for managerial control and planning. The limitation of historical costing system in this respect has given the way to the wide- spread use of standard costs. Though the historical costs have their own value. They form the basis of financial accounting and reporting but they have certain serious drawback from the point of view of modern management. Actual costs are received -very late. These data are available to the management after the expiry of accounting period and closing the accounts. Hence, the management cannot control them.
Image of page 312
Image of page 313
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern