In accounting, a standard costing system is a tool for planning budgets, managing and controlling costs, and evaluating cost management performance. Standard costing is an important subtopic of cost accounting. Standard costs are usually associated with a manufacturing company’s costs of direct material, direct labor, and manufacturing overhead. It is the practice of substituting an expected cost for an actual cost in the accounting records, and then periodically recording variances showing the difference between the expected and actual costs.
The following are the advantages of the standard costing system:
The primary advantages to using a standard costing system are that it can be used for product costing, for controlling costs, and for decision-making purposes.
- A standard costing is a rule of measurement established by authority, which provides a yardstick for performance evaluation.
- The principle of management of exception can be successfully applied by the concerns which follow technique of standard costing. Management has got limited time and it need not burden itself with respect to those activities of the concern which proceed according to standard performance.
- Standard costing system minimizes the wastage by detecting variance and suggesting for corrective actions.
- Standard costing provides a valuable guidance to the management in the formulation of price and production policies. It helps management in preparing price lists, planning production of new products and furnishing costs estimates at higher levels.
- Under the standard costing system, cost centers are established and responsibility is assigned to the concerned departments and persons and thus it helps to increase the effective delegation of authority.
- A properly developed standard costing system with full participation and involvement creates a positive, cost effective attitude through all levels of management.
- The standard system encourages reappraisals of methods, materials and techniques that help to reduce the unfavorable variances.
- Standard costing makes the work of valuation of inventory easier because the inventory is valued at predetermined costs.
- The standard costing system helps to draw management’s attention towards those items which are not proceeding according to plan.
- Standard costing system makes the whole organization cost-conscious as it gives the focus to the standard cost and variance analysis.
- Standard costing system provides a basis for incentive scheme to workers and supervisors.
- Standard costing system simplifies the cost control procedures.
- Standard costing acts as an effective tool for business planning, budgeting, marginal costing, inventory valuation etc.
Finally, standard costing benefits extends to the concerns of profitability and efficiency in a rank-and-file activity rather than exclusive management functions. Standard costing places responsibility for identifying variance with line managers and thereby, integrates product or process efficiency interventions as a routine line activity rather than make it a specialized staff management intervention.