One of the primary function of management accounting is to help in managerial control and cost control is perhaps the most crucial part of managerial control. The success of management of a business enterprise depends to a large extent on efficient cost control. Standard costing is one of the most important tool in the hands of management which helps it to plan and control costs of business operations. Under standard costing, the costs of different business operations are predetermined. These predetermined costs are called Standard costs. The actual costs are then measured and compared with the standards set for that particular business process. The difference between the standard costs and actual costs is known as variance. These variances are analysed and reasons are investigated so that management can take remedial steps to check them in time. Hence standard costing is an important tool for planning, decision making and controlling costs of business operations.
According to the Chartered Institute of Management Accountants (C.I.M.A), London, ” Standard cost is the predetermined cost based on technical estimates for materials, labour and overheads for a selected period of time for a prescribed set of working conditions.”
Thus standard costs are the predetermined costs which serve as a yardstick for measuring the efficiency of management with which it incurrs actual costs under given set of working conditions. These predetermined costs serve as standards for comparing actual costs with the planned ones. For example , in a manufacturing concern the standard cost of raw materials required for producing one unit of finished product is set at $10 Under given set of working conditions. Butonmeasuring the actual costs,it was found that the cost of raw material actually used in producing one unit of finished product came out to be $12. This difference of $2 is called material cost variance. The reasons for this variance are found out and reported to the management. Now it becomes the responsibility of the management to take corrective actions to eliminate this variance In future.
Thus standard costing involves following steps:
1. Setting standard costs for different elements of costs.
2. Recording of actual costs.
3. Comparison of actual costs with the standard costs to find out variances.
4. Analysing variances to know the cause thereof.
5. Reporting the analysis of variances to the management so that remedial action can be taken.