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Again, these should be minimal in percentage and act to avoid repetitive updates, administrative tasks, and create a small margin for errors in profitability tracking. Plastics processors are fortunate to have several options for managing and calculating costs. In part one of this series, we discussed the benefits of a production profit contribution model.
Work-in-progress account is debited with actual cost of material, actual cost of labour and actual overhead. After these standards are once set, they are rarely changed, unless radical changes are made in the product or in the manufacturing processes. One Professor told his students “ideal standards are like dreams of Sophia Lorens— distant, desirable but rarely attainable”. (a) These standards provide definite goals for short periods, which employees can usually be expected to reach. They also appear to be fair bases with which the current performance is measured. Standard costs facilitate identification and measurement of variances from the standards.
Ascertainment of actual costs
Standard cost can provide valuable information about a company’s production efficiency and cost-effectiveness. Management can use this information to make informed decisions about where to allocate resources and how to improve overall performance. There are a few different schools of thought regarding standard costing and profitability. Some people believe standard costing is an accurate way to determine profitability, while others believe it can lead to inaccurate results.
In a word, we can say the term standard refers to predetermined rate against which performance is judged. It is very difficult to compare and find out the reasons of cost fluctuation through Historical Costing, law firm bookkeeping as it ascertains costs after they have been incurred. The reasons for cost fluctuation apart from variations in output (or units produced) may be detected through introductions of standard costing.
Do most companies use standard costing because it is the best methodology or because it is what everyone else is doing?
These are the costs which the business will incur if the anticipated prices are paid for the goods and services and the usage corresponds to that believed to be necessary to produce the planned output. Basic standards are, however, well suited to businesses having a small range of products and long production runs. Basic standards are set, on a long-term https://goodmenproject.com/business-ethics-2/navigating-law-firm-bookkeeping-exploring-industry-specific-insights/ basis and are seldom revised. Instead, the actual cost is expressed as a percentage of basic cost. Standards which are set up in respect of materials, labour and overheads, are helpful in preparing various budgets. There are many other costing methods available, all of which have pros and cons and are “best” depending on how your business operates.
The success of standard costing system depends on the reliability, accuracy and acceptance of the standards. Accordingly, standard price of raw materials is determined based on present market price and expected inflation. The purchase manager, cost manager and materials store department are usually involved in this process. The other considerations are arranging of purchase and procurement policy, production policy and economic order quantity.
Standards for Labour
Current standard may be based either on ideal standard or expected standard. While ideal standard is that which can be attained under the most favourable conditions, expected standard is that which is expected to be attained during a specified budget period. Thus, current standard, which is related to current conditions, reflects the performance that should be attained during the period for which the standard is used.
- It is not suitable for jobbing industries as each job undertaken may be different from another.
- Sometimes, a company will be able to leverage economy of scale when producing more goods.
- In the case of manufacturing organisations, physical standards are set by the engineering department.
- (ii) Labour Skills – It is also necessary to ensure that the right type of personnel with the requisite skills is engaged for each type of work.
- Standard costing and budgeting are two important tools for planning and controlling your manufacturing costs.
- On the other hand, budgets are actual costs that have been incurred.