Standard Costing: Advantages, Types, and Implementation

Posted on Mar 7, 2025 in Modern Languages and Management

Standard Cost Definition

Standard cost is the expected cost under specific assumptions about internal and external factors. It’s an estimate of controlled and uncontrolled parameters, incorporating a management objective.

Advantages of Standard Costs vs. Historical Costs

Standard cost systems offer several advantages:

  • Provide a management reference tool.
  • Enable control by exception through deviation analysis.
  • Facilitate a priori stock assessment.
  • Aid in pricing and policy formulation.
  • Require clear responsibility definitions for facilities or activities.

Types of Standards

  • Based on company data from previous years.
  • Based on corrected data from previous years.
  • Based on technical data:
    • Gold standard: optimal operating conditions.
    • Attainable standard: reasonable management terms.

Advantages & Disadvantages: Past Data Standards

  • Advantage: Easy to establish.
  • Disadvantage: Doesn’t incorporate changing conditions.

Advantages & Disadvantages: Optimal Technical Standards

  • Advantage: Encourages greater efficiency.
  • Disadvantages:
    • Can be discouraging due to difficult achievement.
    • Useful only for cost control, not management (unrealistic).
    • Useful for planning.
    • Allows control by exception (all deviations are favorable).

Best Way to Establish Standard Costs

The best approach is using a technical standard cost system that is realistic and attainable.

Relationship Between Standard Costs and Budget Management

Standard costs are based on forecasts used in budget management.

Stages of Standard Cost Application and Implementation

  1. Estimate standards at the beginning of the period.
  2. Calculate actual costs (using the same methodology).
  3. Calculate and analyze variances.
  4. Present the results.
  5. Make decisions and address deviations.

Types of Cost Systems Based on Standard Cost

  • Conventional Systems:
    • Full Cost Systems (Absorption):
      • In Process
      • For Work Orders
    • Variable Cost Systems (Direct Costing):
      • In Process
      • For Work Orders
  • Other Systems:
    • Cost Systems ABC (Activity-Based Costing)

Requirements for Standard-Based Cost Systems

Establishing a standard cost system requires:

  • A clear organizational structure with defined responsibilities.
  • Planning of business operations and costs based on:
    • Forecasted volume
    • Forecasted activity
    • Working methods
  • Anticipating physical and monetary quantities to achieve the planned activity volume.

Economic Filter Concept

An economic filter records deviations between real and planned situations, enabling corrective actions.

Types of Direct Load Deviations

  • Misuse of direct raw material charges.
  • Misuse of direct labor charges.

Types of Indirect Cost Deviations

  • Technical deviation of indirect costs.
  • Misuse of indirect economic burdens.

Absolute vs. Relative Deviations

Absolute Deviation: Shows the deviation in units of activity analyzed. Requires enterprise data for interpretation. Calculated as: Dab = Predicted value – Actual value.

Relative Deviation: Shows a percentage of deviation from the predicted value. Provides information without needing all data. Calculated as: Drel = (Dab / Expected value) * 100

Rationale for Examining Joint Deviation

It reveals the deviation caused by the synergy of technical and economic variances. If they are inversely proportional, the deviation should not be mixed.

Conditions for Deviation System Operation

  • Reasonable standards leading to significant deviations.
  • Identification of responsible parties for deviations.
  • Accounting for deviations.
  • Reliable sender information.