Standard Cost Accounting System

Posted in Operations and Supply Chain Terms, Total Reads: 2017

Definition: Standard Cost Accounting System

Standard costing is a methodology to estimate the standard cost of the process involved rather than using actual cost for costing. Standard costing system is a substitute to cost system like LIFO and FIFO where a large historical cost have to be maintained.

The variances are periodically reviewed by the account department to factor the changes in cost and is reviewed periodically.

Advantages of Standard Cost Accounting System

• Budgeting

A budget consist of standard cost, since it is difficult to incorporate the actual cost of the items on real time basis. Additionally, since a key utilization of budget is to contrast it with real results in ensuing periods, the standard cost utilized are reflected in the budget period

• Inventory Costing

It is to a great degree simple to print a report demonstrating the period-end stock balances, multiply it by the standard expense of each item to generate end inventory value. The outcome does not precisely coordinate the real cost of stock, but rather it is close. On the other hand, it might be important to overhaul standard expenses as often as possible, if real expenses are constantly evolving. It is most straightforward to redesign costs for the most elevated dollar parts of stock on a regular premise.

• Price formulation

A firm that manages custom items, then it utilizes standard expenses to accumulate the standard cost of a client's prerequisites, after which it includes an edge. This may be a significant complex framework, where the business division utilizes a database of part expenses that change contingent on the unit amount that the client needs to arrange. This framework might likewise represent changes in the organization's creation costs at diverse volume levels, subsequent to this may require the utilization of longer generation runs that are - cost

Disadvantages of Standard Cost Accounting System

• Cost plus Contract

Standard cost accounting cannot be applied in cost plus contract because it is based on actual market price and percentage commission based on it.

• Cost updating due to dynamic environment

A standard costing framework expect that expenses don't change much in the close term, with the goal that you can depend on models for various months or even a year, prior to redesigning the expenses. Be that as it may, in a situation where product life are short or nonstop change is driving down expenses, a standard expense may get to be obsolete inside of a month or two.

• Unit-level information

The change that commonly go with a standard costing report are gathered in total for an organization's whole creation division, as can't give data about inconsistencies at a lower level, for example, the individual work cell, bunch, or unit,

Standard cost variances formulas


Material cost variance

Standard material cost - actual material cost

Material price variance

(standard price - actual price) x actual quantity purchased or used

Material usage variance

(standard quantity for actual output - actual quantity) x standard price

Material mix variance

(actual mix - standard mix ) x standard price

Material yield variance

(standard yield - actual yield) x standard cost

Labor cost variance

Standard wage cost - actual wage cost

Labor rate variance

(standard rate - actual rate ) x actual hours

Labor efficiency variance

(standard hours for actual output - actual hours worked) x standard rate

Idle time variance

Idle time x standard rate

Variable production cost variance

Standard variable overhead - actual variable overhead

Variable overhead expenditure variance

(standard overhead rate - actual overhead rate) x actual hours

Fixed overhead cost variance

Overhead absorbed - overhead incurred

Fixed overhead expenditure variance

(budgeted fixed overhead - actual fixed overhead)

Fixed overhead volume variance

(budgeted volume-actual volume) x standard absorption rate

Fixed overhead capacity variance

(budgeted hours-actual hours) x standard absorption rate

Fixed overhead productivity variance

(standard hours for actual output-actual hours worked) x standard absorption rate

Sales value variance

(budgeted quantity x standard selling price) - (actual quantity x actual selling price)

Sales price variance

(standard selling price-actual selling price) x actual quantity sold

Sales volume variance

(budgeted quantity-actual quantity) x standard selling price or standard profit or standard contribution

Sales margin variance

(budgeted quantity x standard profit)- (actual quantity x actual profit)

Sales contribution variance

(budgeted quantity x standard contribution)-(actual quantity x actual contribution)

Sales allowance variance

(budgeted allowance-actual allowance) x actual quantity sold

Sales mix variance

(standard mix-actual mix) x standard selling price or standard profit or standard contribution

Sales quantity variance

(budgeted quantity-actual quantity in standard mix) x standard price or standard profit or standard contribution

Hence, this concludes the definition of Standard Cost Accounting System along with its overview.

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