IGNOU : M.COM : MCO 5 : UNIT 11 : Q - 2. What is Standard Costing ? State the objectives of standard costing.

Ans. Standard costing is a technique used for the purpose of determining standard cost and their comparison with the actual costs to find out the causes of difference between the 3 two so that remedial action may be taken immediately. The Charted Institute of Management Accountants, London, defines standard costing as “the preparation of standard costs and applying them to measure the variations from actual costs and analysing the causes of variations with a view to maintain maximum efficiency in production”.

Objectives of Standard Costing :

1. Cost Control : The most important objective of standard cost is to help the management in cost control. It can be used as a yardstick against which actual costs can be compared to measure efficiency. The management can make comparison of actual costs with the standard costs at periodic intervals and take corrective action to maintain control over costs.

2. Management by Exception : The second objective of standard cost is to help the management in exercising control over the costs through the principle of exception. Standard cost helps to prescribe standards and the attention of the management is drawn only when the actual performance is deviated from the prescribed standards. It concentrates its attention on variations only.

3. Develops Cost Conscious Attitude : Another objective of standard cost is to make the entire organisation cost conscious. It makes the employees to recognise the importance of efficient operations so that costs can be reduced by joint efforts.

4. Fixation of Prices : To help the management in formulating production policy and helps in fixing the price quotations as well as in submitting tenders of various products. This can be done with accuracy with standard cost than the actual costs. It also helps in formulating production policies. Standard costs removes the reflection of abnormal price fluctuations in production planning.

5. Fixing Prices and Formulating Policies : Another object of standard cost is to help the management in determining prices and formulating production policies. It also helps the management in the areas of profit planning, product-pricing and inventory pricing etc.

6. Management Planning : Budget planning is undertaken by the management at different levels at periodic intervals to maximise the profit through different product mixes. For this purpose it is more convenient using standard costing than actual costs because it is done on scientific and rational manner by taking into account all technical aspects.