Advantages Of Standard Costing Accounting Essay

Advantages Of Standard Costing Accounting EssayDespite the advantages expert noned for about applications of step belling, there be substanti anyy more than situations where it is not a viable costing system. Here ar some(prenominal) problem areasCost-plus contracts. If you have a contract with a guest under which the customer pays you for your cost incurred, plus a profit (known as a cost-plus contract), then you must engagement actual costs, as per the terms of the contract. Standard costing is not allowed.Drives inappropriate activities. A bit of the variances communicateed under a specimen costing system forget drive trouble to take incorrect actions to create favorable variances. For example, they whitethorn buy raw materials in larger quantities in order to mitigate the purchase price variance, even though this increases the investment in inventory. Similarly, management may schedule vaster yield runs in order to advance the labor aptitude variance, even though it is better to produce in smaller quantities and accept less labor efficiency in exchange. fast environment. A step costing system assumes that costs do not change much in the near term, so that you can affirm on regulars for a number of months or even a year, before updating the costs. However, in an environment where product lives are short or continuous improvement is driving down costs, a standard cost may become out-of-date within a month or two.Slow feedback. A complex system of variance calculations are an organic part of a standard costing system, which the accounting staff completes at the end of each reporting period. If the production department is focuse on immediate feedback of problems for instant correction, the reporting of these variances is much too late to be useful.Unit-level information. The variance calculations that typically accompany a standard costing report are accumulated in aggregate for a companys entire production department, and so are u nable to provide information about discrepancies at a lower level, such as the individual work cell, batch, or unit.The foregoing list shows that there are a multitude of situations overtake where standard costing is not useful, and may even consequence in incorrect management actions. Nonetheless, as long as you are awake of these issues, it is usually possible to profitably adapt standard costing into some aspects of a companys operations.Advantages of Standard CostingThough most companies do not use standard costing in its original application of cipher the cost of ending inventory, it is still useful for a number of some other applications. In most cases, users are probably not even sure that they are using standard costing, only(prenominal) that they are using an guestimate of actual costs. Here are some potential usesInventory costing. It is exceedingly easy to print a report showing the period-end inventory balances (if you are using aperpetual inventorysystem), multi ply it by the standard cost of each item, and instantly generate an culmination inventory valuation. The result does not considerly match the actual cost of inventory, but it is close. However, it may be necessary to update standard costs frequently, if actual costs are continually changing. It is easiest to update costs for the highest-dollar mechanisms of inventory on a frequent basis, and leave lower-value items for intermittent cost reviews.Overhead application. If it takes too long to aggregate actual costs into cost pools for allocation to inventory, then you may use a standard overhead application rate instead, and chasten this rate e rattling few months to keep it close to actual costs.production costs at different volume levels, since this may call for the use of longer production runs that are less expensive.Budgeting. A budget is evermore composed of standard costs, since it would be impossible to include in it the exact actual cost of an item on the day the budget is finalized. Also, since a key application of the budget is to compare it to actual results in accompanying periods, the standards used within it continue to appear in financial reports through and through the budget period.Price formulation. If a company deals with custom products, then it uses standard costs to compile the projected cost of a customers requirements, after which it adds on a margin. This may be quite a complex system, where the gross sales department uses a database of component costs that change depending upon the unit bar that the customer wants to order. This system may similarly account for changes in the companys just about all companies have budgets and many use standard cost calculations to clear product prices, so it is apparent that standard costing will remark some uses for the foreseeable future. In particular, standard costing provides a benchmark against which management can compare actual performance.Following through all the arithmetics of varia nces I have pin pointed reasons for the Material Price divergence, Material practise Variance, Labour Efficiency Variance, and Labour Rate Variance.Material Price Variance occurs a failure to purchase the standard quality, thereby resulting in a difference price paid. This will lead into bad purchasing, in which is very discomforting the companys interest such as a rush purchase for an wasteful markets, and also pushes a purchase of a substitute material on account of non-availability of the material specified by the company. This all are think to the interdependence at variances when it ensues an event has a favorable impact on one variance but an perverse impact on another(prenominal) variance. For example, the purchase of inferior quality materials may account for a favorable price variance but it may also have a negative impact on the material usage labor efficiency variance due to the quality causing an increase in usage. The adverse may also be affected by inflation and superior general increase in the market price. In such circumstances the selling price should be altered to refract the current market.Material exercising Variances may be affected by a whole throne of reasons such as carelessness in the use of material also affect the reason of material usage in resulting excessive consumption. Which brings us to the use of defective or sub-standard material that will cause spoliation to the material. Other reasons such as a change in t plant and machinery who also results to excessive consumption of material. The adverse on the variances is due to excess issues. Managers should check the stock are securely locked away that only the standard quantity is issued each day. And its not just that, There are a few more such as Faulty guileFaulty material processingPilferage of materialsUse of material mixture, rather than standard mixtureLabour Efficiency Variance is affected because of the actual hours used is greater than the standard hours, and it adverse is due to the use of an inappropriate standard that should be changed. Alternatively, there may have been idle while, ten working time should be synchronized.Bridget, C. (2012).Standard Costing.Available http//www.accountingtools.com/standard-costing. Last accessed 28th Oct 2012.