What are the steps in standard costing?
Posted: Sun Nov 09, 2025 9:51 pm
The Core Steps in Standard Costing
Standard Costing is a systematic technique used for cost control and performance measurement in an Accounting Services Buffalo. The entire process follows a logical sequence of steps to establish targets, monitor performance, and take corrective action.
1. Setting the Standards
This is the foundational step, where predetermined costs (the standard costs) are meticulously calculated for each element of production.
Establish a Standard Cost for Each Element: Standards must be set for:
Direct Material: Standard Quantity (SQ) x Standard Price (SP)
Direct Labour: Standard Hours (SH) x Standard Rate (SR)
Overheads (Variable and Fixed): Based on budgeted costs and expected activity/output.
Detailed Analysis: This step requires inputs from various departments: production engineers determine the standard quantity of material and time, the purchasing manager determines the standard price, and the HR department determines the standard wage rate. Standards should be currently attainable (challenging but realistic), not idealistic.
2. Ascertaining and Recording Actual Costs
As production takes place, the actual costs incurred must be accurately recorded and measured.
Track Actual Costs: The actual expenditures for direct materials, direct labour, and overheads are collected from invoices, wage sheets, material requisitions, and other accounting records.
Determine Actual Output: The total number of units actually produced is recorded.
3. Comparing Standard Costs with Actual Costs
The standard cost for the actual output achieved is calculated and then directly compared with the actual cost incurred.
Standard Cost for Actual Output: The standard cost per unit is multiplied by the actual number of units produced.
Identify the Variance: The difference between the actual total cost and the standard total cost for the production achieved is determined.
Variance = Standard Cost for Actual Output - Actual Total Cost
4. Analyzing the Variances
This is the most critical step, as a simple difference is not enough. The total variance must be broken down into sub-variances to identify why the cost deviated.
Isolate Causes: Variances are classified into their causes (e.g., price/rate variances and quantity/usage/efficiency variances).
Example: A total Material Variance is split into Material Price Variance (did we pay more or less than planned?) and Material Usage Variance (did we use more or less material than planned?).
Determine Responsibility: The analysis pinpoints which functional area (e.g., Purchasing or Production) is responsible for the deviation, facilitating the principle of management by exception.
5. Reporting and Taking Corrective Action
The final step is translating the accounting information into actionable management decisions.
Report Significant Variances: Only significant unfavorable variances (cost overruns) are reported promptly to the relevant managers.
Investigate and Act: Management investigates the root causes of the variances (e.g., if a high Material Usage Variance is due to a faulty machine or poor labour training) and implements corrective measures to prevent recurrence.
Review Standards: Periodically, standards are reviewed and updated to reflect Accounting Services in Buffalo in market prices, production methods, or technology.
Standard Costing is a systematic technique used for cost control and performance measurement in an Accounting Services Buffalo. The entire process follows a logical sequence of steps to establish targets, monitor performance, and take corrective action.
1. Setting the Standards
This is the foundational step, where predetermined costs (the standard costs) are meticulously calculated for each element of production.
Establish a Standard Cost for Each Element: Standards must be set for:
Direct Material: Standard Quantity (SQ) x Standard Price (SP)
Direct Labour: Standard Hours (SH) x Standard Rate (SR)
Overheads (Variable and Fixed): Based on budgeted costs and expected activity/output.
Detailed Analysis: This step requires inputs from various departments: production engineers determine the standard quantity of material and time, the purchasing manager determines the standard price, and the HR department determines the standard wage rate. Standards should be currently attainable (challenging but realistic), not idealistic.
2. Ascertaining and Recording Actual Costs
As production takes place, the actual costs incurred must be accurately recorded and measured.
Track Actual Costs: The actual expenditures for direct materials, direct labour, and overheads are collected from invoices, wage sheets, material requisitions, and other accounting records.
Determine Actual Output: The total number of units actually produced is recorded.
3. Comparing Standard Costs with Actual Costs
The standard cost for the actual output achieved is calculated and then directly compared with the actual cost incurred.
Standard Cost for Actual Output: The standard cost per unit is multiplied by the actual number of units produced.
Identify the Variance: The difference between the actual total cost and the standard total cost for the production achieved is determined.
Variance = Standard Cost for Actual Output - Actual Total Cost
4. Analyzing the Variances
This is the most critical step, as a simple difference is not enough. The total variance must be broken down into sub-variances to identify why the cost deviated.
Isolate Causes: Variances are classified into their causes (e.g., price/rate variances and quantity/usage/efficiency variances).
Example: A total Material Variance is split into Material Price Variance (did we pay more or less than planned?) and Material Usage Variance (did we use more or less material than planned?).
Determine Responsibility: The analysis pinpoints which functional area (e.g., Purchasing or Production) is responsible for the deviation, facilitating the principle of management by exception.
5. Reporting and Taking Corrective Action
The final step is translating the accounting information into actionable management decisions.
Report Significant Variances: Only significant unfavorable variances (cost overruns) are reported promptly to the relevant managers.
Investigate and Act: Management investigates the root causes of the variances (e.g., if a high Material Usage Variance is due to a faulty machine or poor labour training) and implements corrective measures to prevent recurrence.
Review Standards: Periodically, standards are reviewed and updated to reflect Accounting Services in Buffalo in market prices, production methods, or technology.