Standard Costing & Variances

Aims, Objectives & Introduction

Aim

This unit aims to provide you with the information necessary to operate a system of standard costing for the purposes of analysing variances for control.

Objectives

By the time you have completed this unit you should be able to:

Introduction to Standard Costing

In SU6 and SU7 we looked at budgeting for planning and control. In this unit we take the control aspect one stage further and look at standard costing.

While budgeting relates to an activity or cost centre over a period of time, standard costing takes the procedure further and is concerned with a cost unit.

For example the monthly production budget may set the cost of 40,000 units at £40,000. For control purposes this means that in the period of one month the production department should be capable of producing 40,000 units and the departments costs should not exceed £40,000. If we now set a standard using the budget as a basis, the standard cost will be £1 per unit.

We can now break these costs down even further to take account of the components which go toward the production of a unit of output, ie material, labour and overheads. This allows us to analyse in detail any deviation of actual from standard and pinpoint the exact area in which a problem occurs. We must also look at the sales side of the business and set standards there for quantity of sales and amount of profit.