Quiz 10: Standard Costing and Analysis of Direct Costs


Three parts of a control system and its working: The purpose of any control system is to eliminate wastages and increase efficiency in the performance. In order to achieve this purpose, the control system consists of three parts viz. a. A planned and pre-determined standard performance level; b. Measure the actual performance; and c. Compare the actual performance with the standard performance level. The performance level may be in terms of number of units purchased / produced / sold, number of hours worked, the amount to be spent on different activities etc. Comparison of the actual performance with the standard performance helps in controlling the costs of operations. • Initially the ' standard cost' is set for each operation. For e.g.: Standard quantity of material required for production and the standard price per unit of material will be pre-determined. Similarly, the standard time required to complete the operation and the standard wage rate of the employee for the completion of the operation will be pre-determined • The managerial accountant collects and accumulates the actual costs through a cost accounting system. • Finally, the managerial accountant compares the actual costs that are measured with the standard costs to check of they are in conformity or if there is any deviation that exists is called cost variance which may be for favorable or unfavorable.

Management by exception: Management by exception means practice of concentrating on areas not operating as expected and giving less attention to areas operating as anticipated or as expected. In other words, the areas of operations that function as budgeted are given less attention, and the areas of operations that are not operating as budgeted are given more attention. On the other hand, if there are significant deviations from the planned operations, managers need to find out the reasons and rectify the same.

The two methods of setting cost standards are :- 1. Analysis of historical data and 2. Task analysis 1. Analysis of Historical Data: Historical data is an indicator of future costs more so in established and experienced organization. The data helps in predicting the future costs. The management accountant makes adjustments in the historical data for price level changes (inflationary changes), technological changes in the production process etc. However, the management accountant needs to take care about the relevance of the historical costs in the current conditions for which standards are being set. 2. Task Analysis : Under this method, the management accountant analysis the manufacturing process if a product and then decides as to what it should costs. For their purpose he works closely with the engineers to familiarize about the production process through ' time and motion studies ' and together decide about the cost of each operation as to much it should be.