Tweet
The main advantage of standard costing is that it provides a tool for performance measurement and Bookkeeping Services in Jersey City by allowing management to systematically analyze the difference between expected costs and actual costs.
Performance Measurement & Control
Standard costing establishes a benchmark (the standard cost) for every unit of production before the manufacturing process begins. This predetermined cost acts as a goal for the production team.
Once the production cycle is complete, the standard cost is rigorously compared against the actual cost incurred. The difference between these two figures is known as a cost variance.
Favorable Variance: When the actual cost is less than the standard cost (e.g., you used less material than expected).
Unfavorable Variance: When the actual cost is more than the standard cost (e.g., your laborers worked more hours than budgeted).
How it Facilitates Control
The key benefit isn't just knowing a variance exists; it's the ability to isolate and investigate the cause of that variance. Standard costing separates the total cost variance into detailed components:
Price Variances: Did we pay more or less than expected for materials or labor? (Focuses on purchasing or HR efficiency)
Quantity/Efficiency Variances: Did we use more or less material or labor time than expected? (Focuses on production floor efficiency)
By highlighting the specific where and why of cost overruns or savings, management can practice Management by Exception. Instead of reviewing every cost, they can focus their attention and resources only on the significant unfavorable variances, leading to faster, more effective corrective action.
Supporting Benefits
While control is the main advantage, standard costing offers several strong supporting benefits:
Simplified Inventory Valuation: Instead of tracking the actual cost of every batch, inventory (Work-in-Process and Finished Goods) can be valued quickly and consistently at the predetermined standard cost, simplifying the accounting process.
Better Budgeting and Forecasting: Standards provide a realistic foundation for constructing detailed operational budgets and financial forecasts.
Pricing Decisions: The standard cost provides a solid base from which to calculate a profitable Bookkeeping Services Jersey City, especially in contract bidding where quick, reliable cost data is essential.
Performance Measurement & Control
Standard costing establishes a benchmark (the standard cost) for every unit of production before the manufacturing process begins. This predetermined cost acts as a goal for the production team.
Once the production cycle is complete, the standard cost is rigorously compared against the actual cost incurred. The difference between these two figures is known as a cost variance.
Favorable Variance: When the actual cost is less than the standard cost (e.g., you used less material than expected).
Unfavorable Variance: When the actual cost is more than the standard cost (e.g., your laborers worked more hours than budgeted).
How it Facilitates Control
The key benefit isn't just knowing a variance exists; it's the ability to isolate and investigate the cause of that variance. Standard costing separates the total cost variance into detailed components:
Price Variances: Did we pay more or less than expected for materials or labor? (Focuses on purchasing or HR efficiency)
Quantity/Efficiency Variances: Did we use more or less material or labor time than expected? (Focuses on production floor efficiency)
By highlighting the specific where and why of cost overruns or savings, management can practice Management by Exception. Instead of reviewing every cost, they can focus their attention and resources only on the significant unfavorable variances, leading to faster, more effective corrective action.
Supporting Benefits
While control is the main advantage, standard costing offers several strong supporting benefits:
Simplified Inventory Valuation: Instead of tracking the actual cost of every batch, inventory (Work-in-Process and Finished Goods) can be valued quickly and consistently at the predetermined standard cost, simplifying the accounting process.
Better Budgeting and Forecasting: Standards provide a realistic foundation for constructing detailed operational budgets and financial forecasts.
Pricing Decisions: The standard cost provides a solid base from which to calculate a profitable Bookkeeping Services Jersey City, especially in contract bidding where quick, reliable cost data is essential.
