Standard Costing: Beyond a costing method & Controlling tool

Many of us are aware of what is standard costing.  Still for those who don’t know, for those who want to recap including those who want to test whether author knows, let us have a quick introduction to standard costing.

Standard costing is a management accounting technique that involves setting predetermined cost standards for various elements of cost, such as materials, labor, and overhead. These standards represent the expected or ideal costs of producing a unit of product or delivering a service under normal operating conditions.

It basically involves following cycle:

To know more technical aspects of it, there is an ample literature available & it will be better to read what the scholars’ say.

Here I want to discuss other dimensions of it.

Let me try.

Any cost calculation involves multiplication of two variables : Rate & Quantity.

Rate is dependent on many external factors & is a matter of negotiations.

Assuming A Ltd. & B Ltd., competitors, of equal size & shape, both may get particular input at same or near to same rate. And you are aware it is very practical scenario.

Who will have a competitive edge in terms of better costing & profitability, hence, will depend upon other variable, i.e. quantity or let’s call it usage, which will facilitate exploring the topic better.

Since A & B must perform on usage, the one who is efficient, productive & better managed wins.

Here is where I want to bring up, how standard costing goes beyond a mere costing method.

Mostly, the activities, operations performed in producing output are interlinked & interdependent.

Standard costing entails standardization of usage, in turn standardization of activities, operations, time & motion, flows or let’s say overall performance.

At this juncture can we then perceive standard costing as a tool for team building, a unifying force?

Standards are meant to reflect the organization's strategy, but can they also foster strong bonds between cross-functional teams?

Just as the organization's strategy is expected to permeate deep, can standard costing serve as one of its carriers?

After all, well set standards can achieve a lot more!!

Indeed, well-established standards have the potential to achieve much more than mere cost control. They can drive efficiency, foster collaboration, and propel the organization towards its strategic objectives.

Will talk about variance analysis in next blog.