The installation of standard costing system in a manufacturing concern involves the following steps:
a) Standardization of functions i.e. all activities should be standardized and the technical processes of operations should also be susceptible to planning.
b) Establishment of cost centres.
c) Classification of Accounts i.e., the different accounts can be codified and different symbols may be used to facilitate speedy collection, analysis reporting.
d) Setting up of standards: Standards may be basic (long period) and current (short period), From the point of view of efficiency level they will fall into the three broad categories.
i) Strict ideal
ii) Attainable or expected / actual and
The standard should be realistic and attainable. Unrealistic standards provoke resentment and depress performance. Loose standard leads the management to indulge in self congratulation. Normally a period of one year is more realistic as it coincides with the budget period and the normal accounting period.
e) Setting of standard costs:
Standard costs should be determined for each element of cost separately and accurately. Like the budget committee or standards division which will be versed with the work of the standard costs. the standard committee generally consists of all functional heads like production manager, personal manager, etc. In determining the output regard must be had to the limiting factors affecting sales, production etc. setting up of standard cost involves the determination of cost standards. A cost standard is a usage, price or other standard upon which a standard cost is based.
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