Standard Costs and Budgets


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Standard Costs and Budgets: The technique of standard, costing has been developed to establish standards of performance for producing goods and services. These standards serve “as a goal for the attainment and as basis of comparison with actual costs in checking performance. The analysis of variance between actual and standard costs will: (i) help fix the responsibility for non-standard performance and (ii) focus attention on areas in which cost improvement should be sought by pinpointing the source of loss and inefficiency. The principle here is that or controlling by exception. Instead of attempting to follow a mass of cost data, the attention of those responsible for cost control is concentrated on significant variances from the standard. If effective action is to be taken, the cause and responsibility of a variance, as well as its amount, must be established.

The prime objective of standard costs is to generate greater cost consciousness and help in cost control by directing attention to specific areas where action is needed. To those who are immediately concerned, variances wou1d indicate whether any action is required on their part. It must be noted that

  • Costs are controlled at the points where they are incurred and at the time of occurrence of events, and
  • At the same time they may be uncontrolled at some points.

It is, therefore, necessary to understand the difference between controllable and uncontrollable costs. The variances may also be controllable and uncontrollable. For example, if the material cost variance is due to rise in prices, it is not within the control of the production manager. But if the variance is due to greater usage, control action is certainly possible on his part. The higher management can also decide whether or not they should intervene in the matter. Sometimes, variances may be so significant that a complete reappraisal of the standard costs themselves may be needed.

 


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