Question

Explain the concept of standard costing. outline the advantages and limitations of using standard costing in a manufacturing company. discuss the preliminary steps involved in setting up standard costs for a product and analyze the differences between standard costing and budgetary control

Answer 1

Standard costing is a costing system used by manufacturing companies to establish predetermined costs for their products. It has advantages such as benchmarking performance and enabling variance analysis, but also has limitations. The preliminary steps for setting up standard costs include analyzing historical data and determining cost drivers, and standard costing is different from budgetary control.

Step-by-step explanation:

Standard costing is a costing system used by manufacturing companies to establish predetermined costs for their products. It involves setting standard costs for materials, labor, and overhead, which are then compared to the actual costs incurred during production.

The advantages of using standard costing include providing a benchmark for evaluating performance, facilitating cost control and budgeting, and enabling variance analysis.

However, it also has limitations such as being time-consuming to set up, potentially leading to complacency, and not accounting for external factors.

The preliminary steps for setting up standard costs include analyzing historical data, determining cost drivers, and calculating standard costs for each element.

Standard costing is different from budgetary control in that the former focuses on setting predetermined costs, while the latter involves comparing actual performance against the budget.