Bookkeeping Tips: How Does Standard Costing Affect Manufacturing Companies?

Cost control is an important accounting activity for every business. One effective cost control measure that can help a business to remain competitive is standard costing. The costing method serves as the reference point for performance evaluation.

Businesses that adopt standard costing can improve their operational efficiencies. In this blog post, you will learn about the benefits of standard costing for small businesses.

Standard Costing: An Overview

Standard costing is a performance evaluation method that involves comparing actual performance with benchmarked performance.

Professional accountants set standards for different operations after discussion with departmental heads.

The actual performance of the business is compared with the standards to find out variances. The variances are further analyzed to find out the reason for the actual cost to be different than the benchmark cost.

Understanding Cost Variances

Variances can be favorable or unfavorable for a business. A favorable variance occurs when the actual cost is less than the standard cost. The variance is unfavorable when the actual cost is more than the standard cost.

The variances in costs are due to different factors. The management must understand the reason for the variance and take appropriate measures. Some of the factors that lead to cost variances include price changes, downtime, labor efficiency, and increased overheads.

Cost variances can also be due to different levels of activities. The fluctuation in production levels leads to varying costs of production.

Management makes proper adjustments based on the underlying nature of the variances. This helps in achieving the cost targets in the long run.

Benefits of Standard Costing for Manufacturing Firms

The purpose of standard costing is to improve operational efficiencies to reduce material, labor, and overhead expenses. Manufacturing companies that adopt standard costing can optimize financial and operational resources that help them in achieving strategic objectives.

Here are some of the other benefits of standard costing for manufacturing companies.

Price Formulation

Standard costing helps firms in determining the price of the products. The sales price is based on the estimated cost of the product. The management decides the price of the product based on the predetermined unit costs.

The price policies are created based on the benchmarked costs. This helps the management in the preparation of bids for different orders and also planning new methods and products to improve the overall portfolio.

Achieving Cost Targets

Another benefit of standard costing is that it helps the management in the achievement of cost targets. Standard costing techniques help the management in planning efficient business operations to reduce costs.

Standard costing allows the management to create budgets. The activity helps the management to know about estimated costs for different levels of the production process. It allows them to create effective budget targets for different activities.

Operational Efficiencies

Standard costing allows firms to gain operational efficiencies. The standard costing technique allows the departmental heads to boost production.

Effective budgeting techniques based on standard costing involve determining the required quality at the best cost under specific production conditions.  This involves creating policies to meet the cost targets.

The management determines the optimum quality and quantity of materials to be used for achieving the cost targets. They also determine labor requirements for each activity and the conditions that can help improve operational efficiencies.

Employee Performance Appraisal

The standard costing technique also helps in performance appraisals of employees. The budgeting technique allows the management to compare the actual and standard performance of each employee.

Standard costing helps in creating incentives for the employees to boost productivity. It allows periodic assessment of employee performance.

Standard costing allows the management to set achievable targets for employees. It lets them create performance targets for each employee that are attainable. The performance targets can be set for different activity levels. These measures are generally determined by discussion between the employees and the departmental manager.

The performance targets are set for each worker at different levels of activities. Every worker knows in advance about the standard cost for a particular project. This allows them to know how to plan the work to achieve the targets. It provides flexibility to the employees as they create their strategy for achieving the targets.

Highlight Areas of Improvement

The process of standard costing allows for determining efficient operations. It highlights areas that require immediate management attention.

Department heads can know about inefficient operations that lead to cost overruns. It allows the management to know about activities that result in increased costs. The activity allows the development of a cost-conscious attitude that makes the management focus on improving operational efficiencies.

Efficient Bookkeeping

Standard costing also leads to efficient bookkeeping techniques. The activity allows economic record keeping by keeping a record of different activities.

The bills of requisition can be created more quickly when standard costing techniques are used. It helps professional bookkeepers easily obtain information about the cost of goods. This allows timely preparation of the profit and loss reports

The time involved in collecting information for the preparation of financial reports is reduced when standard costing is used. It allows the bookkeepers to dedicate time to the accurate preparation of financial reports.

Conclusion

Standard costing involves assigning costs for operational activities. Accountants assign a cost to materials, labor, and overhead. The technique is an integral part of manufacturing bookkeeping. It is a type of cost control strategy that help reduce operational costs and improve profitability.

The time required in the preparation of financial statements is reduced when standard costing techniques are used. It allows the management to analyze the performance of the employees and create incentives to boost profitability.

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