Overview
Cost standard refers to a predetermined level of cost expected to be incurred by a cost item used in the supply, production, or operation of a service, product, process, or cost centre. Cost standards are essential for budgeting, performance evaluation, cost control, and decision-making within an organization. They play a crucial role in various industries by setting benchmarks against which actual costs are compared.
Historical Context
The concept of cost standard has evolved alongside the development of cost accounting and management practices. The practice dates back to the early 20th century when industries sought more systematic ways to control and reduce production costs. Frederick W. Taylor, known as the father of scientific management, and Henry L. Gantt contributed significantly to developing standard cost systems and performance measures.
Types/Categories of Cost Standards
- Material Cost Standards: Predetermined costs of raw materials used in production.
- Labor Cost Standards: Expected cost of labor for a certain level of output.
- Overhead Cost Standards: Estimated cost of indirect production costs, including utilities, maintenance, and depreciation.
- Variable Cost Standards: Costs that vary with the level of output.
- Fixed Cost Standards: Costs that remain constant irrespective of the level of production or service delivery.
Key Events in the Development of Cost Standards
- Early 1900s: Introduction of scientific management principles by Frederick W. Taylor.
- 1910s: Development of the Gantt chart by Henry L. Gantt for better performance measurement.
- 1920s-30s: Widespread adoption of standard costing in manufacturing industries.
- 1980s-90s: Integration of cost standards with advanced manufacturing technologies and ERP systems.
Detailed Explanations
Importance of Cost Standards
- Budgeting: Cost standards serve as a foundation for creating budgets and financial plans.
- Performance Measurement: Comparing actual costs to standard costs helps measure efficiency and identify variances.
- Cost Control: Identifies areas where cost overruns occur, enabling corrective actions.
- Decision Making: Provides managers with reliable data for making informed decisions about pricing, production, and investments.
- Motivational Tool: Encourages employees to meet or exceed performance targets.
Applicability
Cost standards are widely applicable across various industries, including manufacturing, services, healthcare, education, and government.
Examples
- Manufacturing: A car manufacturer might set a standard cost for steel used in the production of vehicles.
- Services: A consulting firm may establish labor cost standards for different consulting levels.
Mathematical Formulas/Models
Standard Cost Formula:
Example Calculation
If the standard quantity of raw material required is 10 units at a standard price of $5 per unit:
Variance Analysis
Charts and Diagrams
Mermaid Example:
graph TD;
A[Standard Costing System] --> B[Material Cost Standards];
A --> C[Labor Cost Standards];
A --> D[Overhead Cost Standards];
A --> E[Variable Cost Standards];
A --> F[Fixed Cost Standards];
Considerations
- Accuracy of Standards: Ensure that cost standards are realistic and based on reliable data.
- Regular Updates: Periodically review and update standards to reflect current market conditions.
- Employee Involvement: Engage employees in setting and understanding cost standards to foster commitment and accountability.
Related Terms
- Variance Analysis: The process of comparing actual costs to standard costs and analyzing the reasons for any differences.
- Budgeting: The process of creating a plan to spend money.
- Cost Control: Methods and processes to manage and reduce costs.
- Performance Standard: A benchmark for measuring the quality and efficiency of an operation.
Comparisons
- Standard Costing vs. Actual Costing: Standard costing uses predetermined costs, whereas actual costing records costs as they are incurred.
- Fixed vs. Variable Costs: Fixed costs remain constant, while variable costs change with the level of production.
Interesting Facts
- The use of cost standards can significantly reduce administrative and operational costs by identifying inefficiencies.
- Companies like Toyota have perfected the use of cost standards to drive their lean manufacturing processes.
Inspirational Stories
Henry Ford’s implementation of cost standards and assembly line production revolutionized the automobile industry, drastically reducing the cost of production and making cars affordable for the average American.
Famous Quotes
“Costs do not exist to be calculated. Costs exist to be reduced.” — Taiichi Ohno
Proverbs and Clichés
- “A penny saved is a penny earned.”
- “You can’t manage what you can’t measure.”
Jargon and Slang
- Standard Costing: The practice of assigning predetermined costs.
- Variance: The difference between actual and standard costs.
- Overhead: Indirect costs related to production.
FAQs
- What is a cost standard? A cost standard is a predetermined estimate of the cost to produce a product or provide a service.
- Why are cost standards important? They help in budgeting, performance measurement, cost control, and decision-making.
- How often should cost standards be updated? Regularly, at least annually, or whenever there are significant changes in market conditions.
References
- Horngren, C. T., Datar, S. M., & Rajan, M. V. (2012). Cost Accounting: A Managerial Emphasis. Pearson.
- Drury, C. (2018). Management and Cost Accounting. Cengage Learning.
- Taylor, F. W. (1911). The Principles of Scientific Management. Harper & Brothers.
Summary
Cost standards serve as essential tools in cost accounting and financial management, providing benchmarks against which actual costs are measured. These standards help organizations budget effectively, control costs, and make informed decisions. By understanding and applying cost standards, businesses can achieve greater operational efficiency and profitability.
