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Standard Costing

The standard cost is a predetermined cost which determines what each product or service should cost under given operational conditions. Simply speaking standard cost is an expected cost of producing one unit.

The efficiency of the management depends upon the effective control of costs. If there is a difficulty to control the costs, it means the organisation automatically invites the risk. So the system of standard costing is the most appropriate way of controlling costs.

DEFINITION

Standard

According to Prof. Eric. L. Kohler, “Standard is a desired attainable objective, a performance, a goal, a model”.

Standard Cost

The Institute of Cost and Management Accountants, England defines standard cost is “a predetermined cost which is calculated from management’s standard of efficient operation and the relevant necessary expenditure”.

Standard Costing

The Institute of Cost and Management Accountants, England defines standard costing as “The preparation and use of standard costs and the analysis of variances of their causes and the points of incidence”.

Historical Costing

Historical costing is the process of accumulating costs after they are incurred in an orderly manner. Costing of actual costs in a systematic manner is known as historical costing.

The ICMA defines historical cost as “the actual cost of acquiring assets, goods and services and historical costing as a “system of accounting in which all values are based on the historical costs incurred. This is the basis prescribed in the Companies Act for published accounts”.

Limitations on historical costing are :

(i) It is a post-mortem examination of the actual cost.

(ii) It is not suitable for cost comparison.

(iii) Inaccurate cost determination