Standard Costing

The most frequent reason cited by companies for using standard costing systems is cost control. One might initially think that standard costing provides less information than actual costing, because a standard costing system tracks inventory using budgeted amounts that were known before the first day of the period, and fails to incorporate valuable information about how actual costs have differed from budget during the period. However, this reasoning is not correct, because actual costs are tracked by the accounting system in journal entries to accrue liabilities for the purchase of materials and the payment of labor, entries to record accumulated depreciation, and entries to record other costs related to production. Hence, a standard costing system records both budgeted amounts and actual costs incurred. The difference between these budgeted amounts and actual amounts provides important information about cost control. This information could be available to a company that uses an actual costing system or a normal costing system, but the analysis would not be an integral part of the general ledger system. Rather, it might be done, for example, on a spreadsheet program on a personal computer. The advantage of a standard costing system is that the general ledger system itself tracks the information necessary to provide detailed performance reports showing cost variances. Similar to the reasons given in using normal costing to average the overhead rate over time, there are reasons to average direct costs. Many companies prefer to average out these small differences in direct costs. When actual overhead rates are used, production volume of each product affects the reported costs of all other products.   This reason represents an advantage of standard costing over actual costing, but does not represent an advantage of standard costing over normal costing. Costing systems that use budgeted data are economical. Accounting systems should satisfy a cost-benefit test: more...