Standard Costs for Product Costing - Research Paper Example

It is a cost accounting method that is designed to determine appropriate cost of a product under current production circumstances. The definition of ‘standard cost’ given by Chartered Institute of Management Accountants (CIMA) UK is that, it is “a predetermined cost which is calculated from management’s standards of efficient operations and the relevant necessary expenditure.” More simply, a standard cost is a planned cost for a unit of product or service produced under certain circumstances.

The final phase of the standard costing method involves comparison of the predetermined/standard costs to the actual costs (which can only be established after the production) and a variance between the two costs enables the management to take required corrective action as suited regarding the manufacturing process. Thereby standard costing presents many obvious advantages to a manufacturing business like of Johnstown Division. Listed below are some of the most prominent advantages that have been identified in the past literature. 2. Finding of variance: The variance determined by comparison of actual verses standard costs indicates areas in the business process e.g. production-line with inefficiencies.

It promotes corrective measures at the earliest and thereby systematic checks on various expenditures (Dosch & Wilson, 2010). 5. Right decisions: It enables and generates useful information for the management in taking important decisions. E.g. regarding purchase price inflations, employee incentive schemes, product pricing, etc. (Michael, 2011) Despite of these benefits, literature claims that shorter life cycles of products, new advanced manufacturing technologies, lesser importance of labor in the manufacturing process, and globalized competition has potential to cause expiration of standard costing (Sulaiman et al., 2005). A significant addition to the debate whether to encourage the use of standard costing is the research by Zoysa et al, in 2007. It