SETTING-UP OF STANDARD COST

SETTING-UP OF STANDARD COST

Standard cost is set on the basis of management’s estimation. Cost is estimated on the basis of technical specification provided by the engineering department or other ex- pert such as production engineer. Generally, while setting standards, consideration is given to historical data, current production plan and expected conditions of future. For the sake of detailed analysis and control standard cost is set for each element of cost i.e. material, labour, variable overheads and fixed overheads. Apart from this standard are also set for the sales quantity and sales value; this is generally known as budgeted sales.

Standards are set in both quantity (units or hours) and in cost (price or rate). It is thus measure in quantities, hours and value of the factors of production.

Standard costs are divided into three main cost components, such as

(a) Direct Material Cost

(b) Direct Employee (Labour) Cost and

(c) Overheads