WHY STANDARD COSTING IS NEEDED?

 Why Standard Costing is needed?

Standards or Standard costs are established to evaluate the performance of a particu- lar cost centre or responsibility centre and to control costs. Apart from performance evaluation and cost control, standard costs are also used to value inventory where ac- tual figures are not reliably available and to determine selling prices particularly while preparing quotations.

Standard costing system is widely accepted as it serves the different needs of an or- ganisation. The standard costing is preferred for the following reasons:

(a) Prediction of future cost for decision making: Standard costs are set after taking into account all the future possibilities and can be termed as future cost. Standard cost is used for calculating profitability from a project/ order/ activity proposed to be undertaken. Hence, standard cost is very useful for decision making purpose.

(b) Provide target to be achieved: Standard costs are the target cost which should not be crossed by the responsibility centres. Performance of a responsibility centre is continuously monitoredand measured against the set standards. Any variance from the standard is noted and reported for appropriate action.

(c) Used in budgeting and performance evaluation: Standard costs are used to set budgets and based on these budgets managerial performance is evaluated. This is of two benefits, one managers of a responsibility centre will not com- promise with the quality to fulfill the budgeted quantity and second, variances can be traced with the responsible department or person.

(d) Interim profit measurement and inventory valuation: Actual profit is known only after the closure of the account. Few organisations use to prepare profitability statement for interim periods also for management reporting purpose. To arrive at profitfigure, standard costs are deducted from the revenue.