State the steps for Standard costing system

standard costing system involves the following steps

1) Setting-up of standards for each element of cost: standards should be set up for each element of cost viz., direct material direct labor and overhead. However this is a complex task. Standards must be set up rationally and carefully. They should be neither low nor high. A low standard which every one can achieve dose not bring out the best performance. On the other hand, too high a standard being impossible to achieve, is treated with disdain and indifference setting up right standard being impossible to achieve is treated with disdain and indifference. Setting up right standards requires cooperation of various line managers in the organization. It is not merely an accounting job.

2) Study of the technical aspects of production process: before introducing standard costing system in an organization a complete study of several of various methods of manufacturing and the processes is required. The total production process may be sub-process over a considerable period of time should be examined. The previous production records. The study of previous records ensures the working out of the normal efficiency of labor in each production. this study of the technical aspects of the factors is essential to base the system of standard costing on the technical aspects of the factors is essential to base the system of standard costing on the actual situation in the factory.

3) Review of existing costing and budgetary control system: the existing costing system should be reviewed with special reference to the existing records and forms. For clear definitions of standard costs. The existing costs in general and the method of allocation and apportionment of overheads in particulars should be studied. This is important since the standard costing system is to be built on the basis of the existing system of costing budgeting and internal control procedures. The exiting cost system should be reviewed with special reference to the exiting records and forms. Thad id important since the standard costing system has to be established as an extension to the existing system.

4) Study of the organization chart: the organization chart showing the various line of authority and responsibilities should be studied. It will help in supplying basic data regarding various operation of the undertaking.

5) Determining the type of standard: a study should be conducted to determine the type of standard to be used i.e. whether current basic or normal standard. The choice of the standard depends upon two factor viz., its effectiveness for cost control and as a measure of productive efficiency within or outside the accounting system as statistical data.

6)  Enlisting cooperation of executives: for the success of the standard costing system, cooperation of the factory executives for fixing the quality and efficiency standards is essential. A system of standard costing would be successful only if it receives the full support from various line managers. If line managers view it merely as an imposition by the full support from various line managers will never cooperate with it. To secure the cooperation of executives it is essential to clarify that the system is for overall and would be run only if they find it useful. A standard cost committee comprising important costing system.

7)  Preparation of manual: a detailed manual should be prepared for the guidance of the staff. The manual should briefly describe the system to be followed and the benefits thereof. The responsibilities of various functionaries for different activities and the supply of cost data should be clearly demarcated. Various activities must be clearly detailed and the whole procedure of the system outlined.

8) Training of staff: the office staff required to operate the system should be properly trained. When the system come into force a number of alterations would be required in the scheme of making accounting entries and in the flow of documents.

9) Setting physical standards: the office staff required to operate the system should be properly. The standards of physical activity for various departments should be worked out. For direct materials standards quantity has to be determined with reference to quality and size of material is required for each unit of production. The standard quantities of material are developed by the technical section drawing office or the laboratory after a product study or engineering study which examines the details of materials and plant conditions.

10) Study of labor and machine operations: each item of manufacture should be studied in detail to discover various operations to be performed by labor and machines different grades of labor to be employed. Plant machinery and tools to be needed department in which various operations to be carried out and the standard time required for performance of such operation. This study will enable the setting up of labor and machine cost standards.

11) Study of market conditions: for developing cost standards the study of market condition and the trend of price for a definite period in future are made. This study will be of great help in determining material price standards. The labor cost standards can be set up by studying data regarding the wage rates to be paid. For determining the cost standard for overheads overhead costs and the level of dividing estimated activity in a budget period should be estimated. The standard overhead rate will be arrived at by dividing estimated overheads by the estimated level of activity for the budget period.