Characteristics of standard costing

1) Flow of information: in a standard costing system cost information flows in a straight forward manner as material is requisitioned and wages as well as overheads incurred they are charged(debited) to the work in progress inventory at actual costs( except for material) and quantities. When the completion of goods taken place they are transferred to finished goods stock at standard cost. Therefore the work in process inventory at any point of time consists of the actual cost of the work being processed plus or minus the variance of actual from standard for the goods completed.

2) No actual costs: in a standard costing system, any actual product costs are generated. Actual total costs are collected based on the type of expense and debited to work in progress. The work in progress inventory is credited with the standard costs of the products produced. At no point dose the collection of actual material or labor for a specific product take place. Thus this implies that there is no need to fill in material requisition and time cards by products. All that is required is the number of products produced.

3) Appraisal of performance: a standard costing system collects analyses and reports performance by responsibility centers. It serves as a constant unit for measuring actual performance. In a historical cost incurred are compared with the actual costs in the preceding period. Unfortunately, it is a satisfactory criterion of performance measurement. This is because historical costs include a number of operational inefficiencies and also fails to show changes that have taken place in the intervening period relating to activity levels production methods market target trends etc.

4) Appropriate for repetitive activities: a standard costing system is appropriate where activities are repetitive in nature. Thus it is suitable for industries which produce identical goods in large quantities. In such industries activities are standardized and repetitive in nature, e.g., process industry.