ROLE OF STANADARD COSTING Standards are an established criterion used to measure the quality of performance whereas standard costing

is a carefully predetermined cost used in evaluating performances. Standard costing relates to one unit of output efficiently produced. There are also committees that have been established to set these standards. Standards committee: includes its controller, industrial engineer, marketing manager, and factory superintendent and line supervisors to perform at areas where they are needed. Setting standards: are determined for direct materials, direct labour and manufacturing overheads. ref All businesses including NGOs make use of standard costing to some extent for the completion of certain work tasks to measure actual actual performance against the standards (leading to job completion).clothing factories have exacting standards as to the quantity of cotton going into a pair of trousers as well as standards for the cost of the cotton. The broadest application of the standards cost idea is found in manufacturing companies, where standards relating to materials, labour and overheads are developed in detail for each separate product line.these standards are then organized into a standard cost card that tells the manager what the final manufacturing cost should befor a single unit of a product.ref USES OF STANADARD COSTING CONTROL THROUGH PERFORMANCE REPORTS Managers compare actual performance results with planned operations, in order to be able to monitor subordinates results. These helps employees recognize the importance of meeting specified standards because they know that their work is being monitored. CRITCAL COST ANALYSIS WHEN SETTING STANDARDS This is one of the standards committee roles which is used when setting or updating standards each year. They also re-examine costs which leads to increased efficiencies. PRICING Many firms believe setting a long run, stable selling price based on normal costs is superior to constantly adjusting prices to reflect fluctuations in actual costs. Users of this strategy believe customers prefer to buy their goods knowing that the price will remain the same and they will not obtain a better price by waiting. INVENTORY VALUATING The firm must either use standard cost or actual costs. This brings in the necessity of cost flow assumptions such as LIFO, FIFO or Weighted and the maintenance of record-keeping system for inventories. The need for cost flow assumption and record-keeping and cost of goods is simplified which is a result of keeping all inventories and cost of goods sold priced at standard BUDGET PREPARATION

Standard costs are also used for budget preparation, when used as part of a firms accounting system. Instead of basing the years costs, standard costs for the expected level of activity are use. Instead of focusing on what the cost were in the past, the budget is based on what the costs should rather be.ref Many companies have predicted that the Sherter product life cycles, advanced manufacturing technologies, decreasing emphasis on labour in the production process and global competition may lead to the denise of standard costing. This this exploitary study aims to provide empirical evidence on the extent to which companies use standard costing. It also examines the differences in the use of standard costing. It also examines the differences in the use of such techniques.ref ADVANTAGES OF STANADARD COSTING The use of standard costing is a key element in management by exception approach. If costs remain within standards, managers can focus on other issues. When costs fall insignificantly outside the standards, managers are alerted there may be problems requiring attention. Standards that are viewed as reasonable by employees can promote economy and efficiency. They provide benchmarks that individuals can use to judge their own performance.ref

COST CONTROL Costs can change for four reasons.i.e. Changes in price levels, changes in efficiency, changes in volume and changes in mix. By comparing actual performance with the standard performance , analysing variances to identify controllable causes, and taking action to eliminate inefficient performance in the future. The use of standard costs makes it easy to manage by exception, meaning there is less work for them to study. Management will only be needed when costs fall outside the acceptable range of standard. It helps determine prices and formulates production policies in advance. It also allows making esimates during product planning or the pre-manufacturing phase. It simplifies valuation of stock by transferring the difference between standard costs to a separate variance account. RECORD KEEPING COSTS Standard costs also helps reduce the cost in record keeping. E.g. FIFO, LIFO or other methods are used to calculate the cost of each item that is transfers from work in progress to finished goods. This results in a firm saving more than any increased costs. COST REDUCTION This is when there is introduced methods and procedures to reduce cost. This is improved by better selection of resources or capital investments. A system is firstly established and then tested if it will uncover inefficiencies, material waste and scrap, spoilage and defects units, lost machine time and idle worker time. It indirectly contributes to process efficiency. Fixing standard costs requires a detailed study of a different aspect of the business and its processes. E.g. determining manufacturing expenses requires a time and notion study, and determining standard inventory cost mandates of study of material control processes. Very often, such studies bring to light various

inefficiencies and defects, providing managers a ready opportunity to correct such mistakes and promote efficiency. INVENTORY VALUATION Standard costs also improve inventory valuation by providing more rational costs. A standard cost system record the same costs for physically identical units of materials and products: an actual cost system can record different costs for physically identical units. Differences between the two cost are inefficiencies that are conceptually period costs when incurred. They should not be capitalized and differed in inventory values. DECISION MAKING Standard costs are useful in decision making if material and labour costs are currently attainable. Examples of decisions for which standard cots can be used are regular and special order pricing; make or buy, sell or process further decisions; setting transfer prices; cash planning; and inventory and production control.ref DISADVANTAGES OF STANDARD COSTING The use of standard costing can present a number of problems or disadvantages. Most of these result from improper use of standard costs and the management by exception principle or from using standard costs in situations in which they are not appropriate. Standard cost variance reports are usually prepared on a monthly basis and often are released days or even weeks after the end of the month. As a result the information in the reports may be so stale that it is almost useless. Timely, frequent reports that are proximately correct are better than infrequent reports that are very precise but and of date by the time they are released. Some companies are now reporting variances and other key operating data daily or even more frequently. If managers are insensitive and use variance reports as a club, morale may suffer. Employees should receive positive reinforcement for work well done. Management by exception, by its nature, tends to focus on the negative. If variances are used as a club, subordinates may be tempted to cover up unfavourable variances or take actions that are not in the best interest of the company to make sure the variances are favourable. Labour quanity standards and efficiency variances make two important assumptions.first, the computations assume that labour is a variance cost. However, direct labour efficiency variances creates pressure to build excess work in progress and finished goods. Second, they assume that the production process is labour-paced; if labour works faster, output will go up. However, output in many companies is no longer determined by how fast labour works; rather it is dertremined by the processing speed of machines. In other cases a favourable can be as bad or worse than an favourable variance. There may be tendency with standard cost report syetems to emphasize meeting the standards to the exclusions of other important objectives such as maintaining and improving quality, on time delivery and customer satisfaction. This tendency can be reduced by introducing supplemental performance measures that focus on these other objectives.

Just meeting standards may not be sufficient; continual improvement may be necessary to survive in the current competitive environment. For this reason, some companies focus on the trends in the standard cost variances-aiming for continual improvements rather than just meeting the standards. In other companies, engineered standards are being replaced either by a rolling average of actual costs, which is expected to decline, or by very challenging costs.