Steps involved in installation of standard costing system

Steps in installation of Standard Costing System

As Standard Costing is an important management tool, important should be given in its installation. The following steps are involved for establishing standard costing system in an organization.

1. Determination of Cost Centre: The cost centre is necessary for fixing costs and fixation of responsibility. In the manufacturing concern, cost centres are created according to the number of products produced and the number of sections, departments or divisions are involved in the production process. A cost centre relating to a person is called personnel cost centre and a cost centre relating to products and equipment is called impersonal cost centre.

2. Classification of Accounts: The costs are incurring at various stages of production process. These costs should be recorded properly for accurate calculation of total costs incurred. Hence, there is a need of classification of accounts for cost control under standard costing system.

3. Codification of Accounts: The different accounts can be codified and different symbols can be used to facilitate speedy collection, communication and reporting. The following codes can be used for elements of cost.

4. Setting of Standards: A standard is an ideal which is anticipated and can be attained over a future period of  time, normally in the next accounting year. The success of standard costing system is based on the genuineness, reliability and acceptance of these standards. There are three types of standards. They are current standard, basic standard and normal standard. The current standard is dividend into two i.e. ideal standard and expected or attainable standard.

5. Establishing Standard Costs: Standard costs are established for each elements of cost separately. Generally, elements of cost is grouped as material, labor and overhead. Moreover, standard cost is set for the sales also.

6. Preparing Standard Cost card or Standard Cost Sheet: Standard cost card or standard cost sheet is prepared separately for product wise or process wise.

7. Organization for Standard Costing: A committee is formed to set the standards. If so, the objectives of standard costing system can be easily achieved.

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