Describe the Nature of standard costing

The system of standard costs (standard costing) is a management technique of using predetermined costs (standard costs) for evaluating performances and actual costs. To fine out whether or not costs incurred deviate from costs that should have been incurred the difference between actual costs and standard costs is calculated.

Cost variance is the difference between standard costs and actual cost. The calculation of variance indicates to management whether costs are under control or not. A variance can be favorable or unfavorable (adverse). an unfavorable variance is obtained when actual cost are more than standard costs. This requires remedial action to improve the performance. A favorable variance occurs when actual costs are less than standard costs.

Once a variance has been calculated it needs proper management attention; it should be analyzed and explained. Significant variance should be reported to the appropriate levels of management for corrective actions. Depending on the feedback from the analysis remedial actions should be taken. If it is found that standards were inaccurately set they should be revised. It must be remembered that a mere calculation of variance does not imply control; control of costs lies in the corrective actions taken by management on the basis of variance analysis.