What is the standard cost price?
Standard costing is an accounting method that helps businesses estimate their costs by establishing predetermined standards for direct materials, direct labor, and overhead. These standards are established based on historical data, market trends, and other factors that may affect the cost of producing a good or service.
With standard costing, businesses can determine whether they are making a profit or loss on each product or service they provide. By comparing actual costs with standard costs, businesses can identify areas where they can reduce costs and improve efficiency and profitability.
For example, you set the standard price for product A to be 1200 VND/unit. You buy 10 units of product A at 1000 VND/unit, then buy 10 more units at 1500 VND/unit, the standard cost price is calculated as follows:
Value of goods sold = Quantity sold x Standard price .
How does standard costing work?
The Standard Cost method determines standard values for cost elements in the production or service provision process. Here's how the standard value is determined in this method:
- Determine standard value for raw materials: Standard value for raw materials includes purchase price and related costs such as transportation, loading and unloading. To determine standard values, businesses can use information sources such as price lists from suppliers, price negotiation processes or historical price data.
- Determine the standard value for labor: The standard value for labor includes the average salary, benefits and labor-related costs such as social insurance, taxes, and training fees. These values can be based on a business's historical data or other sources of information such as reports of average salaries in similar industries.
- Determine standard values for other factors: In addition to raw materials and labor, standard values can also be determined for other factors such as energy, machinery and equipment, and management costs. management and other factors related to the production and service provision process. These standard values can be based on historical data, supplier data, or other estimation methods.
After determining standard values for cost components, these values are applied to specific products and services to calculate the standard value for each unit of product or service. This process often involves applying specific formulas or rules determined using the standard cost method.
Note that standard value determination is a process of evaluation and estimation and it may change over time. To ensure the accuracy and reliability of standard values, businesses need to update and review these values periodically based on the latest information and changing factors of the business environment.
Advantages of standard cost price
Standard cost of goods offers a number of advantages to businesses, including:
- Greater accuracy: By using standard cost prices, businesses can estimate their costs more accurately, helping them make better decisions about pricing and profits.
- Improved cost control: Standard costing helps businesses identify areas where they can reduce costs and improve efficiency.
- Better decision making: Standard costing provides businesses with a clear understanding of their costs and profits, allowing them to make informed decisions about investment, pricing and business strategies other.
Limitations of standard cost price
Although the standard costing method offers a number of benefits, it also has some limitations, including:
- Time-consuming: Setting standards for each product or service can be time-consuming, requiring significant effort from accounting and production teams.
- Inflexibility: Once standards are established, they can be difficult to change, making it difficult to adapt to changes in the market or manufacturing processes.
- Not suitable for every business: Standard costing may not be suitable for businesses that produce unique products or services, have irregular production costs, or require highly skilled labor.
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