The Effectiveness Of Standard Costing As A Control Tool For Performance Evaluation In Manufacturing Industries


The study of standard costing as it relates to its use as a control for performance evaluation is never complete without much emphasis on the analysis of various arising in its produce. Therefore this review will also include issues on the variance analysis

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Prior to the definition of these terms standard costing and variance analysis I deemed it important to discuss some of the individual terminology’s standard budget costing variance analysis which were the make up of the two phases.

A standard is a measure of what is the normative order what should occur if performance can be accepted as efficient (Anyigbo 1999:245) To Kirk particular  1986 727) standard is “something used as a basis of measurement a basis for judging quality or a level of excellence aimed at required or achieved” Also in Eze et al (1999:126) a standard is an established criterion model or norm against which actual result can be compared.

A budget is a plan expressed in money” it is prepared and approved prior to the budget period and my show income expenditure and the capital employed. (CIMA). Costing as defined by Lucey (2000:1) is the establishment of budgets standard costs and  actual cost of operation process activities or product and the analysis of variance profitability or the sacral use of fund,”

Eze et al (1999:48) defined the term costing as “the collation and interpretation of the cost accounting records to disclose cost of particular products jobs or process of cost ascertainment”

Variance is the difference between standard cost and actual cost” ( Osuagwu D.C & Nwabueze C.C 1998:79).

To Anyigbo (1999:246) variance is “the difference between the momative or standard cost and actual cost it is the variation between the expected and the actual.

Analysis according to the oxford Advanced learner dictionary is the study of something by examination of its parts and relationship that is it is a critical examination of the relationship” existing between two  things or parts.

Then standard costing is a costing technique where the principle of comparing actual revere and cost with forecasts is applied to a unity production (Osisioma and Ubesie 1994:54) To Anyigbo (1999:245) standard  costing is one of the approaches to planning and controlling the operation and cost of reparative activity such as procurement of approved stock item production

Clerical duties rendering of certain kinds  of services etc’.

While variance Analysis is the process of high, high and analysis the cause of derivation of actual result from stands or budget (Osuagwu and Nwabueze 1998:79) Eze et al 1999: 131) defined variance analysis as the analysis of performance by means of variance and to promote management action at the earliest possible stage in the view of Ama (2001:360) variance analysis is the process of analyzing the total difference between planned and actual performance into its contents parts. Variance analysis can also be defined as a sign post which alerts management to the need for  inquiring into causes of off standard result”.


Many scholar classified standards into different types Among the most exhaustive classification is that of Ama (2001) these he classified into four which include

  1. Basic standard
  2. Ideal standards or potential standards
  3. Attainable standards or practical standards
  4. Current standards

BASIC STANDARD: These are long term standard which remain unchanged over the years . it could be used to show trends over time for such items as material prices labour rates and efficiently and  the Imo- term effects of setting current standards. This standard would not normally from part of the reporting system except as a background, statistical exercise, as any variance produced would have little or no meanings being an unknown mixture of controllable and non controllable factors.

Ideal standards: These are standards, which could be based on optional operating conditions assuming no  break down no wastage no stoppages or idle time. It is a measure of what operational  cost should be where and when all things and operational conditions are perfect (Anyigbo 1999: 247) these standard are periodically adjusted so as to reflect the improvement in material  method and technology. These standard is practically impossible to attain ano accordingly are varlet used for routine reporting purposes. Its use would enhance continual adverse variance which are likely to effect moral and motivation. The ideal standard may however, be considered as long term development purposes but are of little or no value for day to day control activities.

Attainable standard: Most commonly counted standard. These standard condition. Allowance are made  for normal material losses  wastage employee rest period  machine down time and to breakdown.  Anyigbo (1999 : 247) refers to this as  normal standard  working being carried on  under normal operating  condition., they are tight, implicit but attainable. They could be attained through reasonable through highly efficient efforts by the arrearage work at a task. Variance from such standards are extremely useful to management in that they present derivation that fall outside of normal recurring inefficiencies and signed a need for management attention and also forecasting cash flow and in planning inventory.

Current standard: There are standard set for use over a short period to reflect current  condition (Ama 2001) in a situation where condition    are stable or stalic, then a current standard will be the same as anattariable standard. But where for instance a temporary problem exist with material quality or there is an unexpected price covering say  from a three month to deal with their particular circumstances.

Nevertheless, attainable or practical standard is by far, the most commonly encountered standard . it is based on efficient but imperfect operating condition. This type of standard is preferred to any other type of standard by many mangers.


The objective of stand costing could be summarized as follows:

  1. To establish a predetermined estimates of cost (ie standard cost) of the products and services.
  2. To compare standard cost with actual costs as they are incurred and there of report on the variances..
  • To earn a planned (budget profit) at the beginning of a period.

The activity of setting standards is a very sensitive one and it needs a high degree of carefulness. According to Anyigbo (1999:247) standard are self takings congestion of past experience work measurement, engineering estimates, time and motion studies or by a combination of  these methodological approaches. This involves  a vigorous examination of the company past experiences carried out by expertise who have responsibility over price and quantities of input, in a manufacturing setting as in the case  study, the expertise include:

The managerial accountant

The purchasing agents

The industrial engineers

The hire mangers

The production supervisors and the worker themselves.

(a)     Setting standard of material costs

  1. Standard material specification: The materials current of product raw materials, sub – assemblies, , price parts finishing material is derived from technical and engineering specification treqnety in the firm of a bill of materials. The design – department is clearly involved in setting these standards.
  2. Standard material – usage: In preparing standard materials usage an allowance is made for normal and inevitable losses in production (due to machining, off- cuts evaporation).
  • Standard material price: The price used are not the past cost but the forecast expected cost for the relevant Bridget period and takes into account trends in material prices, articulated changes in purchasing polices, quality and cash discounts, carriage and packing charges and any other factor which will influence material costs.

The buying department is responsible in providing material prices. Having obtained the three standards above, the standard materials cost can now be computed.

  • Setting standards for labour or wages costs.

This required consideration of the operation involved skills and exact

=       Standard veritable overhead Absorption rate:

Budgeted variable o heads for cost center Budgeted standard labour hours for cost center

Standard fixed over head Absorption rate :

Budgeted fixed o heads for cost center:

Budgeted standard Labour hours for cost center

Setting standard of selling price and margin standard

It is the pricier which it is planned to sell the cost unit. It is of course our alternative term for budgeted selling price. It is usually set by the sales manager in consultation  with the managing director.

Standard sales margin: Is the difference between  the total standard  cost of a product and its standard selling price.



This involves  analysis of the came of variances on the three major elements of cost, that is, material labour and overheads. The basic variance are  computed by looking at the component of the total material cost, total labour cost and total overhead cost. These component are usage and price for material. Labour hour and rate for labour and machine hour and late for overheads cost. Below is a flow chart of commonly encountered variances.

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