Historical costs are the actual costs that are ascertained after they are incurred. During the initial stages of development of cost accounting, historical costing systems like process costing, contract costing, service costing etc. were available for ascertaining the costs. The historical costing methods are used to determine the cost incurred for the production of a particular products or completion of a particular job.
The historical costing systems suffer from several limitations; some of them are as follows:
* No basis for cost control
* No yardstick for measuring efficiency
* Delay in availability of information
* Expensive
Although standard costing attempts to overcome the limitations of historical costing system, it is not an alternative to the existing historical costing. Standard costing is the most widely used technique of controlling costs.
Standard costing is a technique that establishes predetermined estimates of the cost of products and services and compares these costs with the actual costs as they incur. Standard costing can be considered as a yardstick to measure the efficiency with the actual cost incurred. Hence, standard costing is system of costing which makes a comparison between the standard cost of each product or service with its actual cost to determine the efficiency of the operation, with a view to take corrective actions at the earliest possible time.
Thus, standard costing is the preparation and uses of standard costs, which involves the following process:
* Establishment of standard costs
* Ascertainment of actual costs
* Comparison of the above two and measurement of variances
* Analysis of variances
* Reporting to responsibility centers to take appropriate and necessary remedial actions.
