Benefits of Standard Costing
companies that use process-costing systems produce masses of identical or similar units of output.In such companies it is fairly easy to budget for the quantities of inputs needed to produce a units of output.Standard cost per input unit can then be multiplied by input quantity standards to develop a standard cost per output unit.
The weighted-average and FIFO method become very complicated when used in process industries such as textiles ceramics paints and packaged food that produce a wide variety of similar products. For example a steel rolling mill uses various steel alloys and produces sheets of varying sizes and finishes,the different types of direct materials used and the operations performed are few but used in various combinations they yield a wide variety of products.In these cases if the broad averaging procedure of actual process costing were used the result would be inaccurate costs for each product.Therefore managers in these industries typically use the standard-costing method of process costing.
Under the standard-costing method teams of design and process engineers operations personal and management accountants work together to determine separate standard costs per equivalent unit on the basis of differrent technical processing specifications for each product.Identifying standard costs for each product overcomes the disadvantage of costing all products at a single average amount as under actual costing.