Differentiate between standard costing and historical costing
Standard costing is an estimated or predetermined cost of performing an operation or producing goods under normal conditions. It is used as target costs or basis for comparison with the actual costs and developed from historical data analysis. It also discloses the cost of deviations from standard and classifies these as to their causes, so that management is immediately informed of the sphere of operations to which remedial action is necessary.
Historical costing means the original cost at the time of a transaction. It is a measure of value in which price of an asset is based on its nominal or original cost when acquired by the company. It helps to distinguish an asset’s original cost from its replacement cost, current cost or inflation cost.
Difference between Historical and Standard Costing:
|HISTORICAL COSTING||STANDARD COSTING|
|a) Historical costing is related to past financial transactions that are recorded after the actual performance.
b) It is an actual and real cost related to past.
c) It fails to provide any comparison of budgeted cost with that of actual cost.
d) It fails to provide any yardstick for pointing out the possible causes for rises in cost.
e) There is a time lag in reporting costs which delays the introduction of corrective actions.
f) Only variances are not investigated by use of the principle of exception.
g) Corrective action cannot be taken at an earlier stage.
h) It is not helpful for managerial planning as there is no practical significance.
|a) Standard costing is determined and recorded before actual performance.
b) It is an ideal cost or predetermined cost which is related to future.
c) It helps in measuring the evaluation of efficiency by comparing the budgeted cost with that of actual cost.
d) Standard costing is a system which introduces cost control and cost reduction and can be used as yardstick for pointing out the centre of responsibility through analysis of variations.
e) Standard cost helps to prepare the estimates of the cost of operation and it is carried out under specified working condition.
f) Only variances are investigated by use of the principle of exception.
g) Corrective action can be taken at an earlier stage.
h) It is considered to be an effective managerial tool of cost control and future planning.