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I would guess that they need a "benchmark" to base all their costings on, without some form of "standard" there would be too much fluctuation to accurately plan. A standard charge I would assume would take the form of a "mean" or "average" (estimated) charge.
1. Inventory valuation
In most of the time, manufacturing industry uses standard costing system to cost direct maerial, direct labour and manufacturing overhead (Factory/material/and other industry related OHs) rather than actual overheads. Becuase in the initial stage(pre order stage), they have only vendor agreed prices of each material. Therefore they use the vendor agreed price for materials as standard price and use direct labour/ manufacturing OH in a absorption rate, which are calculated using annual budget. So based on the OH rates and standard prices they calculate standard cost per unit of product. this cost is considered as standard cost of product(Inventory) How ever actual cost of each material and OH will charge during the production based on actual consumptions and actual invoiced prices from suppliers. Any variances in price and usage will charged at P&L in under material cost.
2. Cost Controlling
Standard costing is use to estimate variances between pre order and post order level. So company can take cost controlling decisions based on variances.
And OH costs can control through cost centers.
3.Minimize wastages
4. Can use very effectively in budgeting.
standred cost is used to define a mark that is defined before the actual. it is defined or designed in budgeting or forcasting. Actually this the target that company want to gain. All the corrective action are being taking before that is not to cross the mark.
the story is little bit chane when the MARK is changed. some time the comapny have some sort of flexibility to accept the result otherwise they have to take some action to correct them, is called varience analysis.
