Standard Costing
AdvancedStandard costing is a system in which expected costs for materials, labour and overheads per unit are set in advance and then compared with actual costs, so differences can be investigated.
A standard cost is a target cost for producing one unit under normal efficient conditions. It is built from standard quantities, such as kilograms of material and hours of labour per unit, and standard prices, such as cost per kilogram and wage rate per hour.
For example, a product might have a standard material cost of 2 kilograms at 5 per kilogram, or 10 per unit. If actual production used 2.2 kilograms at 4.8 per kilogram, the actual cost would be about 10.56 per unit. The difference can be split into a price variance, because material was cheaper than planned, and a usage variance, because more material was used than planned.
Standard costing helps with budgeting, pricing, inventory valuation and performance control. Managers focus attention on significant variances, an approach known as management by exception.
Standards must be realistic and updated as conditions change, or variances become meaningless. In fast-changing or highly customised businesses, standard costing may be less useful than in stable, repetitive manufacturing.
For worked examples and full lessons, visit notesbysara.org.