A standard cost is an estimated unit cost.
Standard costing is principally used to value various costs of production using standard cost in order to act as a control device.
The uses of standard costing
Standard costing is used in the following circumstances:
- To value inventories and cost production for cost accounting purposes.
- To act as a control device by establishing standards (expected costs) and comparing actual costs with the expected costs.
- To assist in setting budgets and evaluating managerial performance.
- To enable the principle of ‘management by exception’ to be practiced. A standard cost is an average expected unit cost. Only significant differences between actual and standard should be reported.
- To provide a prediction of future costs to be used in decision-making situations.
- To motivate staff and management by the provision of challenging targets.
- To provide guidance on possible ways of improving efficiency.
Standard costing as a control technique
Standard costing involves the establishment of predetermined estimate of the costs of products or services, the collection of actual costs and the comparison of the actual costs with the predetermined estimates. The predetermined costs are known as standard costs and the difference between standard and actual cost is known as a variance. The process by which the total difference between standard and actual results is analyzed is known as variance analysis.
Standard Costing
