What is a standard cost?

Further, it does not provide a stable basis of measurement of the actual performance due to its frequent revisions; it is also not useful for studying the long-term trend of costs. A standard established for use over a short period of time and related to current conditions, is known as the ‘current’ standard. This standard shows what the performance should be under current conditions.

• The second objective of standard cost is to help the management in exercising control over the costs through the principle of exception.
• Public utilities such as transport organizations, electricity supply companies, and waterworks can also apply standard costing techniques to control costs and increase efficiency.
• An idle capacity variance indicates the amount of overheads that is either under or over- absorbed because actual hours are either less or more than the hours on which the overhead rate was based.
• To determine the standard for overhead, the coffee shop would first need to consider the fact that it has two types of overhead as shown in Figure 8.2.
• Therefore, significant variances must be reviewed and properly assigned or allocated to the cost of goods sold and/or inventories.
• Management must concentrate their attention on variations only.

Units of inventory flow through the inventory accounts (from work-in-process to finished goods to cost of goods sold) at their per-unit standard cost. Many financial and cost accountants have agreed on the desirability of replacing standard cost accounting[citation needed]. There are both advantages and disadvantages to using a standard costing system. The primary advantages to using a standard costing system are that it can be used for product costing, for controlling costs, and for decision-making purposes. Note that the entire price variance pertaining to all of the direct materials received was recorded immediately (as opposed to waiting until the materials were used).

AccountingTools

Standard cost relates to a product, service, process or an operation. It is also determined for a normal level of efficiency of operation. This reflects the view that a standard cost represents the best judgment of management about what costs the business operations will involve when undertaken efficiently.

Knowing that actual direct

materials costs exceeded standard costs by $ 6,015 is more useful

than merely knowing the actual direct materials costs amounted to $

52,015. Now the firm can investigate the cause of the excess of

actual costs over standard costs and take action. The differences between standard and actual costs are analyzed as variances, which can be favorable or unfavorable. Variance analysis helps identify areas of inefficiency, control costs, and make informed decisions for process improvement. By leveraging these tools, businesses can optimize their cost management strategies and achieve greater financial control and profitability. Both budgets and standard costs make it possible to prepare reports which compare actual costs and predetermined costs for management.

Standard Hour or Minute (With Calculation)

The difference between budgeted fixed overhead for the hours available at standard rate and the fixed overhead for actual hours worked at standard rate. Capacity variance arises when the budgeted capacity differs from capacity available. Overhead Cost variance or overall overhead variance is the difference between the actual overhead incurred and the overhead charged or applied into the Job or process at the standard overhead rate. Overhead cost variance and its component variance may be computed and analysed separately for fixed and variable overheads and for each cost centre.

In other words, a business may not revise standards to keep pace with the frequent changes in manufacturing conditions. Standard Costing is a tool for standard costing system the management to gain reduction in the cost and control over it. Under this technique, differences are analyzed and responsibilities are determined.

What is Depreciation in Accounting? Definition, Example, Need, Methods

When standards have been fixed, the section-heads safely delegate the responsibility to the workers. The standard of activity can be measured through the costing reports. Performance variances should be separated from cost variances. The problem actually is how to use the raw material with least waste and how to determine the maximum amount of material that will be allowed for a unit of product. Standards of material specifications are established based on certain assumptions as to quality. If the materials are not available as per quality specifications, the standards may not be achievable.