Standard costs and estimated costs are the pre-determined costs of any form of production. Both costs are calculated in advance before actual production is done and completed.
People often confuse standard and estimated costs, but the two types are actually quite different. The main differences are summarized below.
1. Cost determination: The determination of standard costs is a difficult process. It involves expert opinion and careful analysis of various cost data and other information.
To determine estimated costs, on the other hand, no expert opinion or scientific analysis of recent data is performed.
2. Execution: Estimated costs may be determined by one person in the accounting department, but to fix standard costs, the entire machinery involved in production activities is consulted.
3. Period: Estimated costs are determined for a certain period only, but standard costs are not determined for just one period of production. They remain unchanged for a very long time unless standards need to be revised.
4. Attention to short-term events: When calculating standard costs, short-term events are not considered.
By contrast, for estimated costs, short-term fluctuations are taken into account if they are likely to happen during the period for which the estimated cost is determined.
5. Cost comparison: Standard costs are compared with actual costs. Variances are decisions undertaken to control cost, but such comparison and variance analysis is not performed with the help of estimated costs.