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.

Frequently Asked Questions

How is the standard value calculated?

The standard value or cost of production is determined by obtaining an average cost of production for a given period and multiplying it by the number of units produced.

What is the difference between standard costs and estimated costs?

Standard Costs are determined by experts while estimated costs are calculated not by experts but by people without any expert knowledge of the process involved in the actual production line.

What are standard costs?

A Standard Cost is an estimated expense that a company normally incurs when producing a product or delivering a service.

What is the difference between standard costing and marginal costing?

Marginal and Standard Costing differ in that marginal costing is a subset of Standard Costing, while the Standard Costs are a superset of the marginal costs.

What are the similarities and differences between standard cost and budgets?

While a budget must account for both income and expenditure, standards are usually set for expenses only. Standard Costs are developed for the production and related manufacturing cost as well as for budgets. Budgets project both the volume of business and the levels of costs that should be maintained.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.