What Are Standard Costs?
Standard costs are the predetermined costs associated with manufacturing a single unit or a number of products during a specific period in the immediate future. As such, standard costs are the planned costs of a product under current or anticipated operating conditions.
Standard costs are based on normal or ideal conditions of efficiency and volume, particularly with respect to factory overheads.
The term “standard cost” consists of two words: standard and cost. The standard is a carefully determined method or measurement of executing a task (e.g., making a radio). A standard must be thought of in terms of specific items, such as dollars of material or hours of labor required.
These physical standards, which form the basis for calculating a standard cost, must be set with the utmost accuracy. In many situations, a standard is never changed apart from when shifts occurs in terms of operating methods or products.
Standard costs are known as:
- Basic standard
- Current standard
It is a yardstick against which both expected and actual performances are compared.
It is a standard for a certain period, for certain conditions, and for certain situations. It takes the place of an actual cost and finds its way through the books of accounts.
Characteristics of Standard Costing
The chief characteristics of standard costing are the following:
1. Cost determination: Standard costing is designed to determine the cost of an output based on past experience and future trends.
2. Cost comparison: When actual costs are known, these are compared to budgeted costs.
3. Control over variances: The comparison between standard and actual cost is performed to gain insight into the variances.
4. Verification of variances: Once the variances are known, an effective study is undertaken to forecast future variances.
5. Reporting: For the benefit of top management, reports are prepared and dispatched that specify who is responsible for variances.
6. Revision: The management gives corrective suggestions for variances.