Cost Standard: Detailed Definition
Cost Standard refers to a predefined level of cost that is expected to be incurred for a specific item used in the supply, production, or operation processes of a service, product, or cost centre. This standard helps in budgeting and managing operational costs effectively.
Cost standards are commonly associated with:
- Supply Chain Management: Determining the cost of raw materials.
- Production Processes: Estimating labor and overhead costs.
- Service Operations: Setting benchmarks for service delivery expenses.
By establishing cost standards, organizations can monitor and control expenses, ensuring they stay within budgeted limits.
Examples
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Manufacturing Costs: A company might set a cost standard for the raw materials required to produce a specific product. If the standard cost for raw materials per unit of product is $5 and the company produces 1,000 units, the expected raw material cost would be $5,000.
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Labor Costs: In a service industry, such as a call center, the cost standard for employee wages might be set based on the average time employees spend on calls. If the average cost per hour is $15 and the expected service time is 100 hours, the labor cost standard would be $1,500.
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Overhead Costs: For production overhead, a company might define a standard overhead cost rate based on machine hours. For instance, if the overhead cost rate is $20 per machine hour and the machinery is expected to be operational for 200 hours, the overhead cost standard would be $4,000.
Frequently Asked Questions (FAQs)
What is the purpose of setting cost standards?
The purpose of setting cost standards is to estimate and control the costs of production or service delivery, improve budgeting accuracy, and aid in performance evaluation.
How are cost standards used in accounting?
In accounting, cost standards are used to determine the expected cost levels for various elements such as materials, labor, and overhead. These aid in variance analysis by comparing actual costs to standard costs to identify discrepancies.
Are cost standards the same as budgeting?
While cost standards are related to budgeting, they focus specifically on the pre-estimated costs for individual cost items in production or service processes. Budgeting may encompass a broader scope, including revenue estimates and overall financial planning.
How do cost standards help in performance evaluation?
Cost standards provide benchmarks against which actual costs can be measured. Deviations from these standards (variances) help in assessing operational efficiency and identifying areas for improvement.
How frequently should cost standards be updated?
Cost standards should be updated periodically to reflect changes in market conditions, material prices, labor rates, and other cost-driving factors. Typically, this may be done annually or whenever significant changes occur.
Related Terms with Definitions
- Performance Standard: A predefined level of performance or output expected from a specific process or activity, used to measure efficiency and effectiveness.
- Cost Centre: A department or other entity within an organization where costs can be assigned for cost control and accounting purposes.
- Standard Overhead Costs: The portion of total overhead costs that are expected to be incurred based on predetermined overhead rates.
- Variance Analysis: The process of comparing actual costs to standard costs to identify and analyze the reasons for variances.
Online References
- Investopedia on Cost Accounting: Investopedia: Cost Accounting
- AccountingTools on Standard Costing: AccountingTools: Standard Costing
- Corporate Finance Institute on Cost Standards: Corporate Finance Institute: Cost Standards
Suggested Books for Further Studies
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan
- “Managerial Accounting” by Ray Garrison, Eric Noreen, and Peter Brewer
- “Principles of Cost Accounting” by Edward J. Vanderbeck and Maria R. Mitchell
- “Cost Management: A Strategic Emphasis” by Edward Blocher, David Stout, Paul Juras, and Steven Smith
Accounting Basics: “Cost Standard” Fundamentals Quiz
Thank you for exploring the concept of Cost Standards with our in-depth guide and interactive quiz. By mastering these key accounting principles, you can significantly enhance your financial management skills and operational efficiency.
