Definition
Standard Cost is a predetermined or budgeted cost used for performing cost control. It represents the estimated or expected cost of manufacturing a single unit of a product or delivering a unit of service. Standard costs are set based on historical data, expected future costs, and market conditions. They do not reflect real-time costs but instead, serve as a benchmark for measuring efficiency, cost control, and performance.
Uses and Applications
- Budgeting: Standard cost is crucial in forecasting budgets and setting cost targets for production.
- Performance Evaluation: By comparing standard costs with actual costs, organizations can measure performance and efficiency.
- Cost Control: Identifies variances between actual and standard costs, prompting investigation and corrective actions to control costs.
Examples
- Manufacturing: In a car manufacturing company, the standard cost of producing a vehicle may include the cost of materials, labor, and overhead predetermined at the start of the fiscal year.
- Retail: For a retail store, the standard cost may include the expected purchase price of goods from suppliers, adjusted for any expected changes in market prices.
- Services: In a consulting firm, the standard cost may be the predetermined hourly rate for a consultant’s services, including expected salary, benefits, and overhead.
Frequently Asked Questions (FAQs)
What is the difference between standard cost and actual cost?
Standard Cost is the budgeted amount for the cost of manufacturing a unit of product, while Actual Cost is the real cost incurred during production. Comparing the two helps in analyzing variances and improving cost efficiency.
How are standard costs determined?
Standard costs are set based on historical data, future market conditions, inflation expectations, and efficiency targets. They are often reviewed periodically to ensure they remain relevant.
What are the components of a standard cost?
Standard cost typically includes Direct Materials, Direct Labor, and Manufacturing Overhead. Each component is estimated based on expected usage rates and costs.
What is variance analysis in standard costing?
Variance Analysis involves comparing actual costs to standard costs to identify and analyze differences (variances). This helps management identify areas where performance deviates from expectations.
Can standard costs change over time?
Yes, standard costs are reviewed and updated periodically to reflect changes in production processes, material costs, labor rates, and market conditions.
Related Terms
- Budgeted Cost: The estimated cost of production or operations for a specified period.
- Actual Cost: The cost that has been truly incurred in the production of goods or services.
- Variance Analysis: The process of comparing budgeted (standard) costs to actual costs to ascertain performance.
- Direct Cost: Costs that can be directly attributed to the production of specific goods or services.
- Overhead: Ongoing operational expenses not directly attributed to product creation but necessary for overall business functions.
Online References
- Investopedia: Standard Cost
- Accounting Coach: Standard Costing
- Corporate Finance Institute: Standard Cost
Suggested Books for Further Studies
- Cost Accounting: A Managerial Emphasis by Charles T. Horngren, Srikant Datar, and Madhav Rajan
- Cost Accounting: Foundations and Evolutions by Michael R. Kinney and Cecily A. Raiborn
- Principles of Cost Accounting by Edward J. Vanderbeck and Maria R. Mitchell
- Managerial Accounting by Ray H. Garrison, Eric W. Noreen, and Peter C. Brewer
Accounting Basics: “Standard Cost” Fundamentals Quiz
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