Standard price refers to a set baseline cost established for a product or service that companies use for various financial activities such as budgeting, costing, and performance evaluations. It acts as a benchmark to compare actual costs against expected costs, helping to identify variances that need management’s attention.
Detailed Definition
The concept of standard price revolves around creating a fixed price point—either for purchase or selling—that organizations use to streamline costing and pricing strategies. In manufacturing and other industries, standard prices help in ensuring that there is uniformity and accuracy in cost recording and helps in performance evaluation by providing a comparison measure for actual prices incurred.
Types of Standard Prices:
- Standard Purchase Price: This is the predetermined cost at which an organization expects to acquire raw materials or components. It helps in budgeting procurement costs and aids in variance analysis.
- Standard Selling Price: This is the estimated price at which a company plans to sell its product or service. It serves as a reference point for profitability and sales target planning.
How It Works:
- Setting Standard Prices: Organizations set standard prices based on historical data, market trends, inflation estimates, and supplier quotes.
- Recording Costs: Standard prices are used to record costs of goods sold or manufactured in the accounting records.
- Variance Analysis: Actual costs are regularly compared against standard prices to identify variances that may indicate inefficiencies or price changes.
Examples:
- Manufacturing: A company establishes a standard purchase price of $50 for a raw material used in production. If the actual purchase happens at $55, this creates a $5 variance that needs to be analyzed.
- Retail: A retailer sets a standard selling price of $100 for a product. If the actual selling price is reduced to $90 due to a discount, the retailer uses the standard price to evaluate the impact on gross profit margins.
Frequently Asked Questions (FAQs)
What is the purpose of establishing a standard price?
The main purpose is to allow businesses to simplify their costing process, budget more accurately, and perform variance analysis to improve financial performance.
How often should standard prices be reviewed and updated?
Standard prices should be reviewed periodically, usually annually, or whenever there is significant change in market conditions, cost structures, or business strategy.
What is variance analysis in the context of standard price?
Variance analysis involves comparing actual costs or prices to standard prices to determine the efficiency of cost management and to identify areas needing attention.
Can standard prices impact profitability?
Yes, when actual costs or selling prices deviate significantly from standard prices, it can directly impact the profitability positively or negatively.
Are standard prices used universally across all industries?
While they are commonly used in manufacturing, standard prices can be beneficial in many industries including retail, services, and construction.
Related Terms
- Budgeting: The process of creating a plan to spend money over a specified period.
- Variance Analysis: The quantitative investigation of the difference between actual and expected behavior.
- Cost Accounting: A branch of accounting that deals with recording, classifying, and summarizing costs attached to products or services.
- Price Benchmarking: Comparing the set standard prices against the market prices or peer group prices to determine competitiveness.
- Profit Margins: The amount by which revenue from sales exceeds costs in a business.
Online References
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 H. Garrison, Eric W. Noreen, and Peter C. Brewer
- “Management and Cost Accounting” by Charles T. Horngren, Alnoor Bhimani, Srikant M. Datar, and George Foster
Accounting Basics: “Standard Price” Fundamentals Quiz
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