Standard Costing
Standard costing refers to a system of costing in which standard costs are fixed for an item of cost in advance for controlling and recording purposes. Other terms which also refer to this system of costing are current costing (Andrews, 1990), normal costing (Neumann, Rankia and Wilson, 1985) and predetermined costing (Hansen and Mowen, 1993).
Standard costing is the practice of calculating costs by comparing the cost of materials, labour and other inputs to predetermined standards. It is an important tool for managers in the accounting process since it allows them to determine the actual cost of production, make efficient decisions regarding purchasing and production and save money in the process.
The primary purpose of standard costing is to provide a consistent measure of cost which is more reliable than traditional methods. It is used as a means of anticipating and controlling costs by setting prices for specific activities, such as materials and labour, before the actual cost is known.
Standard costing is used in a variety of industries, including manufacturing and services. In manufacturing, it can be used to determine the cost of goods sold and calculate inventory costs. In services, it can be used to calculate labor costs and overhead expenses.
Standard costing is based on a system of budgets and forecast costs. Budgets reflect what is expected to be incurred in a given period. Forecast costs are then used to determine the anticipated cost at the point in time when the standard cost is set. The standard cost is the total of all indirect and direct costs of a given product.
The standard cost must be developed in a way which allows for changes in costs during the production process. Companies must plan for expected cost inputs, as well as unexpected costs which may occur. Once the standard cost has been determined, it is used to benchmark actual costs. Differences between the standard cost and the actual cost can then be identified and corrective action can be taken to ensure that production costs do not exceed expectations.
Standard costing is not a one-size-fits-all system of cost control. It must be tailored to each individual business. Accurate accounting information is essential for this type of cost control, as variances between budgeted and actual costs can be used to highlight areas where costs may be too high, or inefficiencies exist.
Standard costing can be a powerful tool for small businesses and large corporations alike. By properly employing standard costing systems, companies can gain greater insight into their operations and more effectively manage their budgets. Standard costing can also help companies more accurately set pricing and develop pricing strategies which take the cost of production into account.
