What Is Standard Costing?
Predetermined costs, variances, and a worked example.
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| Standards cover | Price and quantity of materials, labour rate and hours, overheads |
|---|---|
| Output | Variances for management control |
| Topic | Cost accounting · Cost control |
Standard costing in plain English
Think of it as a recipe: “one unit should use 2 kg of material at 2.50 per kg.” After production you compare the recipe with what really happened, and investigate the gaps.
Worked example
The standard for one unit is 2 kg of material at 2.50 per kg, a standard cost of 5.00. In practice each unit used 2.2 kg at 2.50 per kg, an actual cost of 5.50.
Variance per unit = 5.50 − 5.00 = 0.50 adverse. For 1,000 units, the total material variance is 500 adverse. Here the cause is quantity: 0.2 kg extra per unit.
- Never updating standards, so they no longer reflect real prices and methods.
- Using variances to blame people without first finding the cause.
Frequently asked questions
What types of standards are there?
Ideal standards assume perfect conditions. Attainable standards allow for normal waste and delays. Attainable standards are more commonly used.
Why use standard costing?
It supports budgeting, simplifies bookkeeping and highlights where actual performance differs from plan.
Who sets the standards?
Usually management accountants together with production and purchasing managers.
Keep learning
This page is for general learning. Accounting rules vary by country and standard.