The predetermined cost of performing an operation or producing a good or service

A standard cost is an estimated or predetermined cost of performing an operation orproducing a good or service, under normal conditions. Standard costs are used as target costsor basis for comparison with the actual costs because every situation has its share ofunpredictable factors. There are many reasons for using standards but the most frequentmotive is because they estimate product costing techniques. Standard costing is the traditionalmanagement accounting which has been used during the last century on a wide frontier.The main reason for the use of standard costing is that relying on actual costing could notprovide managers with appropriate data which are needed by managers. The general purposeof standard costing is to provide cost information related to controlling cost, providequickness and convenience to compute production cost. It also helps in preparing the businessbudgets, pricing products and measuring the performance of managers by comparing theactual costs with standard cost. Standard costing is mostly used in production companieswhere products are produced constantly and permanently (Kucksavas, 2006).Standard costing has been a very useful technique for cost control, performance evaluationand determining the product costing. According to Mitchell standard costing provides anumber of benefits in performance evaluation. These include providing feedback informationdesigned to help managers control operations in accord with the plans they have set. Studiesexamining the use of standard costing among companies in the developed and the developingcountries have shown widespread use of the technique (Puxty, 1990).

Standard Costing Overview

Standard cost

• A standard cost is an estimated/predetermined unit cost of performing an operation or producing a good or services under normal conditions.
• The predetermined unit cost (standard cost) is based on expected direct materials quantities and expected direct labour time and priced at a predetermined rate per unit of direct materials and rate per direct labour hour and rate per hour of overhead.
• Overheads are normally absorbed at direct labour hour.

Standard costing

• Standard costing is a control technique that report variances by comparing actual cost to pre-set standards. Standard costing may use; absorption or marginal costing.

Types of Standard

This assumes perfect operating conditions.

No allowance for wastage is made.

Unlikely to be achieved.
Reported variance is always adverse

This assumes efficient but not perfect operating conditions.

An allowance for wastage is made.

Attainable targets.

These are based on current working conditions.

Includes an allowance for the expected wastage or idle time.

This remains unchanged over a long period of time.

Variances are calculated by comparing actual results with basic standard.

• Idle time are the hours for which the direct labour employees are paid for no work.
• Idle time is recorded and the hours lost due to idle time are measured.

Methods of including idle time in standard costs

As a separate elements of standard cost

• Standard of idle time is a part of Total standard cost per unit.

Allowance for expected idle time

• Allows for a standard amount (pre-set amount) of idle time in standard hours per unit of each product, therefore including an allowance for expected idle time.

Budget

• Budget: A budget is a formal plan (for a specified time period) covering all the activities of the entity.
• It is a statement of what the entity is going to strive to achieve in future.
• Standard costing is a component of budgeting.
• Standard costs for a unit are often set out in record called a standard cost card.

• It is the original budget prepared at the beginning of a budget period.
• It is prepared for a specific volume of output and sales activity.
• It is the master plan for the financial year that company tries to achieve.
• Variances are NOT calculated by comparing actual results to fixed budget directly.

• It is drawn-up at the end of the period.
• It is based on the actual levels of activity and standard revenue and standard costs.
• This shows the amount that the company would have received for the actual number of units sold if they had been sold at the budgeted revenue per item.
• Variances are calculated by comparing actual results with flexed budget.

What is the definition of standard costing quizlet?

Which of the following involves effectively directing the major activities of a business to achieve its goals?

Are operations the major ongoing activities of a business?

Does leading involve guiding employee work toward achieving the company's goals?