Differences between standard cost and standard costing

What is the standard cost?

Standard cost is a predetermined cost. It is a determination in advance of production of what should be that cost.

When standard costs are used for cost –control, the technique is known as standard costing.

Definition of Standard Cost and Standard Costing

The costing terminology of the Chartered Institute of Management Accountants, London defines a standard cost and standard costing as follows:

“A determined calculation of how much costs should be under specified working conditions. It is built up from on assessment of the value of cost elements and correlates technical specifications and the quantification of material, labour and another cost to the prices and or wages rates expected to apply during the period in which the standard cost is intended to be used. Its main purposes are to provide bases for control through variance accounting for the valuation of stock and work in progress and in some cases, for fixing selling prices.”

Eric l. Kohler has defined standard cost as follows:

“Standard cost is a forecast or pre-determination of what actual cost should be under projected conditions, serving as a cost and as a measure of production efficiency or standard of comparison when ultimately aligned against actual cost. It furnishes a medium by which the effectiveness of the current result can be measured, and the responsibility for deviations can be placed.”

The main points in the above definition are:

Meaning of Standard Costing

Standard Costing is the preparation of standard costs and applying them to measure the variations from the actual cost and analysing the cause of variations to maintain maximum production efficiency. It is a technique that uses standards for cost and revenues for control through variance analysis.

Standard costs are used as a baseline against which real costs may be compared in order to determine the source of inefficiency in the system. It follows that the real costing system must always be considered, even if a traditional accounting method is employed. This system of costing may be advantageous in any business; however, it is most commonly used in industries that create standard commodities that are comparable in nature. Therefore, standard costing is more common in the process and engineering sectors, but is useless in the task order industry.

Even in jobbing industries where jobs vary significantly, there is a considerable possibility for implementing this costing system. While the product in many businesses may not be repetitive and standard, the activities required to do the task are, and standards can be established for the processes conducted.

The standard cost of the project can be determined by aggregating the standard costs of the job’s operations. Comparing the actual cost of operations to the standard cost of operations will assist in controlling the cost of operations and, thus, the work cost.

Advantages of Standard Costing

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