Standard Cost Use and Example of Standard Cost

The standards of performance may be determined on the basis of time and motion study. (ii) Operating efficiency can be measured if both actual costs and estimated costs are available side by side. While making cost estimation, however, allowance is generally made for price fluctuations.

For the Bases, Inc., the total overhead variance is $485 unfavorable. It consists of a $717 unfavorable controllable variance and a $232 favorable volume variance. An unfavorable controllable variance indicates that overhead costs per direct labor hour were higher than expected.

Standard Costing

For example, the grade of material used to establish the standard may no longer be available. Ranking should look to how stakeholders are affected by costs and any decisions related to cost variance, or why the variance occurred. For example, if a cost variance is due to an additional cost to make a product eco-friendly, then an organization may determine that incurring the cost is a benefit to its stakeholders. However, if the additional cost creates an unfavorable situation for a stakeholder, the process incurring the cost should be investigated. Remember that the owners of a company, including shareholders, are also stakeholders. While standard costs can be a useful management tool for a manufacturer, the manufacturer’s external financial statements must comply with the cost principle and the matching principle.

It makes the employees to recognise the importance of efficient operations so that costs can be reduced by joint efforts. The second objective of standard cost is to help the management in exercising control over the costs through the principle of exception. Another way of computing the direct materials variance is using formulas. Standard cost (SC) is the pre-determined cost that will be incurred to purchase goods or conduct operations in a normal environment. Every company requires a budget to estimate the cost involved in a project.

Standard Cost Variances

For example, under actual cost system, each item of each material requisition must be coasted separately, when LIFO of FIFO method is used. In a large company, this is an enormous task, since thousands of requisitions may be issued. With all this information, https://www.bookstime.com/articles/adjusting-entries it becomes possible to ascertain the extent to which an available price will cover out-of-pocket costs and con­tribute to recovery of fixed costs. The standard cost provides one of the many factors that should be considered in pricing.

Then, finally an assembly standard cost sheet for final product is prepared. Manufacturing process of pianos require more than four hundred different parts and for each part, there is standard cost sheet. In these situations, an standard costing system assembly standard cost sheet for final product is prepared in the end. Suppose production in coke oven factory is – 1,000 kg of coke and 600 cft of gas and the standard time allowed per unit is 8 hours and 16 hours respectively.