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+1-802-778-9005Standard costing is a technique of cost accounting that allocates standard costs to goods or services, serving as a benchmark in assessing the business’s performance. It aims to provide an estimated cost to the components of production like raw material, direct labor, overheads, etc. These standard costs are then compared with actual costs that are incurred during the production process to establish variances.
Standard Costing aids businesses in controlling costs, simplifying and optimizing the budgeting process, and improving the decision-making process regarding variances between anticipated and actual results. One of the classes of managerial costing is standard costing; it is commonly applied in manufacturing and service industries for effectiveness and profitability.
Standard costing provides several important functions in the field of business, and the first one is related to budgeting and financial planning.
Standard costing in cost accounting offers many benefits.
Let’s Explore a few of them:
While standard costing offers multiple advantages, there are a few drawbacks the business should keep in mind:
Standard Costs for Materials: These are the anticipated expenses that are required in the production process of the final product and they include costs of raw materials as estimated by history and current market trends.
The formula for calculating standard costs for material is:
Material Cost = Market Price per Unit x Total number of Units
Standard Costs for Labor: These include the wages that have been estimated to be paid and the time it takes to complete the production which is benchmarked as the cost of labor.
The formula for calculating the standard cost of Labor is:
Direct Labour = Employee Hourly Rate x Hours Worked x Total number of Units
Standard Variable Overhead Costs: These include the variable overhead costs that consist of the expenses that vary with the level of activity for instance the expenses on electricity and certain employees.
Standard Fixed Overhead Costs: These are the factory overheads that do not vary with the amount of output and can include such things as, depreciation, rent, and salaries.
The formula for calculating standard overhead costs is:
Standard Overhead Costs = Fixed Overheads + (Variable Manufacturing Overheads x Total Number of Units)
The formula for standard costing:
Standard Cost = Direct Material Cost + Direct Labor Cost + Variable Overhead Cost + Fixed Overhead Cost
Standard costing calculation is done with this formula that assists the business in predicting the feasible overall production cost in terms of acquiring materials, human resources, and overheads. With this approach, one can arrive at a cost base from which cost control and cost variances can be well-checked.
Standard costing examples are usually based on getting an idea of the total cost of production.
Let’s understand it with a simple example:
Below are the expenses borne by the company for the production of school bags:
Expected No of Production: 10,000
Expected Total hours per unit: 6
Standard Direct Material Cost Per Unit: $150
Standard Labor Material Cost Per Hour: $80
Standard Variable Overhead Cost Per Unit: $35
Standard Fixed Cost: $500,000
Solution:
Type of Cost | Rate | Hour | Cost Per Unit | Unit Produced | Total Cost |
Direct Material | 150 | _ | 150 | 10000 | 1500000 |
Labor Material | 80 | 6 | 480 | 10000 | 4800000 |
Variable Overheads | 35 | _ | 35 | 10000 | 350000 |
Fixed Overheads | 500000 | _ | _ | _ | 500000 |
Total Cost of Production | 7150000 |
Variance in standard costing is the difference between the standard cost and the actual cost of production. This brings out performance gaps to show that there is a mismatch. Variance in standard costing can be favorable or unfavorable; they show that actual costs are less than planned (favorable) or greater than planned (unfavorable). It contains the material variances that reflect the variation between anticipated and actual amount of material cost and secondly, it has labor variances that compare between the standard labor cost and the actual labor cost.
Overhead variances generally evaluate the differences in fixed as well as variable overhead expenses. Understanding these variances would give useful information in the fight against excessive cost and the improvement of efficiency in operations as spotted by the management for correction where necessary.
Variance in standard costing can be related to different components like material, labor, overheads, etc.
Let’s understand them below:
The process of standard costing includes a few steps that make it important for the business:
There are several strategic motives for which standard costing is used by different companies. They give an outline of the amount that should be spent on a project because the costs involved are already standardized. This method facilitates the identification of cost variances and hence it assists business organizations to identify areas of inefficiency and take necessary action.
Standard costing also makes it easier in financial planning since it makes the precipitate forecasts correspondingly better, and the allocation of resources. Also, it helps in appraising performance by comparing actual cost with standard cost and hence enables the management to make good policies that will boost the overall profitability.
Standard costing is an estimated cost that works as a benchmark before the actual cost is realized. This method of cost accounting caters to cost components like raw material, labor, fixed cost, variable overheads, etc. This method helps majorly with cost control. Cost controlling helps a business to make insightful decisions, cutting unnecessary costs, etc.
Standard costing is a technique used to estimate the expected costs of production, comparing them to actual costs to identify variances.
It helps businesses control costs, improve budgeting accuracy, and evaluate efficiency by identifying cost discrepancies.
Material variances compare the expected cost of materials to the actual cost, highlighting inefficiencies in material usage or pricing.
Labor variance measures the difference between the standard labor costs (wages and output) and actual labor costs incurred.
Overhead variance compares actual overhead costs to budgeted costs, breaking them into fixed and variable components to pinpoint cost discrepancies.