What is a Standard Costing System?
A standard costing system assigns predetermined 'should-cost' amounts to materials, labor, and overhead based on efficient operating conditions. Actual costs are then compared to these standards to calculate variances, helping managers spot and control cost problems quickly.
Standard costing sets a standard cost per unit (standard quantity × standard price) in advance, then compares it to actual costs to compute favorable or unfavorable variances used for budgeting and performance control.
- 1.Set standards — Establish standard price and quantity for materials, labor and overhead.
- 2.Record actual costs — Track actual price and quantity incurred during production.
- 3.Compute variances — Compare actual costs to standard costs to find variances.
- 4.Analyze causes — Investigate whether variances are favorable or unfavorable, and why.
- 5.Take corrective action — Adjust operations, pricing or standards, then repeat the cycle.
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Step-by-step worked examples
The standard quantity of material allowed for a batch is 500 kg at a standard price of $4 per kg. Find the standard material cost.
Standard cost = SQ × SP Standard cost = 500 × $4 = $2,000
Standard labor time for a job is 20 hours at a standard rate of $18 per hour. Find the standard labor cost.
Standard cost = SQ × SP Standard cost = 20 × $18 = $360
A factory sets a standard of 2 hours of machine time per unit at $25 per hour for 300 units produced. Find total standard overhead cost.
Standard hours allowed = 2 × 300 = 600 hours Standard cost = 600 × $25 = $15,000
Flashcards
Quick quiz
Q1.A standard costing system primarily helps managers to...
Q2.Standard quantity is 200 units at a standard price of $6. What is the standard cost?
Q3.If actual cost is higher than standard cost, the variance is...
Q4.Standard costs are typically set based on...
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Common mistakes
Treating standard costs as exact predictions of actual costs. — Correct: Standards are targets based on efficient conditions; some variance is normal and expected.
Never updating standards over time. — Correct: Standards should be revised periodically as prices, processes, or efficiency change.
Ignoring small variances entirely. — Correct: Investigate significant variances, even small ones if they recur, to catch systemic issues.
Assuming all unfavorable variances are bad management. — Correct: An unfavorable variance can result from external factors (e.g. price hikes) and needs investigation, not automatic blame.
FAQ
What is a standard costing system?
It's a costing system that assigns predetermined standard costs to products and compares them to actual costs to compute variances.
What is the standard costing formula?
Standard cost = Standard quantity allowed × Standard price or rate.
What are examples of standard costing?
Manufacturers set standard costs for materials (like $4/kg of steel) and labor (like $18/hour) to budget and control production costs.
How is standard cost calculated?
Multiply the standard quantity allowed for output by the standard price or rate per unit.