Standard Costing
A cost accounting system using predetermined estimates of efficient production costs to value inventory and analyze variances between expected and actual results.
Standard Costing
A cost accounting system that uses predetermined estimates of what costs should be under efficient operating conditions, establishing benchmarks for materials, labor, and overhead costs to value inventory and analyze performance.
For instance, a furniture manufacturer might establish standard costs of $200 for materials, $150 for direct labor, and $100 for overhead to produce each dining chair, then compare these standards with actual costs incurred to identify and investigate variances.
Standard costing serves both inventory valuation and performance evaluation purposes. Product costs are initially recorded at standard, with variances captured separately and analyzed for causes like price changes, usage efficiency, or volume fluctuations. These variances provide valuable feedback for management about purchasing effectiveness, production efficiency, capacity utilization, and cost control. While offering control benefits, standard costing requires careful development of realistic standards and regular updates to maintain relevance in changing business conditions.