What are Standard Costs?
Standard costs are the predetermined costs of manufacturing a single unit or a number of products, during a specific period in the immediate future, standard costs are planned costs of a product under current or anticipated operating conditions. They are based on normal or ideal conditions or efficiency and volume particularly respect to factory overheads.
The term standard cost consists of two words: standard and cost, the standard is carefully determined method or measurement of executing a task, i.e. making a radio. A standard must be thought of in terms of specific items, such as dollars of material, hours of labor required, and hours of plant capacity to be used.
These physical standards which form the basis for calculating a standard cost must be set with the greatest accuracy. In many situations, a standard is never changed except as changes in operating methods or products occur.
Standard costs are known as :
(i) Basic standard
(ii) Current standard
It is a yardstick against which both expected and actual performances are compared.
It is a standard for a certain period, for certain conditions, and for certain situations. It takes the place of an actual cost and finds its way through the books of accounts.
Characteristics of Standard Costing
The chief characteristics are as under:
1. Cost determination. Standard costing is designed to know cost of output based on past experience and future trend.
2. Cost comparison. When actual costs are known these are compared to budgeted costs.
3. Control on variances. The comparison between standard and actual cost is made to know the variances.
4. Verification of variances. Once the variances are known the effective study is made to check the future variances.
5. Reporting. For the benefit of top management, reports are prepared and despatched specifying who is responsible for variances.
6. Revision. The management gives corrective suggestions for variances.