Standard Costing

Standard Costing is often described as estimated future cost because it is set before undertaking any project. The idea is to plan the total cost of materials, labours and overheads and estimating the sales as well. At the end of the period, when the project gets completed, actual costs are analysed and compared with the standard costs. Any difference is called the variance and it may be favourable and adverse. It depends on the situation under consideration.

Objective 

The objectives of Standard Costing are as follows:

  • Performance evaluation - By setting standard for costs such as materials, labours and overheads, the actual results can be compared to judge the performance,
  • Accurate Budgeting - By continuous implementation of standard costing, a time comes when the entity set an accurate budget which acts like a yardstick,
  • Planning - By knowing the required materials, labours and overheads, an effective plan can be developed to improve efficiency,
  • Grey Areas - This method of costing helps the management in identifying the loopholes and grey areas where it needs to focus to improve performance.

Variances

The deviation of standard cost from the actual cost is referred to as Variance. Thre are various types of variances calculated in standard costing which are as follows:

Material Variance

Labour Variance

Overhead Variance