STANDARD COSTING

Standard costs are realistic estimates of costs based on analyses of both past and projected operating costs and conditions. They are usually stated in terms of cost per unit. They provide a standard, or predetermined, performance level for use in standard costing, a method of cost control that also includes a measure of actual performance and a measure of the difference, or variance, between standard and actual performance. This method of measuring and controlling costs differs from
the actual and normal costing methods in that it uses estimated costs exclusively to compute all three elements of product cost—direct materials, direct labor, and overhead. Standard costing is especially effective for managing cost centers. You may recall that a cost center is a responsibility center in which there are well-defined links between the cost of the resources (direct materials, direct labor, and overhead) and the resulting products or services. A disadvantage to using standard costing is that it can be expensive because the estimated costs are based not just on past costs, but also on engineering estimates, forecasted demand, worker input, time and motion studies, and type and quality of direct materials. However, this method can be used in any type of business. Both manufacturers and service businesses can use standard costing in conjunction with a job order costing, process costing, or activity-based costing system.