Everything about Standard Costing

Definition of Standard Costing

Standard costing is an accounting system used by many manufacturing companies to identify the differences or variances between the actual costs of the goods produced and the standard costs — the estimated costs of the goods produced.

Main use of Standard Costing: variance analysis

Standard costing is a valuable management tool. When differences between standard and actual costs arise, management becomes alert and investigates the reasons through variance analysis:

• If actual costs are greater than standard costs, the variance is unfavorable. An unfavorable variance tells management that the company’s actual profit could be less than planned.
• If actual costs are less than standard costs, the variance is favorable. A favorable variance tells management that the actual profit will likely exceed the planned profit.

The sooner that the accounting system reports a variance, the sooner that management can direct its attention to the difference and make appropriate corrections.

How to calculate standard costs?

To calculate the standard cost of a product, a company can use the following formula: