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Standard Costing

Standard costing is a managerial accounting technique that estimates product costs for comparison with actual costs, aiding in pricing and budgeting decisions. It differentiates between standards (cost per unit) and budgets (total cost based on production volume), with standards being incorporated into cost accounting systems. Setting standard costs requires collaboration among various experts and must be regularly updated to reflect changing business conditions.

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41 views1 page

Standard Costing

Standard costing is a managerial accounting technique that estimates product costs for comparison with actual costs, aiding in pricing and budgeting decisions. It differentiates between standards (cost per unit) and budgets (total cost based on production volume), with standards being incorporated into cost accounting systems. Setting standard costs requires collaboration among various experts and must be regularly updated to reflect changing business conditions.

Uploaded by

novi bag-ay
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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STANDARD COSTING

Understanding Standard cost Standard costing is a key part of managerial accounting and a cost-
control technique where businesses estimate how much a product or service should cost, then
compare it to the actual cost incurred. These estimates serve as benchmarks to compare actual
costs against planned costs. When businesses understand their costs, they can make better
decisions about pricing, budgeting, and efficiency improvements.

Distinguishing Between Standards and Budgets Standards and budgets both help businesses plan
and control costs, but they’re not quite the same. A standard is a cost per unit—for example, if the
standard labor cost for making one product is P10, that’s the expected cost for each unit. A budget,
on the other hand, is the total cost based on how many units a company plans to produce. So, if the
company makes 5,000 units, the budgeted labor cost would be P50,000. A standard is the
budgeted cost per unit of product. A standard is therefore concerned with each individual cost
component that makes up the entire budget. There are important accounting differences between
budgets and standards. Except in the application of manufacturing overhead to jobs and
processes, budget data are not journalized in cost accounting systems. In contrast, standard costs
may be incorporated into cost accounting systems. Also, a company may report its inventories at
standard cost in its financial statements, but it would not report inventories at budgeted costs.

Setting Standard Costs:

A team effort Determining the standard cost to produce a unit of a product is no easy task—it
requires input from various experts responsible for costs and quantities. For direct materials,
management consults purchasing agents, product managers, quality control engineers, and
production supervisors will determine material costs. For direct labor, pay rate data comes from
the payroll department, while industrial engineers determine the labor time required. Managerial
Accountants also analyze historical cost data and assess how costs change with different activity
levels.

To effectively control costs, standard costs must always be up to date. Since business conditions
constantly evolve, standards should be continuously reviewed and revised when necessary. The
following are the factors that may require standard cost updates like the new union contracts
affecting wage rates, changes in product specifications, and implementation of new manufacturing
methods. Keeping standards current ensures they remain a reliable tool for cost control and
performance evaluation.

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