Standard Costing
Definition of Standard Costing:
The word ‘standard’ means a benchmark or yardstick. The standard cost is a predetermined or
expected cost, which determines what each product or service should cost under given conditions.
In other words, it is the expected cost of producing one unit. It is, in effect, a budget for one unit.
Standard costing may be defined basically as a technique of cost accounting, which compares the
standard cost of each product or service with the actual cost to determine the efficiency of
operation so that remedial action may be taken immediately.
The Institute of Cost and Management Accountants, England defines standard costing as “the
preparation and use of standard costs, and the analysis of variances of their causes and the points
of incidence.” Variance is the difference between a budgeted or standard amount and the actual
amount during a given period.
The following steps are thus involved in standard costing:
(a) Preparation and use of standards;
(b) Comparison of actual costs with standards to determine the variance; and
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(c) Investigating the variance and taking appropriate actions where necessary.
Type of Industries where Standard Costing is More Suitable:
Standard costing is a system or technique of cost accounting, which can be used in conjunction
with process, job or operating costing without any difficulty, whatsoever.
Industries where standard costing is more suitable and used can be listed as under:
1. Process industries where the method of production and nature of output are the same.
Examples: Chemical works, Paper mills, Oil refineries, etc.
2. Industries where the methods of manufacture are repetitive and products are homogeneous.
Examples: Agricultural and food products.
3. Service industries where operating or operation costing system is also applicable.
