6. Standard Costing (copy)

what is standard cost

an estimated unit cost

a standard cost is calculated from managements expectations (3)

• usage and efficiency levels of materials and labour

• prices of materials labour and overheads

• budgeted overhead costs and levels of activity

What is a standard costing system used for?

Used where a business produces standard products requiring the same materials and time.

What are the 4 main types of standard?

1. Ideal

2. Target (Attainable)

3. Normal

4. Basic

ideal standard

Set on the basis that perfect working conditions apply at all times.

• No allowance for waste, inefficiency, or idle time

• Unrealistic for most businesses

• Adverse variances likely → demotivating

Target (Attainable) Standard

Achievable standard allowing for some wastage and inefficiency.

• Reflects realistic working conditions

• Motivational for managers and staff

• Includes elements for improvement

normal standards

Based on current working conditions (includes usual inefficiencies).

• Reflects normal level of wastage and inefficiency

• Suitable for short-term use

• Revised frequently to remain up-to-date

• Does not aim for improvement

basic standards

Standards unchanged over a long time.

• Based on historical data

• Easy to maintain but often out of date

• Generates large or meaningless variances

• May be used only for comparison with past performance