Standard Cost

Standard Costs Definition

Standard cost accounting is a goal or budget costs that is associated with variable costs. They are also used to measure the cost that management believes that it will incur over a period.

Standard Costing Explained

In short, standard costing takes the direct labor, direct materials, and manufacturing overhead, and estimates the cost over a quarter, year, or whatever the period may be. This is similar to budget costing, but is different in that budget costs account for a total cost while a standard cost estimate is on a per unit basis. Therefore, if a standard cost estimate turns out to be correct, then the total cost would turn out to be equal to the budget cost. But, this sort of thing never happens.

Standard Cost Formula

The standard cost method can be broken down using the following formula:

Standard Costs = Direct Labor * Direct Materials * Manufacturing Overhead

Where:
Direct Labor = Hours Worked * Hourly Rate

Direct Materials = amount of materials * market price

Manufacturing Overhead = Fixed Salary + (Machine hours * Machine rate)

Note: All but the fixed salary component of overhead must be predicted given the market conditions on demand and cost of the materials. It should also be noted that this is the same formula for the manufacturing costs, but the difference lies in the fact that Standard costs accounting is done on a predictive basis.

Standard Cost Example

For example, Jenny is an accountant that was given a task by her boss, Craig, the CFO to calculate the standard cost of the company for the upcoming year 2010. The following past information for Wawadoo Co. was given to her to try and calcualte the standard cost for Wawadoo’s product called the widget.

Direct Labor-2009
AVg. Labor Hours= 1,960 hours per employee
Avg. Hourly Wage – $10
Number of employees = 47
Total Costs= $92,120

Direct Materials-2009
Material Units=20,000
Avg. Market Price= $20
Total Cost= $400,000

Overhead-2009
Fixed Salary per Manager= $80,000
Number of Managers= 5
Number of Machine hours= 1,000
Hourly Machine rate= $2
Total Cost=$410,000

Jenny’s Boss, Craig, believes that the overall demand for widgets will increase by 5% and the price and number of units needed will increase by the same amount. He also believes that there will be a need for 8 new employees as well as a new manager.

Jenny finds the following:

Direct Labor= 1,960 hrs.* $10/hr* 55 employees= $1,078,000
Direct Material = $21 mkt price* 21,000 units= $441,000
Overhead= ($80,000* 6) + (1,000 hrs.* $2/hr* 6) = $492,000

Total Standard Cost= $2,011,000 cost for the year

standard cost

See Also:
Manufacturing Cost
Cost of Goods Sold (COGS)
Overhead Definition
Direct Cost vs. Indirect Cost
Variable Cost

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4 Responses to Standard Cost

  1. Robert Doan December 20, 2017 at 1:07 pm #

    I don’t understand calculation about overhead. Why you calculated total cost of overhead is $410,000 and Overhead= ($80,000* 6) + (1,000 hrs.* $2/hr* 6) = $492,000? So can ask you bout number six? Where is it? Can you help me?Thank you for your help.

  2. HAMIDA MSOFE February 4, 2018 at 2:40 pm #

    They were expecting to have a need for one more new manager. That make it 6 managers

    • Mellow February 18, 2018 at 9:39 pm #

      How comes you multiply machine hours and machine rate with a number of managers (machine hours *machine rate *6)…and am your student by the way…from 72A2.

  3. Mellow February 18, 2018 at 9:30 pm #

    How comes you multiply machine hours and machine rate with a number of managers… It doesn’t make any sense my class teacher.. 🙈🙈

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