Standard Costing System

See Also:
Standard Costing Example
Process Costing
Activity Based Costing vs Traditional Costing
Absorption vs Variable Costing
Implementing Activity Based Costing
Cost Driver

Standard Costing System

In accounting, a standard costing system is a tool for planning budgets, managing and controlling costs, and evaluating cost management performance.

A standard costing system involves estimating the required costs of a production process. But before the start of the accounting period, determine the standards and set regarding the amount and cost of direct materials required for the production process and the amount and pay rate of direct labor required for the production process. In addition, these standards are used to plan a budget for the production process.

At the end of the accounting period, use the actual amounts and costs of direct material. Then utilize the actual amounts and pay rates of direct labor to compare it to the previously set standards. When you compare the actual costs to the standard costs and examine the variances between them, it allows managers to look for ways to improve cost control, cost management, and operational efficiency.

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Standard Costing – Advantages and Disadvantages

There are both advantages and disadvantages to using a standard costing system. The primary advantages to using a standard costing system are that it can be used for product costing, for controlling costs, and for decision-making purposes.

Whereas the disadvantages include that implementing a standard costing system can be time consuming, labor intensive, and expensive. If the cost structure of the production process changes, then update the standards.

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standard costing system

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standard costing system

Source:

Hilton, Ronald W., Michael W. Maher, Frank H. Selto. “Cost Management Strategies for Business Decision”, Mcgraw-Hill Irwin, New York, NY, 2008.

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4 Responses to Standard Costing System

  1. sapro.co.za August 23, 2014 at 9:17 am #

    Heya i’m for the primary time here. I found this board and I
    find It truly useful & it helped me out a lot.
    I hope to give something again and help others like you helped me.

    • John July 27, 2017 at 6:40 am #

      how the standard costing can help manager in decision making

      • ankur bakshi August 3, 2018 at 4:33 am #

        Without standard costing, how a manager can decide actual nearby price of a product?
        Its helpful for negotiation & cost down

        Ankur Bakshi
        India

  2. Kelvin Richardson December 12, 2018 at 7:20 pm #

    What happens if A company is using the Standard cost system and the sales manager put in a rush order? Do the cost go up for labor or has cost of over time been included from the beginning period of planing ?

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