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
Budgeting 101: Creating Successful Budgets
Analyzing Your Return on Investment (ROI)
Product Pricing Strategies

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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Advantages and Disadvantages of Standard Costing

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


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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7 Responses to Standard Costing System

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

    Heya i’m for the primary time here. I found this board and I
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    • 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

  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 ?

  3. maksman June 5, 2019 at 7:42 am #

    standard costing system assist management in planning and control of operations
    2. it is also vital because it helps management to identify variance and how to improve performance. also helps management in decision making

  4. P.H.T.S.Pathiraja June 22, 2019 at 9:26 am #

    how standard costing motivate employees

  5. Richard Daley October 17, 2019 at 4:18 am #

    Explain how standard costing can be used to help and manage resources more effectively?

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