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Standard Cost

Standard cost refers to the predetermined cost of producing a product, consisting of direct materials, direct labor, and manufacturing overhead. Its purposes include budgeting, performance measurement, cost control, and pricing decisions. The process of standard costing involves setting standards, measuring actual costs, calculating and analyzing variances, and taking corrective actions.

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43 views2 pages

Standard Cost

Standard cost refers to the predetermined cost of producing a product, consisting of direct materials, direct labor, and manufacturing overhead. Its purposes include budgeting, performance measurement, cost control, and pricing decisions. The process of standard costing involves setting standards, measuring actual costs, calculating and analyzing variances, and taking corrective actions.

Uploaded by

sujitkumarsahani07
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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MBA 2nd SEM

UNIT-03

Q.1 Define standard cost and what is its components and purpose?

It refers to the predetermined or estimated cost of producing a product or performing


an operation under normal conditions. These costs are used as benchmarks against
which actual performance and costs are compared.

Components of Standard Cost:

1. Direct Materials – The expected cost of raw materials needed.


2. Direct Labor – The expected cost of labor time and rate.
3. Manufacturing Overhead – Predetermined overhead costs, both fixed and
variable.

Purposes of Standard Costing:

 Budgeting and planning – Helps estimate future costs and set financial targets.
 Performance measurement – Compares actual costs with standard costs to find
variances.
 Cost control – Identifies areas where operations deviate from expected
performance.
 Pricing decisions – Assists in setting product prices based on expected costs.

Q.2 Explain the process of Standard Costing.

1. Set Standards
o Based on historical data, time studies, supplier quotes, etc.
2. Measure Actual Costs
o Track actual expenses during production.
3. Calculate Variances
o Variance = Actual Cost – Standard Cost.
4. Analyze Variances
o Determine if they are favorable (cost-saving) or unfavorable (extra cost).

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5. Take Action
o Investigate causes, improve processes, or revise standards.

Q.3 Relationship between Standard Costing & Budgetary Control.

Standard Costing Budgetary Control

Sets unit-level cost standards Sets overall spending/income targets

Focuses on production and operational cost Focuses on broader business/departmental goals

Used for variance analysis (actual vs standard) Used for budget variance (actual vs budget)

Helps cost control per unit Helps expenditure and performance control

Applied in cost accounting Applied in financial & managerial accounting

Q.4 Define Variance analysis.

Variance analysis is the process of evaluating the difference between actual results and
expected (standard or budgeted) results, and then analyzing the reasons behind those
differences.

Variance = Actual Result – Standard/Budgeted Result

This analysis helps managers identify areas where performance differs from
expectations, so they can take corrective actions or adjust future plans.

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