Standard cost

Definition

Standard cost is a predetermined estimate of the cost to produce a single unit of product or service. It serves as a benchmark for evaluating actual production costs and operational efficiency.

5 Must Know Facts For Your Next Test

1. Standard costs are used to set budgets and measure performance.
2. They are derived from historical data, market trends, and expected future conditions.
3. Variances between standard costs and actual costs help identify areas needing improvement.
4. Standard costs can be broken down into direct materials, direct labor, and manufacturing overhead.
5. They assist managers in planning, controlling, and decision-making processes.

Review Questions

• What is the primary purpose of using standard costs in managerial accounting?
• How are standard costs typically determined?
• What does a variance between standard cost and actual cost indicate?

Related terms

Variance Analysis:

The process of comparing actual outcomes to standard or budgeted outcomes to understand discrepancies.

Direct Materials Cost: The expense incurred for raw materials used directly in the production of goods.

Manufacturing Overhead:

Indirect factory-related expenses that support the production process but cannot be directly traced to specific units produced.