Standard Costing - Defined

Standard Costing can be defined as:

"the amount a firm thinks its product should cost, based on certain assumed conditions of efficiency, working conditions and other factors".

The standard cost can be ascertained using historical information, i.e. how much it cost in the past, or by using time and motion studies, or a combination of the two.

A Standard is "that which can be attained under normal working conditions."

Standards are useful as a control since the workforce see them as achievable and can be motivated to achieve them.

Material Standards

These standards will be set by studying the quantity of material which must be input to produce one unit of output. This quantity will include any normal wastage.

For example, in order to cut the pieces of a skirt, one metre of material is required. The actual material used in the skirt will be less because there will be a certain amount of wastage in the cutting process which is unavoidable.

The quality of material used is also important as it will affect the price of the material used. An inferior quality material may be cheaper but may be difficult to cut and may lead to greater than normal wastage.

Labour Standards

Labour standards will normally be set by studying the time taken to complete each part of the operation. Unavoidable delays must be measured and included in the time allowed.

The wage rate will also be set although this will normally be set either by the company, or the union rate will be applied. However in some cases overskilled or underskilled personnel may be used and this may effect output.

Overhead Standards

These will be set in the same way as the overhead absorption rates were set in SU3. For the purposes of control, overheads will be split into fixed and variable overheads.

Sales Margin Standards

These must be set by gathering market research data for quantities to be sold, or by reference to historical sales data from previous accounting periods, and a calculation should also be done to determine a profit element.