Standard costing is a technique that involves setting standards for costs, comparing actual costs to standards, investigating variances, and taking corrective action. It involves establishing standard costs per unit for direct materials, direct labor, and overhead. Actual costs are then compared to standards and any differences or variances are identified. Variances can be investigated to determine where costs differed from standards and actions can be taken to remedy issues. Standard costing can be used with both absorption and marginal costing systems.

1. Standard Costing
 A standard cost is a carefully predetermined estimated unit cost.
 Usually a standard cost per unit of production, per unit of service rendered, per routine task
completed or standard cost per Rs 1/= of sale.
Standard costing is defined basically as a technique of cost accounting, which compares the ‘standard
cost’ of each product or service with the actual cost, to determine the efficiency of the operation, so
that any remedial action may be taken immediately.
 Standard costing involves:
o Setting of standards
o Ascertaining actual results
o Comparing standard and actual costs to determine the variances
o Investigating the variances and taking appropriate actions where necessary
 Standard cost may be used in both marginal and absorption costing systems.
Difference between Budgeted and standard costing methods
Budgeted Cost Standard Cost
Total Cost Unit cost
Possible to have budgeting without Not possible to have standard cost
standard cost system without total cost budgeting
system
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2. Standard Cost Card
Standard Cost Card Rs. Rs.
Product: Prizma, No 3304
Direct Materials
A 6 Kg at Rs.20/= per Kg 120
B 2 Kg at Rs. 30/= per Kg 60
C 1 liter at Rs. 40/= per liter 40
Other 20 240
Direct Labor
Grade I: 3 hours at Rs. 40/= per hour 120
Grade II: 5 hours at Rs. 54/= per hour 270 390
Variable production overhead: 8 hours at Rs. 10/= 80
Fixed production overhead: 8 hours at Rs. 30/= per hour 240
Standard Full Cost 950
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3. Setting Standards
Revised once a year
People concern with setting standards,
 The production controller : Production requirements in term of material, labor and overhead
 The buyer : schedules of prices and details of market price trends
 The personnel Manager : labor rates of pay and possible forecasts of any changes in rates
 The time study engineer : standard times for operations
 The cost accountant: labor requirements, overhead recovery rates, etc.
Advantages of standard costing
 Yardstick against the actual costs
 Involves determining best materials and methods, which may lead to economies.
 Costing procedures are often simplified
 Stock evaluation is easy
 The operation of cost centers defines responsibilities
 A target efficiency is set for employees to reach
The standard Hours
 Production is frequently expressed in terms of units, kilos, liters etc.
 Nevertheless, in standard costing system production can be expressed in terms of a measure
common to all products, as “standard hour”.
Example: ABC Jam Co.Ltd produces and markets three types of Jam: Orange, Marmalade and Mixed
Fruits. It is estimated that the following number of jars could be filed within one hour. Orange 2000 jars,
Marmalade 6000 jars, Mixed Fruit 4000 jars. The production in February 2003 is 300,000 jars of orange
1,000,000 jars of Marmalade and 600,000 jars of Mixed Fruit.
Type of Jam Production Standards units per Production in standard
hour hours
Orange 300,000 jars 2000 150
Marmalade 1,000,000 jars 6000 166
Mixed Fruit 600,000 jars 4000 150
466
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