Standard costing involves setting predetermined norms or benchmarks for direct materials, direct labor, and overhead costs for manufacturing products. Standards are planned costs that are used for budgeting, controlling costs, promoting cost reduction, simplifying cost accounting, and assigning inventory costs. The key purposes of standard costs are establishing budgets, controlling costs, and motivating efficiency. Some advantages include making managers cost-conscious, reducing costs through economies, and simplifying accounting procedures. Standards must be carefully set based on past averages or engineering studies. Master standard cost cards detail the standard costs for materials, labor, and overhead for each product. Variances can then be analyzed to compare actual costs to standards.

1. STANDARD COSTING: Setting of computed standards and analysis of variance
What, Why, and How of Standard Costing
A standard cost is the predetermined norm for direct materials, direct labor, and overhead assigned to
cost products or services.
It is the budgeted or forecasted cost of manufacturing a single unit or a number of product units
during a specific period in the immediate future.
It is the planned cost of a product under current and/or anticipated operating conditions.
Two components: standard and cost
Standard – like a benchmark or norm used for planning and controlling purposes.
- a model against which actual results are compared and evaluated just
like a budget.
- whatever is considered normal can generally be accepted as a standard.
Cost – a resource sacrificed or foregone to achieve a particular objective
- the amount paid or cash equivalent value exchanged for goods or
services that will give current or future benefits to the business
enterprise.
Purposes of Standard Costs:
1. Establishing budgets.
2. Controlling costs and motivating and measuring efficiencies.
3. Promoting possible cost reduction.
4. Simplifying costing procedures and expediting cost results.
5. Assigning costs to materials, work in process, and finished goods inventories.
Forming the basis for establishing bids and contracts and for setting sales prices.
Advantages of Standard Costs
1. Standards serve as measurements which call attention to cost variations. Therefore executives
and supervisors become cost conscious as they become aware of results.
2. This cost-consciousness tends to reduce costs and encourages economies in all phases of the
business.

2. 3. The use of standard costs for accounting purposes simplifies costing procedures through the
reduction of clerical labor and expense.
4. Reports can be systematized to present complete information regarding standards, actual costs,
and variances.
Comparison of Budgets and Standards
SIMILARITIES:
1. Both standards and budgets aim at the same objective – managerial control – it is often felt that
the two are the same and cannot function independently.
2. Both budgets and standard costs make it possible to prepare reports which compare actual
costs and predetermined.
3. With the use of standard costs, the preparation of budgets for any volume and mixture of
products is more reliably and speedily accomplished, and a budget becomes a summary of
standards for items of cost.
DIFFERENCES:
BUDGET STANDARD COSTING
The budget, as a statement of expected costs, acts Standards do not tell what costs are expected to
as a guidepost which keeps the business on a be, but rather what they will be if certain
charted course. performances are achieved.
A budget emphasizes the volume of business and Standards stress the level to which costs should be
the cost level which should be maintained if the reduced. If costs reach this level, profits will be
firm is to operate as desired. increased.
SETTING STANDARDS
Standards must be set for a definite period of time to be effective in the control and analysis of
costs. Standards are usually computed for a six- or twelve-month period, although a longer period is
sometimes used.
The success of a standard cost system depends on the reliability, accuracy, and acceptance of
the standards. Extreme care must be taken to be sure that all factors are considered in the
establishment of standards.
Methods:
1. Sampling of averages derived from the records of previous records.
2. Engineering department makes a careful study of products and operations, using
appropriate sampling techniques and including participation by those individuals whose
performance is to be measured by the standards.

3. The Master Standard Cost Card
The Master Standard Cost Card shows the itemized cost of each material part, labor operation,
and overhead cost. It is supported by individual cards that indicate how the standard cost was compiled
and computed.
STANDARD COST CARD FOR PRODUCT MC Date of Standard Aug. 1, 2010
ITEM QTY STANDARD DEPARTMENT
CODE UNIT PRICE 1 2 3 4 5 TOTALS
DIRECT 2-234 4 P 3.00/pc P12
MATRIALS 3-671 24 10.00/doz P20
4-480 2 5.00/pc P10
5-361 8 1.50/pc 12
TOTAL DIRECT MATERIAL COST P 54.00
OPERATION STD STANDARD DEPARTMENT
NUMBER HRS RATE/HR 1 2 3 4 5
DIRECT 1-477 3 P 6.00 P18.00
LABOR 2-581 11.5 6.40 73.60
3-218 4 6.30 P25.20
5-420 2.5 6.20 P15.50
TOTAL DIRECT LABOR COST P132.30
STANDARD RATE/DL DEPARTMENT
HOURS HOUR 1 2 3 4 5
FACTORY 14.5 P 1.80 P26.10
OVERHEAD 4 2.00 P 8.00
2.5 1.50 P3.75
TOTAL FACTORY OVERHEAD P 37.85
TOTAL MANUFACTURING COST PER UNIT P 224.15
Materials Purchase Price Variance – occurs if the actual price paid is more or less than the standard price
EXAMPLE: Assuming 5,000 pieces of item 4-480 on the standard cost card for MC are purchased at a
unit price of P4.97.
PIECES X UNIT COST AMOUNT
Actual quantity purchased 5,000 4.97 actual P24,850
Actual quantity purchased 5,000 5.00 standard 25,000
Materials purchase price variance 5,000 P (.03) P (150) fav.