Importance of standard costing

Answer 1

A valuable management tool, standard costing is part of cost accounting. Rather than using actual costs for direct material, labor and manufacturing overhead, standard costs are used to easily track variances and estimate profit.

Though actual costs are still paid, standard costing is often used for inventories and cost of goods sold. The difference between standard and actual costs are known as variances. These variances are what make standard costing such a valuable practice for management. Management can quickly become aware of changes in budgeted costs by tracking the variances.

When standard costing is used, you will often hear the terms unfavorable or favorable variance. This refers to changes in actual costs in relation to planned or standard costs. A favorable variance takes place when actual costs dip below standard costs. Conversely, if actual costs rise above standards, the variance is unfavorable.

In regards to manufacturing companies, standard costs would first be seen as individual parts or pieces of the finished product. This means that the final standard cost will be the sum of the standard costs of each of the individual pieces of the product.