Everything to Know about Standard Costing

A standard costing system is a method used in accounting which is used by accountants to measure actual costs and variance. This predetermined cost method is used by numerous accountants and the main objective of this method is to provide companies with a basis of comparison between its expected and actual cost. This technique highlights the gaps in planning and execution and also helps managers to identify inefficiencies in their structure and do the corrections that are required. 

In the article, we are going to explain what is standard costing and the main reason why numerous companies use standard costing. 

Why is Standard Cost Used by Companies?

The production process of any company is quite complex and this is why it is difficult to predict the expected cost of the production process. Standard cost is used by companies to establish indicators for performance, cost allocations, deciding sales prices, budgeting and even decision-making. 

If you want to achieve greater profitability and improve your budget accuracy then, it is very important to use standard costing as an accounting method. 

What are the main components of Standard Cost?

Now that you know about Standard costing meaning, it is also important for you to know about the components of Standard cost as this will tell you what all things are included in it. 

1. Direct materials Standard cost: Standard cost will tell you about the direct materials price which includes several things like the cost of raw materials, freight shipping and other items. 

2. Direct labour Standard cost: The predetermined direct labour costs include the standard hours of labour and the direct labour rate. 

3. Standard Production cost: The production cost of your company is also included in the standard cost which is the cost of labour, material and even overhead cost. 

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