Standard Costs

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​  Standard costs are actually estimates of the actual costs in a company’s production process.  These estimates are used because knowing the exact costs would be impossible until the process is performed.  Another way to think of standard costs is as the target or budgeted costs involved in a businesses processes.  Standard costs usually include: material costs, labor costs and overhead costs.

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  One of the benefits of using standard costs is so the company can quote, estimate and budget more efficiently.  Using standard costs allows a company to see variance in the estimates once the actual data has been collected.  As was mentioned already no company can predict all the variables that will occur during manufacturing, so they use standard costs.  Typically as the actual costs are collected a company should go back and check the estimates by entering the appropriate actual costs.  If at the end of the accounting period, the standard costs are higher than the actual expenses, then the company has a favorable variance.  On the other hand, if the company’s actual costs were higher, then the company would have an unfavorable variance.  If the company's variance was unfavorable the company must then analyze the data and find where in the manufacturing process the actual cost differences lie.  Some areas they may analyze are labor cost variances, material cost variances and overhead cost variances.  By doing this it will reduce the variance in your estimates and help keep them more accurate.  You may also hear standard costs referred to as preset costs, preset pricing, expected costs, predetermined costs or preset costing.  As a reminder you should speak with a CPA, professional accountant or accounting attorney before deciding on different methods of valuation.
What are the Advantages of Standard Costs?

• ​There are many advantages of standard costing, the first being that it allows an organization to budget much better than without it.  Next, standard costing plays a vital role in quoting items and assigning a value to the inventory that you have.  Another benefit is that it makes it much easier and faster for an organization to produce financial records and finally it gives businesses a way to benchmark one another.

What are the Disadvantages of Standard Costs?

• Some of the disadvantages of standard costing are: standard costing needs to be updated regularly.  Without this the estimates themselves will not assume any changes and this can result in very unfavorable results.  This leads us to another disadvantage, which is that standard costing really does not look enough on favorable variances, but tends to be quite critical of unfavorable ones.  Last but not least standard costs require a lot of work to hone in and get your estimates accurate.  With that being said, once they are accurate they can be a powerful tool for a company. 

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