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Chapter 7
Standard Costs
Prepared by
Diane Tanner
University of North Florida
Standard Costs
 What is a standard cost?
 The unit ‘cost’ that management
believes should be incurred to produce
a good or service under anticipated
conditions
 Primary benefit
 Allows for comparison of standard
versus actual costs
 Functions as a benchmark
 Differences are flagged for investigation
if significant
Standard Costs and Budgets
Terminology
Standard cost
 Standard cost of a single unit
Budgeted cost
 Cost, at standard, of a single unit or the
total number of budgeted units
How are Standard Costs Developed?
 Formulas or recipes
 Price lists provided by suppliers
 Time and motion studies conducted by
industrial engineers
 Union contracts
 Analyses of past data
 Insight from management
 Expected economic changes
Ideal Versus Attainable Standards
Two views when developing standard costs:
Ideal standards
 Assumption that no obstacles to the
production process will be encountered
 Called ‘perfection’ standards
Attainable Standards
 Assumption that there will be occasional
problems in the production process
 Such as equipment failure, labor
turnover, and materials defects
Standard Costs
Standard Price is the budgeted price of the
material (per RM unit), labor (per hour), and
overhead for each unit of product
Standard Quantity is the budgeted quantity of
material (in RM quantities), labor (in hours),
and overhead in a product
Investigation of Standard Cost
Variances
 Variances are not a clear sign of good or
bad performance
 Indicate a potential problem
 Must be investigated if material in amount
 Management by exception
 Many reasonable explanations
The End
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