Standard Costing
| Author | Bernard Newman, Mary Oliverio |
| Pages | 691-693 |
Page 691
Standard costing is an objective method of optimizing the use of resources in the provision of goods or services. This is a traditional method for monitoring the use of resources that was initially applied to basic inputs for only basic factory costs of production of goods. In the last two decades of the twentieth century, the technological capabilities of computers initiated innovative ways to identify and monitor costs, but the basic concepts of standard costing have continued to have relevance in many businesses.
Costing is the identification of the value of resources used for specified goods or services. One purpose of costing is to determine what resources, and in what quantities, are required to provide the goods or services. A second purpose is to provide a guide to resource usage monitoring. It is the second purpose that is considered in the following discussion.
Budget figures may be based on actual, budgeted, or standard costs. These categories are not mutually exclusive. For example, while a standard cost is a budgeted cost, a budgeted cost is not always a standard cost. An actual cost for a prior year may be a budgeted cost for the forthcoming year and recorded in the budget.
Budgeted costs are generally described as the best estimate about what should be allowed for forthcoming activity. Some budgeted costs are based on actual costs of the previous year, information from supervisors about where resources might be more efficiently used, and subjective judgments about how much should be allowed for resources. Another basis for recording budgeted costs is to use standard costs.
Standard costs are determined costs that reflect the effective and efficient use of resources. Standard costs are costs established through identifying an objective relationship between specified inputs and expected outputs. Engineers in laboratories are often involved in establishing standards for manufacturing processes, for example. Standard costs are generally related to carefully analyzed phenomena both in the laboratory and in the workplace. For example, in a factory that produces personal computers, standard costs are often used for direct materials, direct labor, and variable overhead, at the unit level. Resource usage that can be traced exactly to what is to be produced is referred to as direct.
To establish the standard usage of a direct material for the production of the keyboard of the personal computer, the possibilities are analyzed in a laboratory, where conditions are maintained as optimum as possible. Prior attention has been given, generally, to the quality of the...
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