}In the budgeting chapter we looked at the preparation of budgets within an organisation.These budgets were prepared at a total level and became a target against which actual results could be measured.

}In this standard costing chapter we will look at another control technique known as standard costing.

}Standard costing also produces a target against which we can measure actual results, but in standard costing the targets are set at a unit level.

Standard cost

}A standard cost is a carefully pre-determined unit cost which is prepared for each cost unit.

}The standard becomes a target against which performance can be measured.

}The actual costs incurred are measure dafter the event and compared to the pre-determined standards.

}The difference between the standard andthe actual is known as a variance. 

}Analysing variances can help managers focus on the areas of the business requiring the most attention. 

}This is known as management by exception.

Standard cost card

}Once standard costs for a product or service have been set, they are presented in a standard cost card.

}A standard cost card for a product, showing the variable elements of production cost per unit, might look like this:

}Standard cost card: XX1

}For each of the variable costs, the standard amount and the standard price are given.

}Note

}The standard hours for labour and overheads are usually the same as we normally assume that variable overheads are absorbed on the basis of labour hours.

}These standard data provide the information for a detailed variance analysis, as long as the actual data are collected at the same level of detail.

Illustration 1

Solution