CAT / FIA FMA Syllabus E. Standard Costing - Purpose and principles - Notes ^{1 / 3}

A standard cost

is a predetermined estimated unit cost of a product or service.  Therefore, a standard cost represents a target cost.

Standard costing has a variety of uses

1. it is useful for planning, control and motivation

2. it is used to value inventories and cost production for cost accounting purposes

3. it acts as a control device by establishing standards (planned costs), highlighting activities that are not conforming to plan and thus alerting management to areas which may be out of control and in need of corrective action.

Variances provide feedback to management indicating how well, or otherwise, the company is doing.

Standard costs are essential for calculating and analysing variances.

Main types of cost standards

1. Basic standards 

   – these are long-term standards which remain unchanged over a period of years. They are used to show trends over time.

2. Ideal standards 

   – these standards are based upon perfect operating conditions. Therefore, they include no wastage, no scrap, no breakdowns, no stoppages, no idle time. 

   Ideal standards may have an adverse motivational impact because they are unlikely to be achieved.

3. Attainable standards 

   – these standards are based upon efficient but not perfect operating conditions.  

   These standards include allowances for the fatigue, machine breakdown and normal material losses. 

   Attainable standards motivate performance as they can be achieved with a certain amount of hard work.

4. Current standards 

   – these standards are based on current level of efficiency. 

   They do not provide any incentive to improve on the current level of performance.