Standard Costs and Transactions
Standard Cost Foundation:
The supplemental reading on I-Learn will serve as the primary foundation for standard costs.
is a benchmark for measuring performance. The standard is used in the inventory valuation system and
provides a way to evaluate actual performance against a benchmark. It is a key component in a
Controls System Example:
There are three elements to all control systems:
Predetermined, standard performance level
Measure actual performance
Comparison of standard and actual performance
The standard cost of a product is a predetermined, standard performance level and allows us to compare to actual
results with the calculation of variances.
There are two types of standards a company can choose to calculate:
are standards that do not allow for normal waste and work interruption due to breakdown of machinery,
employees’ rest periods, shortage of raw materials or any other reason. The achievement of such standards requires
highly skilled and motivated workers and the best possible use of production facilities. They can only be achieved under
the best and perfect work circumstances.
are standards that are challenging but achievable through the use of efficient and motivated workers
under normal working conditions. They allow for work interruptions because of machine breakdowns, workers’ rest
periods and other conditions that are considered normal in a particular work environment.
As most companies using a standard costing system set practical standards, we will illustrate the use of these standards.
A standard cost is made up of two parts—
. The quantity and price relate to the
, which are
. The standard cost relates to the
, or finished product. The standards for material,
labor, and overhead for a finished product are summarized on a
standard cost card