Introduction to Standard Costing (Cambridge International A-Level Accounting)

Spec point — the meaning of a system of standard costing in an organisation

Introduction to standard costing

What is standard costing?

• This costing system uses costs that should be achievable under efficient working conditions within the business
• Costs that are expected in efficient working conditions are known as standard costs or budgeted cost
• The standard costs are set using certain standards based on ideal working conditions
• Setting standards should be realistic and motivating
• The standard costs are then compared to actual costs and sales by doing a variance analysis

What is a variance analysis?

• This involves comparing the standard cost to the actual cost.

• The following key financial information is used in the variance analysis:

  • Material cost variance
  • Labour cost variance
  • Overhead cost Variance
  • Sales variances

• Each variance analysis with indicate either a favourable or adverse outcome

  • Favourable: positive impact on profit
  • Adverse: negative impact on profit

• The table below shows how variances work

Exam Hint Standard cost is sometimes referred to as budgeted cost!