Standard Costing

Standard costing is the technique to control the cost through standard cost. Every company which use this technique, has to make standard committee. This committee classify whole production plant into cost centers where from they get actual data. They calculate standard cost. Standard cost is pre-determined cost on past and current estimations. Many technical estimations are also done.After this, we compare actual cost of production with standard cost of production for calculation of variance.

Standard costing is very useful for increasing efficiency of production, decreasing wastage and misuse the resources of production because every element of cost is estimated and compared. So, there is no chance of any inefficiency of resources.

We calculate three types standard cost:

1st : Standard Direct Material Cost 

For calculating standard cost, we estimate standard quantity of production for budget period. After this, we calculate standard rate of per unit of material. By multiplying both, we can calculate standard direct material cost.

 = Standard quantity of direct material X Standard rate of per unit of direct material


2nd : Standard Labor Cost 

 For calculating standard labor cost, we estimate total hours of laborers for doing the work in specific budget period. After this, we estimated rate of using labor per hour. By multiplying both, we can calculate standard labor cost.

Standard labor hours X Standard Rate per hour


3rd : Standard Overhead Cost 

For calculating standard overhead cost, we divide total overhead into variable and fixed overheads. After this, we calculate standard overhead rate per hour.

Standard variable overhead rate per hour = standard variable overheads / total hours for working in budget period. 

Standard fixed overhead rate per hour = Standard fixed overheads / total hours for working in budget period. 

If there is different budget period, we can use same standard overhead rate for calculating standard overheads.


Related : Standard Cost Example

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