standard costs and briefly indicate how they may be used by management in planning and control.

Standard Costs are realistic estimates of cost based on analysis of both past and projected operating costs and conditions. There are usually stated in terms of cost per unit. They provide a standard or predetermined performance level for use in standard costing, a method of cost control that also includes a method of actual performance and a measure of the difference or variance between standard and actual performance. This method of measuring and controlling costs differ from the actual and normal costing methods in that it uses estimated costs to exclusively to compute all three elements of product cost – direct materials, direct labour and overhead. Standard Costing is especially effective for managing cost centers. You may recall that a cost center is a responsibility center in which there are well defined links between the cost of the resources and the resulting products or services.

Standard Costs & Management

            Standard Costs are useful tools for management. Managers use them to develop budgets, to control costs and to prepare reports. Because of their usefulness in comparing planned and actual costs, standard costs have usually been most closely associated with the performance evaluation of cost centers.


After managers have projected sales and production targets for the next accounting period, standard costs can be used in developing budgets, for direct materials, direct labour and variable overhead. These estimated operating costs not only serve as targets for product costing but also useful in decision making about product distribution and pricing.


As actual costs for direct material, direct labor and overheads are incurred and recorded, managers apply  standard costs to the work in progress. By using these standards as yard sticks for measuring expenditures, they can control product costs as those costs occour.


At the end of an accounting period,   be it a day, a month or an year, managers compare the actual costs incurred for direct materials, direct labor and overhead with the standard costs and compute the variances. Variances provide the measures of performance that can be used to control the costs. In evaluating a variance, managers compute its amount and if the amount is significant, they analyze the causes for it.

Their analysis of significant unfavorable variances may reveal operating problems of the cost center such as inefficient departments or work center which they can act to correct. Managers also investigate significant favorable variances to determine why and how the positive performance occurred. Favorable variances may indicate desirable practices that should be implemented elsewhere or need to revise the existing standards. Both favorable and unfavorable variances from standard costs can be used to evaluate a cost center and its individual managers performance.  


Managers use standard costs to report on cost center operations and managerial performance. A variance report tailored to a manager’s specific responsibilities provides useful information about how well cost center operations are proceeding and how well the manager is controlling them.

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