Standard cost
Standard cost is a predetermined cost per unit of input or output, set before the period begins under efficient operating conditions. It is the benchmark against which actual costs are measured in variance analysis.
Also known asstandard costing
FrameworkStandard costing
See it move
A tree diagram places the standard cost of €20 per unit at the root and derives it by multiplying two inputs. The left branch gives the standard price of €5 per kilogram; the right branch gives the standard quantity of 4 kg per unit of output. Multiplying €5 by 4 produces the €20 benchmark used to value output as it is produced and to decompose any actual-versus-standard cost gap into a price variance and an efficiency variance.
The formula
Variables
- Standard cost per unit of finished output (€/unit)
- Standard price per unit of input (€/input unit)
- Standard quantity of input allowed per unit of output
Set before the period begins. Provides the benchmark for price and efficiency variances.
Check yourself
A furniture manufacturer sets a standard materials cost of €8 per unit of output (4 kg of timber at €2/kg) before the quarter begins. During the quarter, timber prices rise to €2.50/kg. How should the standard cost be used in that quarter's variance analysis?