What is Standard Cost?

A standard cost is a planned or budgeted cost. A standard cost is based on engineering designs and production methodologies, which can be attained under normal operating conditions. It is comprised of material, labor, and overhead components, and is typically recorded within a bill of materials.

How are Standard Costs Used?

Standard costs are commonly used to derive cost variances, particularly in regard to production and inventory costs. Any material unfavorable variances should be reviewed by management to see if any corrective actions can be taken. In some cases, they will find that the real problem is an incorrectly-derived standard cost that generates unfavorable variances even when there is no underlying problem.