What you’ll learn to do: Identify the objectives of a standard cost system

Whenever you have set goals to achieve, these goals could also have been called standards. For instance, if you have a goal of saving 10% of your gross income in order to save up $1 million by the time you retire, the 10% goal is a standard. Periodically, you should measure your actual performance against your standards and analyze the differences to see how close you are to your goal. Similarly, in business, management sets goals, like standard costs, and compares actual costs with these goals to identify possible problems and ultimately improve the bottom line.

In manufacturing, standard costing:

• provides a formal basis for assessing performance and efficiency
• controls costs by establishing standards and analysis of variances
• enables the principle of ‘management by exception’ to be practiced at the detailed, operational level
• is critical in creating and setting budgets
• can be used for profit planning and decision making and as a basis of pricing where ‘cost-plus’ systems are used
• assists in isolating responsibility for nonstandard performance in order to correct deficiencies or to capitalize on benefits
• can be used to both motivate and assess staff and management
• provides guidance on possible ways of improving performance

In this section, you’ll learn how to identify the components of a standard cost system and the benefits of using standard costs, and you’ll gain an understanding of the standard-setting process.

When you are done with this section, you will be able to:

• Identify the components of a standard cost system
• Identify the benefits of a standard cost system
• Understand the standard setting process

Learning Activities

The learning activities for this section include the following:

• Reading: Components of a Standard Cost System
• Self Check: Components of a Standard Cost System
• Reading: Benefits of a Standard Cost System
• Self Check: Benefits of a Standard Cost System
• Reading: Standard Setting
• Self Check: Standard Setting