There are four major components of a standard cost system:

• Standard Cost (SC)
• Standard Quantity (SQ)
• Actual Cost (AC)
• Actual Quantity (AQ)

A standard cost is a carefully predetermined measure of what a cost should be under stated conditions. Standard costs are not only estimates of what costs will be but also goals to be achieved. When standards are properly set, their achievement represents a reasonably efficient level of performance. To measure performance, actual cost is compared to standard cost.

A standard quantity indicates how much of an input, such as labor time or raw materials, should be used in manufacturing a unit of product or in providing a unit of service. To measure performance, actual quantities used are compared to standard quantities allowed.

The total standard direct materials cost (TDSMC) per unit of a product consists of the standard price of the material multiplied by the standard quantity of material required to produce the unit.

SC x SQ = TSDMC/unit

Standard cost usually refers to the price per unit of inputs into the production process, such as the price per pound of raw materials. This is also referred to as standard price. Usually, in accounting, we refer to price as the amount we would see in a catalog, but once we buy something, we refer to the price paid as the cost.

For example, if the standard price of alder wood is $6 per board foot (BF) and the standard quantity of material required to produce a guitar body is four board feet, the standard direct materials cost of the product is 4 BF x $6 per BF = $24.

Similarly, a company computes the total standard direct labor cost per unit for a product as the standard number of hours needed to produce one unit multiplied by the standard labor or wage rate per hour. If Boulevard Blanks expects employees to convert raw lumber to a finished body in 1.5 hours and the expected cost of wages and benefits is $18, then the total standard direct labor cost of one body is $27 ($18 per hour times 1.5 hours).

Therefore, the standard direct costs of one guitar body would be $24 + $27 = $41 ($24 in direct materials plus $27 in direct labor).

In addition, under full absorption costing, the company will allocate a portion of manufacturing overhead to that amount.

Before you go on, check your understanding of the components of a standard cost system: