Standard Costing
A costing method that records inventory and production at predetermined standard costs and reports the differences from actual costs as variances.
In standard costing, a company sets a standard quantity and price for each input to a product: materials, direct labor and manufacturing overhead. Production is recorded at those standards, and the differences between what was actually spent and what the standards allowed are captured as variances, such as material price, material usage, labor rate and labor efficiency.
Standards can be ideal, practical, normal or current. The method supports budgeting, pricing, performance measurement and management by exception. Standard costs are acceptable for external reporting when they approximate actual cost and are revised as conditions change.
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