Standard costs are amount that are incurred in an ideal circumstance for raw materials, direct labour, and factory overhead. Standard costs are developed prior to the applicable operating periods and remain in effect until circumstances require their revision. Management’s routine comparison of actual costs with standard costs reveals the difference, or cost variances. Cost variances are unfavorable when actual costs exceed standard costs and favorable when standard costs exceed actual costs. The concept of standard cost can be used informally in special periodic management reports comparing actual costs with what costs should have been according to plans. However, standard costs are most effectively used when they and related variances are recorded in accounts. Under such standard cost procedures, work in progress, finishing goods, and cost of goods sold are recorded at the standard costs for raw materials, direct labour, and factory overhead. Differences between the standard costs of goods produced and actual cost incurred are recorded as eithe

6. Standard costs are not defined broadly enough to capture various important aspect of performance. For example the standard direct-material price does not capture all the costs of ownership. In addition to the purchase price and traditional costs, the costs of ownership includes the costs of ordering, paying bills, scheduling delivery, receiving, inspecting etc.

to compare budgeted costs at one (planned) activity level with actual costs incurred at a different (actual) activity level. Standard costs enable the managerial accountant to compute the standard allowed cost, given the actual output, which then serves as a sensible benchmark to compare with the actual cost.

5. Use of standard costs in product costing results in more stable product costs then if actual production costs are used. Actual costs often fluctuate erratically. Whereas standard costs are changed only periodically.

Any controlling system has three basic parts: a predetermined or standard performance level, a measure of actual performance, and a comparison between a standard and actual performance. For e.g. first a thermostat is a controlling system first it has a predetermined or standard temperature, which can be set at any desired level. For instance if you want the temperature in a room to be 68 degrees, you set the thermostat at the standard of 68 degrees. Second, the thermostat has a thermometer, which measures the actual temperature in the room. Third, the thermostat compares the preset or standard temperature with the actual temperature so that if the actual temperature falls below the preset temperature the thermostat activates a heating device.

2. Traditional cost variances are also too aggregate in the sense that they are not tied to specific product lines, production batches or FMS cells. The aggregate nature of the variance makes it difficult for managers to determine their cause.

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