What is standard costing?

Standard costing is a cost accounting technique used to establish predetermined cost standards for various activities within an organization and compare actual costs against these standards. It involves setting standard costs for direct materials, direct labor, and overheads based on factors such as historical data, industry benchmarks, and management’s expectations. Standard costs serve as benchmarks or targets against which actual performance is evaluated. The process of standard costing typically involves the following steps: setting standards, recording actual costs, calculating variances, analyzing variances, and taking corrective actions where necessary. Standard costing helps management identify inefficiencies, deviations from expected performance, and areas for cost improvement. By providing a basis for performance evaluation and cost control, standard costing contributes to better decision-making and overall organizational effectiveness.