Standard costing is an accounting technique where the actual cost is substituted with standard costs or expected cost in the accounting records. After recording the costs the next step is to calculate the variance periodically so that the difference between the actual cost and expected cost can be calculated. With the help of standard costing an expected cost can be calculated for all the activities of the business including the items stored in the inventory.
The basic reason of using standard cost is that there are a number of cases where it is quite difficult to collect actual costs of the products or activities so an expected or estimated standard cost is used to carry out all the activities. Since there is a difference between the standard costs and the actual costs so accountants and managers periodically calculate the variance that is the difference between the actual and the standard costs. The examples of this variance calculation are the selling price variance and the labor rate variance.
There are a number of advantages of the standard costing as the approximation costs can be used to calculate the future costs of a number of items and products and can be used to plan budget for the company. The budgets are always based on the standard costs as it is almost impossible to calculate actual cost and use it in formation of the budget. Another advantage of the standard costing is the costing procedure of the inventory as it helps in showing period end inventory reports on the base of the estimated cost of the inventory. Other advantages of standard costing may include price formulation that can be based on an expected price and the overhead application.
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