Standard Costing Basics and Types of Standards

Understand Standard Costing Basics and Types of Standards

Key rules to remember

Standard material cost per unit

Standard kg per unit × standard price per kg

Build one line per material. Include normal losses in the kg per unit if the standard allows for them.

Standard labour cost per unit

Standard hours per unit × standard rate per hour

Use the hours that should be paid for, including any allowed idle time.

Standard overhead absorption rate

Budgeted overhead ÷ budgeted activity level

Activity is usually labour hours or machine hours. Do variable and fixed rates separately.

Standard cost per unit

Material + labour + variable overhead (+ fixed overhead if absorption costing)

Check the question for marginal or absorption costing.

Standard cost of actual output

Actual units produced × standard cost per unit

Always the base for comparing with actual costs, never budgeted output.

Standard input with a normal loss

Good output required ÷ (1 − normal loss %)

For example, 9 kg of good output with 10% normal loss needs 9 ÷ 0.9 = 10 kg of input.

How to solve Standard Costing Basics and Types of Standards questions

1. 1Read what is asked: a cost card calculation, a choice of standard type, or a discussion of advantages and disadvantages.
2. 2For a cost card, list each input: materials, labour, variable overhead, fixed overhead if needed.
3. 3For each input, find the quantity per unit and the price. Adjust quantity for normal losses or allowed idle time.
4. 4Multiply quantity by price for each line and add to get the standard cost per unit. Add the selling price if profit is asked.
5. 5Check that overhead rates use budgeted overhead over budgeted activity, and the correct costing basis.
6. 6For type-of-standard questions, match the description to the type: perfect is ideal, tough but achievable is attainable, short-term present conditions is current, long-term unchanged is basic.
7. 7For discussion, link every point to the scenario: motivation, variance meaning, how often standards are updated, and cost of maintaining them.
8. 8Write a clear short answer and give a reason for any recommendation.

Quickest way: Cost card in four lines

Common mistakes in Standard Costing Basics and Types of Standards

• Ignoring normal loss when setting the material quantity.

  Students use the good output quantity as the input quantity.

  Fix: Divide required good output by (1 − normal loss %) to find the input needed, then multiply by price.

• Using budgeted output instead of actual output when finding the standard cost for comparison.

  The budget figures are listed first and look convenient.

  Fix: Multiply actual units produced by the standard cost per unit before comparing with actual cost.

• Confusing current and attainable standards.

  Both seem realistic.

  Fix: Attainable means demanding but achievable with effort, allowing normal waste. Current means based on present conditions and used over a short period; it may include existing inefficiency.

• Saying ideal standards always motivate staff.

  Students link high targets with high performance.

  Fix: Say ideal standards are rarely achieved, so large adverse variances can demotivate. Attainable standards are usually more motivating.

• Mixing variable and fixed overhead rates.

  Both are per hour and look alike.

  Fix: Calculate each rate separately from its own budgeted overhead and the same budgeted hours, and include fixed overhead only under absorption costing.

• Giving generic advantages and disadvantages without context.

  Students memorise lists.

  Fix: Tie each point to the business: a stable repetitive process suits standards, while bespoke work or rapid change does not.

Worked examples