INTRODUCTION

Standard cost is the estimated cost of material, labor, overheads and other costs for each unit o
f production or purchase in a given accounting period. It is used as the benchmark against whic
hcost variances and financial performance are measured, the valuation for inventory and a basi
sfor pricing.Standard costing is a technique which helps you to control costs and business opera
tions. It aimsat eliminating wastes and increasing efficiency in performance through setting up s
tandards or formulating cost plans.The Institute of Cost and Works Accountants defines standar
d costs as ³Standard costs are prepared and used to clarify the final results of a business, partic
ularly by measurement of variations of actual costs from standard costs and the analysis of the
causes of variations for the purpose of maintaining efficiency of executive action.´
Concept of Standard Costing
Standard costing is a technique used for the purpose of determining standard cost and their co
mparison with the actual costs to find out the causes of difference between the two so thatrem
edial action may be taken immediately. The Charted Institute of Management Accountants,Lon
don, defines standard costing as ³the preparation of standard costs and applying them tomeasu
re the variations from actual costs and analysing the causes of variations with a view tomaintain
maximum efficiency in production´.

Thus, standard costing is a technique of cost accounting which compares the µstandard cost¶ o
f each product or service, with the actual cost, to determine the efficiency of the operation. Wh
enactual costs differ from standards the difference is called variance and when the size of theva
riance is significant a detailed investigation will be made to determine the causes of variance,so
that remedial action will be taken immediately.Thus, standard costing involves the following st
eps:1.

Setting standard costs for different elements of costs2.

Recording of actual costs3.

Comparing between standard costs and actual costs to determine the variances4.

Analysing the variances to know the causes thereof, and5.