Actual cost system – product cost are recorded when they are incurred.

Normal costing – direct materials and direct labor costs are accumulated as they are incurred, while factory
overhead is applied to production on the basis of actual inputs multiplied by a predetermined application
rate.

Standard costing
 all costs attached to the products are based on standards or predetermined amounts. The costs of every product to be produced during
the can be computed at the start of the period.
 The purpose is to control costs and promote efficiency.
 Concerned with cost per unit and serves basically the same purpose of a budget.
 Used with either job order or process costing to manufacture a product and the subsequent comparison of the actual costs with the
established standard. Any deviation from the standard can be quickly detected and responsibility pinpointed so that appropriate action
can be taken to eliminate inefficiencies or to take advantage of efficiencies.

Comparison of Actual, Normal and Standard Costing

Actual Costing Normal Costing Standard Costing

Direct Materials Actual Actual Standard
Direct Labor Actual Actual Standard
Factory overhead Actual Applied * Standard **

* Actual base x predetermined overhead rate

** Standard base x predetermined overhead rate

Standard Costs
 Is a predetermined cost of manufacturing a single unit of product during a specific period in the immediate future.
 Represent what cost should be under attainable, acceptable performance. They do not represent what cost would be if perfection in
performance had actually been attained.
 Do not replace the actual costs in the cost accumulation system. Instead, standard costs and actual costs are accumulated and
compared to see whether the operation are proceeding within the limits that management has set.
 A planned cost of a product under normal conditions.
 Usually determined for a period of one year and are revised annually. However, if cost analyses during the year indicate that a
standard is incorrect or if a significant change has occurred in cost or other related factors, management should not hesitate to adjust
standard accordingly.
 Standards relate to the quantity and cost of inputs used in manufacturing goods or providing services.
1. Quantity standards indicate how much of a cost element, such as labor, time, raw materials, should be used in manufacturing a
unit of product or in providing a unit of service.
2. Cost standards indicate what the cost of the time or the materials should be.

Uses of Standard Costs

1. Cost control
2. Pricing decisions
3. Performance appraisal
4. Cost awareness
5. Management objectives
Cost control
 To aid management in the production of a unit of product or service, at a lowest possible cost, in accordance with predetermined
quality standards. Standards enable management to make periodic comparisons of actual costs with standards costs for the purpose of
evaluating performance and correct inefficiencies.

Pricing decisions
 Standard costs provide measure of consistency by eliminating fluctuations in actual costs for some of raw materials or random
fluctuations. It becomes vital to companies operating in competitive markets to generate consistent and timely cost information in
pricing its products or services. Standard costing provides this timely information.
 Setting prices is greatly enhanced by the availability of reliable standards and the continuous review of standard costs.

Performance Appraisal
 Standards, if established for performance appraisal, provide measurements that can be applied uniformly to all personnel being
evaluated.
 Standards provide one of the few objective means of performance evaluation. The employee should now how the standards are used
in employee evaluation and reward system.
Cost Awareness
 The primary concerns/goals of many managers are usually increasing production, improving product quality and reducing
absenteeism. Each concern/goal has specific cost consequences which managers may not be aware of. Standard cost performance
reports inform managers of the cost implications of these actions and as a result make them take steps to effectively control costs.
 Managers and employees become cost conscious because variances between standard costs and actual costs are reported , studied and
their causes determined.

Management Objectives
 Specific objectives are established for each business activity and the manager responsible for the activity works to achieve the
objectives. When performance varies significantly from acceptable levels, the manager tries to correct the problem by taking
appropriate actions. A standard cost system facilitates (MBO) because it provides a quick reference for identifying and reporting
differences between standard and actual performance.
 Standards serves a a compass that guide managers toward improvement.

Establishing Budgets
 Standard cost are very useful in preparing budgets. They aid management planning by providing the unit amount for budgeting.

Users of Standard costs

Manufacturing, service, food, not-for profit organization, financial institution or almost any line of