Standard Cost:

Standard Cost is defined as “the predetermined cost that is calculated at the management’s
standards of efficient operations and the relevant necessary expenditure”.
From this we understand that it is the cost calculated when all the people working in the
organisation to their utmost, the expenditure incurred for producing the product can be taken
as standard cost. The optimum efficiency can not at all time exists. Therefore, optimum
efficiency is assumed and that is why standard cost is called assumed cost. Further, all the
inputs of cost scientifically analysed using so many industrial engineering techniques such
as work measurement, method study, time and motion study, merit rating, job evaluation and
other scientific techniques, it can also be called as Scientific Cost.

Setting of Standard Costs:

While setting production costs standards, the following preliminaries should be considered:
a. Study of the technical and operational aspects of the concern, such as methods of
manufacture and the processes involved, management of organisation and line of
assignment of responsibilities, division of the organisation into cost centres, units of
measurement of input and output, anticipation of wastes, rejections and losses, expected
efficiency, and capacity likely to be utilized.
b. Review of the existing costing system and the cost records and forms in use.
c. The type of standard to be used, i.e, whether current, basic, or normal standard costs are
to be set. The choice of a particular type of standard will depend upon two factors, viz. which
type would be most effective for cost control in the organization, and whether the standards
will be merged in the accounting system or kept outside the accounts as statistical data.
d. Proper classification of the accounts so that variances may be determined in the manner
desired.
e. Fixation of responsibility for setting standards. As definite responsibility for variances from
standards is ultimately to be laid on individuals or departments, it is but natural that all those
individuals or departments should be associated with the setting of standards.