Introduction to Standard Costing (Cambridge (CIE) A Level Accounting): Revision Note

Introduction to standard costing

What is standard costing?

• This costing system uses costs that should be achievable under efficient working conditions within the business

• Costs that are expected in efficient working conditions are known as standard costs or budgeted cost

• The standard costs are set using certain standards based on ideal working conditions

• Setting standards should be realistic and motivating

• The standard costs are then compared to actual costs and sales by doing a variance analysis

What is a variance analysis?

• This involves comparing the standard cost to the actual cost.

• The following key financial information is used in the variance analysis:

  • Material cost variance

  • Labour cost variance

  • Overhead cost Variance

  • Sales variances

• Each variance analysis with indicate either a favourable or adverse outcome

  • Favourable: positive impact on profit

  • Adverse: negative impact on profit

• The table below shows how variances work