Standard costs

A standard cost is a predetermined, carefully estimated cost of making one unit under efficient operating conditions. It combines a standard quantity of each input with a standard price (or rate) for it:

> standard cost of an input = standard quantity per unit × standard price per unit of input

The standards for one product are summarised on a standard cost card. Standards are used to value inventory and cost of sales, to build budgets (budgets are standards × planned volume), to set prices, and above all for control: comparing actual cost with the standard cost of what was actually produced gives variances that direct attention to problems (management by exception).

Setting standards: - Price standards come from purchasing: the expected supplier price for the period, net of trade discounts, plus delivery and handling. - Quantity standards come from engineering and production: the bill of materials and time studies. Allow for normal, unavoidable losses and downtime. If 10% of oak input is lost in cutting and a stool needs 2.25 kg in the finished product, the standard is 2.25 ÷ 0.9 = 2.5 kg of input. - Labour rates include the wage rate and employer costs that vary with hours. - Overhead is absorbed at standard rates per standard hour: variable overhead rate per hour, and a fixed overhead absorption rate = budgeted fixed overhead ÷ budgeted hours.

Types of standard: - Ideal — perfect conditions, no waste or idle time. Rarely achieved; can demotivate. - Attainable (currently attainable) — efficient but realistic, allowing normal loss and downtime. Most widely recommended. - Basic — left unchanged for years to show trends; quickly becomes out of date.

The flexed standard. For control, the key figure is the standard cost allowed for actual output: actual units × standard quantity × standard price. Never compare actual cost with the original budget for a different volume — flex the standard to what was actually produced. Standards are internal management tools, not set by IFRS; if they are used to value inventory in published accounts, IAS 2 accepts standard cost only where the result approximates actual cost and standards are reviewed regularly.