Hey everybody! I'm currently going through the basics of cost accounting and I have a doubt. Are Predetermined and standard costs different in any way or the same? I'm giving you both the definitions for easy reference,
Predetermined Costs:
It is the cost which is computed in advance, before the production starts, on the basis of specification of all the factors affecting the cost.
Standard Costs:
Estimated or predetermined cost of performing an operation or producing a good or service, under normal conditions (where special or extraordinary factors, that may affect performance, are absent). Standard costs are used as target-costs (or basis for comparison with the actual costs), and are developed from historical data analysis or from time and motion studies. They almost always vary from actual costs, because every situation has its share of unpredictable factors.
Thank you soo much! :)
Ans:Compare actual costs with standard costs at the actual level of output
When we are calculating variances we must flex the standard costs to reflect the actual level of output that was achieved in the period. If we simply compare actual costs against budgeted costs we would have some difficulty in answering the following two questions:
1.How much of the difference between budgeted and actual costs is due to output being different from budget?
2.How much of the difference is due to unit costs being higher or lower than were budgeted?
Variance analysis flexes the original budget to reflect actual output by asking the following two questions:
1. Have we used more labour or materials than we should have for this level of output?
2. Have we paid more than we should have for the labour or materials that we should have used?
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Standard Costing System
Standard Costing system is an estimated or predetermined cost of performing an operation or producing a good or service, under normal conditions. They are generally related to a manufacturing company’s costs of direct material, direct labor, and manufacturing overhead.
Standard costs are used as target costs (or basis for comparison with the actual costs), and are developed from historical data analysis or from time and motion studies. It is the practice of substituting an expected cost for an actual cost in the accounting records. They almost always vary from actual costs, because every situation has its share of unpredictable factors. It involves the creation of estimated (i.e., standard) costs for some or all activities within a company. This system is universally accepted as an effective instrument for cost control in industries. Also called normal cost.
Here are some potential uses:
- Budgeting: A budget is always composed of standard costs since it would be unfeasible to include in it the accurate actual cost of an item on the day the budget is finalized.
- Overhead application: If it takes too long to aggregate actual costs into cost pools for allocation to inventory.
- Price formulation: If a company deals with custom products, then it uses standard costs to compile the projected cost of a customer’s requirements, after which it adds a margin.
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