# Difference between Standard Costs and Actual Costs

Steps to calculate standard costs
Determine all the elements that become a part of the standard manufacturing costs like direct material, direct labour and manufacturing overheads.

Calculate the standard quantities of material and standard labour hours that will be required for the production of actual output.

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Difference between Standard Costs and Actual Costs
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Multiply the standard quantity and standard hours with the per unit or per hour rates.

Sum up the costs calculated in step 3 to ascertain the total standard cost.

Standard costing
A technique establishing predetermined estimates of costs of products and costs of services is standard costing. The collection of such costs is known as standard costs. When comparing these predetermined standard costs with actual costs when they are incurred, the difference between the standard cost and the actual cost is known as a variance. The causes and points of incidence of variances are analysed and then promptly reported to the managers, so that the management is immediately informed of the domain of operations in which the action for remedies is necessary.

Standard costing thus involves the following
The setting of standards .

Comparison of standards and actual costs to ascertain the variances .

Investigation of the variances and taking appropriate action as and when required.

In practice, standard costing is a detailed process that requires considerable development work before it becomes a useful tool. For standard costing to be successful, it requires reasonable stability and repetitive work. These conditions can be found across many sectors of the economy. For example, in manufacturing, in service industries such as transport, computing and banking, and so on. Its major application in practice is in manufacturing and repetitive assembly work. The standard costingâ€™s use is not just restricted to industries having similar products, such technique has set the benefits of its use in industries producing large range of products. E.g., textiles, automobiles, engineering, etc.

Applications:

Standard costing is a technique of cost accounting. It is not a method of costing. Therefore, it is more useful:

In the case of industries where mass production of homogenous products takes place, e.g., production of cement, iron and steel, bricks, chemicals, etc.

In industries where production processes are repetitive.

In all cases where single, unit or output costing, process costing and operation costing methods are used.

Standard costing can be used in case of a large number of service industries such as transportation, power generation, gas and electricity supply, etc.

Extraction industries such as mining and quarries.

Even in the case of industries producing a large range of products, e.g., engineering, textiles, automobiles, etc.

In terms of business functions, standard costing is most useful in the production function, though it has limited use in other business functions.

In public utilities such as the provision of transportation, supply of gas, electricity, and water.

# Difference between Standard Costs and Actual Costs

Steps to calculate standard costs
Determine all the elements that become a part of the standard manufacturing costs like direct material, direct labour and manufacturing overheads.

Calculate the standard quantities of material and standard labour hours that will be required for the production of actual output.

Don't use plagiarized sources. Get Your Custom Essay on
Difference between Standard Costs and Actual Costs
Just from \$9/Page

Multiply the standard quantity and standard hours with the per unit or per hour rates.

Sum up the costs calculated in step 3 to ascertain the total standard cost.

Standard costing
A technique establishing predetermined estimates of costs of products and costs of services is standard costing. The collection of such costs is known as standard costs. When comparing these predetermined standard costs with actual costs when they are incurred, the difference between the standard cost and the actual cost is known as a variance. The causes and points of incidence of variances are analysed and then promptly reported to the managers, so that the management is immediately informed of the domain of operations in which the action for remedies is necessary.

Standard costing thus involves the following
The setting of standards .

Comparison of standards and actual costs to ascertain the variances .

Investigation of the variances and taking appropriate action as and when required.

In practice, standard costing is a detailed process that requires considerable development work before it becomes a useful tool. For standard costing to be successful, it requires reasonable stability and repetitive work. These conditions can be found across many sectors of the economy. For example, in manufacturing, in service industries such as transport, computing and banking, and so on. Its major application in practice is in manufacturing and repetitive assembly work. The standard costingâ€™s use is not just restricted to industries having similar products, such technique has set the benefits of its use in industries producing large range of products. E.g., textiles, automobiles, engineering, etc.

Applications:

Standard costing is a technique of cost accounting. It is not a method of costing. Therefore, it is more useful:

In the case of industries where mass production of homogenous products takes place, e.g., production of cement, iron and steel, bricks, chemicals, etc.

In industries where production processes are repetitive.

In all cases where single, unit or output costing, process costing and operation costing methods are used.

Standard costing can be used in case of a large number of service industries such as transportation, power generation, gas and electricity supply, etc.

Extraction industries such as mining and quarries.

Even in the case of industries producing a large range of products, e.g., engineering, textiles, automobiles, etc.

In terms of business functions, standard costing is most useful in the production function, though it has limited use in other business functions.

In public utilities such as the provision of transportation, supply of gas, electricity, and water.

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