What is the standard cost?

The standard cost it is a standard or benchmark that is used to determine performance. Therefore, the standardized costs that belong to the default costs are the ones to be used in a company or project in accordance with the condition of efficiency of any process established through studies technicians.

These costs are used to measure the performance of any process that is related to the company, identifying the reasons that allow the existence of the cost overrun within a specific period of weather.

They can determine in a technical way the individual cost of a product, the standard costs They are based on efficient systems and methods and based on the amount of a given activity. These are usually predetermined costs that can be incurred measurement of a real performance.

The standards of these manufacturing costs, is formally established in the cost accounts and is established under strict quality principles, complying with with the objective cost and informing the administrator about the level of compliance that the company has on costs objectives.

Main objectives of the standard cost

Among the main standard cost targetsr, are:

• Assist in the definition of sales prices on new products or services and on the complete manufacturing order.
• Perform variance analysis, which is essential to be able to identify the places where they should make more effort using the minimum cost surcharge, this indicates that the standard cost is essential in these cases.
• Allow to determine profits in advance.
• Measure efficiency of all processes.
• Serve as an intermediary in the general control of the entire company and also to establish effective policies and standards of production.

Standard cost features

Within the standard cost characteristics the ones shown below can be mentioned:

• It generates a direction of objectives with results of the real costs within a certain period.
• It is an instrument used to carry out the real performance evaluation.
• It manages to stimulate workers to work more efficiently and responsibly.
• It requires serious cooperation from the cost accounting and engineering departments, in order to develop the standardization of product design and thereby optimize the quality and the manufacturing system.
• It provides the efficiency to a great extent, as it allows the checking of what is used against what is planned, which indicates that it is an indicator that favors differences in the effectiveness of operations and in turn provides important information to management.
• When set it is very easy to use.

Standard cost classification

This type of cost is classified as follows:

• Fixed standards: They refer to the quantities that once they have set, cannot be modified, that is, they cannot be changed.
• Achievable standards: These are the amounts that can be achieved through normal levels of efficiency, therefore, they are the ones that most are used in decision-making to make comparisons regarding the levels of efficiency of any process.
• Ideal standards: they refer to perfect patterns, which in reality are difficult to achieve. This indicates that these costs should affect the conditions of process efficiency. Which indicates that this efficiency circumstance allows these standards to be used very rarely by management.

Steps to determine the standard cost

These standard costs need to be formulated in a cost sheet for each product, taking into account the cost elements that can be determined as follows:

Determination of direct labor costs

It is carried out by doing a study that determines the time it takes to obtain a certain amount of production and thus achieve a higher performance for a minimum cost and effort.

Determination of direct materials

Different techniques related to the quantity, quality and performance of direct materials are determined, as well as the reduction of the statistical data generated by the accounting records in the price and quantity in a way unitary.

Advantages of standard cost

This type of cost has a large number of advantages, some of them are:

• Standards can motivate employees to do their jobs efficiently.
• It allows to measure and monitor the efficiency of the operational development of the company, since it does not show abnormal operations or situations, therefore, it can set responsibilities.
• Carry out detailed analyzes of the different operations that contribute to reducing costs.
• Make budgets with ease.
• It allows you to have knowledge of the capacity that is not used in production and the losses that occasionally occur.
• They are very useful in making decisions, especially if they are rejected depending on the fixed or variable behavior and whether labor or material costs are cost-based expected.
• It allows to know the value of the product during the entire manufacturing process, as well as the evaluations of the inventories in process with the corresponding cost.

Disadvantages of standard cost

The disadvantages of this type of cost are:

• It is not recommended in small businesses.
• It causes some annoyance to employees as they feel pressured during the pursuit of standards.
• They do not favor operations that have small orders or that will not have more production.
• They cannot be adopted in all types of companies.
• Requires inventory ratio in short periods of the existing manufacturing process.

In order to achieve their objectives, companies set goals that they can achieve, mainly the accounting of the standard cost, which is very useful in the administration to create, execute and control plans.

For this, administrators generally make inquiries related to the analytical information provided by cost accounting that is timely and efficient.