Standard Costing (Material, Labour & Overhead Variances)

is the management-accounting technique that pre-sets what costs ought to be, measures what costs actually were, and analyses the gap — the variance — to drive corrective action.

Only the variance between actual and standard is calculated — not a fresh cost build-up every period. The cost-accounting workload shrinks dramatically once standards are set.

Each variance points to a specific cause — wrong supplier, inefficient operator, machine breakdown. Management can locate and eliminate the source rather than searching blindly.

When operating staff know there is a published standard, they become more competitive to meet (and beat) it. Standards act as both a yardstick and a motivator.

Selling prices built on standard cost + markup are more realistic — they reflect normal cost, not the supplier's transient inefficiencies. Prices built on actual cost may be rejected by the market because the market does not care about one producer's internal problems.

Standards make department-wise and individual-wise responsibility measurable. Each cost centre owner is held accountable for their variances — delegation becomes operational, not theoretical.

Definition: Established for long-term use. Provide a common base over an extended period for comparison of actual costs with the same standard year after year.; Strength / Weakness: Strength: continuity of comparison. Weakness: not useful if production methods, price levels or labour conditions…

Definition: Represent the costs achievable under ideal (perfect) operating conditions — zero waste, zero idle time, perfect material yields, top-of-class labour productivity.; Strength / Weakness: Strength: ambitious target. Weakness: idealistic and unrealistic — workers see the gap as impossible…