Standard Costing Basis

Standard Costing

Standard Costing


This chapter gives detailed guidance on how to apply standard costing in businesses.

Uses of Standard Costing

  • Set per-unit performance targets for products, ie selling price, variable cost per unit and fixed costs in total
  • Provide a basis for control, ie budgetary control
  • Value inventory, ie issued inventories are valued at standard costs


Variance is a difference between standard and actual results.

A favourable variance arises because of:

1. Increased sales volume

2. Increased selling price

3. Decreased costs

An adverse variance arises because of:

1. Decreased sales volume

2. Decreased selling price

3. Increased costs

Different Standards

  • Ideal standards - based on perfect operating conditions, ie no inefficiencies.
  • Attainable standards – not based on perfect operating conditions, ie allow some inefficiencies.
  • Current standards - based on current working conditions.
  • Basic standards – based on the old standards for comparison purpose.

Case Study:

Let’s consider ACCA exams as an example. The full marks for each ACCA exam are 100 whereas the passing marks are 50. Suppose a student who worked very hard and got 60 marks in one paper and she is about the take the next exam.

  • Ideal standard – she should get 100 marks.
  • Attainable standard – she should get 62 marks as an improvement to the previous exam.
  • Current standard – she should get 60 marks which are the same as the previous exam.
  • Basic standard – she should simply pass the exam with 50 marks as the passing mark is kept unchanged over the long period of time.

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Categories: : Management Accounting (MA)