standard costing system

Price variances look at the price of the cost component captured at the standards roll versus the actual price of the cost component on the given activity. At the end of each fiscal year, the accounting team must perform a comprehensive analysis to compare the actual costs to the standard costs that have been allocated. The accounting team then must process journal entries to allocate the difference (a positive or negative variance) back to the products. The variance accounts show the difference between the actual costs and the standard costs for the units produced.

One of the dangers of using outdated information is that it can lead to incorrect standard costs. The resulting standard costs will be inaccurate if the information is used to calculate standard costs. This can happen if prices have changed since you last updated your standard costs or if your production process has changed and you haven’t updated your standard costs accordingly. If you see any areas of concern, you can discuss them with the relevant personnel to see if there are any ways to improve the situation. In some cases, standard cost variances may be due to inefficiencies in the production process.


Standard cost accounting can hurt managers, workers, and firms in several ways. For example, a policy decision to increase inventory can harm a manufacturing manager’s performance evaluation. Increasing inventory requires increased production, which means that processes must operate at higher rates. When something goes wrong, the process takes longer and uses more than the standard labor time. The manager appears responsible for the excess, even though they have no control over the production requirement or the problem. It is used in manufacturing and service industries and can be applied to any product or service type.

  • One method is to review the production process and compare it to the standard process, as this can help identify areas where actual costs differ from standard costs.
  • Finally, companies should consider implementing more dynamic cost systems that are better equipped to adapt to changes in production costs quickly and efficiently.
  • Comparative analysis is another tool that can be used for variance analysis.
  • This question has no definitive answer, as it will depend on several factors specific to your company and situation.

By monitoring this variance, companies can determine whether their corrective actions have the desired effect. Once the root cause of a standard cost variance is identified, corrective action can be taken to improve the production process and reduce future variances. By understanding the variances, you can make informed decisions about improving your processes and controlling costs. One way to better understand where these variances originate is to observe the production process to help pinpoint areas where costs are not aligned with expectations. By observing the production process, you may be able to identify potential causes of standard cost variances and take corrective action.

Cost Accounting – Standard Costing

Many manufacturing entities utilize the Standard Cost system instead of the Actual Cost system to reduce the tracking requirements for purchases, labor, and overhead. Although ideal standards may provide motivation for workers to strive for excellence, these standards can also have a negative impact because they may be impossible to achieve. In the process of establishing standards, managers must decide between using ideal standards or attainable standards.

You can use a standard overhead application rate instead of waiting for hours or days to keep up with actual costs. This will aggregate the data and adjust this number every few months so it’s close enough to what happened in your business during that period without being too far off from reality. Perpetual inventory systems make it easy to print reports showing your period-end balances.