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Standard Costing

BIBLIOGRAPHY Budgeted costs are generally described as the best esti-
Abernathy, William (n.d.). Obstacles to the effective execution of mate about what should be allowed for forthcoming activ-
an incentive pay system. Organizational Performance Sys- ity. Some budgeted costs are based on actual costs of the
tems. Retrieved December 1, 2005 from http://www previous year, information from supervisors about where
.organizationalsystems.com/articles/incentive-pay-
obstacles.cfm resources might be more efficiently used, and subjective
judgments about how much should be allowed for
American Youth Policy Forum. (2002, February 1). National
skill standards board: Integrating manufacturing skill stan- resources. Another basis for recording budgeted costs is to
dards into education and training programs. A forum brief. use standard costs.
Retrieved November 23, 2005, from
http://www.aypf.org/forumbriefs/2002/fb020102.htm
STANDARD COSTS
Compensation & Performance Management. http://www.
compensation.com/servicescompstrategy.cfm Standard costs are determined costs that reflect the effec-
tive and efficient use of resources. Standard costs are costs
Heneman, Robert L., and Werner, Jon M. (2005). Merit pay:
Linking pay to performance in a changing world (2nd ed.). established through identifying an objective relationship
Greenwich, CT: Information Age. between specified inputs and expected outputs. Engineers
in laboratories are often involved in establishing standards
Human Resource Department Ltd. (n.d.) Incentive plans (pay
for performance). Retrieved November 23, 2005, from for manufacturing processes, for example. Standard costs
http://www.thrd.com/services/incentive_plans.php are generally related to carefully analyzed phenomena
Texas Skill Standards Board. (n.d.). A user’s guide: Incorporating both in the laboratory and in the workplace. For example,
skill standards into community & technical college curricu- in a factory that produces personal computers, standard
lum. Retrieved November 23, 2005, from http://www.tssb costs are often used for direct materials, direct labor, and
.org/wwwpages/pdfiles/TSSBUsersGuide1.doc variable overhead, at the unit level. Resource usage that
can be traced exactly to what is to be produced is referred
to as direct.
Wanda L. Stitt-Gohdes
To establish the standard usage of a direct material for
the production of the keyboard of the personal computer,
the possibilities are analyzed in a laboratory, where condi-
STANDARD COSTING tions are maintained as optimum as possible. Prior atten-
tion has been given, generally, to the quality of the metal
Standard costing is an objective method of optimizing the
to be used. There are times, though, that alternative mate-
use of resources in the provision of goods or services. This
rials that meet company standards for quality have been
is a traditional method for monitoring the use of resources
selected and each is tested to find out if there are differ-
that was initially applied to basic inputs for only basic fac-
ences in quantities needed, since scrap and problems in
tory costs of production of goods. In the last two decades cutting may not be the same for all the alternatives. At this
of the twentieth century, the technological capabilities of point, the focus is not on how many minutes are needed
computers initiated innovative ways to identify and mon- by an experienced cutter to meticulously cut the metal so
itor costs, but the basic concepts of standard costing have as to minimize usage, but rather on how much of the
continued to have relevance in many businesses.
metal is to be allowed for each keyboard.
Costing is the identification of the value of resources What is determined to be the optimum usage of
used for specified goods or services. One purpose of cost- material—the standard usage of material for the produc-
ing is to determine what resources, and in what quantities, tion of a single personal computer of a specified type—in
are required to provide the goods or services. A second the laboratory undergoes another assessment. This then
purpose is to provide a guide to resource usage monitor- answers the question: “What usage is to be allowed for an
ing. It is the second purpose that is considered in the fol- adequately qualified worker in the factory?” Often, a tech-
lowing discussion.
nically determined standard in laboratory testing is mod-
ified to take into account the conditions of the workplace,
METHODS OF COSTING which might not be as ideal as those maintained in the
IDENTIFIED IN BUDGETS laboratory.
Budget figures may be based on actual, budgeted, or stan- The goal of the personnel responsible for setting stan-
dard costs. These categories are not mutually exclusive. dard costs is to provide realistic standards. Only standards
For example, while a standard cost is a budgeted cost, a perceived to be reasonable are likely to motivate workers
budgeted cost is not always a standard cost. An actual cost to adhere to what is prescribed. Workers are motivated to
for a prior year may be a budgeted cost for the forthcom- achieve output by meeting specified standards. If stan-
ing year and recorded in the budget. dards are unreasonable, either too tight or too loose, the

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 691