Standard cost

economic-dictionary

A standard cost is a measurement established by producers of goods and services, useful to know the optimal productive level to achieve in their activity.

This concept is within the scope of accounting or the economics of organizations. It allows companies to bring their unit costs to levels of maximum efficiency.

The analysis of the production processes gives an idea or impression of efficiency. The use of resources such as raw materials or resources used must be evaluated to determine their optimal productive level.

In this sense, determining a certain standard cost allows economic agents to establish efficient levels of production.

This happens because these indicative levels will be established in the budgeted costs as a guide to follow in the process.

To a large extent, the standard cost of a product will be translated into the sum of all those costs necessary to carry out its production. For example, in the field of gastronomy, this concept is called scandal.

Standard cost target

The main accounting utility of standard costs is the estimation or measurement of the production processes of goods and services.

Under normal production conditions the standard cost indicates the estimated cost level for the process in question. That is, the costs that are estimated to be budgeted to undertake a particular project.

In other words, they are the costs involved in said project and that ensure optimal returns. It is also made up of all the direct and indirect costs necessary for the production of the good or service.

For this reason, organizations establish standard costs in their inventories and in their different business plans.

Main features of the standard cost

Determining an optimal level of production by calculating this type of cost facilitates a series of facts:

  • Avoid the appearance of inefficiencies in the use of resources: Examples of this can be stock remains, excess waste or excessive energy consumption.
  • Represents the sum of costs: The standard cost is the conjunction of the costs derived from the production of a particular good. It encompasses from its design to its preparation, passing through the basic technological and energy elements for its realization.

Standard cost example

A simple approach to this concept is the comment of scandals in the field of catering or hospitality.

Thanks to this approach to the costs incurred, a restaurant has the possibility of knowing the efficient costs when preparing a specific dish.

For example, a special pizza may have a standard cost set at 5 euros. This amount includes the allocation of raw materials necessary for a pizza, the time allocated to its processing and other expenses such as energy consumption or the labor costs of the cook.

Thus, it is possible to define that the efficient preparation for said pizza involves using 20 minutes with a single cook, exact amounts of oil, salt and other elements and 10 minutes of baking at a previously established temperature.

Any deviation from this type of guideline usually results in cost overruns or inefficiencies for companies. That is, in the possibility of obtaining lower benefits.

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