In Standard Costing and Variance Analysis, various types of variances are calculated to evaluate the performance of a company in terms of how closely actual costs align with budgeted or standard costs. Below is a detailed explanation of each term and the associated variances.

1. Standard Costing

Explanation: Standard costing is an accounting method used to estimate the expected cost of production for materials, labor, and overhead. These standard costs are predetermined costs set by the company, based on historical data, industry standards, or management’s expectations. The primary purpose of standard costing is to create a baseline or budget for production costs, which can then be compared to actual costs to assess performance.

Key Characteristics:

• Helps in cost control and budgeting.

• Provides a means to measure efficiency and cost management.

• Standard costs are calculated for materials, labor, and overhead.

Example: A company might set a standard cost of $5 per unit of material based on historical data, which will then be used to compare against the actual cost incurred when purchasing or using material.