Question

Explain the difference between a cost standard and an efficiency standard.  Give an example of each.

Answer 1

A standard is an estimation or a target in order to achieve and to show an improvement over a specific period of time.

A cost standard is the estimation to incur the total cost within a budgeted or target level and the total cost standard which includes both price/rate standard and quantity/efficiency standards.

For example - The Direct Labor Cost Standard is the estimation to control the total direct labor cost which includes Direct Labor Rate Standard and Direct Labor Efficiency Standard and same applies to materials where Direct Material Cost Standard is the combination of both Material Price Standard and Material Quantity Standard.

Efficiency standard is the estimation to use the total quantity of materials or to use the total labor hours within the budgeted or target level.

For example - Direct Labor Efficiency Standard provides an estimation of the same by comparing the actual and standard hours/units to find out the difference or variance.