Question

7. What is a standard? What is a standard cost? How is it calculated? Why is it important for companies to develop standards?

Answer 1

Standard means estimate or roughly idea on the basis of past experiance or professional competence. In simple words standard means guessing.

Standard cost means estimatd cost or cost which has been predetermined. Standard cost are used as a targeted cost and on the basis of this standard cost they incurr actual cost. In simple words we can say standard cost is a cost which is estimated before the actual cost incurred.

It is very important for every company to determine their standard cost because it helps to control their upcoming expenses like material, labour and other overheads. Standard cost sheet work as a guidance for companies and it save companies to do any extra expense and maintain efficiency.

For better understanding understand the full concept of standard from our daily life, in the beginning of month we prepare our estimate for expense and spend according to that, and if we fail to do so then at the end we may suffer from cash crunch.

I hope this clear your doubt.

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