Standard cost
In one sentenceThe predetermined cost of producing one unit under good operating conditions, made up of a quantity and a price for materials, labor and overhead.
Simply put
Before production you write a “standard cost card” for the product: how many kilos of materials it needs and at what price, how many labor hours and at what wage, and how much overhead it absorbs.
At the end of the period you compare the actual cost with this card, and the price, quantity and efficiency variances appear. That is why standard cost is the basis of variance analysis in factories.
Worked example
A confectionery factory sets the standard cost of one box as follows (an illustrative example).
Materials: 2 kg sugar × 10 SAR20 SAR
Direct labor: 0.5 hour × 40 SAR20 SAR
Variable overhead: 0.5 hour × 20 SAR10 SAR
Fixed overhead per box25 SAR
Standard cost per box20 + 20 + 10 + 25 = 75 SAR
Formula: For each element: Standard quantity per unit × Standard price
Don't confuse it with
Unit costActual unit cost is calculated after production from what happened, while standard cost is set before it as a target.