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Standard costing: purpose and setting up a system

Edexcel IAL Accounting · WAC12 Corporate and Management Accounting

A standard cost is a predetermined cost of making one unit under expected conditions. Comparing actual costs with standards produces variances that show where performance differed from plan.

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Purpose

Standard costing helps a business:

Types of standard

Stages in setting up a system

1. Identify the products or cost units.

2. Set standard quantities: material per unit from product specifications and past usage records (allowing for normal wastage); labour hours from work study (time and motion) and past time sheets.

3. Set standard prices: material prices from supplier quotations, purchase invoices and stores record cards; wage rates from the payroll and wage agreements.

4. Set overhead absorption rates from overhead budgets and budgeted activity.

5. Record everything on a standard cost card.

6. Collect actual costs from the accounting records, calculate variances, report them and review the standards regularly.

The specification stresses collecting data from accounting records: stores record cards, invoices, payroll and time sheets.

Using a stores record card

When material is bought at different prices, the actual price is the weighted average, not the last price on the card (an examiner warning). Receipts: 2,000 m at £2.40; 3,000 m at £2.55; 1,000 m at £2.70.

Average price = total cost / total quantity = £15,150 / 6,000 = £2.5250 per metre.

Worked example

Prepare a standard cost card for one chair: 2.5 m of fabric at £4.00 per m; 1.5 hours of labour at £12.00 per hour; variable overhead £3.00 per labour hour; fixed overhead absorbed at £5.00 per labour hour.

  1. Materials 2.5 x 4.00 = £10.00
  2. Labour 1.5 x 12.00 = £18.00
  3. Variable overhead 1.5 x 3.00 = £4.50
  4. Fixed overhead 1.5 x 5.00 = £7.50

Answer: Standard cost per chair £40.00

Key idea: Standards are set from specifications, work study and accounting records (stores cards, invoices, payroll); attainable standards motivate best; variances between actual and standard are used for control.

Check yourself

  1. A product needs 4 kg of material at £2.50 per kg and 2 hours of labour at £11 per hour. Overheads are absorbed at £6 per labour hour. Calculate the standard cost per unit.
    Show answer

    £44.00. 10 + 22 + 12 = £44.00.

  2. A stores card shows receipts of 500 kg at £3.20, 1,500 kg at £3.40 and 1,000 kg at £3.65. Calculate the weighted average price per kg to 2 decimal places.
    Show answer

    £3.45. (1,600 + 5,100 + 3,650) / 3,000 = £3.45.

  3. The standard cost of a unit is £38.50. Budgeted production is 2,400 units. What is the budgeted production cost?
    Show answer

    £92400. 38.50 x 2,400 = £92,400.

  4. Which type of standard is usually best for motivating staff?
    • Ideal standard
    • Basic standard
    • Attainable standard
    • Historic actual cost
    Show answer

    Attainable standard. Attainable standards are challenging but achievable.

  5. Which source is most appropriate for setting standard labour times?
    • Work study (time and motion) and past time sheets
    • Supplier price lists
    • The share register
    • The statement of cash flows
    Show answer

    Work study (time and motion) and past time sheets. Work study measures how long tasks should take.

  6. Which record is a source for setting standard material prices?
    • Labour time sheets
    • The directors' report
    • Purchase invoices and supplier quotations
    • Customer invoices
    Show answer

    Purchase invoices and supplier quotations. Prices paid and quoted for materials come from invoices and quotations.

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Last updated 8 November 2026. Spotted a mistake? Tell us.