What does "standard costing" mean?

Standard costing refers to a costing system that utilizes predetermined costs for direct materials, labor, and overhead. This method sets standard costs based on expected performance and efficiency, allowing companies to budget and plan more effectively while tracking variances between actual costs and these pre-established standards. By using standard costs, management can assess how well the business is performing relative to these targets, making it easier to identify areas where improvements or cost control actions may be necessary.

Determining costs in this manner aids in decision-making processes, such as pricing, budgeting, and forecasting. Moreover, it allows organizations to pinpoint variances, which can be analyzed to improve operational efficiency and effectiveness. This system contrasts with the use of actual costs or average market prices, highlighting how standard costing serves as a useful management tool in many accounting scenarios.